Private ruling: business income
Date of advice: 18 July 2017
Published: November 2017
Ruling period: Year ending 30 June 2003 to Year ending 30 June 2016
Date scheme commenced: 1 July 2002

Ruling: Q1: Is the partnership carrying on a business for tax purposes? | A1: No. | Q2: Is the partnership required to lodge tax returns? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995.

Reasons for decision: Summary: The definition of a partnership under subsection 995-1(1) of the Income Tax Assessment Act 1997 states: (a) an association of persons (other than a company or a limited partnership) carrying on a business as partners or in receipt of ordinary income or statutory income jointly; or (b) a limited partnership. Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) outlines the factors taken into account in determining whether persons are carrying on a business as partners for income tax purposes. There are no statutory rules in the income tax law for deciding whether persons are carrying on a business as partners. The question of whether a partnership exists is one of fact. The following factors are relevant in deciding whether persons are carrying on a business as partners in a given year of income. Intention: (a) the mutual assent and intention of the parties Conduct: (a) joint ownership of business assets (b) registration of business name (c) joint business account and the power to operate it (d) extent to which parties are involved in the conduct of the business (e) extent of capital contributions (f) entitlements to a share of the profits (g) business records (h) trading in joint names and public recognition of the partnership. The weight to be given to these factors varies with the individual circumstances. The above list of factors is not exhaustive and no single factor is decisive, although an entitlement to a share of net profits is essential. We will now apply the above factors to your case: Intention: You originally intended to operate a business together. However, there is no formal written partnership agreement. There is no formal partnership agreement about sharing of net profits or contributions. Conduct: (a) joint ownership of business assets (b) It is unclear who owns the business computer and other assets. (c) registration of business name (d) The business is registered as a partnership. (e) joint business account and the power to operate it (f) A joint business account is used for the business expenses. (g) extent to which parties are involved in the conduct of the business. (h) Entity A generates all the business income and makes all the business decisions. Entity B has no involvement in the business. Entity B’s original intention to help in the business never eventuated. (i) extent of capital contributions (j) Entity A contributed the capital for the business. (k) entitlement to a share of net profits (l) There is no evidence of how the business income will be shared. Entity A is entitled to the business profits. (m) business records (n) All formal business records are in the business name. Tax returns have not been lodged for the partnership. All business income has been declared on Entity A’s tax return. (o) trading in joint names and public recognition of the partnership. (p) Customers and other parties deal with Entity A only. After comparing the factors against your facts it is considered that a partnership, for tax purposes, does not exist for the following reasons: ● Tax returns have not been lodged for the partnership. ● Entity A generates all the income and makes all the business decisions. Entity B has no involvement in the business. ● No partnership agreement exists. ● There is no formal partnership agreement about sharing of net profits. ● Entity A includes all the business income in their individual tax returns which indicates the business operates as a sole trader. Although you intended to operate as a partnership, there is insufficient evidence to support this. The ABN registration is not sufficient evidence to support that the partnership operates the business. The overall conclusion is that the business has not been carried on in partnership for tax purposes. Rather Entity A has been operating as a sole trader and as such all business income and deductions relating to the business should be declared on their individual tax returns. Entity B is not entitled to any share of the business income or expenses. As the partnership is not operating the business and has no income, the partnership is not required to lodge a tax return. You should lodge the relevant 'no return necessary’ for the partnership in the relevant years. The business income has been correctly declared on Entity A’s individual tax returns.

Relevant facts: Entity A and B made enquiries about setting up a family business whereby entity A would be the main operator of the business and entity B would step in to assist when work builds up and assistance would be required. Also entity B would assist in taking calls from new clients and arranging meetings between entity A and potential new clients. | Following advice the partnership applied for a tax file number and ABN several years ago and registered a trading name. | A business joint account was set up. The business expenses are paid from this business account. | You do not have a partnership agreement. | The business invoices have the business trading name. | The original intention of entity B helping with the business never eventuated and entity B has no involvement in the business. | Entity A operates the business solely and makes all the decisions in relation to the business. | Entity A contributed the capital for the business and is entitled to the business profits. | No trading or business activities are done in joint names. There is no public recognition of the partnership, other than the ABN registration showing the partnership names. | The partnership has never lodged a tax return. | The business income has been reported in Entity A’s individual income tax return as sole trader income. | It is unclear who owns the business assets.