Joint Venture
A joint venture is a cooperative business arrangement formed by two or more entities with the shared goal of establishing a new entity to pursue specific business objectives.
When entering into a joint venture, parties typically formalise their collaboration through legal agreements, such as shareholders’ agreements. These agreements play a critical role in defining the rights and obligations of each party, establishing a structured framework for the operation of the joint venture.
Some of the key features outlines in joint venture rulings include:
- Sharing of Product or Output: Joint ventures involve sharing the product or output, not just sale proceeds or profits.
- Contractual Agreement: Participants must have a contractual agreement.
- Joint Control: Joint ventures exhibit joint control among the parties.
- Specific Economic Project: They are associated with a particular economic project.
- Cost Sharing: Participants often share costs.
For the ATO (Australian Taxation Office) to recognise a joint venture for GST purposes, the primary feature is the sharing of a product or output.
While other indicative features are expected to be present, there might be instances where not all features apply, especially in joint ventures established by statute without a separate agreement.
Moreover, while the critical feature of a joint venture for GST purposes is the sharing of product or output, it’s important to note that the output can extend beyond tangible items to include intangibles such as copyrights and patents.
For instance, a joint venture might be formed for the construction and maintenance of a road, with the output involving interests related to operating a toll on the road.
Two types of joint ventures
In the Australian business world, joint ventures can take two distinct forms: incorporated or unincorporated.
Incorporated Joint Ventures
Structure: These joint ventures are established as separate legal entities with limited liability, typically in the form of a company registered with the Australian Securities and Investments Commission (ASIC).
Partners’ Role: Venture partners in an incorporated joint venture become shareholders in the registered company. Their participation involves sharing profits and losses based on their respective shareholding percentages.
Legal Entity: The incorporated joint venture functions as a distinct legal entity, offering protection to partners through limited liability.
Registration: Registration with ASIC is a prerequisite for incorporated joint ventures.
Unincorporated Joint Ventures
Structure: Unlike incorporated joint ventures, unincorporated joint ventures do not establish separate legal entities and do not require registration with ASIC.
Contractual Basis: Venture partners in unincorporated joint ventures enter into a contractual agreement that outlines their rights, responsibilities, and the terms of their partnership.
Profit and Loss Sharing: Partners in unincorporated joint ventures share profits and losses according to the predetermined percentage agreed upon in their contractual arrangement.
Liability: In contrast to incorporated joint ventures, in an unincorporated joint venture, each partner assumes personal liability for the venture’s debts and obligations.
Key Considerations
One notable advantage of incorporated joint ventures lies in the provision of limited liability protection for the participating partners. In this structure, the entity itself assumes responsibility for any incurred debts or legal obligations.
This distinctive feature shields individual partners from personal liability, offering a layer of financial protection. This attribute makes incorporated joint ventures particularly attractive for larger projects entailing significant financial risks.
On the other hand, unincorporated joint ventures present their own set of advantages, particularly catering to smaller and simpler projects. In this arrangement, partners willingly embrace shared liability.
Without the necessity of creating a separate legal entity, unincorporated joint ventures are agile and well suited for ventures where partners are comfortable assuming personal responsibility for the project’s debts and obligations. This flexibility makes them a fitting choice for collaborative efforts on a more modest scale.
The choice between an incorporated or unincorporated joint venture is contingent upon the specific objectives and circumstances of the participating entities.
Incorporated joint ventures are often preferred for larger projects involving substantial financial risks, while unincorporated joint ventures are more fitting for smaller ventures where partners are willing to accept personal liability.
Eligibility to establish a joint venture
Entities have the ability to self assess their eligibility for establishing a joint venture. This process allows entities to initiate the formation at any point during a tax period, typically without requiring approval from the ATO. To form a joint venture, the following conditions must be met:
- Eligible applicants must qualify as entities. Importantly, residency for tax purposes in Australia is not mandatory, and it’s explicitly clarified that an unincorporated joint venture is not considered an entity.
- To be eligible for participation in a joint venture, applicants must actively engage in a joint venture.
- The joint venture must align with eligible purposes, such as the exploration or exploitation of mineral deposits, as specified in the regulations.
- It’s a crucial requirement that the joint venture does not fall under the classification of a partnership for GST purposes.
- Each entity intending to participate must meet the specific participation requirements outlined for that particular GST joint venture.
- A joint venture operator must be nominated. Interestingly, the operator is not obliged to be an Australian resident but must be registered for GST. Additionally, an entity can serve as the joint venture operator for multiple joint ventures.
- The joint venture operator must either be a direct party to the joint venture or, alternatively, must be registered for GST and share the same GST tax period as the participants in the joint venture.
Preliminary steps before entering a joint venture
Preliminary Agreements
While not mandatory, participants often opt for preliminary agreements to establish alignment among potential joint venture partners before finalising formal agreements.
Key Considerations in Preliminary Agreements:
- Strategic rationale for selecting a joint venture over alternative business models.
- Identification and characteristics of proposed counterparty participants, including their stakes.
- Definition of the joint venture’s operational scope and limitations.
- Valuation and relative contributions of assets by participating entities.
- Assessment of tax, accounting, and economic impacts associated with different joint venture structures.
- Formulation of dispute resolution mechanisms, covering deadlock, dilution, and exit scenarios.
- Detailed business planning, management considerations, and expected duration of the joint venture.
Due Diligence
Participants conduct thorough due diligence, scrutinising various aspects such as the target market, assets (including intellectual property), and the credibility of other participants.
Due diligence may extend to evaluating political risks, corporate reputation, and broader market factors associated with the counterparty.
Conditions Precedent
The establishment of a joint venture may depend on conditions typically associated with asset or share acquisitions and the initiation of new business endeavours.
External conditions may include government approvals, competition or regulatory clearances, Australian foreign investment approvals, and home country approvals.
Considerations for Listed Company Joint Ventures
Listed companies must evaluate whether the joint venture formation qualifies as a significant transaction under the ASX Listing Rules.
Triggering shareholders’ approval requirements may necessitate the preparation of an expert report.
Ongoing restrictions and considerations for listed companies post joint venture establishment may apply, requiring specific compliance advice.
These preparatory measures empower joint venture participants to make informed decisions, mitigate potential risks, and establish a robust foundation for their collaborative endeavours.
Tax implications for joint ventures in Australia
The treatment of taxes for joint ventures in Australia depends on the type of JV whether it’s an incorporated JV with subscribed shares or an unincorporated JV governed by participant agreements.
Corporation Tax
For incorporated JVs, the transfer of depreciating assets triggers balancing adjustments. This involves assessing the sale’s written down value, leading to either assessable or deductible amounts.
Capital gains tax (CGT) applies to the disposal of assets or shares, contingent on the tax residency of the transferring entity and potential CGT roll over relief.
Goods and Services Tax (GST)
GST, a comprehensive consumption tax, comes into play during JV formations. Determining whether an unincorporated JV constitutes a tax law partnership is crucial. Participants may opt for a GST JV structure, often seen in mining and primary production. In such cases, a nominated operator manages GST liabilities on behalf of participants.
Stamp Duty/Transfer Tax
Stamp duty, administered by individual Australian states, is levied on specific transactions, including asset transfers. Considerations vary for incorporated and unincorporated JVs, necessitating a meticulous examination of duties, exemptions, and implications for foreign entities.
Tax on Issuing/Transferring Shares
Issuing shares by a JV company doesn’t trigger CGT, but attention is needed to navigate value shifting rules, particularly if shares are issued at a discount. The GST applicability during share transfers depends on the nature of supplies made during the transfer.
Taxation of JV Participants
Participants must include JV income in their assessable income. For foreign tax residents, only income with an Australian source is subject to Australian tax. Taxes like CGT and stamp duty may come into play during the disposal or acquisition of JV interests.
Taxation of Dividends
Dividends distributed by a resident JV company fall under Australia’s imputation system. This system credits shareholders with the tax paid by the company, known as a franking credit. Non residents receive dividends without withholding tax if fully franked. If not, a 30% withholding tax may apply.
Joint Venture vs Partnership
The definition of a partnership as per Australian tax laws include an association of individuals engaged in joint business activities or receiving income jointly, excluding companies. It’s essential to note that this tax definition goes beyond the conventional legal understanding of partnerships.
A critical distinction lies in the treatment of income derivation. For tax purposes, a partnership involves the joint derivation of income, while a joint venture centres around the collaborative generation of a product or result, subsequently shared among the participating entities.
Importantly, venturers in a joint venture have the autonomy to independently derive income from the shared product.
The motivation to avoid being classified as a partnership stems from practical complexities, notably the obligatory submission of a partnership income tax return.
Some of the prominent distinctions outlined by tax laws include:
Joint Entitlement vs. Sharing of Product
In a partnership, there is joint entitlement to profit or income. Contrastingly, in a joint venture, entities engage in the collaborative sharing of the product or output in defined portions.
Nature of Business
Partnerships signify an ongoing business endeavour. Joint ventures are more project oriented, associated with a specific economic project rather than a continuous business.
Binding Actions
In a partnership, the actions of one partner may bind all partners. On the other hand, a joint venture operates under joint control, where decisions are collectively made, ensuring a collaborative decision making process.
Interests in Assets
Partners in a partnership possess indirect undivided interests in partnership assets. While individual partners can deal with their interest, they lack control over the underlying assets. In a joint venture, venturers exhibit a well defined separation of interests, not sharing a joint undivided interest in the assets contributed to the venture. This highlights a clear demarcation of ownership.
Liability for Debts
Partners in a partnership are considered agents of each other and are jointly and severally liable for partnership expenses. Conversely, participants in a joint venture typically bear liability for their individual debts incurred as principals, ensuring a more individualised responsibility.
Exiting a joint venture
An entity is considered to cease to be a participant in a joint venture when its approval as a participant or the approval of the joint venture as a whole is revoked
Responsibilities Upon Cessation
When an entity exits a joint venture, it becomes accountable for accounting purposes related to supplies, importations, and acquisitions made on its behalf by the joint venture operator.
Adjustments
Generally, adjustments resulting from the joint venture operator’s activities on behalf of group members are attributed to the operator. However, when an entity leaves a joint venture, it assumes responsibility for such adjustments.
If, after exiting the joint venture, an adjustment arises regarding a supply, acquisition, or importation made on behalf of the entity during the joint venture activities, the adjustment is assigned to the entity that ceased to be a participant, not the joint venture operator.
Change of Creditable Purpose
In cases where a joint venture operator acquires or imports an item on behalf of a participant, and the participant ceases to be part of the joint venture, any adjustment related to a change in creditable purpose is calculated by comparing the operator’s entitlement to an input tax credit or adjustment with the actual application of the acquired or imported item. This adjustment is attributed to the entity that ceased to be a participant, rather than the joint venture operator.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.
