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Many property and investment syndicates are described as joint
ventures but do not actually qualify as joint ventures for tax or
GST purposes because of the narrow scope of the definition of joint
venture in the legislation.
For tax purposes, most of these 'joint venture'
structures are in fact partnerships or, in cases where a nominee
holds the syndicate property, may actually constitute a separate
trust estate.
If the parties do not understand what sort of 'tax
entity' they have created they may trigger unexpected tax and
GST outcomes. These risks have been illustrated by two recent
decisions.
In Yacoub v Commissioner of Taxation, Mr and Mrs Yacoub
entered into a property development 'syndicate agreement'
with a third party. The parties referred to their arrangement as a
'syndicate' and there was an express clause in the document
that 'no partnership shall exist between the parties'.
The project was unsuccessful and the third party became
insolvent as a result.
The syndicate was registered for GST purposes but incorrectly
described as a limited partnership.
The Australian Tax Office (ATO) issued a GST assessment for
approximately $610,000 representing input tax credits that the
syndicate had incorrectly claimed.
Mr and Mrs Yacoub paid 50% of that assessment and argued that
was the limit of their liability under the joint venture
arrangement.
However, the court held that, notwithstanding the denial of
partnership in the agreement, other terms of the document meant
there was in fact a general law partnership and the result was that
Mr and Mrs Yacoub, as partners, were 100% liable for the GST
assessment.
The decision in Wynnum Holdings No. 1 Pty Ltd v Commissioner
of Taxation is even more concerning.
That case involved a common syndicate structure where a group of
investors formed a syndicate to develop a retirement village and
established a company to hold the real estate as a nominee for the
syndicate members.
The nominee entity made a claim for input tax credits in
relation to the acquisition and development costs of the retirement
village but the ATO argued that the nominee could not claim input
tax credits because the syndicate (and not the nominee) was
carrying on the enterprise.
The Administrative Appeals Tribunal accepted the ATO arguments
that the nominee was not carrying on an enterprise and therefore
was not entitled to claim input tax credits. It was the syndicate
that was carrying on the enterprise and the parties had failed to
register the correct entity for GST purposes.
Implications for advisers
Both cases illustrate that advisers establishing syndicated
investment structures need to be very clear about exactly what type
of structure they have created and must ensure that the correct
entity registers and accounts for GST.
Also, advisers who act for existing syndicates should check that
the syndicate is correctly registered for GST.
If there is any doubt as to exactly what entity should be
registered for GST, taxpayers should consider applying for a
private ruling to avoid the prospect of missing out on input tax
credits or incurring penalties because the incorrect entity is
registered.
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