One of the contentious issues in this case was not whether a partnership under tax law existed, but whether the Applicant had ceased as a partner by entering into a partnership retirement deed on 16 November 2016, as he sought to avoid certain partnership income from his income tax returns.

Clause 2.9 of the partnership retirement deed set out the Applicant’s chosen approach to deal with reversal of his untaxed work in progress (WIP) for which his taxable income was about 10% less than his accounting draw for the years that he acted as partner:

Taxation Timing Differences

The Outgoing Partner’s taxation timing differences of $313,008, will be rolled out over the years ending 30 June 2018, 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022. The Outgoing Partner acknowledges that he will return the timing differences as taxable income within the years ending 30 June 2018, 30 June 2019, 30 June 2020, 30 June 2021 and 30 June 2022.”

The Applicant was offered this approach by the partnership as the “concessional” approach given the alternative, instead of spreading the $313,008 into 5 tranches of $62,602 across his 5 years post-retirement, would be to return the entire $313,008 in his 30 June 2017 tax return.

Annexure A of the partnership retirement deed set out the calculation of a separate “retiring gracefully” termination payment of $269,778 to be paid in six annual payments of $44,962.96, which would be paid to the Applicant’s fixed capital discretionary trust and which he accepted the statement that these payments would be taxable in his own hands.

The six retiring gracefully payments and five WIP reversal tranches could be seen as broadly coinciding in terms of their timing, which may be why the Applicant mistakenly linked them together. The Applicant stated in an email to the partnership’s in-house legal team: “I received a huge fright when I realised, I was being asked to include $100k in my tax returns. In short, I was always under the impression … that the Retiring Gracefully worked so that you only returned the WIP reversal, not the WIP reversal and the [Retiring Gracefully] cash.”

Here, the Applicant conceded in cross examination that he had mistakenly linked the retiring gracefully payments with the WIP reversal amounts in his 2018 to 2022 tax returns:

“In the way I’d read the termination deed, it said you return this over five years [...] and then there was a separate amount. And I thought they were linked concepts. Incorrectly as it turned out. What made sense to me at the time, is I got $44,000 for the cash in the partnership. And then I returned $60,000……I see? ---I thought I’d get $40,000 cash, pay tax on $60,000, the timing difference’s the reverse, everyone’s happy.”

However, the Applicant did understand he would be taxed on the WIP reversal amounts in his 2018 to 2022 tax returns, as the Commissioner submitted “a person with the Applicant’s experience and training should have been expecting the Assessments to include the now-disputed amounts”.

Which brings us to one of the key arguments by the Applicant that he claimed he was not a partner of the partnership after he had signed the partnership retirement deed. The Tribunal rejected this argument and it’s helpful to consider the submissions of the Commissioner below on this point as it explains the relevant taxing mechanism, for which the Tribunal ultimately accepted the Commissioner’s reasoning:

(a) The Applicant did not need to be a partner of the Partnership in the Relevant Years to have assessable income included in the Assessments under section 92 of the ITAA 36.

(b) The net income of the Partnership is determined by reference to section 90 of the ITAA 36 and is calculated as if the partnership was a taxpayer. Section 91 requires the Partnership to file a return, but it is not liable to pay tax.

(c) The net income of the Partnership (whatever that amount is determined to be under section 90 of the ITAA 36), has in this case been allocated between the partners, including the Applicant, in accordance with the binding contractual arrangements reached between the partners.

(d) There is no temporal restriction contained in section 92 of the ITAA 36 as to when the Applicant is a partner in the Partnership, but it applies to ensure that he is assessed on that part of the income of the Partnership that is attributable to him according to his interest in the Partnership’s earnings from time to time.

(e) It does not matter that the Applicant was not a current partner of the Partnership in the Relevant Years. The part of the net income of the Partnership which was assessed to the Applicant in the Relevant Years “concerns the timing difference amount that was calculated by reference to work in progress, prepayments and other amounts which related to the period when the Applicant was a partner of the [Partnership].” It is sufficient that the amount can be identified as having been paid to the Applicant for that reason.

The Tribunal accepted the Commissioner’s submissions (summarised in paragraphs (f) and (g) above) in that the Applicant did not need to be a partner of the partnership in the relevant years to have assessable income from the partnership (the retiring gracefully payments and WIP reversal amounts) included under in his income tax assessments section 92 of the ITAA 36.

But the Tribunal also accepted the Commissioner’s submissions, that as the Applicant accepted some ongoing obligations to the partnership under the partnership agreement after he signed the partnership retirement deed, he in effect remained in a tax law partnership after 30 October 2016 because he was in receipt of statutory income (being WIP in progress amounts) jointly with the partnership.

The Applicant also sought to argue that he did not receive any money in relation to the WIP reversals, however this was rejected as he paid a lower amount of income tax by around 10% by reason of the timing differences arrangements with the partnership in the financial years during which he was a partner. The Tribunal stated:

The current application for review has arisen in the unusual circumstances that the Applicant has misunderstood his obligations under the Partnership Documents and seeks to avoid the assessment and payment of tax under the concessional approach.

The was no direct evidence on the question of whether the Commissioner is “comfortable” with the concessional approach of the Partnership. The Tribunal infers that the Commissioner is prepared to be tolerant of the concessional arrangements because, as submitted [... by the Commissioner], they do align practically with the way in which many professional services firms or partnerships earn their income.Therefore, for tax law partnership purposes, we have an example here of where the taxpayer doesn’t need to be a partner of the partnership to be taxed on partnership income for the relevant later years (although he was found to not have ceased as a partner), but not a consideration of when the tax law partnership relationship would then have ceased for the partner (which could be relevant analysis for the partnership limb of the Part 8 associates test under section 70E of the Superannuation Industry (Supervision) Act 1993 (SIS Act)), which could have occurred once the retiring gracefully payments ceased and/or when the WIP reversal amounts in his tax returns ended (both around a similar time).