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Taxation Law News June 2013

Partners to limited liability partnerships face increased risk

The Supreme Court decides in Deputy Commissioner of Taxation v McGuire [2013] NSWSC 184

Messrs McGuire and Gray were limited partners to a limited partnership between themselves and BM & DG Enterprises Pty Ltd. The company was an ordinary partner. The partnership was registered under s50A of the Act as C & C Combined. 

Section 60 of the Partnership Act 1892 (NSW) [“the Act”] may be engaged by a ‘limited partner’ of a partnership to limit that partner’s individual liability to ‘…the amount shown in relation to the limited partner in the Register as the extent to which the limited partner is liable to contribute.’

In the case at hand, McGuire and Gray had, pursuant to s60 of the Act, limited their respective maximum liabilities in the partnership arrangement to $5.00 each. 

C & C Combined operated a commercial leasing business. In the course of trading, it had incurred a number of liabilities for income tax and GST. The Deputy Commissioner of Taxation engaged s8AAZC of the Taxation Administration Act 1953 [“TAA”] to establish a “Running Balance Account” in respect of the partnership to manage the liabilities of the company for PAYG and GST. The tax liabilities subject to the Running Balance were liabilities of the limited partnership of C & C Combined. At the time of commencement of proceedings by the Commissioner to recover outstanding tax from the defendants McGuire and Gray, the partnership was in deficit to the Commissioner for roughly $356,000.00 worth of PAYG and GST. Interest was accruing to this amount pursuant to the TAA.

When proceedings were commenced, BM & DG Enterprises Pty Ltd was being wound up. The Commissioner engaged the TAA to pursue McGuire and Gray, as individual partners, for the partnership’s tax debts personally – that is, jointly and severally. The Commissioner brought this claim notwithstanding the putative $5.00 individual limit of McGuire and Gray’s respective liabilities for the partnership’s debts.

McGuire and Gray based their defence to the Commissioner’s claim on s60 of the Act, arguing that the Act clearly allowed them to confine their liability as limited partners to $5.00 each by registering this limit to their liability.

The Commissioner countered by arguing that s60 did not limit a limited partner’s liability for partnership tax debts or, if it did, that the provision was invalid as it was inconsistent with the operation of the TAA and s109 of the Constitution was therefore enlivened.

In the Supreme Court, Gzell J found for the Commissioner without considering the Constitutional argument. His Honour held that the liabilities of a partnership are incurred by one or more of the partners acting on behalf of the partnership. In a limited partnership such as C & C Combined, he said, the ordinary or regular partner (in this case the company, BM & DG Enterprises Pty Ltd) will ordinarily incur all liabilities on behalf of the partnership as agent for the limited partners. These liabilities will then be binding jointly and severally on the limited partners to the limit of their registered liability. 

However, his Honour held that the TAA imposes liabilities for taxation debts on a limited partnership directly, and, by extension, on the individual partners (both limited and regular) jointly and severally. That is, tax debts are not, as is the presumably the case with most other debts, incurred by the general partner who is then able to seek indemnity from the limited partners only to the extent of their registered liability. In so concluding, Gzell J held that s60 of the Act did not limit the liability of McGuire and Gray for the tax debts of the limited partnership.

This decision tests the limits of the Partnership Act, while exposing the potential pitfalls of attempting to limit one’s liability as a partner to a partnership, whether registered or otherwise. It should also serve as a cautionary tale to partners and company directors alike, highlighting as it does the potential difficulties involved in limiting exposure to the liabilities of a business.

If you are considering entering into business with a friend, partner or family member and need advice on the most appropriate vehicle for your business, please contact Forum Law today. We will also be happy to discuss your liabilities as a partner, company director or businessperson and to assist you to protecting your position.

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