Tax law partnerships and apportioning profits and losses
How do tax law partnerships differ from regular partnerships?
A tax law partnership is defined by the ATO as an ‘association of persons (other than a company or a limited partnership) … in receipt of ordinary income or statutory income jointly’. This differs to regular, general law partnerships where income is received from carrying on business as partners.
What situations will involve tax law partnerships?
Tax law partnerships commonly arise with the ownership of rental properties which are jointly owned and are thus recognised as a form of partnership by the ATO. In the case of FCT v McDonald, Mr McDonald and his spouse both owned two units that were rented out and they agreed that net profits would be distributed 25% to Mr McDonald and 75% to Mrs McDonald; and Mr McDonald would bear the whole of any net loss under this partnership agreement. The question in the case was whether an operating loss on the properties was wholly incurred by Mr McDonald or shared between them. It was decided that there was no partnership at general law as they were simply joint-owners and that their loss should be shared equally. It also declared that the private arrangement between Mr McDonald and his spouse, as to the sharing of profits and losses, does not affect their respective entitlements for income tax purposes.
In summary, where a husband and wife jointly own a rental property, each must include half of the income and expenses in their tax returns. Any agreement that the couple might draw up to divide the income and expenses in proportions other than equal shares has no effect for income tax purposes. This is the case even if one paid most of the bills associated with the rental property.
Another situation related to tax law partnerships and property is that of Tikva Investments Pty Ltd v FCT, where a syndicate acquired a stake in a property. A member of the syndicate gifted part of his share to a company he controlled, and a question raised was whether the taxpayer’s company’s profit was assessable. It was decided that whether or not they were a general law partnership, they jointly received income and thus were regarded as a partnership. It was also recognised that the company that had received the share of the land had done so with the purpose of resale at a profit.
Our tax accountants at the Quinn Group can assist you in determining the correct treatment of profits and losses for income tax purposes. Contact us on (02) 9223 9166 or submit an online enquiry.