Private ruling: Business: sole trader or partnership
Published: May 2012
Ruling period: Year ended 30 June 2005 | Year ended 30 June 2006 | Year ended 30 June 2007 | Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010
Date scheme commenced: 1 July 2004

Ruling: Q1: Will the Commissioner accept that an entity was a partnership as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for previous income years? | A1: No | Q2: Will the Commissioner grant an extension of time to amend the assessments under section 170(6) of the Income Tax Assessment Act 1936 (ITAA 1936) for you from a sole trader return to a partnership return for the income years where the limited amendment period has ended? | A2: No | Q3: Can you amend prior income years returns from a sole trader return to a partnership return where the limited amendment period has not ended under Part IV of the ITAA 1936? | A3: Decline to rule. | Q4: Can you lodge the current outstanding income year return for the entity as a partnership return under Part IV of the ITAA 1936? | A4: Decline to rule

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. You are an Australian tax resident. A number of years ago a business name was registered by you. You have an associate who is a resident of another country. You contacted the non resident associate and advised that you had set up a business trading name. You provided details of discussions with your accountant that whilst the trading name was set up as a sole trader arrangement, that in fact there are silent partners. The non resident associate responded to you with discussions regarding 'partnership' arrangements, partner's percentage ownership and that a 'partnership agreement' would in fact be drawn. This response also describes the nature of the venture being entered into as well as the requirements of you in your partnership role. This response listed the individuals involved and the relevant percentages You corresponded with the non resident associate regularly You renewed the business name with the regulating authority. A number of years after the initial registration of the business name, your non resident associate entered into a series of correspondence with an international accounting firm regarding the most appropriate structure moving forward to operate your entity's activities and the options of whether it would be better to convert the existing 'partnership' (as per their understanding) into either a company or a trust with consideration given to the non resident partners and their tax needs. The firm provided draft recommendations to you regarding incorporating the partnership which contained background information and assumptions. You have had this response from the firm for a number of years. To date all taxation returns for the entity have been lodged as sole trader returns in your personal taxation returns. There are quarantined non commercial losses sitting in your personal taxation returns. The entity is registered for GST and all quarterly BAS have been lodged and GST credits claimed. The ABN is registered under your name as an individual/sole trader. You, and the other individuals involved, wish to incorporate the 'partnership' with a view to forming a consolidated group as part of your asset realisation strategy. You have provided a number of documents that have been considered for the purposes of the facts of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 995-1. | Income Tax Assessment Act 1936 Part IV | Income Tax Assessment Act 1936 section 161AA | Income Tax Assessment Act 1936 subsection 170(6)


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. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'. | Question 1: Will the Commissioner accept that the entity was a partnership as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for previous income years? | No. The Commissioner does not accept that the entity was a partnership as defined in section 995-1 of the ITAA 1997 for previous income years. | Detailed reasoning: The term partnership is defined in section 995-1 of the ITAA 1997 as follows: | · 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 | Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) provides guidance in determining whether persons are carrying on business as partners for income tax purposes. The question of whether a partnership exists is one of fact. The existence of a partnership is evidenced by the actual conduct of the parties towards one another and towards third parties during the course of carrying on business. | 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. | In your ruling application and your responses to further information requests you have put forward submissions as to the intention of the parties involved, including yourself, when the arrangement was set up and the conduct of the parties involved, including yourself, from the date it was set up to present to support that you were conducting activities as a partner in a partnership for tax law purposes. | You have also referred to relevant Court cases which discuss the issue of whether a person is carrying on a business as a partner in a partnership. In particular you have referred to the following statement by Ward J in Walters v. Scarborough [2011] NSWSC 1380 citing Lindley & Banks : | Thus it is said that, subject to exceptional cases, persons who agree to share profits and losses will normally find themselves treated as partners. | The rights of the parties to an arrangement to a share of the net income or loss of the activity is an indication of whether persons are carrying on a business as a partnership. TR 94/8 states as paragraph 25: | Partners share between them the profits and losses of the partnership activity ( I.R.Commrs v. Williamson (1928) 14 T.C. 335). We look at the rights of the parties to a share of the net income or loss of the partnership. A situation in which profits are shared in line with clearly stated rights and entitlements in the partnership agreement is prima facie evidence of the existence of a partnership. | We have considered your submissions, and the documents attached to your submission, with reference to the factors regarding intention and conduct as discussed in TR 94/8. | We consider there are facts that are particularly relevant to both the intention and conduct of yourself and the other parties involved in determining whether you were conducting your activities as a sole trader or as a partner in a partnership for tax law purposes. | Conclusion: The existence of a partnership is evidenced by the actual conduct of the parties towards one another and towards third parties. Based on your facts and submissions it has been determined that you have conducted the activities of the entity as a sole trader. The entity is not a partnership as defined in section 995-1 of the ITAA 1997. | You registered the business name with a regulatory authority as a sole trader. You received professional advice at the time of registration regarding the implications of carrying on the activities as a sole trader and it was suggested that you consider an alternate business entity at that time. | You have registered for GST and lodged quarterly BAS statements and claimed GST credits as a sole trader. You have lodged personal income tax returns including the activities of the entity in your personal returns. | You have represented yourself to third parties as a sole trader. Third parties would not be aware that they are trading with a partnership, as opposed to dealing with you as an individual, for example if a third party was to verify the ABN for the entity on the ABN Lookup on www.business.gov.au it would state that the entity they were dealing with was you as an individual. In addition the other parties, resident in another country, involved in your arrangement have been aware since the time that the entity was set up that you were representing yourself to the ATO as carrying on the activities of the entity as a sole trader. | You did not have an arrangement with the other parties involved in your arrangement for sharing of losses. All losses have been your responsibility. You have provided evidence which indicates that for a number of years you were seeking advice from professionals as to what business structure would be most suitable for your arrangement and consideration was given to forming a partnership, company, joint venture trust and unit trust. | You received professional advice in respect of the implications of being a sole trader prior to commencing your activities. You have provided evidence which indicates that the other parties involved in your arrangement have been fully aware that you were trading as a sole trader since the entity was set up. You have made an informed decision to carry on the activities of the entity as a sole trader. | Your conduct in continuing to be registered for GST as an individual/sole trader, and the lodging of personal income tax returns accumulating losses as an individual for a number of years is consistent with you having an intention to carry on the activities of the entity as a sole trader. | The Commissioner will not accept that the entity is a partnership as defined in section 995-1 of the ITAA 1997 for the previous financial years. | Question 2: Will the Commissioner grant an extension of time to amend the assessments under subsection 170(6) of the ITAA 1936 for you from a sole trader return to a partnership return for the income years where the limited amendment period has ended? | Answer: No. The Commissioner will not grant an extension of time to amend the assessments under subsection 170(6) of the ITAA 1936 for you from a sole trader return to a partnership return for the income years where the limited amendment period has ended? | Detailed reasoning: Section 170(6) of the ITAA 1936 allows the Commissioner to extend the period of time to amend an assessment even though the limited amendment period has ended to give effect to a private ruling. | The Commissioner has determined at question 1 of this ruling that you are trading the entity as a sole trader and that the entity is not a partnership as defined in section 995-1 of the ITAA 1997 for the previous financial years. | As a result no amendment to the sole trader returns is required and it is unnecessary to consider the extension of time in these circumstances. | Detailed reasoning: Part IV of the ITAA 1936 provides that an amendment of an assessment for an individual for a year of income can be made within two years after the day on which the Commissioner gives notice of the assessment to the individual. | Taxation Ruling TR 2006/11 Private Rulings outlines the system of private rulings and provides guidance on the provision of a private ruling and situations where the Commissioner may decline to rule on a question. | The Commissioner has declined to rule on this question as it is considered that there will be no practical consequence for you as there will be no change to your assessable income as the activities of the entity have resulted in a loss. | Detailed reasoning: Part IV of the ITAA 1936 provides that a person must lodge an annual return if required by the Commissioner. Section 161AA provides for the content of returns of full self-assessment taxpayers. You are a full self-assessment taxpayer. | Under the self-assessment system, the claims a taxpayer makes in their tax return are accepted by the ATO, usually without adjustment, and an assessment notice is issued. Even though we may initially accept the tax return, the return may still be subject to further review. | To ensure the integrity of the tax system, the law provides the ATO with a period where it may review a return (and make sure all income has been included) and may increase or decrease the amount of tax payable. We may amend an assessment up to two years (or four years for taxpayers with more complex tax affairs) after tax became due and payable under the assessment | The Commissioner has declined to rule on this question as it is considered that the correctness of ruling on this question would depend on which assumptions were made about events that have occurred in the financial year. | This ruling has not considered whether the activities carried on by you and your trading entity amount to the carrying on of a business.