What Tax Will I Have To Pay Under A Joint Venture?
Do you know how much tax you need to pay if you have a valid joint venture? Here is everything you need to know about your tax obligations under a Joint Venture.
What is a Joint Venture?
A Joint Venture (JV) is a business relationship where two or more parties cooperate with each other for the purposes of undertaking a particular project. Each party contributes to the project with their special expertise. JV’s are quite common in the mining and infrastructure industries. Parties try to classify a commercial relationship as a JV, rather than a partnership. This is to avoid the imposition of fiduciary obligations, restrictions and liabilities located under the relevant state Partnership Acts.
What are the different types of Joint Ventures?
A JV can either be “incorporated” or “unincorporated”. Incorporated JV’s have something called “separate legal personality”. This means that it can enter into contracts and hold property in its own name. Further, it can enter into a JV agreement establishing the elements of the business including regulation, liability and tax aspects. Given that it has separate legal personality, it can be sue and be sued in its own name as well. Contrastingly, parties in an unincorporated JV hold specific shares in JV, yet it does not hold separate legal personality. Therefore, it does not have the ability to enter into contracts or hold assets in its own name.
How is a Joint Venture different from a partnership?
It is quite common to classify a relationship as a partnership if parties within a business relationship share gross profits between each other. Whereas a JV is where parties share their expertise, output or products for the benefit of the project. Nevertheless, it can sometimes be confusing whether a business relationship is a JV or a partnership. Generally, the Court will look at all the circumstances of each relationship. This is because the sharing of profits is not the only thing that will determine whether you have a JV.
What tax will I have to pay under a joint venture?
There are significant tax benefits if your business relationship is a valid JV. In a partnership, each partner has to pay tax at their individual tax rate on their share of the profits. Whereas, a JV sees that each party has the ability to make and claim tax deductions. This is because the parties of the JV are receiving income jointly.
Further, according to section 51.5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), a JV is required to lodge a Goods and Services Tax return if the JV is classified as a “GST Joint Venture”. The Australian Taxation Office (ATO) lists three criteria for a GST JV:
- The participants share products or outcomes based on an agreed equity ratio.
- They do not share sale proceeds or profits.
- All participants must be registered and account for GST on the same basis during the life of the joint venture.
Additionally, a JV is required to hold separate accounts and lodge separate tax returns, similar to parties in a partnership. There is a requirement for the JV to hold records to account for deductions and joint income receipts. Importantly, the assets that the JV might hold (i.e. real property) may be subject to various taxes. For example, capital gains tax (CGT), stamp duty tax, and other relevant taxes to the sale or transfer of assets. We recommend that you read ATO Taxation Ruling GSTR 2004/2 if you would like to know more about taxes associated with a JV. If you have specific JV tax questions, we recommend that you seek advice from a lawyer on our legal marketplace.
Gianluca is a legal tech intern at Lawpath. He is in his final year at the University of Technology Sydney studying a double degree of Communications (Social and Political Sciences) and Law. He is interested in the role that technology has in commercial litigation.