Edited version of private advice

Authorisation Number: 1012649447730

Ruling

Subject: Exemptions from lodging partnership income tax returns

Question

Will the Commissioner exercise his powers of general administration under section 8 of the Income Tax Assessment Act 1936 (ITAA 1936) to grant the taxpayer an exemption from lodging a partnership tax return?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 20BB

Year ended 30 June 20CC

Year ended 30 June 20DD

Year ended 30 June 20EE

Year ended 30 June 20FF

The scheme commenced on

1 July 20AA

Relevant facts

Taxpayer A and taxpayer B (the co-owners) each acquired a 50% ownership interest of a property in the financial year ended 30 June 20BB as tenants in common.

The property was acquired for XX amount of dollars.

The co-owners have entered into an agreement which sets out the commercial basis of the joint venture arrangement.

The taxpayer has advised the Tax Office of the following:

1. The property has been acquired as a joint venture and is being held by the co-owners as a long term investment for the purpose of deriving passive rental income arising from the leasing of the property.

2. The nature of the ownership arrangements that exist between the co-owners is that they will receive rental income and incur certain related expenses in conjunction with the receipt of rent, such as variable outgoings and other charges jointly.

3. The co-owners have made independent decisions with regards to the acquisition of their respective interests in the property. Moreover, the co-owners do not act for the mutual benefit, or on behalf of the other co-owner.

4. Similarly, each co-owner will make independent decisions with regards to the future divestment of their interest in the Property. The pre-emptive rights created in the agreement which have been granted will in no way undermine the independence of each co-owner's interest in the property.

5. Each co-owner incurs their own funding costs in relation to their proportionate share of the property acquisition. The acquisition of the property has not been funded out of joint borrowings or funds.

6. The only income of each co-owner comes from the passive rental income arising from the leasing of the property.

7. Any reference to development of the property in the agreement does not connote the existence of a partnership activity as there is no intention on the part of the owners of development of the property for resale.

8. There is no arrangement between the co-owners which would constitute the co-owners as partners at general law for any purpose or scope. The co-owners have expressly agreed not to form a general law partnership or to jointly carry on an enterprise.

9. The circumstance of no Australian Business Number (ABN) withholding will not arise for the partnership as the co-owners have each been quoting their respective ABN in recognition that they are separately carrying on an enterprise in their capacities as co-owners.

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 section 161

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Section 8 of the ITAA 1936 provides that the Commissioner shall have the general administration of this Act.

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

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

partnership means:

a) 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

b) 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.

As a general rule a partnership is not liable to taxation. Section 91 of the ITAA 1936 provides that a partnership is required to lodge a return of the income of the partnership but is not liable to pay tax thereon. Under section 92 of the ITAA 1936 a partner in a partnership is assessable on the net partnership income.

Paragraph 128 of the Law Administration Practice Statement PS LA 2011/15 states:

The Commissioner may grant an exemption from lodging a partnership return where:

• the entity's only income is either rent from an investment property held by the individual partners as co-owners where they are not carrying on a business and/or interest derived jointly by the partners and each partner shows their share of the income and expenses in their own tax return, or

• an application for an exemption from lodging a partnership tax return has been approved by the Commissioner.

Paragraph 129 of PS LA 2011/15 states:

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.

There is no arrangement between the Co-owners which would constitute the Co-owners as partners at general law for any purpose or scope. The Co-owners have expressly agreed not to form a general law partnership or to jointly carry on an enterprise.

Conclusion

The taxpayer has advised the Tax Office that the property has been acquired as a joint venture as tenants in common, and is being held by the co-owners as a long term investment for the purpose of deriving passive rental income arising from the leasing of the property.

The taxpayer has also advised the Tax Office that the nature of the ownership arrangements that exist between the co-owners is that they will receive rental income and incur certain related expenses in conjunction with the receipt of rent, such as variable outgoings and other charges jointly.

Further, the taxpayer has advised the Tax Office that there is no arrangement between the co-owners which would constitute the co-owners as partners at general law for any purpose or scope. And that the co-owners have expressly agreed not to form a general law partnership or to jointly carry on an enterprise.

The taxpayer has advised the Tax Office that the circumstance of no ABN withholding will not arise for the partnership as the co-owners have each been quoting their respective ABN in recognition that they are separately carrying on an enterprise in their capacities as co-owners.

Therefore, the Commissioner will exercise his powers of general administration under section 8 of the ITAA 1936 to grant the taxpayer an exemption from lodging a partnership tax return and for each co-owner to separately account for their share of income and expenses in their own tax returns.