A joint venture (JV) vs a partnership – Be careful

The benefits of an unincorporated JV include that there is no joint and several liability. In other words, each of the parties in the joint venture is responsible for their own tax consequences and one cannot impinge on the other. The real-life problems that arise if you have created an accidental partnership are shown in the following example.

Consider two friends, Mark and Brian, who formed a JV for their property development, making a point of documenting that the arrangement was not a partnership in their initial agreement.

To obtain finance to complete the project, Brian needed to put up his family home as collateral. Because of this, Mark and Brian formed a new agreement, which contained the following clause:

‘The parties have agreed that, notwithstanding their co-registered proprietor shares of the property, they 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.’

So Mark and Brian agreed that they would have equal shares in the property, that they would share all costs equally, and that they would share all proceeds (or profits) equally. As previously discussed in an earlier blog, one of the defining features of a partnership is that the partners receive an equal share of the profits, while in a JV each party is entitled to an output of the undertaking. Consequently, this new clause meant Mark and Brian were now considered to be a tax partnership, even though it may not have been their intention.

Upon completion of the development, the properties were sold and the GST liability, as issued by the ATO, was $508,962. Brian paid his share of the GST liability ($254,481), believing that the Mark would also pay his share. Unfortunately, Mark did not. The ATO then pursued Brian for Mark’s share on the basis that they were a partnership (I think you know where this is going).

The ATO was successful and Brian was liable for the full GST liability – $508,962.

The key issue for consideration was whether there was in fact a JV in place. It was concluded that while the first agreement was a JV, the subsequent agreement changed the entitlements from sharing the properties developed (a feature of a JV) to a share of ‘joint or collective’ profits (a feature of a partnership).

Consequently, Brian, as a partner in the partnership created by the subsequent agreement, was jointly and severally liable for the full amount of the GST owing. If it was found that there was a genuine JV in place, he would have only been liable for his half of the GST liability.

As you can see, care needs to be taken in any JV development.

If you would like to discuss an upcoming development or one you have already begun, we’d be happy to have a chat – absolutely no obligation.

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Tony Dimitriadis
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