Private ruling: Partnership Law
Published: June 2012
Ruling period: 1 July 2009 to 30 June 2014
Date scheme commenced: 1 July 2009

Ruling: Q1: Does Company A's 50% interest in the investment property (through A Trust) constitute (a) a general law or (b) tax law partnership? | A1: Yes Company A's 50% interest in the investment property constitutes a tax law partnership.

Relevant facts and circumstances: Company A is a private investment company. Company A owns a 50% interest in one commercial building. Company A originally built and developed the commercial premises with another co-owner. Company A later transferred its share in the property to A Trust a wholly owned trust within the Company A consolidated tax group. The other co-owner sold its 50% share to the current co-owners. Company A and the current co-owners jointly own the commercial premises as tenants in common, each holding a 50% share. Each co-owner submits Income Tax Returns and Business Activity Statements ("BAS") in its own name and not in a Partnership Return or Partnership Business Activity Statement. Property Management Agreement ("PMA") The original co-owners appointed a property management agent to handle the commercial leasing business on behalf of both owners. The PMA includes the following points: · The PMA describes the co-owners as ,the Principal". · The Property Manager acts on the co-owners" behalf to manage and maintain the premises and arrange leases. · The PMA, however, recognises the co-owners as separate entities. · Income and expenses are apportioned according to their ownership interests. · The management agents hold bank accounts to operate the business, for instance, income is paid to the property manager's trust account. · The co-owners do not have a joint bank account and receive the net income from the property manager. · The property manager sends separate monthly reports to each co-owner. For example the breakdown of the net property income shows that 50% is Company A's share. The agent transfers the 50% to Company A's account. Joint Ownership Agreement ("JOA") The owners" rights and obligations are set out in a JOA. The JOA states the intention of the parties to operate and maintain the building as a profit making enterprise. Each owner is to bear its own costs, in respect of any ancillary costs. A joint ownership committee has been set up to meet quarterly, make decisions and liaise with the management agents The committee secretary may be an employee of the property manager. Each owner may arrange for valuations of its interest independently of the other owners. The scope of the JOA is strictly limited and representations cannot be made by one owner on behalf of the other. The JOA expressly states that there is no partnership between the owners and each has the right to engage in other ventures that may be competitive with the other owner. Company A and the co-owners are audited independently.

Relevant legislative provisions: Section 995-1 Income Tax Assessment Act 1997 (ITAA 1997) | Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)


Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Detailed reasoning: Taxation Ruling, TR 93/32 Income tax: rental property - division of net income or loss between co-owners (TR 93/32). | TR 93/32 explains the basis upon which we will accept, for income tax purposes, the division of the net income or the loss from a rental property between the co-owners of that property. However, the Ruling only examines the taxation position of co-owners whose activities do not amount to the carrying on of a business. | 3. Co-ownership of rental property is a partnership for income tax purposes but is not a partnership at general law unless the ownership amounts to the carrying on of a business. | 4. Where co-ownership is a partnership for income tax purposes only, the income/loss from the rental property is derived from co-ownership of the property and not from the distribution of partnership profits/losses. | 5. Because co-owners of rental property are generally not partners at general law, a partnership agreement, either oral or in writing, has no effect on the sharing of income/loss from the property. | 6. Accordingly, the income/loss from the rental property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title. | Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration - e.g., A and B, who each own an identical 50% share in a property are, provided the other requisite features are present, joint tenants of that property. However, the legal interest of tenants in common need not be identical- e.g., C owns a 30% share of a property while D owns a 70% share of the property. C and D are, provided the other requisite features are present, tenants in common. | Partnership at general law: Partnership is defined in the various State and Territory partnership acts as "the relation which subsists between persons carrying on a business in common with a view of profit." For example in WA the relevant Act is The Partnership Act of 1895 (WA). An essential facet of the definition is "carrying on a business". If this is not satisfied, there can be no partnership at general law. | Lindley on Partnership, 15th ed. says at p 81: 'If each owner does nothing more than take his share of the gross returns obtained by the use of the common property, partnership is not the result. On the other hand, if the owners convert those returns into money, bring that money into a common stock, defray out of it the expenses of obtaining the returns, but then divide the net profits, partnership is created in the profits, if not also in the property which yields them.' | As a general proposition, it is more accurate to describe the owners of rental property in the words of Beaumont J in F.C. of T. v McDonald (1987) 18 ATR 957; 87 ATC 4541 ( McDonald's case at ATR p.969; ATC p 4552) 'as co-owners in investments rather than as partners in a business operation.' Consequently, co-owners of rental property are generally not partners at general law with the result that they are not subject to the general law applicable to partnerships including the division of profits and losses from the property. | Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships). Paragraph 2 states: | This Ruling is not to be applied: | (a) to situations where persons are in receipt of income jointly unless that income is derived from carrying on business; and Company A's interest in the investment property means they are in receipt of income jointly along with the other property owner. However as can be seen from TR 93/32 if the owners of rental property are viewed as carrying on a business in common that there can be a general law partnership, Thus TR 94/8 is a useful guide to the indicia applied to determine whether persons are carrying on business as partners. Paragraph 4 outlines these indicia as follows: | 4. We look at the following factors in deciding whether persons are carrying on business as partners in a given year of income: | Intention - the mutual assent and intention of the parties | (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 net profits | (h) trading in joint names and public recognition of the partnership | 5. 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 the entitlement to a share of net profits is essential. | "The essential element for a partnership to exist is the genuine intention of all the parties to act as partners. This intention must be demonstrated by the conduct of the parties." | Based on the facts you have provided the co-owners are recognised as separate entities, income and expenses are apportioned according to their ownership interests, the co-owners do not have a joint bank account and so on. Each owner bears their own costs and each has the right to engage in other ventures that may be in competition with the other owner. | Furthermore the Ruling application provides that each owner considers that in line with industry practice they are required to include their share of the net income from the commercial building leasing in their respective income tax returns and that each co-owner makes independent decisions regarding their investment, including funding, acquisition or disposal. | From the facts given by you it is thus considered that you are not carrying on business as partners and you are not partners under general law. | Partnership for taxation law: The definition of partnership is wider for income tax purposes than it is at general law. Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines partnership as 'an association of persons carrying on business as partners or in receipt of income jointly but does not include a company.' Under this extended definition of partnership, it is not necessary that persons carry on a business for their association to be treated as a partnership for income tax purposes. They need only to be in receipt of income jointly. Therefore, co-owners of rental property come within the definition of "partnership" for income tax purposes, not because they are necessarily partners at general law, but because they are in receipt of income jointly. | As acknowledged in your ruling application the second limb of this provision extends the definition of partnership for tax purposes to entities that may receive income jointly, e.g. as joint tenants or tenants in common such as on the facts of this case.