Edited version of private ruling

Authorisation Number: 1011451125719

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Ruling

Subject: Joint venture

Issue 1

Question

Are you carrying on a business in partnership for income tax purposes?

Answer

No.

Issue 2

Question 1

Are you entitled to a deduction under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the decline in value of the depreciating assets which are not subject to an option to acquire on the cessation of the rental contract?

Answer

Yes.

Question 2

Are you entitled to a deduction under Division 40 of the ITAA 1997 for the decline in value of the depreciating assets which are subject to an option to acquire on the cessation of the rental contract?

Answer

No.

Issue 3

Question

Are you entitled to a deduction under Division 41 of the ITAA 1997 in relation to the depreciating assets held by you under section 40-40 of the ITAA 1997?

Answer

No.

This ruling applies for the following period/s:

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2007

Relevant facts and circumstances

A joint venture agreement will be entered into between your participants and another entity. The joint venture is for a limited period.

The other entity carries on a rental and leasing business to external third party clients. The objective is to become a rental company of assets which creates income from rental contracts continuing on after third party financiers have provided funding, which is called inertia income.

The other entity commenced the business shortly before the joint venture and might continue to carry on the business after the joint venture ends. Alternatively, the business might be sold.

You are the financier of the rented and leased items.

You are funded by investors who have participating interests in you relative to the amount invested. The funds invested are then used to obtain substantial borrowings which allow you to acquire the items which are to be rented to customers.

You then assign the interest in these rental contracts pursuant to the master sale of receivable agreements with various financial institutions.

All of your profits and losses are to be distributed to your participants according to their participating interests. In addition, your investors are entitled to interest payments which are calculated based on the present value of the inertia income.

The majority of your profit will be derived from the brokerage obtained from rental agreements and inertia income which is obtained from customers who continue to rent items after the finance institution has been paid.

You currently employ staff.

You are constituted for the following purposes:

· to fund and conduct the business for the joint venture period

· to enhance and expand the business

· to acquire the assets

· to enable the joint venture to conduct the business

· to pay all costs of the joint venture for the duration of the joint venture

Your participants have appointed the other entity as the attorney, trustee and management of the joint venture. The other entity, with the help of its key staff, is to perform all management functions of the business including:

· the hiring of staff

· maintenance of the IT system

· maintenance of the relationships with the banks who enter into the master sale of receivable agreement

· attend to all statutory requirements, including the lodgement of partnership income tax returns and business activity statements

There are clauses in the agreement which relate to capital contributions, profit sharing and several liability.

You will be the economic and legal owner of the depreciating assets.

The business name will be in the name of the other entity.

Third parties will not be aware that they are dealing with you.

The other entity is shown as the owner on the rental agreements.

The business bank account will be in the name of the other entity.

Some participants have shown an interest in being involved in the business, however there is no other participation in the business by the participants excluding the other entity.

Some of your employees will be participants.

The business records will be in your name.

All rental equipment held by the business will be owned by you. There are few other business assets.

The depreciable assets are not allocated to a small business pool.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-40

Income Tax Assessment Act 1997 Paragraph 41-20(1)(d)

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 995-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, go to our website 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.

Reasons for decision

Are you carrying on a business in partnership?

Partnership is defined in section 995-1 of the ITAA 1997 to mean an association of persons carrying on business as partners or in receipt of ordinary income or statutory income jointly, but does not include a company.

An individual may carry on a business either alone or in a partnership with others. An investor in a managed investment scheme can be regarded as carrying on their own individual business (Hance v. FC of T; Hannebery v. FC of T 2008 ATC 20-085). However, retention of ownership by individual members, of the produce of the scheme, was of critical importance in that court decision.

Taxation Ruling TR 94/8 provides guidelines in relation to whether business is carried on in partnership. Paragraph 3 of TR 94/8 states:

There are no statutory rules in the income tax law for deciding whether persons are carrying on business as partners. 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.

TR 94/8 then provides 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

· Conduct

· joint ownership of business assets

· registration of business name

· joint business account and the power to operate it

· extent to which parties are involved in the conduct of the business

· extent of capital contributions

· entitlement to a share of net profits

· business records

· 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 the entitlement to a share of net profits is essential.

Applying the relevant factors to your circumstances

Intention

Paragraphs 12 and 13 of TR 94/8 state:

12. Mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. We accept a written or an oral agreement as prima facie evidence of such an intention.

13. A written agreement signed by all parties, although desirable, is not necessary to demonstrate mutual assent and intention. An agreement to act as partners may also be inferred from a course of conduct agreed to by all parties.

In this case, the written agreement is to create a joint venture between the participants and not a partnership. The agreement, however, contains indicia of a partnership as will be discussed below, and the fact that there is a joint receipt of income would indicate that this arrangement is a tax partnership rather than a joint venture.

Conduct

Joint ownership of business assets

You will be the legal owner of the rental equipment. The agreement, however, provides that the liabilities of the participants shall be several and, except as specified in the agreement, not joint or collective.

Registration of business name

The business name will be in the name of the other entity.

Joint business account and power to operate the account

The business bank account will be in the name of the other entity.

Extent to which parties are involved in the conduct of the business

Some participants have shown an interest in being involved in the business. There is no other participation in the business by the participants excluding the other entity. Some of your employees are participants in the joint venture.

Extent of capital contributions

The agreement provides that the participants are required to contribute certain amounts to fund the joint venture.

Entitlement to a share of net profits

The agreement provides that the participants will share in the net operating profit according to their participating interest.

Business records

The business records will be in your name.

Trading in joint names and public recognition of the partnership

As mentioned above, the business name will be in the name of the other entity. Additionally third parties will not be aware that they are dealing with you. The other entity is shown as the owner on the rental agreements.

Conclusion

Some of the factors that are indicators of the carrying on of the business in partnership, such as the capital contributions, entitlement to a share of net profits and the business records in your name may be seen to be present, however other indicators such as the business name and bank account being in the name of the other entity, the lack of participation in the business by the joint venturers, and the lack of public recognition of you negate the conclusion that the participants are carrying on the business as partners.

In this regard, paragraph 28 of TR 94/8 states:

… Banks, suppliers and customers dealing with a partnership should be aware that they are trading with a partnership, as opposed to dealing with an individual. It is important that creditors of a partnership are aware that they are dealing with a partnership, as partners are obliged, jointly and severally, to meet the partnership debts to the full extent of their own resources.

The overall impression in this case is that the business is essentially being carried on by the other entity, and that your role in the arrangement is to obtain funding and to provide the rental equipment to enable the other entity to carry on and expand its business.

Accordingly, it is considered that the participants are not carrying on a business as partners for the purpose of the partnership definition in section 995-1 of the ITAA 1997.

Under the extended income tax definition of partnership, it is not necessary that persons carry on a business as partners for their association to be treated as a partnership for income tax purposes. They need only to be in receipt of income jointly.

In this case, factors such as the joint receipt of income as indicated by the agreement, the capital contributions and entitlement to a share of net profits as discussed above, indicate that the participants are in partnership, although they are not considered to be carrying on a business in partnership.

Any income derived by you will be included in your net income and distributed to the participants, as partners in the partnership, according to your agreement for the sharing of profits or losses.

Decline in value

Broadly speaking, Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset a taxpayer holds to the extent the asset is used for a taxable purpose (section 40-25 of the ITAA 1997).

The table in section 40-40 of the ITAA 1997 identifies a holder of a depreciating asset in any particular circumstance. The default rule is that a taxpayer holds an asset if they are the owner of it (item 10 of the table in section 40-40 of the ITAA 1997). However, there are items in the table that identify a taxpayer as a holder in various other circumstances even though they are not the asset's owner.

One of these other circumstances is contained in item 6 of the table in section 40-40 of the ITAA 1997 and applies where:

· a taxpayer has possession, or an immediate right to possession, of the asset combined with a right, the exercise of which would make it the holder (for example, an option to acquire) and

· it is 'reasonable to expect' that the taxpayer will become the holder by exercising that right or that the asset will be disposed of at their direction or for their benefit.

Another circumstance is contained in item 7 of the table in section 40-40 of the ITAA 1997, and applies where a depreciating asset that is a partnership asset is held by the partnership and not by any particular partner.

The Commissioner's established practice is to treat as a contract for the sale of goods an arrangement where a lessee is provided with an option to purchase or retain the use of leased goods.

In your case, you are the owner of depreciating assets, which you hold for the purpose of producing assessable income in the form of brokerage and inertia income, which is a taxable purpose under paragraph 40-25(7)(a) of the ITAA 1997.

Some of the rental agreements, however, allow the renter the option to acquire the rented assets on the cessation of the rental contract. The depreciating assets which are subject to the option to acquire on the cessation of the contract will be held by the renter for the purposes of Division 40 of the ITAA 1997 under item 6 of the table in section 40-40 of the ITAA 1997.

The depreciating assets which are not subject to the option to acquire will be held by you for the purposes of Division 40 of the ITAA 1997, and you will be entitled to claim a deduction for the decline in value of these assets.

Small business and general business tax break

Small business entities and other businesses are able to claim a deduction under Division 41 of the ITAA 1997 for eligible assets that they:

· commit to investing in between 13 December 2008 and 31 December 2009, and

· start to use or have installed ready for use by 31 December 2010.

In order for the entity to be entitled to claim the tax break, the entity must be entitled to deductions for the asset's decline in value. Where eligible assets are held under a lease, the tax break is to be claimed by the entity in the leasing arrangement who would claim the deductions for the decline in value of the asset.

One of the requirements to claim the tax break is that when you start to use the asset, or have it installed ready for use, it must be reasonable to conclude that you will be using the asset principally in Australia for the principal purpose of carrying on business (paragraph 41-20(1)d) of the ITAA 1997).

As we have determined above that you are not carrying on a business in partnership, you do not satisfy this requirement, and you will not be entitled to a deduction under Division 41 of the ITAA 1997 for the assets that would otherwise be eligible for the deduction.

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