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Ruling

Subject: Exemption from lodging a partnership return

Question 1

Will the Commissioner exercise his powers of general administration under section 8 of the Income Tax Assessment Act 1936 (ITAA 1936) to exempt the partnerships from being required to lodge partnership income tax returns and instead for each co-owner to separately account for their XX% share of income and expenses in their tax returns?

Answer

Yes

This ruling applies for the following periods:

XX/XX/XXXX to XX/XX/XXXX

The scheme commences on:

XX/XX/XXXX

Relevant facts and circumstances

Background of the company

Company B is an Australian resident taxpayer.

Company B and Company E are members of a tax consolidated group. Company B is the head company of the group and Company E is a subsidiary member.

Company B and Company E entered into an agreement to acquire an interest in a property.

On XX/XX/XXXX, Company B entered into a number of Co-owners' agreement (the Agreement) with various entities (the Co-owners).

The Agreements between the entities provides that after settlement all the XX% interests will be held by the relevant Co-owners as tenants in common.

The Co-owners' agreements

The Agreements explain the relationship of the Co-owners as follows:

Nothing contained in this agreement will:

· be regarded as constituting a partnership between the Owners; or

· constitute the Owners as partners with one another for any purpose or scope,

· except to the extent to which the joint receipt of income in respect of the Property constitutes the Owners of the Property as a partnership for income tax purposes.

If the Owners' ownership of the Property gives rise to a tax law partnership, the Owners agree and acknowledge, in reliance on GSTR 2004/6, that:

· They are each separately carrying on an enterprise for GST purposes; and

· The tax law partnership is not carrying on an enterprise for GST purposes.

Nothing contained in this agreement will render any of the Owners liable for any debts or obligations of the other Owners other than as provided in this agreement, nor will any Owner be constituted the Agent of the other Owners, except to the limited extent specifically permitted by this agreement and as may be subsequently agreed upon within consent of the Owners.

The Owners agree to co-operate to make submissions to the Australian Tax Office to permit the Owners to prepare separate tax returns for income tax purposes (as required by owners acting reasonably)

As a shared objective, the Co-owners agreed that they will keep and maintain the properties thereby maintaining and enhancing the properties' long term investment values (paragraph (b) of clause 2.1 of the Agreements).

Clause 5.1 of the Agreements provides that all income will be distributed to the Co-owners in the proportion that their interest bears to the total of all of the Co-owners' interest in the property.

Clause 5.2 of the Agreements states that:

All expenses will be payable by the owners in the proportion that their interest bears to the total of all Owners' interests in the Property.

To avoid doubt, an Owner is not responsible for any part of any:

· income tax, capital gain tax or other similar imposts levied or charged directly on another Owner as a consequence of the other Owner's interest;

· any loss or expenses arising out of any sale of another Owner's interest; and

· any loss or expenses arising out of the negligence or default of another Owner.

Under the Agreements the Co-owners must enter into a Property Management Services Agreement with a third entity and into a Development Management Services Agreement with a fourth entity.

The Agreements define 'income' as the "income, revenue, profits, proceeds and receipts derived from or in any way arising out of the ownership, management, operation, and development of the property".

The Applicant contends that any reference to 'development' of the properties in the Agreements is referring to the ongoing need to refurbish properties. There is no intention of redevelopment for resale.

Clause 8.3 of the Agreements contains terms and conditions of dealing with an interest. If an Owner (seller) wishes to sell a portion or all of its interest, it must serve a Transfer Notice in writing to the other owner. The Transfer Notice constitutes an offer to sell the interest to the other owner (the Offeree). If the Offeree notifies the seller that it wishes to acquire all of the interest, the seller must sell to the Offeree. If the Offeree wishes to acquire less than all of the interest, the seller may (but is not required to) sell to the Offeree. If the Offeree does not notify the seller of its wish to acquire some or all of the interest within a specified period, the seller is entitled to sell the interest to a third party on terms and conditions no more favourable than those set out in the Transfer Notice.

The Applicant further contends that:

· The Co-owners have agreed not to form a general law partnership or to jointly carry on an enterprise. The co-ownership is being held by each party as part of their business activity. Therefore, the partnerships are tax law partnerships and not general law partnerships.

· The Co-owners will make independent decisions with regard to the acquisition of interests in income producing property.

· Each Co-owner will not act for the mutual benefit or on behalf of the other Co-owners and is primarily concerned with securing an enhanced value or return on their investment.

· The income and expenses will not be paid to or from a joint bank account in the name of the Co-owners.

· The acquisitions are not funded out of joint borrowings or funds.

· The interests are held as tenants in common rather than as joint tenants.

· The income of each tax partnership will only be from rent (any related amounts akin to, or in conjunction with, the receipt of rent. eg. variable outgoings and other charges).

The circumstances of 'no ABN' withholding will not arise for the partnerships, as quoting of the ABN of both parties of each partnership will be made (in recognition that they are separately carrying on an enterprise in their capacities as Co-owners).

The Applicant advises that the involvement of Company B is a part of the carrying on of its business and is therefore not a 'passive investment' of the company. Also, the Applicant anticipates that the involvement of the other parties would also be a part of the carrying on of their business and is not a passive investment.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 8,

Income Tax Assessment Act 1936 section 91,

Income Tax Assessment Act 1936 section 92,

Income Tax Assessment Act 1936 subsection 166(1) and

Income Tax Assessment Act 1997 subsection 995-1.

Reasons for decision

Lodgement requirements

Pursuant to subsection 161(1) of the ITAA 1936, every person must, if required by the Commissioner, by notice published in the Gazette, give the Commissioner a return of income for an income year within the period specified in the notice.

In Legislative Instruments TPAL 2012/1 the Commissioner sets out when a tax return must be lodged for the purposes of subsection 161(1) of the ITAA 1936 for the income years ended 30 June 2012. For the purposes of section 161(1) of the ITAA 1936, 'person' is defined to include "a partner of a partnership, including a foreign hybrid as defined in Division 830 of the Income Tax Assessment Act 1997 and, subject to Table K or Table P…".

Subsection 995-1(1) of the ITAA 1997 states:

partnership means:

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

· a limited partnership.

The first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership.

The second limb of paragraph (a) of the definition includes as a partnership an association of persons (other than a company or a limited partnership) 'in receipt of ordinary income or statutory income jointly'. This type of partnership is referred to as a tax law partnership.

Mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. The execution of a partnership agreement is the strongest evidence of a partnership being formed at a particular time.

Under the Agreements the Co-owners must enter into a Property Management Services Agreement with a third entity and into a Development Management Services Agreement with a fourth entity.

Furthermore, the ruling application provides that the Co-owners will make independent decisions with regard to the acquisition of interests in income producing property and each Co-owner will not act for the mutual benefit or on behalf of the other Co-owners and is primarily concerned with securing an enhanced value or return on their investment. The acquisitions are not funded out of joint borrowings or funds. The interests are held as tenants in common, rather than as joint tenants.

The Applicant expressly states that the Co-owners have agreed not to form a general law partnership or to jointly carry on an enterprise. The co-ownership is being held by each party as part of their business activity.

The Agreements provide that nothing in those agreements should constitute a partnership between the parties or constitutes the parties as partners for any purpose other than the joint receipt of income in respect of the properties. The Applicant states that as the parties have specifically contracted that their relationship does not constitute a general law partnership, it follows that the essential element of mutual assent and intention to form a general law partnership does not exist. Thus, a tax law partnership exists between Company B and the other Co-owner of the interests in each of the properties.

Returns and payment of tax

As a general rule a partnership is not liable to taxation. Under section 92 of the ITAA 1936 the members of the partnership are taxable in their individual shares of the net partnership income whether distributed to them or not. Under section 91 of the ITAA 1936 a partnership is required to lodge an annual tax return even though it is not liable to pay tax.

Partnership lodgement obligations

Paragraph 82 of the Practice Statement Law Administration PS LA 2011/15 states that the Commissioner may grant an exemption from lodging a partnership return where:

The partnership's only income is either rent from an investment property held by the individual partners as co-owners or interest derived jointly by the partners; or both and each partner shows their share of the income and expenses in their own tax return…

Paragraph 8 of PS LA 2011/15 states that an exemption is not granted where a partner is claiming a credit for amounts withheld, under the no ABN withholding rules, from payments made to a partnership.

The Applicant advises that the circumstances of 'no ABN' withholding will not arise for the partnerships, as quoting of the ABN's of both parties of each partnership will be made (in recognition that they are separately carrying on an enterprise in their capacities as Co-owners).

The Applicant also advises that the income of each tax partnership will only be from rent (any related amounts akin to, or in conjunction with, the receipt of rent eg. variable outgoings and other charges).

Therefore, there is no requirement for the partnerships to lodge a partnership return as it is considered that Company B is a partner in a tax law partnership but not a general law partnership and the only income is rent from an investment property held by the partners as Co-owners.

Accordingly, the Commissioner exercises his powers of general administration under section 8 of the ITAA 1936 to exempt the four partnerships from being required to lodge partnership income tax returns and instead for each Co-owner to separately account for their share of income and expenses in their own tax returns.