The partnership agreement is a contract between the partners. It agrees the terms of the business. A Partnership Agreement deals with:
We all love the simplicity of a partnership. Indeed, many people are in a ‘partnerships’ without their knowledge. But such undocumented partnerships are dangerous.
You have a friend. Together, you have a vision. You work together in your new business to make a profit. Congratulations, you are in a partnership.
Now that you are in a partnership, you need to document it. Build a Partnership Deed on our law firm’s website. Just press the Start Building above. There are hints that explain every question. And you can telephone us anytime to help you answer the questions.
If you do not document your partnership, you suffer risks and potential losses. You also suffer the risk of joint and several liability of you and your partners.
In Australia, each state has legislation for partnerships.
What if you have no written partnership agreement? Then you have to rely on out of date legislation in each state:
ACT – Partnership Act 1963
NSW – Partnership Act 1892
NT – Partnership Act 1997
QLD – Partnership Act 1891
SA – Partnership Act 1891
TAS – Partnership Act 1891
VIC – Partnership Act 1958
WA – Partnership Act 1895
One of your business partners buys a Ferrari in the partnership name. He drives into the sunset never to be seen again. You are liable for 100% of that Ferrari’s payment.
Liability under a partnership is unlimited. In contrast company shareholders are not exposed to the vehicle’s debt. The shareholders liability is limited. (This is the case even if you do not have a Company Shareholders Agreement.)
A written partnership agreement reduces that risk.
Our law firm’s partnership agreement reduces the joint liability. This is between you and your other partners:
Because you built a Partnership Agreement with our firm, you can seek out your rogue business partner who bought a Ferrari under the partnership and sue him.
Neither a partnership nor a trust is a legal ‘entity’. In contrast, a human and a company is a legal entity. Nevertheless, tax records are usually prepared for a partnership (and a trust). But generally, only the partners (or beneficiaries of a trust) pay tax on the revenue.
Partners are not employees. Superannuation contributions and workers’ compensation insurance are not compulsory for partners.
Unlike companies, partnerships are not taxed. You and your business partners pay tax separately on the profits made through the partnership.
Each partner gets their income based on their percentage interest in the partnership. They then add that income to their personal tax returns.
For example, this financial year, your partnership makes $3m. You currently have 3 partners. They have this percentage interest in the partnership:
Employ yourself: Individuals as partners cannot ’employ’ themselves. There is no salary packaging, workers compensation or employer-sponsored superannuation. Instead, build an:
if a partner wants to provide services to the partnership.
A Partnership Agreement should not try and document services or products supplied by a partner. This includes a person or business related to the partner.
Like a partnership a joint venture is a relationship between two or more parties.
But unlike a partnership each party retains its separate identity.
And, therefore, unlike a partnership, joint ventures often have a short life. There are often short-term or one-off projects.
In a partnership you carry on an ongoing business. A joint venture is more likely to be a single or isolated transaction.
Similarly, one party does not have the capacity to bind another joint venturer.
A partnership doesn’t pay tax on its income. Instead, each partner pays tax on its share of the partnership’s net income. But still, in a partnership you prepare a partnership tax return. And the partnership tax return is lodged with the Australian Taxation Office each year
In contrast, there is no requirement to prepare income tax returns for the joint venture.
Sorry, but partners are either ‘humans’ or ‘companies’.
The trustee of the trust holds the partnership interest under the Partnership Deed. But this interest in the partnership is held in trust for the trust. The trustee is not the true or beneficial owner. Instead, the true owner is the trust. The trustee is just the ‘legal’ owner. The ‘beneficial’ owner is the trust. So even though the partnership interest is in the trustee’s name, the true owner is the trust. For example:
Colin is the trustee of the Peters Family Trust. The Peters Family Trust is going to be the partner in a new Partnership Agreement. But Family Trusts (like all trusts) can only operate through a trustee. Therefore, although the true or beneficial owner is the Peter Family Trust, the trustee, being Colin, holds the legal ownership of the partnership interest. E.g. Colin holds a one third interest in the Partnership in trust for the Peters Family Trust ABN 3838393020938.
Even though the partnership interest is held in Colin’s name, the trust is the beneficial owner. The Family Trust is responsible for the income that comes from the partnership. Colin does not pay tax on the partnership income. The Peters Family Trust is responsible for the partnership income.
Koko Nominees Pty Ltd is trustee of the Koko Family Trust. The Koko Family Trust is going to take up an interest in a partnership. But trusts cannot hold assets in their own name. Trusts operate through ‘trustees’. A trust needs a trustee. The trustee holds the assets on trust for the family trust. In this instance: the partnership interest is owned by Koko Nominees Pty Ltd atf the Koko Family Trust.
In this example, Mary and Fighting Fit Pty Ltd hold their interest in the partnership for themselves – absolutely. They are both the ‘legal’ and ‘beneficial’ owners.
But John and Cologne Nominees Pty Ltd are only ‘legal’ owners. They only hold the partnership interest as trustees. They hold their respective partnership interests on trust for the beneficial owner.
A partnership owns an asset or business. The partners share the ‘profit’. That all sounds good. But there is ‘joint and several liability’. If one partner makes a mistake, all other partners are liable 100% each for that mistake. The Legal Consolidated Partnership Deed seeks to reduce that risk. But that only works up to a point.
Another way to reduce the effects of ‘joint and several liability’ is having a partnership of family trusts. (A ‘family trust’ and a ‘discretionary trust’ is the same thing.) Instead of having a group of individuals or companies as partners, each partner is a Trustee of a Family Trust. Each partner to the partnership is a family trust.
If the Partner holds the Partnership Interest for another person or in trust, then:
1. Press ‘yes‘.
2. Type in the name of the trust. And also type in the ABN if the trust has one.
Actually, each partner is a trustee of a discretionary trust. Contrast this with a partnership of individuals. Rather than each individual being a partner in the partnership, each individual’s discretionary trust is the partner.
A partnership of discretionary trusts may also have other entities (such as humans and companies) as partners. The Legal Consolidated’s Partnership Deed allows you to use this strategy.
Each partner has its own Family Trust. For asset protection they probably only use the Family Trust to be a partner of this partnership. They probably would not use the Family Trust for other purposes. The three partners are:
(It is strange that Mary (a human) is the trustee of this particular Family Trust. The partnership of family trust structure is to protect individuals from exposure to a failed business. It is an asset protection strategy.
Sure, humans are often trustees of family trusts. But this is usually only if the Family Trust is a ‘safe house‘. Perhaps Mary has no assets. She may be following the ‘woman of straw and man of structure‘ asset protection strategy.)
So, for example, the first partner Kale Nominees Pty Ltd holds its interest in the partnership on trust. This is for the family trust called the Smith Family Trust.
The 3 partners of the partnership are: Kale Nominees Pty Ltd, Modern Kay Pty Ltd and Mary Bikic. That is what the world sees when the partnership transacts with others.
Sure, each family trust, as a partner, is still ‘jointly and severally’ liable for partnership debts. But the only asset the family trust owns is a percentage interest in the partnership. So if the partnership goes down you do not lose any of your other assets. Your non-partnership assets and personal assets are protected.
Share the Partnership profit with family: If you personally own the interest in the partnership then all income you get you pay tax on. You cannot share that tax burden with your spouse or family. But they may be on lower marginal tax rates. And you do not want to ‘waste’ those lower tax rates.
In contrast, the family trust distributes its percentage of the partnership profit as it sees fit. It can, this financial year, distribute to your son who is on maternity leave and is on a low rate of tax. Next year the family trust distributes the partnership profit to just your spouse.
The trustee of each trust distributes the trust’s share of the partnership income among the trust’s beneficiaries as it wishes.
A partnership of family trusts faces 3 challenges:
John, Fred and Muriel want a partnership of family trusts. John incorporates a company called “John Australia Nominees Pty Ltd”. Once he gets the Certificate of Incorporation of the company then he builds a family trust. He calls the family trust ‘Avis Family Trust’ after his dead grandfather’s name. (John can call his family trust anything he likes.) Fred and Muriel do the same.
Now with the three companies, they then build a Partnership Deed. The three partners are the three companies. “John Australia Nominees Pty Ltd” and Fred and Muriel’s companies.
For a business between strangers, commonly your accountant recommends one of three structures a:
This is where the business is more than one family. Obviously, if it is just mum and dad running the business then you only need a corporate trustee of a family trust.
Income. It is often easier to distribute tax-free (pre-tax dollars) through a partnership of discretionary trusts and unit trust. This is when compared to a company.
Tax relief on sale. It is also easier for the partners of a partnership of trusts and Unit Trust to access concessional capital gains tax (CGT) treatments. This includes the small business CGT concessions. This is when compared to a company.
Independence. Each partner’s trust is effectively independent of the others. It is even possible to have partners that are not discretionary trusts. Such as unit trusts, companies and humans.
The four farming blocks are purchased over the last 55 years. This in the name of four separate Family Trusts. Each have their own corporate trustee – for asset protection. Or the farming lands are purchased in a Unit Trust (with a special type of Unit Trust corporate trustee) if the children are becoming part owners of the farm earlier than their parent’s death. (We do not recommend that. The children get it soon enough when you are dead. No point rushing it.)
Everyone working on the farm, and their spouses, are made partners. Or they each form a Family Trust. And their Family Trust becomes one of the partners.
When one of the farmers die the old Partnership is dissolved. And you just build a new Partnership Deed. And who ever is left, plus the grandchildren who are interested in coming on, sign the new Partnership Agreement.
In other words, when people exit partnerships, by death or retirement, or enter partnerships, by the addition of new partners such as wives and children, the old partnership dissolves and a new partnership is created.
Apart from a header and few trucks there is generally no assets of value in the partnership. Therefore, there is no CGT and very little stamp duty on the hopping from one Partnership to the next over the following 200 – 300 years.
Obviously you do not put into the farming trading partnership:
This is the common way your accountant and adviser sets up your structure. This is no matter what primary production you engage in:
Rather than a partnership, why not trade via a company?
But, companies are poor structures in which to conduct farming business. They are not eligible for a range of primary production concessions:
Plus, companies suffer income tax issues:
But companies are useful as trustees of your Family Trust and Unit Trust. As a mere corporate trustee, the company does not trade in its own right. It trades on behalf of the trust structure and trust beneficiaries.
A Partnership Agreement is a contract. It governs a business relationship between two or more individuals (or corporations) that are working together.
A partnership is not a separate legal entity. It is not like a company. But it still has a tax file number (TFN). A Partnership, while not usually paying tax itself, still lodges a yearly tax return. Instead, each partner is taxed separately on their share of the profits.
A partnership is entitled to an Australian business number (ABN) if it is carrying on an enterprise in Australia. For example: running a business for profit that comes within the definition of enterprise in the GST Act.
Your partnership (just like a trust) is not a separate identity for tax. However, you may still need to register for TFN, GST, ABN, PAYG. You can do this for free on the ATO website.
After a Partnership deed is signed, a partnership bank account is opened.
As of 1 July 2021, non-listed companies are no longer allowed to prepare Special Purpose Financial Statements (SPFs). Instead they prepare the arduous General Purpose Financial Statements (GPFS). Small proprietary companies where 5% of their shareholders request GPFS to be prepared are included in the definition of companies that comply with this requirement.
This requirement also applies to SMSF, Trusts and Partnerships, but only where the founding Deed makes mention of AASB15 in its definition of income.
Happily, Legal Consolidated documents do not mention AASB15 in the definition of income.
Further, no Legal Consolidated documents require compliance with the arduous AASB15.
Please telephone us for more legal advice on building your Australian Partnership Agreement.
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
National: 1800 141 612
Mobile: 0477 796 959
Email: [email protected]