Federal Court finds property development carried on by a partnership and applicant liable for GST

In Yacoub v Commissioner of Taxation [2012] FCA 678 the Federal Court found that the applicants were liable for pay the whole GST liability for a property development on the basis that the entity was a partnership rather than a joint venture.  The applicants contended that they were only liable to a share of the GST liability on the basis that the entity was a joint venture.  The Court rejected this contention and as the other participant had gone into external administration, the applicants were left with the entire GST debt. The decision provides an important discussion between what constitutes a partnership and what constitutes a joint venture – as this decision shows, it is often a difficult distinction to make and getting it right (or wrong) has significant implications for the participants.

The applicants had entered into a “Syndicate Agreement” in 2005 with another entity (without legal assistance). In 2007, the parties entered a further agreement, this time with legal assistance.  In August 2007, an entity (ML) was registered for GST.  Construction of the development occurred between October 2007 and June 2009 and over that time ML lodged activity statements.  The Commissioner issued a notice of assessment to ML for the GST owing in respect of the sale of the development and the applicants paid 50% of the assessments in discharge of what they believed to be their liability.  The other entity did not pay the remaining 50% and was placed into external administration.  The Commissioner then commenced recovery proceedings against the applicants for the balance on the basis that the 2007 agreement superseded all previous agreements and made the applicants and the other entity partners for tax purposes, even if not partners in general law.

In deciding that there was a partnership, the Court looked at the “substance and reality” of the transaction. The agreements expressly stated that no partnership was being carried on, but the Court noted that while the existence of such a statement may be relevant, it did not determine the issue.  The Court found that the proper construction of the 2007 agreement was that the parties had replaced the 2005 agreement with one in which they expressly agreed to “share equally all costs, liabilities, mortgages and proceeds derived from any sale arising from the property”.  Accordingly, as a matter of substance the parties created between themselves both a partnership at general law and a tax law partnership.




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