This case emphasises that while statements of intention are relevant, the Courts will consider the substance of the contractual terms between the parties to determine whether a partnership exists. Contracting parties should carefully consider the language used in agreements to ensure that a partnership does not unintentionally arise either for tax purposes or more generally.
Madeline and Maroun Yacoub (the Yacoubs) and EJ’s Construction Pty Ltd (EJ’s) acquired 4 properties for a redevelopment project as tenants in common, with EJ’s as to 75% and the Yacoubs as to 25%. In 2005, a ‘Syndicate Agreement’ was entered into whereby it was agreed that in return for the Yacoubs providing security for loan financing by Capital Finance, they would own 50% of the project (Syndicate Agreement). The Syndicate Agreement provided that the Yacoubs and EJ’s would each be transferred particular lots at completion and be severally liable for loan repayments.
The Syndicate Agreement was varied by a second agreement in July 2007 (the July 2007 Agreement) which provided that notwithstanding their co-registered proprietorship status, the Yacoubs and EJ’s will have “equal shares in the property as tenants in common” and will “share equally all costs, liabilities, mortgages and proceeds derived from any sale arising from the property”.
The Yacoubs paid 50% of a notice of assessment for GST issued by the Commissioner to the entity registered for the project for GST purposes in discharge of their 50% liability. EJ’s did not pay the remaining 50% and was placed under external administration. The Commissioner then pursued the Yacoubs for the full amount on the basis that the arrangements between the Yacoubs and EJ’s constituted a tax law partnership as defined in section 995-1 of the Income Tax Assessment Act 1997 (Cth) (Tax Act) (being an association of persons in receipt of ordinary or statutory income jointly), even if not a partnership at general law.
In reviewing existing case law, the Court noted that the indicia of a partnership included:
- a mutual interest in the carrying on of a business for profit or gain;
- mutual confidence that all the parties would engage in the venture for joint advantage only;
- sharing of the venture’s profits and losses; and
- mutual agency giving each party the authority to bind the others.
Ultimately, the Court found a partnership did not exist under the Syndicate Agreement but the July 2007 Agreement (which altered the provisions for partition, transfer and several liability under the Syndicate Agreement) was held to satisfy paragraphs (i) to (iii) above and therefore created both a partnership at general law and a tax law partnership. It was also held that the practice of the parties to obtain the consent of the other for matters relating to the project did not negative the existence of mutual agency. Further, the fact that the proceeds were paid to Capital Finance (until the debt was repaid) rather than to the project nominated account did not mean that the income was not derived jointly.
See the case.