Edited version of your written advice

Authorisation Number: 1051275117395

Date of advice: 8 September 2017

Ruling

Subject: Income tax - Assessable income - Timing and derivation

Question 1

Will the joint venture pursuant to the operations entered into and carried out under the joint venture and sharefishing agreements (in terms materially identical to the agreements attached with the ruling application) be considered a partnership for tax purposes as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the joint venture be obliged (with the other entities described in the joint venture and sharefishing agreements) to lodge a partnership income tax return on the basis of the relationship as set out in those agreements (in terms materially identical to the agreements attached with the ruling application)?

Answer

No

Question 3

On the basis of the relationships described in the joint venture and sharefishing agreements (in terms materially identical to the agreements attached with the ruling application) will the Partnership of which the applicant is a member be required to include as assessable income so much of its interest in any income arising under either or both of those agreements as required by Division 6 of the ITAA 1997?

Answer

Yes

As the joint venture does not lodge an income tax return of its own each joint venture participant is required to include their portion of assessable income and allowable deductions resulting from the joint venture arrangement in their own income tax returns.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The applicant owns “Pot Entitlements” by way of licence from a State fisheries department which entitles the licence holder to a quota of allowable catch of lobster.

Separate fishing licences (not held by the applicant) are also issued by the State fisheries department.

Each fishing season, typically a 7 month period, the applicant enters into a limited period joint venture agreement (JVA) by way of joint venture (JV) with others including other “Pot Entitlement” holders, a fishing licence holder and the owner of a sea vessel.

The owner of the vessel (who may also hold “pot entitlements” and a fishing licence) contributes a vessel, a fishing licence and enters into a sharefishing agreement (SFA) with a skipper.

The skipper undertakes fishing operations, maintenance of the vessel, engages a fishing crew, is entitled to a percentage share of each catch at the end of each voyage and is responsible for a percentage of the operating expenses of the vessel.

The skipper is entitled to a fee expressed as a share of the net proceeds of sale from all the “pots” directly from the buyer/lobster processor. The fishing licence holder and the skipper deliver the catch at the end of each journey to a buyer and direct the buyer to pay the skipper’s share of the net proceeds of sale directly to the skipper.

Payment for each joint venturer’s (JV’s) share is made directly by the buyer/processer into each JV’s bank account.

Each “Pot Entitlement” holder contributes their quota entitlement to the venture (which determines the quota that may be fished) and is entitled to be paid a proportion of the net sale proceeds of their “pot”.

A share of net sale proceeds are allocated to the fishing licence holder and skipper directly from the lobster buyer/processer and a proportion of the balance are entitled to the “Pot Entitlement” licence holder directly from the lobster buyer/processer.

The JV’s each has their own business records. Minutes of meetings, business records or other documents indicating that fishing activities are undertaken as a partnership do not exist. No minutes are kept; everything is done on an informal basis. As far as business records are concerned, the parties to the JVA and SFA sell their own share of the catch and (as far as the applicant is concerned) keep their own separate records.

The Joint Venture agreement provides as follows

In addition to the above facts, the JVA provides for the following.

The JV’s have agreed to join together for their mutual profit to catch lobster.

There is no joint ownership of assets and no intention of creating a partnership or joint ownership of the vessel.

A clause of the JVA states there is no intention of creating any partnership between the JV’s i.e. “Nothing herein contained shall be deemed or intended to create any partnership between the Joint Venturers”.

The JVA acknowledges the pots contributed by each JV participant remain their separate and distinct property.

The “pot entitlements” are contributed by each joint venturer.

A clause sets out each JV’s share of the profit. The lobster processor must pay each JV’s share of the net profit of the JV being a set % (after payment to the vessel owner and the skipper) plus a set % management fee directly to the JV’s.

The sharefishing agreement provides as follows

In addition to the facts above the SFA provides as follows.

The skipper holds a current commercial fishing licence.

The licence holder and the skipper agree to make available the skipper’s service and the licence holder’s vessel and licence for the purpose of carrying out the SFA.

The parties agree that each is in business for their own right.

The skipper will perform the duties associated with the lobster fishing including preparation and maintenance of the vessel and fishing gear.

The skipper engages any fisherman and crew.

Each party to the SFA will bear their own proportion of the operating expenses of a vessel.

At the conclusion of each voyage the parties deliver the lobster caught to a buyer and advise the buyer of the total percentage of kilograms of the catch that is payable to the skipper (and any fisherman as may be nominated in writing to the buyer by the skipper) under the agreement. The parties must direct the buyer to pay the skipper the percentage of the proceeds from the sale of the catch payable to the skipper.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 Division 6

Income Tax Assessment Act 1997 section 995

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

The Commissioner will not assess the applicant as a member of a partnership pursuant to the operations entered into and carried out under the joint venture and sharefishing agreements.

Detailed reasoning

Partnership

The meaning of “partnership” in the relevant State partnership law is described as the relation which subsists between persons carrying on a business in common with a view of profit.

For income tax purposes partnership is defined in subsection 995-1(1) of the ITAA 1997 as:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary or statutory income jointly, or

(b) a limited partnership.

This definition extends the meaning given to the word 'partnership' in State and Territory partnership law. According to the statutory definitions partnership is the relationship between persons carrying on a business in common with a view to profit. Taxation Ruling TR 93/32 Income tax: rental property – division of net income or loss between co-owners (TR 93/32) explains partnership for income tax purposes at paragraphs 24 to 25:

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

Property co-owners in receipt of rental income jointly are therefore a tax law partnership.

Goods and Services Tax Ruling GSTR 2004/2 Goods and services tax: What is a joint venture for GST purposes? (GSTR 2004/2) paragraph 47 and Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) (TR 94/8) paragraph 3 both state the question of whether a partnership exists is one of fact. The existence of a partnership has regard to the agreement between the parties towards one another and towards third parties during the course of carrying on business and circumstances surrounding formation of the agreement. There will usually be an entitlement to a share of net profits and evidence of the parties’ intention to act as partners will be relevant. There will also be joint and several liability of the partners.

Joint Venture

A joint venture is not defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or subsection 995-1(1) the ITAA 1997.

Whether a business is a joint venture is a matter of fact. As generally understood a joint venture is akin to a partnership. However an important distinction for tax purposes is that partners derive income jointly whereas joint venturers derive income separately and instead share product from the joint venture.

Common law partnerships are usually evidenced by parties carrying on a business in common with a view to making a profit to be shared between them. Tax law partnerships involve entities in joint receipt of income. In contrast joint ventures are entered into for a limited period for a specific project after which they are wound up. The joint venture's most important feature and the one that sets it aside from a partnership is that in return for their contributions to the venture each participant receives an agreed share of the product or output from the joint venture to their own account. The benefit is in kind rather than a share of jointly earned profit or income.

The Commissioner considers what a joint venture is in GSTR 2004/2. Paragraph 12 says the term joint venture is not defined in the GST Act. Accordingly it takes its ordinary meaning having regard to the context in which it appears in the GST Act. Many concepts the Commissioner uses to identify a joint venture using its ordinary meaning are the same for income tax.

Often a joint venture is characterised by the following features (GSTR 2004/2 from paragraph 11 with further at paragraphs 30 to 41);

● Sharing of product or output rather than sale proceeds or profits;

○ Obtaining individual benefits for the parties in the form of a share of output of the arrangement rather than joint or collective profits for all the parties.

○ Sharing product or output is the most important distinguishing feature of a joint venture. Other features are indicative.

○ GSTR 2004/2 paragraph 33 explains participants may agree product is to be sold collectively by one participant on behalf of the others. This does not mean participants are sharing proceeds of sale or there is a joint profit to share. Rather the entity sells each participant's share of product on behalf of that participant.

● A contractual agreement between the participants;

○ Each of the parties agrees to the formation of a joint venture.

○ Although not determinative joint venture agreements usually declare that participants associate themselves in a business undertaking for a stated purpose [in this case fishing]. Agreements usually disclaim other legal relationships between participants such as partnership (GSTR 2004/2 paragraph 35).

○ However the fact that an arrangement is referred to as a joint venture does not by itself make it a joint venture. (GSTR 2004/2 paragraph 30).

● Joint control;

○ Joint control by participants is a feature. Daily management may rest with a manager appointed by the participants. The manager may be a participant or third party (GSTR 2004/2 paragraph 38).

● A specific economic project;

○ The association is usually for participation in a single project rather than a continuing business.

○ Commonly a joint venture is for a specific project with a finite life (such as a mine) and when the project is completed the joint venture ends. It is not essential the end date be specified or determined when entering into the joint venture agreement (GSTR 2004/2 paragraph 40).

● Cost sharing

○ Each participant is liable only for its own debts and own costs. Unlike a partnership there is no statutory basis to be jointly and severally liable for debts incurred by the other participants (GSTR 2004/2 paragraph 41).

The following table indicates common features of a partnership and joint venture (GSTR 2004/2 paragraph 51).

Whether business is carried on in partnership

Taxpayers are entitled to choice of structure how they operate in business. Joint venture is one method where they seek to share the benefits of undertaking or activity jointly with another party without incurring the joint liability risk of partnerships.

In the current situation a quota is allocated to each licence holder prescribing a maximum amount of ‘catch’. Joining together with other licence holders and using one vessel to undertake the fishing activity increases economies of scale.

The Commissioner’s views whether business is carried on in partnership are contained in TR 94/8. Relevant factors to be considered are listed at paragraph 4 of the ruling and commented on further throughout the ruling.

Intention - the mutual assent and intention of the parties

TR 94/8 paragraph 10 states:

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.

Mutual assent and intention to act as partners is essential to demonstrate existence of a partnership. Agreements showing this may be written or oral (TR 94/8 paragraph 12). Written agreement is desirable but intention to act as partners may be inferred from the conduct of the parties (TR 94/8 paragraph 13). Generally a lack of intention to be in partnership means a partnership does not exist at law (TR 94/8 paragraph 14). Mutual assent and intention to act as partners is assessed with all relevant circumstances including conduct of the parties and those listed below.

(a) Joint ownership of business assets together with a joint liability to business debt indicates a business partnership (TR 94/8 paragraph 16).

(b) Business Name Registration although a positive factor in determining existence of a partnership is not required (TR 94/8 paragraph 17).

(c) Joint Bank Account. The existence of a joint bank account and power to operate the account is a positive factor in establishing that business is being carried on in partnership (TR 94/8 paragraph 18).

(d) Extent to which parties are involved in the conduct of the business; however it is not essential that all partners actively participate in a partnership (TR 94/8 paragraph 20).

(e) Extent of capital contributions; the sharing by the parties of contributions to assets and capital weighs in favour of the existence of a partnership (TR 94/8 paragraph 24).

(f) Entitlement to a share of net profits; where profits are shared in line with a partnership agreement it is prima facie evidence of existence of a partnership (TR 94/8 paragraph 25).

(g) Business records; the maintenance of business records in the name of the parties or in the name of the partnership, rather than in the name of one party only, is indicative of the existence of a partnership (TR 94/8 paragraphs 26 and 27).

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

The conclusion a partnership exists is supported where parties trade in joint names with the public, indicating they are in partnership. Banks, suppliers and customers dealing with a partnership should be aware they are trading with a partnership. It is important that creditors of a partnership are aware they are dealing with a partnership as partners are obliged jointly and severally to meet partnership debts to the full extent of their own resources (TR 94/8 paragraph 28). The existence of the following is relevant (TR 94/8 paragraph 29):

(i) invoices, receipts, tenders, business letters and applications in the partnership name;

(ii) written and oral contracts with the partnership; and

(iii) advertising in the partnership name.

Following is an application of the above factors to the current situation.

Clauses of the JVA confirm the parties do not intend for the relationship between them to constitute a partnership. It is clear based on the JVA that mutual assent and intention of the parties to carry on business as partners does not exist.

Joint ownership of business assets; each joint venturer owns their own distinct asset, namely “pot entitlement” licences, fishing licences or the fishing vessel and does not intend to join them as partners. This is clearly expressed by a clause of the JVA stating there is no intention of creating a partnership or joint ownership.

Business Name Registration; the parties do not trade under a business name. This is a factor in favour of a joint venture.

Joint Bank Account; the parties do not operate a joint business account. Each has their own bank account. Payment for each JV’s share is made directly by the buyer/processer into each JV’s bank account. There is no receipt of ordinary or statutory income jointly.

Extent of capital contributions; each joint venturer provides their relevant asset, being their respective “pot entitlements” (referred to as “pots” in the sample JVA).

Entitlement to a share of net profits; each participant receives payment for the product referrable to their pots from the JV activity.

Business records; each joint venturer has their own business records. Minutes of meetings, business records or other documents indicating the fishing activities are undertaken as a partnership do not exist. No minutes are kept; everything is done on an informal basis. As far as business records are concerned, the parties to the JVA and SFA sell their own share of the catch and (as far as the applicant is concerned) keep their own separate records.

Trading in joint names and public recognition of the partnership; rather than operating as partners in an ongoing relationship the parties enter into a limited period agreement on a seasonal basis, combining resources for typically a 7 month period. The parties do not trade under a joint name and there is no public recognition of a partnership.

Based on the factors listed in TR 94/8 it appears the JV is not operating as a partnership. The Commissioner will not assess the applicant as member of a partnership pursuant to the operations entered into and carried out under the JVA and SFA.

Question 2

Detailed reasoning

As the parties to the JVA and SFA are not partners for income tax purposes they will be taxed as separate taxpayers and not required to lodge a partnership income tax return on the basis of the relationship as set out in those agreements.

Question 3

Detailed reasoning

As the parties to the agreement are not partners for tax purposes they will be taxed as separate taxpayers.

The applicant as a party of the joint venture is required to include in its assessable income so much of its individual interest in any income; or entitled to deduct from its assessable income so much of its individual interest in allowable deductions, loss or outgoings arising under either or both of those agreements, for the year of income as is attributable to a period when they are resident.

ATO view documents

Taxation Ruling TR 93/32 Income tax: rental property – division of net income or loss between co-owners

Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships)

Goods and Services Tax Ruling GSTR 2004/2 Goods and services tax: What is a joint venture for GST purposes?

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