Rural Business Succession and Dealings with Partnership Property
By Paul Radford
A Swollen River of Laws
Lawyers, Accountants, Rural Business Succession Planners and the like should always take special care when dealing with the sale or gift of enormously valuable grazing and cane farm properties.
The lure of not having to pay hundreds of thousands of dollars in transfer duty on the transfer of a farm to a defined relative (under s105 of the Duties Act - the Family Business Concession) motivates many to dive in and start transferring property without considering the complex and swollen river of federal and state revenue laws they have just dived into.
The title to land
More often than not the land is owned by a partnership and not the owner recorded on the title to the land.
Most lay people find this concept difficult to understand let alone believe. I often get looked at strangely but particularly so when I tell someone they do not (personally or individually) really own their farms and what they really own is a non-specific interest in the partnership (which in turn owns land, stock, crop and plant and equipment etc).
Partnership property must be held exclusively for the purposes of the partnership. The owner/s shown on the title to the land hold the land on a distinct and separate trust for the partnership. The partners (i.e. the beneficiaries) have special and unique rights under that trust relationship, being their partnership interest.
At any point in time that interest will be different (as the values of assets and liabilities fluctuate constantly). The interest of a partner depends on the partnership agreement and the precise time and purpose for which the question is asked. It is also affected by capital and loan accounts recorded in the partnership balance sheet.
Before completion of a winding-up, no partner has any specific, fixed or ascertained equitable proprietary interest in any specific asset of the partnership.
This body of law was discussed at length by the High Court in a decision published in March 2020 Commissioner of State Revenue v Rojoda Pty Ltd [2020] HCA 7.
A 4-1 majority of the High Court confirmed the line of case authority that a partner's interest in a partnership constitutes an equitable chose in action, that is a right to receive a proportion of the surplus after the realisation of the assets and payment of the debts and liabilities of the partnership. A partner also has a beneficial interest in the totality of the underlying partnership assets but that interest can only be ascertained when the winding-up has been completed and until then it is a non-specific interest.
What should you do?
Look before you leap.
Before diving into any river you should check what is beneath the surface.
A confirmation, acknowledgement or agreement by the partners as to how the partnership assets are held may change the nature of the partners’ rights and a change in partners’ rights may be a dutiable transaction under the Duties Act.
Pretending land recorded in partnership financial statements for decades is not an asset of the partnership doesn’t work either.
Even though a lot of care may be taken in documenting and labeling an arrangement in a certain way (i.e. dressing mutton up as lamb) courts will look through the packaging and examine and determine the true legal position.
The results are often surprising and devastating.
If a court is going to undertake this exercise, advisors and their clients should do so as well (well before they dive in the river).
The duty assessments in Rojoda were issued in 2014 and the High Court delivered its decision in 2020. Who knows what the legal bills were (the taxpayer was ordered to pay the costs of the Commissioner of State Revenue) but the assessment was still payable 6 years later even after winning in the Western Australia Court of Appeal.
Are there any other considerations?
Of course there are.
The same principles apply when you make a Will.
If you make a Will gifting land you own to someone but the land is owned by a partnership (or a family trust or an SMSF) the gift fails. It fails because you do not own the land. It is pure and it is simple.
No Will should ever be prepared (or any property transferred) without a review of the partnership balance sheet.