Case N56

KP Brady Ch

LC Voumard M
JE Stewart M

No. 2 Board of Review

Judgment date: 15 July 1981.

K.P. Brady (Chairman); L.C. Voumard and J.E. Stewart (Members)

The issue raised in these references is whether the income derived in the years 1974 to 1977 inclusive was the income solely of the taxpayer, or was the income of a partnership existing between the taxpayer and his wife.

2. The taxpayer is a carpenter by trade. He migrated from Germany to Australia in 1959, and shortly afterwards married a German girl who had also migrated. After working initially in the State of A, he and his wife in 1967 moved north to Queensland where they conducted a small trucking business. Upon cessation of that operation in 1973, they purchased a house in Brisbane and renovated it and subsequently sold it. However, the taxpayer found the climate incompatible with outside manual work, and so he and his wife and family, then comprising five children aged between two and 14 years, returned to A. There he recommenced the operation which he had found successful in Queensland of buying an old and run-down residence, doing it up and then selling it at a profit.

3. Over the years of income in question, it seemed that the taxpayer bought, renovated and sold three separate residences, in which he and his family lived for a time whilst carrying out the renovation work. Additionally he built four villa units, two on one block of land and two on another. When not engaged in this way, he did work as a carpenter contractor for the Public Works Department and also for the public at large.

4. Some time in June of 1976, the Taxation Office enquired of him as to why returns of income had not been lodged by him in the two prior years. Resulting from that enquiry, he engaged a firm of chartered accountants, X & Co., in August of that year, to write up the books of his business as from 1 July 1973, from cheque butts and bank statements, and to prepare his taxation returns for the years of income ended 30 June 1974, 1975 and 1976. Additionally to preparing returns for the taxpayer, the firm prepared partnership returns commencing with the year of income ended 30 June 1974. The 1974 and 1975 returns for both the taxpayer and partnership were dated 15 November 1976. The returns for 1976 were dated 12 November 1976.

5. The partnership returns disclosed the following distribution of net income:

      1974                   $
      Taxpayer............ 3,320
      Wife of taxpayer.... 3,320
      Total               $6,640


      1975                   $
      Taxpayer............ 6,573
      Wife of taxpayer.... 6,573
      Total              $13,146

      1976                   $
      Taxpayer............ 9,190
      Wife of taxpayer.... 9,189
      Total              $18,379

6. The accounting firm, X & Co., has continued to act for the taxpayer, and for the year ended 30 June 1977 again lodged tax returns for the taxpayer and partnership. These were dated 30 December 1977. The distribution of net income as reflected in the partnership return was:

      Taxpayer.......... 16,683
      Wife of taxpayer.. 16,683
      Total             $33,366

7. In making his assessments, the Commissioner contended that the taxpayer in the above years of income was not engaged in a business in partnership with his wife and adjusted his assessable income as returned to include his wife's alleged share (one-half) of the net income of the partnership. The taxpayer objected to the Commissioner's action, and the matter has now come before this Board for review.

8. The partnership return for the year of income ended 30 June 1974 provided the following information in answer to the standard Notes for Guidance supplied by the Taxation Office to assist in the compilation of the Form G, Trust Estate and Partnership Income Tax Return:

        ``Notes for Guidance                        Information supplied
                                                        by (X & Co.)
The following additional information should be
forwarded with the return, if a return has
not been lodged previously:

(a) A copy of the partnership agreement.              (a) Nil.

(b) A copy of the firm's certificate of               (b) Not needed.
registration, if any, where there is no
written partnership agreement. If there
is no certificate of registration,
invoices, or other documentary evidence,
that the partners were, in fact, trading
as a partnership.

(c) The date of commencement of the                   (c) 6th July 1973
partnership or any change in the
commencement of the partnership.

(d) A statement showing the name of the               (d) ... (taxpayer) and
partnership, bank account, the name of the            ... (taxpayer's wife).
bank and branch, date account was opened,             Bank of New South Wales
names of persons authorised to operate on the         ... Brisbane, Queensland,
account, and the date of such authorisation.          6th July 1973, Partners
                                                      ... (taxpayer) and ...
                                                      (taxpayer's wife),
                                                      A.N.Z. Banking Group
                                                      Ltd. ... 13th February
                                                      1974, Partners.

(e) Details and sources of capital                    (e) Deposit of $974.78 in
contributed by each partner.                          equal shares.

(f) Names in which business contracts

         are             (f) Partnership.

(g) The family relationship of the partners.          (g) Husband and wife.

(h) Whether all the partners own jointly or           (h) Nil.''
in common the property, if any, from which
interest, dividends, rents or royalties were

9. All partnership returns were signed by the taxpayer, and the tax agent's certificate was provided by X & Co. Having necessarily set out the fact situation in some detail, we turn now to considering the relevant law.

10. The term, partnership, is defined in sec. 6(1) of the Assessment Act where it is stated that:

```partnership' means an association of persons carrying on business as partners, or in receipt of income jointly, but does not include a company.''

Because of the inclusion of the words ``or in receipt of income jointly'', the concept of partnership for income tax purposes is considerably wider than under the general law where, according to the statutory definition, ``partnership is the relation which subsists between persons carrying on a business in common with a view of profit''. Thus, it is possible that a business relationship between two or more persons may not constitute a partnership as a matter of general law, but may still be regarded as a partnership for taxation purposes if it can be said that the partners are in receipt of income jointly.

11. Whether a partnership exists or not is a question of fact (
Morden Rigg & Co. and R.B. Eskrigge & Co. v. Monks (1923) 8 T.C. 450 at p. 464), and the onus is upon the person alleging a partnership to prove that fact. In the case of
I.R. Commrs. v. Williamson (1928) 14 T.C. 335, the Lord President of the Court of Session stated at p. 340 as follows:

``My Lords, you do not constitute or create or prove a partnership by saying that there is one. The only proof that a partnership exists is proof of the relations of agency and of community in losses and profits and of the sharing in one form or another of the capital of the concern; the only proof of a partnership consists in proof of these things. No doubt the proof may be supplied by what in fact the persons alleging themselves to be partners have done during the currency of the alleged partnership.''

12. In the case now before us, it came out in the taxpayer's evidence that only he contributed the original capital which was directly opposed to the statement contained in the partnership taxation return that it was contributed in equal shares. As it was only the taxpayer's oral evidence which was given on oath, the taxation return having been received by the Board as an exhibit without proof of its contents, it is the taxpayer's oral statement which must be accepted by us.

13. The evidence revealed too that all properties were purchased in the taxpayer's own name, and that all tender forms were completed in his own name, as were all contracts and applications for plan approvals. (Again, this was at variance with the information detailed in the tax return.) All accounts were made out in his name, and the business was advertised in his own name only. Furthermore, the mortgage given to the bank as security for an overdraft was completed in his name as sole mortgagor. Finally, we note that the accounts books and records which are often maintained by a taxpayer's wife in this sort of husband/wife business relationship were in fact maintained by X & Co., the taxpayer's accountants. Accordingly, taking account of all the above aspects, we find as a fact that the business was operated by the taxpayer only and not by him and his wife in a legal partnership.

14. As was indicated in the partnership tax return for the year of income ended 30 June 1974, there was no written partnership agreement between the taxpayer and his wife, and whilst this of itself does not exclude a claim that a partnership existed, a heavy onus is placed on a taxpayer conducting a small manual-type operation of a personalised nature as is the situation before us, to show that his wife was a necessary part of that business.

15. We have little doubt that his wife fulfilled a very supportive role to the

ATC 281

taxpayer in his business, and assisted him actively in renovating the houses purchased in 1974 and 1975. However, it must be borne in mind that it was in those same houses that the family lived whilst the renovation work was being carried out. Accordingly, the question arises as to the extent of work performed by the taxpayer's wife in the normal husband/wife relationship and the work performed as part of the asserted business association which she had with her husband. Obviously the two are inextricably intermingled. In such circumstances the courts have been wary of treating the wife's role as indicative of the existence of a partnership; rather they have tended to see it as a normal incident flowing from the ordinary family relationship of husband and wife (ref.
Booth v. Booth (1935) 53 C.L.R. 1 at pp. 27 and 28; see also
Butler v. Madden (1941) 41 S.R. (N.S.W.) 245 at p. 247).

16. Also a further constraint on the wife's business activity lay in her role as mother to five young children. Furthermore, in 1976 and 1977 the taxpayer built villa units and employed sub-contractors and outside of that activity obtained work as an independent building contractor, and bearing in mind that the family continued to live during those years in the same house as was purchased and renovated in 1974, it might be considered with good reason that the wife's degree of activity in his business tended to diminish. For all of the above reasons, we are confirmed in our view that in a real sense, extending over the whole of the period 1973 to 1977, the business was conducted by the taxpayer only.

17. Whether or not a business was operated in the form of a partnership was examined by the courts in the case of
Ayrshire Pullman Motor Services and D.M. Ritchie v. I.R. Commrs. in 14 T.C. 754. There, at p. 765, the Lord President stated:

``The Income Tax becomes incident on the profits of each year, and the question therefore in each year is - whose are those profits? To whom do they belong? From whose business do they arise? And there is not the smallest doubt, therefore, that until after the date of this co-partnery the profits belonged to Mr. Ritchie and to the firm under which he traded and to nobody else.''

This dictum was cited with approval by the High Court in
F.C. of T. v. Happ (1952) 9 A.T.D. 447 at p. 451. We answer those various questions in the instant case by stating that in the years of income in question it was the activity of the taxpayer only that generated the profits of those years, and therefore those profits properly belonged to him.

18. The taxpayer stated in his evidence that whilst he signed all documents relating to the business in his own name, he was in fact signing on behalf of the partnership. This may well have been his belief as doubtless it was his conviction that his wife was his business partner. However, for a partnership to exist the law requires more than both a bona fide intention of the parties to act as partners (see
Waddington v. O'Callaghan (1931) 16 T.C. 187 at p. 199) and a general understanding between the parties that they are in business as partners (see I.R. Commrs. v. Williamson (supra) at p. 340). A business being carried on as a partnership represents to the world that a contractual obligation, either express or implied, exists between the parties forming the partnership. As part of this contract, a partner cannot transfer his share in a partnership to someone who is not already a partner unless all co-partners consent. Also, banks, suppliers and customers having dealings with a partnership have a right to know that they are trading with a partnership, as opposed to dealing with an individual, stemming from the obligation of partners to meet the partnership debts to the full extent of their own resources.

19. The taxpayer also sought to show that the Taxation Office acknowledged that a partnership in fact existed between his wife and himself when in June 1977 a taxation officer calculated for the benefit of the taxpayer's tax agents the amount of tax that would be payable by each of them for the years 1974 to 1977. These calculations were based on the amounts of net income contained in the partnership returns, and were prepared for the taxpayer and his wife in response to a request by his agents, being based on a policy which the Taxation Office had at the time that payment of late taxes prior to 30 June 1977 would result in the imposition of lower penalties. No assessments, however, were issued at that

ATC 282

time, and so the amounts of tax represented prepayments of tax against liabilities yet to be quantified.

20. The taxpayer's argument that the Commissioner's receipt of such tax payments was tantamount to acknowledging that a partnership existed lacks substance, the legal position being that no conduct on the part of the Commissioner can operate as an estoppel against the operation of the Assessment Act (see
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at p. 117).

21. Having come to the view that no partnership relationship existed between the taxpayer and his wife as a matter of general law, it becomes necessary to examine whether they might not yet be partners under the terms of the Assessment Act because of the extended meaning given to the concept through the inclusion of the words ``receipt of income jointly'' as provided by sec. 6(1).

22. However, no evidence was led to show how the income was distributed, if at all, between the alleged partners. A joint bank account was opened in their names at the Bank of New South Wales in the Brisbane suburb of B on 6 July 1973, when the partnership was said to commence, and a rubber stamp bearing their joint names was purchased by that bank on their behalf, and its cost debited to the joint account. A bank statement tendered by the Commissioner's representative detailing entries in the account for its first two months of operation showed two initial credits, one of $245.94 on 6 July stated to be trading income, the other of $974.78 on 18 July stated to be the original partners' capital contribution, but which in fact represented funds belonging to the taxpayer only.

23. Upon the couple returning to A some six months later, the present business bank account was opened in their joint names. It would seem that either the taxpayer or his wife could operate on that account. It appeared further that settlement cheques for properties sold were paid via the taxpayer's solicitor into the joint account. Also, all payments for supplies in connection with the business were seemingly made through the joint account. No other account was maintained by the taxpayer's wife other than a savings account into which were paid child endowment cheques.

24. Whilst it would seem that all business receipts of moneys were paid into the joint account, it does not necessarily follow that the husband and wife were in receipt of income jointly. The account was not specifically designated as a business account, and it is of course common practice for husbands and wives to operate joint bank accounts financed solely from the husband's own income. Also the evidence showed that the taxpayer and his wife had operated on joint bank accounts prior to the alleged commencement date of the partnership, and accordingly that event did not induce any change in their normal practice. However, the overriding reason for ruling that they were not in receipt of income jointly stems from the fact that they never became jointly entitled to the profits. It was only the taxpayer who in a real sense conducted the business and therefore the profits of the business were his, and his only.

25. For all the above reasons, the Board confirms the Commissioner's assessments of the taxpayer's income for the years of income ended 30 June 1974 to 30 June 1977 inclusive.

Claims disallowed


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