Private ruling: Tax law partnership
Date of advice: 30 April 2021
Published: July 2021
Ruling period: 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are Trustee Company A and Trustee Company B an association of persons in receipt of income jointly for the purposes of the definition of partnership in section 995-1 of the Income Tax Assessment Act 1997 ? | A1: Yes | Q2: If yes, are Trustee Company A and Trustee Company B conducting an enterprise as a tax law partnership? | A2: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. There are two trustee companies involved: • Company A; and • Company B. Individual A is the director of Company A. Individual B is the director of Company B. Individual A and Individual B are siblings. On 1 Month 20xx, Individual A attended an auction for the sale of a commercial property (the property). Prior to the auction, Individual A and Individual B discussed the purchase of the property and arranged to purchase it together. Individual A was successful at auction and signed the Contract of Sale as purchaser. However, the Contract allowed for a different purchaser to be nominated. Company A and Company B are the registered proprietors of the property as tenants in common each holding 1 of 2 equal undivided shares from 2 Month 20xx. There is no mortgage registered over the property. The property was purchased with separate funds, with each of Company A and Company B being individually responsible for their share of the purchase funds. A real estate agent was appointed to manage the property. On 3 Month 20xx, a single lease was executed for the property. The lessee pays the lease payments directly to the real estate agent. The real estate agent meets some of the expenses from the funds and distributes the surplus to each of Company A and Company B in equal shares. Company A and Company B do not operate a joint bank account. There is no written or verbal partnership agreement between Company A and Company B. If issues arise, Individual A and Individual B discuss those issues to resolve the problems.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1 | A New Tax System (Goods and Services Tax) Act 1999 Paragraph 184-1(1)(e) | Section 195-1

Reasons for decision: Summary: Trustee Company A and Trustee Company B are an association of persons that are in receipt of income jointly and accordingly, are a tax law partnership. | Detailed Reasoning - Detailed reasoning: 'Partnership' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 . That definition states: partnership means: (a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or (b) a limited partnership. The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership, set out in the Partnership Act of each State and Territory, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. This type of partnership is referred to as a general law partnership. The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. This type of partnership is referred to as a tax law partnership. Tax law partnerships exist only for tax purposes. General law does not recognise tax law partnerships. At general law, joint tenancy, tenancies in common, joint property or part ownership do not, in themselves, create a partnership in respect of anything that is so held. Neither does the sharing of any profits from the use of such property result in a partnership. The receipt of income jointly from investments without carrying on business is outside the definition of a partnership under general law. | Detailed Reasoning - What is a tax law partnership?: A tax law partnership, as described in the second limb of paragraph (a) of the definition of partnership, is 'an association of persons (other than a company or a limited partnership)... in receipt of ordinary income or statutory income jointly'. If the 'receipt of income jointly' is from the 'association of persons' carrying on business as partners, that association of persons is a general law partnership, and not a tax law partnership. Association of persons The reference in the ITAA 1997 definition of a partnership to an 'association of persons' means that there must be some link, connection, or existence of a mutual or common purpose between the persons. 'Person' is defined in subsection 995-1 of the ITAA 1997 to include a company. The term 'association' is not defined in the ITAA 1997 and therefore takes its ordinary meaning. The Macquarie Dictionary defines 'association' as: • '1. an organisation of people with a common purpose and having a formal structure; • 5. connection or combination'. In Yeung & Anor v. FC of T 88 ATC 4193; (1988) 10 ATR 1006 , Davies J took the view that: It is sufficient for the existence of a partnership ... that the properties were owned by the six members of the family as tenants-in-common, that the leases were in the names of the six and, therefore that the rents were derived by the six. Persons who are in receipt of income jointly are, therefore, an association of persons and a tax law partnership. | Detailed Reasoning - Receipt of income: A tax law partnership exists only if there is an association of persons 'in receipt of income jointly'. To be in receipt of income jointly, it is not necessary to have actually received the income. The Commissioner considers that there is receipt of income jointly if there is a joint entitlement to income. The Commissioner considers the expression 'in receipt of' may be read broadly to include, not only the actual receipt of income, but also all the steps leading to the right or entitlement to that income. The expression 'in receipt of ordinary income...jointly' suggests that two or more persons have commenced an activity which gives rise to, or will give rise to, a right or entitlement to receive jointly an amount or payment of a revenue nature. | Detailed Reasoning - Time of association approach: The Commissioner considers an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly. This is referred to the 'time of association' approach. The Commissioner takes this view because the expression 'in receipt of income jointly' is read widely to include all the steps leading to a joint right or entitlement to income. There must be a logical and timely progression between all the steps that lead to the joint right or entitlement to income. The time between each step must be reasonable having regard to the facts and circumstances of each case. | Detailed Reasoning - Joint acquisition of property: Two or more entities may enter into a single agreement to purchase property for leasing purposes. This step is the first of a series of steps resulting in the joint right or entitlement to income. In this situation, the Commissioner considers that a tax law partnership exists from the time the entities enter into the agreement to acquire the property. The relevant association of persons exists from that time and not from the time that the property is actually leased. | Detailed Reasoning - In your circumstances: You entered into a single agreement to purchase a commercial property for leasing purposes. The property is currently leased under a single lease agreement with the lessee paying a single lease amount to your real estate agent. The real estate agent pays some relevant expenses from the lease payments, including commission and rates, and accounts to each of the co-owners separately for their respective interest in the balance. The Commissioner considers that you are in receipt of income jointly and that a tax law partnership exists. | Summary: The tax law partnership of Trustee Company A and Trustee Company B is not carrying on an enterprise; each of the co-owners are carrying on a leasing enterprise in their own right. | Detailed Reasoning - Detailed reasoning: The definition of partnership is defined in section 195-1 of in the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) and refers to the definition of 'partnership' in the ITAA 1997. Therefore, a tax law partnership also applies to arrangements that may fall within the GST Act. | Detailed Reasoning - Tax law partnership as an entity: 'Entity' is defined at paragraph 184-1(1)(e) of the GST Act and includes a partnership. The moment a tax law partnership exists it is an entity for GST purposes. The GST Act treats the partnership as an entity separate from its partners. Is a tax law partnership capable of carrying on an enterprise? As an entity for GST purposes, a tax law partnership is capable of carrying on an enterprise. Carrying on an enterprise includes doing anything in the course of the commencement or termination of an enterprise. A tax law partnership may make supplies or acquisitions in carrying on its enterprise. Supplies and acquisitions made by or on behalf of a partner in the partnership as partners, are taken to be supplies and acquisitions made by the partnership. | Detailed Reasoning - Is the tax law partnership carrying on an enterprise?: The fact that a tax law partnership exists does not necessarily mean that in every case it is the partnership that carries on an enterprise. The question of whether a tax law partnership carries on an enterprise requires an objective evaluation of all the facts and circumstances of a case, including the conduct of the co-owners of the income producing property. In some cases, an objective evaluation of all the facts and circumstances may lead to a conclusion that an enterprise is carried on by each co-owner and not by a tax law partnership. Paragraph 62 of Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property provides the following factors that may point to an enterprise being carried on by a tax law partnership, and not by each co-owner in their own right: • an oral or written agreement determines the mutual rights and obligations of the parties; • the income producing property is jointly acquired by the co-owners under a single contract; • property is held by the co-owners as joint tenants; • the co-owners fund their acquisition of the income producing property out of joint borrowings or funds; • the joint activities of the co-owners of an income producing property are for their family's mutual benefit or the mutual benefit of all the co-owners; • the co-owners of the income producing property jointly appoint a manager or agent to manage the enterprise or one co-owner may act, with the authority of all the co-owners, on behalf of all the co-owners in managing the enterprise; • income from the income producing property is paid into a joint bank account of the co-owners; • expenses relating to the income producing property are paid from a joint bank account of the co-owners; and • the co-owners jointly pay all liabilities in relation to the income producing property. Paragraph 66 of GSTR 2004/6 provides the following factors that may point to an enterprise being carried on by each co-owner in their own right, and not by a tax law partnership: • the co-owner is registered for GST in its own right in relation to a broader enterprise and acquires an interest in property in carrying on that enterprise; • there is an agreement between the co-owners not to form a partnership nor to jointly carry on an enterprise; • each co-owner makes independent decisions with regard to the acquisition of an interest in income producing property; • each co-owner's acquisition of their interest in property is made separately; • any borrowings by a co-owner are to fund the acquisition of their interest in the income producing property only; the co-owners do not fund the acquisition of each of their interests out of joint funds or borrowings; • the co-owners act independently of each other in making decisions about their respective investments; • each co-owner acts independently with respect to the appointment of a manager or agent, even though the same manager or agent is usually appointed to act on behalf of all the co-owners; • the gross rental income may be paid into a single trust account operated by a property manager or agent and operating expenses may be met from this trust account. The income is not paid into and the expenses are not paid out of a joint bank account in the name of the co-owners; • the manager or agent accounts to each co-owner separately, both in respect of income and outgoings and will distribute net rental income from the trust account to the co-owners on a regular basis; • each co-owner does not act for the mutual benefit or on behalf of the other co-owners and is primarily concerned with securing an enhanced value or return on their investment; • property is held as tenants in common, rather than as joint tenants; and • although contributing to a mutual fund to pay all liabilities in relation to the income producing property, each co-owner makes the payment in the course of carrying on their own enterprise. | Detailed Reasoning - Single lease agreement: The fact that a single lease agreement is executed by all the co-owners, and that the lessee pays a single rental amount are further factors that need to be considered and weighed in the context of all the evidence in determining which entity carries on the enterprise. The presence of a single lease agreement and a single lease amount is not decisive of an enterprise being carried on by a tax law partnership. When assessing the weight of the factors to be considered, GSTR 2004/6 provides: 70. While the factors mentioned in paragraphs 62, 66 and 68 of this Ruling are relevant, they are not exhaustive. Neither the existence nor the absence of any one factor is conclusive one way or the other. The scale of the enterprise, the number of co-owners of each property, the number of properties involved or the value of the property or properties being exploited are also not necessarily determinative of whether the enterprise is being carried on by a partnership or by the co-owners in their own right. It is the overall weight of evidence that is important, and the individual weighting of each factor will depend on the circumstances of each case. 71. We consider that, in any particular case, a preponderance of the factors mentioned in paragraph 62 of this Ruling would lead to a conclusion that the partnership and not each co-owner, carries on the enterprise. 72. However, a preponderance of the factors mentioned in paragraph 66 of this Ruling would lead to a conclusion that an enterprise is carried on by each co-owner in their own right in respect of their interest in an income producing property. In these cases, we take the view that, although a tax law partnership may exist, it does not carry on any enterprise | Detailed Reasoning - In your circumstances: The following points are relevant in considering whether the tax law partnership is carrying on an enterprise; • the property was purchased in a single transaction; • the property is held as tenants in common; • each of the co-owners made their own independent decision as to whether to enter into the purchase; • each of the co-owners hold their share of the property for their own benefit, no benefit is held for the other co-owner; • each of the co-owners are concerned with enhancing their own investment; • there is no written or verbal partnership agreement; • there is no mortgage held over the property; • each of the co-owners funded their share of the purchase price from their own endeavours; • there is a single lease; • the co-owners do not operate a joint bank account; • the co-owners appointed a real estate agent to manage the property; • the lessee makes lease payments to the real estate agent; • the real estate agent pays some relevant expenses from the lease payments, including commission and rates; and • the real estate agent divides the balance in half and pays each co-owners' share of the balance to their own individual bank account. The Commissioner considers that your circumstances are similar to those contained in Example 4 of GSTR 2004/6 where the following was found: 79. The acquisition of Xena's interest in the property is made independently using its own funds. In carrying on its own leasing enterprise, Xena negotiates with Russell as an independent entity, and meets only its own share of the total liabilities in relation to the property. The presence and weight of these factors indicates that a leasing enterprise is carried on by Xena (and similarly by Russell), and not by a tax law partnership. The leasing enterprise in relation to this property is part of the broader enterprise that Xena carries on. 80. The fact that a single lease agreement is executed by both Xena and Russell and that they have a co-owners' agreement that sets out administrative processes in relation to the property is not sufficient to outweigh the factors that point to Xena carrying on an enterprise in its own right in relation to this property . The Commissioner is satisfied that after an individual assessment of all your circumstances, the tax law partnership is not carrying on a leasing enterprise and that each of the co-owners is carrying on a leasing enterprise in their own right.