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For the purposes of the STS eligibility requirements in subsection 328-365(1) of the Income Tax Assessment Act 1997 (ITAA 1997), does a partner in a business partnership 'carry on a business' by virtue of their involvement in the partnership?

No. A person who is simply a partner in a business partnership is not considered to be carrying on a business for the purposes of the STS eligibility requirements in subsection 328-365(1) of the ITAA 1997.

The taxpayer is one of three partners in a business partnership. All three partners have an equal share in the partnership.

The average turnover of the partnership's business for the 2003 income year is $2.7 million. As a result the partnership itself is not eligible to be an STS taxpayer.

Subsection 328-365(1) of the ITAA 1997 states that an entity is eligible to be an STS taxpayer for an income year if, amongst other requirements, • the entity carries on a business in that income year (paragraph 328-365(1)(a)); and • the entity's STS average turnover for that income year is less than $1,000,000 (paragraph 328-365(1)(b))

We do not consider that a partner in a partnership can satisfy the carrying on business requirement if their only connection to a business is their status as a partner.

For general law purposes, a partnership has no separate legal personality. The partners in the partnership are considered to be the ones who together carry on the business of the partnership. They do this as agents of the other partners in the partnership, and not in their own right. This is the approach adopted in the various state and territory Partnership Acts, and decisions in cases such as Re Agriculturist Cattle Insurance Co ( Baird's case ) (1870) LR 5 Ch App 725, Goldberg v Jenkins (1889) 15 VLR 36 and Molinas v Smith [1932] St R Qd 77.

However, this is not the case for general income tax purposes. For general income tax purposes, the legislative framework treats a business partnership as if it was a separate entity distinct from those who constitute it, with the partnership being the entity that carries on the business, not the partners. This approach has been applied in various cases that have reviewed the operation of sections 90 to 92 of the Income Tax Assessment Act 1936, including Rowe v Federal Commissioner of Taxation 82 ATC 4243; 13 ATR 110 and Rose v Federal Commissioner of Taxation (1951) 84 CLR 118. We consider the same approach applies for the purposes of the STS provisions.

It underpins comments in the Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Bill 2000, such as those at paragraph 2.9: The $1 million threshold applies to partnerships in the same manner as for other entities such as companies, trusts, and individuals. This is consistent with the general treatment of partnerships under other provisions of the income tax law. Although partnerships are not liable to income tax, they are treated as entities for the purposes of calculating their net income or loss for an income year. Accordingly, a partnership is an STS taxpayer in an income year if it is carrying on a business, its STS average turnover is less than $1 million and the value of depreciating assets is less than $3 million.

In addition, it is unlikely that the STS average turnover requirement in paragraph 328-365(1)(b) of the ITAA 1997 could ever be satisfied in a partnership situation if a partner in the partnership is the relevant entity for STS purposes. A partner does not make supplies in his or her own right that are capable of giving rise to an STS group turnover (and consequently an STS average turnover), because under general law principles the supplies made by a partner as a partner are viewed as being made jointly by all the partners in the partnership rather than by the individual partners.

For these reasons, we consider the partnership is the relevant entity for STS eligibility purposes, not the partner.