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Ruling

Subject: Existence of partnership - partnership agreements - distribution percentages

Question

Did a partnership exist for income tax purposes between you and your spouse during the relevant year.

Answer

No.

This ruling applies for the following period

For year ended 30 June 2012

The scheme commenced on

July 2011

Relevant facts

You purchased a retail outlet business for your spouse.

You paid the money for the business out of an account in your name.

Your spouse operated the business and you did the accounts and went in once a week to help, mainly on the weekend.

The business is registered under your spouse's name.

The rental agreement is in the name of the business trading name.

There is a separate bank account under the registered business name. Both your spouse, and yourself can operate the account.

You have indicated that the Public Liability insurance is in the business name, but a copy of your 'Business Insurance' with the insurer indicates that it is in the names of yourself and your spouse.

You have indicated that your spouse's name is on some of the credit applications and yours is on others.

The business was initially registered as a sole trader in your spouse's name and business activity statements were lodged every quarter in that name.

You have provided copies of two emails about overdue accounts. The emails are addressed to the business name, one has your name on it and the other has both your names on it.

You have stated that there is a verbal partnership agreement and you and your spouse agreed to make distributions from the partnership on a 80/20 basis, at the time the business was purchased.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

Based on the information available a partnership did not exist in the relevant year. The weight of the evidence indicates that the business was conducted by your spouse as a sole trader.

Detailed reasoning

The definition of a partnership under section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

(a) 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

(b) a limited partnership.

Taxation Ruling TR 94/8 outlines the factors we take into account in deciding whether persons carrying on business as partners for income tax purposes. It has particular relevance to what are sometimes known as husband and wife partnerships.

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

We look at the following factors in deciding whether persons are carrying on a business as partners in a given year of income.

Intention

· the mutual assent and intention of the parties

Conduct

(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 the profits

(g) business records

(h) trading in joint names and public recognition of the partnership.

The business has been conducted for a period of approximately twelve months, with expenses through: purchases of stock, rent expenses, depreciation and all other expenses. There was gross income derived.

You lodged your income tax return and asked for a ruling on partnership distribution and clarification on the way the return was completed. You were sent a letter outlining the information the Commissioner requires to make a decision on whether a partnership business is being carried on. Reference was made to Taxation Ruling TR 94/8, you were asked specific questions and a general question asking you to provide any other information you consider would support your argument that a partnership exits. You provided a very brief response.

Applying your information to the above factors:

Intention

This is unclear. You stated that you purchased a retail outlet business for your spouse. The business was registered in your spouse's name. The registration with the Australian Taxation Office (ATO) is an ABN for your spouse as a sole trader and business activity statements have been lodged for the full year on that basis. There is no formal partnership agreement in place, but you say there was a verbal agreement at the time of purchase, which conflicts with registering the business as a sole trader with the ATO. You have not provided any statement from your spouse that you are in fact conducting the business in partnership.

Conduct

(a) joint ownership of business assets

This is unclear. You purchased the outlet for your spouse. The money paid came from a bank account in your name, but the ownership of the assets are not clear.

(b) registration of business name

The business is registered in your spouse's name.

(b) joint business account and the power to operate it

There is a separate business account under the business name. It is not clear if this is in joint names, but both parties can operate the account. No bank statements have been provided to evidence ownership of the account or the TFN quoted on the account.

(c) extent to which parties are involved in the conduct of the business.

Your spouse operated the business and you did the accounts and went in once a week to help, mainly on weekends.

(d) extent of capital contributions

You paid for the business and because the business did not make any money you have both been living off your wage. You stated that you purchased the business for your spouse. It is not clear whether you gifted the money to your spouse, lent it or you contributed the capital to secure a share in the business.

(e) entitlement to a share of net profits

This is unclear. The business was registered as a sole trader with the ATO on your spouse's ABN. In your request you raised the question 'Do I need a formal agreement for a partnership as my spouse and I have agreed on a 80-20 split, due to the circumstances.'

You were asked to provide an explanation of this and if there was a verbal partnership agreement, when was it made, as it conflicts with your spouse being a sole trader. Your response was 'Verbal agreement when purchased'. You gave no explanation of the circumstances and did not expand on how you arrived at the 80-20 split.

(f) business records

You have provided copies of two emails, which are not conclusive evidence of any outcome. They are both sent to the trading name with one having both of your names on it and the other your name on it. You stated that the Public liability insurance is in the business name and provided a Business Insurance Certificate of Currency in joint names.

During the twelve month period you would have had a large number of invoices for products and services (telephone and electricity) as evidenced by an expenditure of approximately $x, but you have not supplied a copy of one invoice to evidence the business activities.

(g) trading in joint names and public recognition of the partnership.

Similar to the business records, no real evidence has been presented.

The conclusive evidence that is available is that:

1. the business name was registered in your spouse's name

2. the business was registered as a sole trader with the ATO on an ABN allocated to your spouse and the business activity statements were lodged on this ABN for the full year.

3. Your spouse operated the business and would have been recognised by the public as the business operator.

The other evidence available to us does not give a clear indication of whether the business operated through a partnership or as a sole trader, due to the briefness of the evidence it could be applied either way.

The overall conclusion is that the business was conducted by your spouse as a sole trader and you are not entitled to any of the losses from the activity in the relevant year.

The figures for the business and partnership loss will be removed from your income tax return and your assessment amended on the basis of the outcome of this ruling. No losses will be allowed in your assessment in relation to the business activity.

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