Edited version of your written advice

Authorisation Number: 1012879539409

Date of advice: 16 September 2015

Ruling

Subject: Rental property

Question

Are the owners of the property regarded as a partnership at general law?  

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

Several years ago a firm was looking to expand and was seeking an investor to build and lease them a new business premise.

Person A and their spouse sought an additional investor for this investment. Person 3 and person 4 agreed to jointly make the investment and the land and building was purchased and constructed.

Person 1 and 2 own their half share as joint tenants.

Person 3 and 4 own their half share as joint tenants.

Each half share is held as tenants in common.

Borrowings were required to facilitate the upfront land and building costs. The financial institution requested that the loan be in all four names. Each couple also contributed personal funds to the investment in equal shares.

Since its establishment the building has been leased to the same tenant who is an unrelated party.

Rent is paid into a bank account held in four names due to ease of operation. From this account expenses and liability payments are met and the balance is paid to the owners as cash flow allows. This account is used for no other purpose.

There are minimal holding costs as the tenant pays most of the outgoings.

The individuals have no day to day involvement with the venture and it is treated as a passive investment between the parties.

There is no formal partnership agreement.

All parties must be in agreement in relation to decisions made in relation to the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a partnership as an association of persons carrying on a business as partners or in receipt of ordinary income or statutory income jointly, but does not include a company.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners discusses the income/loss from a rental property co-owned by husband and wife.

Paragraphs 3 and 4 of TR 93/32 state that:

"3. Co-ownership of rental property is a partnership for income tax purposes but is not a partnership at general law unless the ownership amounts to the carrying on of a business. 

4. Where co-ownership is a partnership for income tax purposes only, the income/loss from the rental property is derived from co-ownership of the property and not from the distribution of partnership profits/losses."

That is, co-owners of a rental property come within the definition of partnership for income tax purposes, not because they are necessarily partners at general law, but because they are in receipt of income jointly. 

Paragraphs 14 to 23 of TR 93/32 examine partnership at general law. Paragraphs 14 and 15 state:

14. Partnership is defined in the various State and Territory partnership acts as "the relation which subsists between persons carrying on a business in common with a view of profit.". The Partnership Act of 1892 (NSW);

15. An important ingredient of the definition is "carrying on a business". Without this ingredient, there can be no partnership at general law.

Paragraph 5 of Income Tax Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest states:

A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business. 

Beaumont J in FC of T v McDonald 87 ATC 4541in determining whether the respondent and his spouse in were true- partners at general law said:

'The reference to "business" . . . indicates a "commercial enterprise as a going concern": see Hope v Bathurst City Council (1980) 144 CLR 1 at 8; 12 ATR 231 at 236 per Mason J. Purely domestic transactions are thus excluded from the definition: see Fletcher, op cit p 28. The "business" must be "carried on". This suggests some active occupation or profession: see IRC v The Marine Steam Turbine Co Ltd (1919) 12 TC 174 per Rowlatt J at 179.' . . . 'On the other hand, in the case of a private individual as distinct from a company, "it may well be that the mere receipt of rents from properties that he owns raises no presumption that he is carrying on a business." see American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue (1979) AC 676 per Lord Diplock at 684.'

In this case, you own one property. The scale of operations does not amount to the carrying on of a business and as such you are not conducting a partnership at general law.

Although, the co-ownership of the rental property is a partnership for taxation purposes under the extended definition contained in section 995-1 of the ITAA 1997, as you are not carrying on a business, your relationship is that of co-ownership rather than partners in a partnership. There is a mere investment in property rather than a partnership in the property or its profits.

Even if individuals in receipt of income jointly are deemed to be partners by reason of subsection 995-1(1) of the ITAA 1997, it does not carry with it the consequence that each co-owner is deriving income or sharing losses in the capacity of partners, as they are not from the distribution of partnership profits/losses.

In this case, as there is no partnership at general law, the parties being the co-owners of a rental property do not derive their income from their interest in a partnership, they derive their income or loss from their joint ownership interest in the property. It follows that each co-owner incurs expenses in their individual capacity and not as a partnership.