RA Balmford SM
Administrative Appeals Tribunal
R.A. Balmford (Senior Member)
These are two applications for review of decisions of the respondent disallowing objections by the applicant to the inclusion in the respondent's assessment of her income for the years ended 30 June 1983 and 30 June 1984 of amounts of $1,441 and $809 respectively, which amounts had been claimed by her as deductions pursuant to sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'').
2. The applicant's tax agent, on 14 August 1984 and 19 September 1985 respectively, requested that the decisions on the applicant's objections be referred to a Board of Review, and that request was complied with by the respondent. By virtue of sec. 223(1) of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 and sec. 189(2) of the Act that referral of the decisions on the applicant's objections is deemed to constitute the making by the applicant of applications to the Tribunal for review of the decisions.
3. The issue being the same in respect of each deemed application, both matters were heard together. The Tribunal had before it the documents lodged by the respondent pursuant to sec. 37 of the Administrative Appeals Tribunal Act 1975 as modified by sec. 14ZG of the Taxation Administration Act 1953 and numbered as folios 1-14, together with other materials lodged at the hearing. Evidence was given by the applicant, who was represented by her tax agent, Mr Melrose. The respondent was represented by Mr Richard Phillips of counsel.
4. The essential facts in this matter are not in dispute, and on the basis of the applicant's evidence, which was not challenged by the respondent and which I accept unreservedly, I make the findings of fact set out in this and the following six paragraphs. In February 1983, the applicant and her husband bought a 15-acre property (``Blackacre'') in the hills outside Melbourne. There was a three-bedroom house on the property, which was generally run down. The applicant and her husband had each been married before their marriage to each other, and each of them had a family. For this reason they bought the property as tenants in common in equal shares, in order that on the death of either of them, that person's share would pass to his or her own estate. Blackacre has been continuously let, to a series of tenants, since they bought it, save for periods when one tenant has left and a successor has not yet been found. It is not always easy to find a tenant.
5. Since buying Blackacre the husband and wife have spent many weekends working on it, improving it and doing routine maintenance, approximately every other weekend over the whole period. In order to do this, when tenants are in the house, they stay with friends nearby. They live in a house in the suburbs of Melbourne which is owned by the husband.
6. During the two taxation years with which I am concerned, the applicant and her husband were both in the full-time work force, as a teacher and an engineer respectively. The husband retired some five years ago and the wife two years ago. They bought Blackacre with a view to its being an investment in the short term, and in the long term, a place for them to live in after their retirement. However, having retired, they have not yet moved there, and are beginning to doubt whether they will. At the date of the hearing there was no tenant, but they intended to relet the property if a tenant could be found.
7. The purchase was partly financed by a bank mortgage. Rent receipts did not cover the repayments required. However, the loan was repaid, with the assistance of other income, before the applicant and her husband retired. The rent is paid to an estate agent, who pays it into a joint bank account of the applicant and her husband.
8. At the time of the purchase the applicant and her husband executed a partnership agreement in a standard form, stating that the parties had become partners ``for the purpose of carrying on the business of property rental''. Clauses 3 and 4 of the partnership agreement read as follows:
``3. The net profits and losses of the partnership shall be divided between the partners in the following proportions: As mutually agreed by the partners and evidenced in writing prior to the end of each financial year and if there is no mutually agreed division equally.
- (a) The capital of the partnership shall comprise the property situated at and known as [Blackacre];
- (b) the said capital of the partnership shall be owned by the parties hereto in the following proportions: equally.''
9. A minute of a partnership meeting held on 28 June 1983 reads, so far as relevant:
``It was hereby resolved that pursuant to clause 3 of the partnership deed that [the husband] shall receive the whole of any loss result from the partnership.''
However, the whole of the loss on the property in the year ending 30 June 1983, amounting to $2,883, was in fact claimed as a deduction by the wife, the applicant in these proceedings. There was evidence before me on which I find that the minute was an incorrect record of the proceedings at the meeting, the intention of the parties at all relevant times having been that the loss in respect of that year should be wholly borne by the wife. I consider that the requirement in cl. 3 of the partnership agreement that an agreement as to division of profits and losses be ``evidenced in writing'' was not essential to the operation of that provision.
10. A minute of a partnership meeting held on 28 February 1984 reads, so far as relevant:
``It was agreed by the partners that the partnership losses be incurred by [the wife] and in the event of a profit split equally.''
Again, the whole of the loss on the property in that year, amounting to $1,618, was claimed as a deduction by the wife.
11. The submission of the applicant was that a partnership existed between the parties in terms of the general law of partnership. That being so, profits and losses were to be shared as provided by the partnership agreement. The whole of the losses in each of the 1983 and 1984 taxation years were borne by the wife in accordance with agreements made in each of those years pursuant to cl. 3 of the partnership agreement, and thus were properly claimed by the wife.
12. Mr Phillips submitted, relying on the decision of Beaumont J. in
F.C. of T. v. McDonald 87 ATC 4541, that there was no partnership in terms of the general law. The husband and wife were deemed to be partners for the purposes of the Act by virtue of the definition of ``partnership'' in sec. 6(1) of the Act, which has read as follows at all relevant times:
``In this Act, unless the contrary intention appears -
- `partnership' means an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company,''
Their income from that deemed partnership was therefore assessable and their losses deductible, pursuant to sec. 92 of the Act which has read, so far as relevant, at all relevant times:
``92(1) The assessable income of a partner in a partnership shall include -
- (a) so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was a resident; and
92(2) Where a partnership loss is incurred by a partnership in a year of income, there shall be allowable as a deduction to a partner in the partnership -
- (a) so much of the individual interest of the partner in the partnership loss as is attributable to a period when the partner was a resident; and''
As the two deemed partners owned the property in equal shares, one-half of the profits was assessable as income to each of them, and one-half of the losses was allowable as a deduction to each of them.
13. In McDonald's case a husband and wife agreed in writing to invest in income-producing properties as joint tenants, profits to be apportioned 75% to the wife and 25% to the husband, and the husband to bear all losses. Several properties were purchased and let. In 1978 the husband claimed a deduction for the total loss on the property, but the Commissioner allowed only half of that loss. Beaumont J. found that the husband and wife were not ``carrying on a business in common with a view of profit'' in terms of the statutory definition of ``partnership'' (to be found in Victoria in sec. 5(1) of the Partnership Act 1958). The relationship was one of co-ownership, and the husband was entitled to claim only his individual interest in the loss. His Honour said at p. 4552:
``In the present case, a number of indications point to the conclusion that the parties were not carrying on a business, with the consequence that their relationship was that of co-ownership rather than partnership. Their investment involved little, if any, active participation from either party. This was inevitable because the respondent was apparently in full-time employment, and Mrs McDonald was fully committed at home. On the few occasions on which the owners needed to be involved, the respondent and not Mrs McDonald attended to the matter. This was not a case of the active joint participation by the parties in a business activity. Rather, it was a case of a renting out of premises without the provision of other services... In my view, there was here a mere investment in property rather than a partnership in the properties or their profits. This is not, of course, to say that it is not possible for husband and wife to enter into a partnership under the general law with respect to land dealings - see, e.g.,
Spence v. F.C. of T. (1967) 121 C.L.R. 273.
Given the respondent's minor participation in the affair and given Mrs McDonald's apparent lack of commercial expertise and her passive role, it is, I think, more accurate to describe them as co-owners in investments rather than as partners in a business operation.
This is not to say that the respondent and his wife were not each entitled to claim one-half of the losses under sec. 51(1) of the Act. That provision is not limited to deductions from income derived as being the proceeds of a business. It is `a general provision relating to deductions claimable in relation to expenses, losses or outgoings incurred in gaining or producing any income whatever and not merely in relation to income derived from a business'. (See
F.C. of T. v. Green (1950) 81 C.L.R. 313 per Latham C.J. at p. 319.)''
14. Mr Melrose sought to distinguish McDonald's case on the basis of the extent of the involvement of the parties in physical maintenance and development of the property. He submitted that the work done was far in excess of what could be attributed to a mere passive investment. The parties did the work themselves: had they paid for the work to be done the amount of money involved would have been considerable and would have been regarded as a contribution to a business.
15. Mr Phillips submitted that the parties had done no more than what would ordinarily be required of an owner of property, and that in doing so they had had the additional aim of enhancing their own enjoyment of Blackacre when they came to live there, as they had intended to do.
16. Having considered the evidence, I do not find that the physical work done by the husband and wife on the property is sufficient to take this case out of the ambit of McDonald. If they did any more than was natural for an owner of rental property, it was done for their own domestic purposes. I find that, like the husband and wife in McDonald, they were co-owners of an investment, in which they each owned one-half share, rather than partners in a business operation. Accordingly, by virtue of sec. 92 of the Act, one-half of the losses on the investment was allowable as a deduction to each of them. For the reasons given, the objection decisions under review will be affirmed.