How to structure a joint venture for tax


A joint venture means different things to different people.  In any event, people tend to use the term “joint venture” to mean an arrangement under which several parties come together to undertake a project. 

Nature of a joint venture

Legally, a joint venture is a different arrangement from a common law partnership, which is bound by a joint venture agreement, rather than a partnership agreement. This difference is significant as a partner of a common law partnership is jointly and severally liable to the acts done by another party of the partnership. Therefore, from a commercial risk and liability protection perspective, a joint venture may be a much safer option because each party will only be responsible for their own actions.

On the other hand, for taxation purposes, if the joint venture parties are ‘jointly in receipt of income’, the joint venture will be treated as a tax partnership, even though it is not a common law partnership. This means that the joint venture will need to maintain a separate set of accounts for the partnership and lodge a separate partnership tax return each year. Each partner will be taxed on their respective share of the profit generated by the partnership. If the partnership incurs a tax loss, each partner will be entitled to offset their share of the tax loss against their other income, subject to the potential application of the non-commercial losses rules.

Joint ventures in real life

One of the most common scenarios involving a joint venture is where one party owns land and the other develops it for the landowner to sell for a profit. To incentivise the developer, the landowner may negotiate with the developer such that the latter will be remunerated based on the profit achieved by the landowner on the sale of the developed property.

To facilitate this arrangement, the parties may enter into a joint venture agreement, which clearly specifies the rights and obligations of the joint venture parties.  Typically, it will say something to the effect that the landowner will allow the developer to access the land and develop the property. Upon the sale of the property, the development fees payable by the landowner to the developer will be calculated under a prescribed formula, which subtracts the various costs incurred on the project (eg, construction, holding cost of land, etc) from the sale price of the property to arrive at a profit figure; sometimes, the formula will include a notional cost of the land, which is based on a market valuation of the land at the time the parties entered into the joint venture agreement. The developer will then be entitled to an agreed percentage of the net profit achieved.

This type of arrangement provides the developer an incentive to do their best as their remuneration will be directly proportionate with the amount of profit achieved from the sale of the property. To this end, both the landowner and the developer will need to consider their individual tax positions to ensure that any profit or loss resulting from the joint venture will maximise their respective tax positions.

For instance, the developer may use an existing entity with carried forward tax losses to enter into the joint venture agreement and undertake the development such that the profit from the joint venture will be reduced by the tax losses. Similarly, the landowner may use an entity in its tax consolidated group that will be in the position to offset its share of joint venture loss against the taxable profits of the other members of the group if such an outcome eventuates.

Naturally, there is no one-size-fits-all solution. Each joint venture party will need to carefully structure their side of the arrangement to maximise their respective commercial and tax positions where possible, having regard to any potential structuring costs that may be incurred. For instance, if the landowner transfers a property from one entity to another, income tax (including capital gains tax) and stamp duty may be payable.

Disclaimer: The article is provided for general information only and the author No person should rely on the contents of this article without first obtaining advice from a qualified professional person.

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