JV or partnership – practicalities to consider for your project

When embarking on a new property project that will involve multiple parties, there are a number of considerations. One of the first will be structuring the project. While this is often a question of liability, risk management, governance and profits, it is also critical to weigh up the tax implications and what the potential consequences are for the structure you decide on.

It is important that these discussions are had prior to acquiring any interest in land, as there may very well be stamp duty implications if the structure needs to be changed after exchange.  It is also important that your solicitor and accountant both work together on developing the structure, as each has distinctive roles in advising on the most appropriate avenue (noting this will change depending on the parties involved, and the nature of the project).

One issue that commonly arises in the structuring of property ownership is whether co-owners of property are joint venture parties, or in a partnership (whether in tax law, or common law, noting it may not always be the case that it is the same answer to both of these scenarios).

 

What is a joint venture?

A joint venture involves parties collaborating to develop a property with a view to taking the product of the project – for example in an off-the-plan development where the resulting units or subdivided lots are retained by the respective parties to deal with on their own. The parties will usually contribute money, real property, skill or a combination into the project.  A joint venture can be unincorporated or incorporated. We have expanded on the relevance of this with reference to taxation law below.

Joint venture agreements typically govern these relationship structure and the agreement usually has a defined termination date, often being the completion of the project.

In a joint venture, the respective parties are responsible for the debts they themselves have incurred.

What is a partnership?

A partnership is a relationship between parties who carry on a business sharing a common goal of making a profit. Like a joint venture, a partnership is not a separate legal entity (like, for example a company). In the ACT, partnerships are governed by the Partnerships Act 1963 (ACT). Like a joint venture, partnerships are usually governed by an agreement, in this case, a partnership agreement. However, a partnership can be formed without the existence of a written agreement under the Act, and given the implications for liability discussed below, this is they key issue when deciding between the two structures.

Partnerships are often used as structures for businesses which are ongoing.

Under a partnership each of the partners is jointly and severally liable for all the debts and obligations of the partnership. This means that where one partner is unable to pay a debt owed by the partnership, the other partners will be liable for it. Each partner is entitled to its share of the partnership profits from the business or development based on its share in the partnership.

What are the differences?

Liability

Significantly, because a joint venture is usually formed to carry out a particular project, the parties are generally only liable for issues relating directly to that project. In a partnership, partners are jointly and severally liable for all debts and obligations of the partnership.

Outcome

Partnerships are generally more concerned with raising income (long term aim) as opposed to developing an end product at the end of a project (short term goal).  In a property development setting for an off-the plan development, joint venture parties would usually take resulting units at completion to deal with themselves while a partnership would sell all units and share in the proceeds from the sales.

The implications above highlight the importance of obtaining professional advice when purchasing property when multiple parties are involved. Sometimes, putting a joint venture agreement in place for an unincorporated joint venture could be a determinative factor as to whether the parties are liable for each other’s actions.  A failure to properly consider this, and purchasing property jointly, could lead to a circumstance where one party is liable for the other’s action (or inaction) which may not have been an intended consequence.

And what about tax?

Partnerships are regarded as a ‘flow through’ vehicle for tax purposes. This requires partners to report their share of partnership income in their respective income tax returns and consequently they will be taxed on their share of that income at their own marginal income tax rates. While not considered a separate legal entity, a partnership is still required to lodge an income tax return. Notably, a partnership cannot accumulate undistributed income and profits.

Joint venture structures are not subject to tax and are not required to submit an income tax return. The respective parties are subject to tax at their respective marginal income tax rates at the time of a taxing event (e.g. sale of resulting units in a development).  The taxation implications of a joint venture can be complex and depend largely on how the venture is structured and the parties’ agreement regarding sharing of expenses and division of venture assets and product.

Where the joint venture is unincorporated, income and expenses usually flow to the participants individually and taxation is conducted in the same manner as a partnership.  Similarly if an unincorporated joint venture is entered into with a joint bank account and an intention to make profit jointly, it will be regarded as a tax law partnership. It is important to note that where the product which is the subject of a unincorporated joint venture has not yet been distributed, it will be treated as a partnership for the purposes of tax law. This is because at this stage, the venture will be profit sharing which is a key characteristic of a partnership. Similarly if an unincorporated joint venture is entered into with a joint bank account and an intention to make profit jointly, it will be regarded as a tax law partnership. Once the end product is returned to parties to a joint venture, it will be a genuine joint venture.

Where a joint venture is incorporated, tax losses will be retained in the incorporated joint venture company until future years when assessable income is derived by the company as opposed to in a partnership where losses flow to the partners.

In the first instance we always recommend that you seek structuring advice from your accountant. We can then provide you with further information and advice tailored to your situation, please contact our property team at Terracon Legal on (02) 6128 0755 or send us an email at admin@terraconlegal.com.au.

Disclaimer

This communication is intended to provide commentary and general information.  It should not be relied upon as legal, taxation or accounting advice. Formal advice should be sought in particular transactions or on matters of interest arising from this communication.