The concept of a tax law partnership has been imported into the partnership limb of the related parties test under section 70E of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which points to the definition of partnership under section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) (to which the Income Tax Assessment Act 1936 (ITAA 1936) also refers to), which includes the following broadly defined “partnership” definition:

(a)  an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; 

Which for note can be broader than the definition in section 5 of the Victorian Partnership Act 1958:

(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit […] 

The Australian Taxation Office (ATO) sets out its view in Taxation Ruling TR 94/8 Private Binding Ruling 1051832733348 of 2021, which refers to Yeung & Anor v Commissioner (1988) 10 ATR 1006 that it is sufficient for the existence of a tax law partnership that a property is owned between tenants in common, where those owners are in receipt of income jointly.

The fact that a tax law partnership exists does not necessarily mean that in every case it is the partnership that carries on an enterprise.

The Commissioner considers an association of persons in receipt of income jointly is a tax law partnership from the time that the persons jointly commence an activity from which the income is or will be received jointly. This is referred to the 'time of association' approach.

'Entity' is defined at paragraph 184-1(1)(e) of the GST Act and includes a partnership. The moment a tax law partnership exists it is an entity for GST purposes. The GST Act treats the partnership as an entity separate from its partners.

In this decision of KRBM v Commissioner [2025] ARTA 556 a partnership agreement was entered into by the Applicant and that partnership was carrying on a business, not just as tenants in common. The Applicant was an equity partner of an accounting firm partnership between 1 July 2012 and 30 October 2016.

The contentious issue 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.

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:

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 had considered this approach as the “concessional” approach given the alternative instead of the 5 tranches of $62,602 across 5 years post-retirement would be to return the entire $313,008 in the 30 June 2017 tax return.

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

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 Tribunal found amongst other things that 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: 

“Consistent with your evidence today, you’ve said that you were always under the impression that the retiring gracefully – and by that you mean the termination payment – worked so that you only returned the WIP reversal and not the WIP reversal and the cash. Are you able to explain precisely what you mean about your understanding that retiring gracefully meant you only returned the WIP reversal? -- -Yes. In the way I’d read the termination deed, it said you return this over five years (indistinct words ‘which it might do”) 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 the key conceptual contention 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 and its helpful to consider submissions of the Commissioner on this point as it explains the relevant legislative mechanism, for which the Tribunal ultimately accepted this reasoning:

(c) 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.  

(d) 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. 

(e) 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. 

(f) 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. 

(g) 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) included under in his income tax assessments section 92 of the ITAA 36.

But the Tribunal also accepted the Commissioner’s submissions, to the effect that the Applicant accepted some ongoing obligations to the partnership under the partnership agreement after he signed the partnership retirement deed and that he 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 the 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 that the taxpayer doesn’t need to be a partner of the partnership to be taxed on partnership income for the relevant later years, but not a consideration of when this the tax law partnership would then have ceased for the partner, which could be once the retiring gracefully payments ceased, which could be seen to broadly coincide with the concessional spreading out of his WIP reversal amounts in his tax returns.