Jack and his wife 13 nCome from Australian soure puter and 29% rs income from fo
ID: 2342761 • Letter: J
Question
Jack and his wife
13 nCome from Australian soure puter and 29% rs income from foreign sources. Assuming the partnerships net income for the of its t income year is $400,000, how is this income taxed? [9233] ack (an architect) and his wife Jill (a housewife) borrowed money to purchase a rental property Jack is entitled to 10% of the profits from the property and Jill is entitled to 90% of the profits from the property. The agreement also provided that if the generates a loss, Jack is entitled to 100% of the loss. Last year a loss of$10,000 arose. How is this loss allocated for tax purposes? If Jack and Jill decide to sell the property, how would they be required to account for any capital gain or capital loss (123.2], 123.3], [123.4] as joint tenants. They entered into a written agreement which provided that property 5) Murray, Anthony, Greg and Geoff have been carrying on an entertainment businessExplanation / Answer
The facts in this scenario are similar to the case of FC of T v McDonald (1987) 87 ATC 4541. In this case, a husband and wife were taxpayers who owned two rental properties. In a written agreement, the taxpayers agreed to share the profits from the properties 25/75 and that all losses would be distributed to the husband. The effect of this was to stream income to the wife as she had little other income and stream losses to the husband to offset other income. The court held that the husband was only entitled to 50% of the share losses he was merely a notional partner for tax purposes and not a partner at general law and this represented a share of his ‘individual interest’ in the partnership
Therefore, in accordance with the principle established in McDonald case, Jack and Jill would be held to be in a statutory partnership as per s 995-1 ITAA97. They are not carrying on a business; therefore they are not a common law partnership. Jack will only be entitled to a deduction for the loss to the extent of his ‘individual interest’ in the partnership. That is, his ownership interest of 50%. So, Jack and Jill will need to share the loss of $10,000 equally.
On the sale of property, any capital gain or loss will be made by Jack and Jill personally rather than at the partnership level. Any capital gain will not be included in the net income of the partnership (s 106-5 ITAA97), but will be assessable to each partner to the extent of their ownership interest in the property.
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