FEDERAL COURT OF AUSTRALIA Ryvitch v Commissioner of Taxation [2001] FCA 806 INCOME TAX ‑ Deductions ‑ Loss on property development ‑ Whether incurred by partnership ‑ No written partnership agreement ‑ Whether oral partnership ‑ Whether partnership to be inferred from conduct of parties ‑ Penalties for tax shortfall ‑ Whether shortfall caused by recklessness of taxpayer or agent. Income Tax Assessment Act 1936 (Cth) ss 92(2), 226H Partnership Act 1958 (Vic) s 6 rule 3 Robinson v Federal Commissioner of Taxation 86 ATC 4784 cited United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 cited Badeley v Consolidated Bank (1888) 38 Ch D 238 applied Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd [1961] SR (NSW) 165 cited Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 cited HELEN JOSEPHINE RYVITCH v COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA V 214 OF 1999 SUNDBERG J 28 JUNE 2001 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V214 OF 1999 BETWEEN: HELEN JOSEPHINE RYVITCH APPLICANT AND: COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: SUNDBERG J DATE OF ORDER: 28 JUNE 2001 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeals against the disallowance of the deductions for non‑primary production losses be dismissed. 2. The understatement penalties be set aside and the question of penalties be remitted to the respondent. 3. The applicant pay seven eights of the respondent's costs of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V214 OF 1999 BETWEEN: HELEN JOSEPHINE RYVITCH APPLICANT AND: COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: SUNDBERG J DATE: 28 JUNE 2001 PLACE: MELBOURNE REASONS FOR JUDGMENT BACKGROUND 1 This case concerns a decision by the respondent (the Commissioner) to disallow tax deductions claimed by the applicant (Mrs Ryvitch) for losses incurred on the sale of four units situated at 1105‑1107 Malvern Road, Toorak. The units were acquired by Santop Pty Ltd (Santop) on 21 April 1990, redeveloped by it between May 1990 and March 1992, and sold by it in August and September 1994. Santop was incorporated on 12 February 1990. On 4 April 1990 Mrs Ryvitch, her late husband Dr George Simmelmann (Dr Simmelmann), his brother Jeffrey (Mr J Simmelmann) and Mr J Simmelmann's wife Marion (Mrs Simmelmann) became shareholders in Santop and, with the exception of Mrs Simmelmann, were appointed directors of the company. Mrs Ryvitch was appointed the company's secretary. 2 In her income tax returns for the years ended 30 June 1993 to 30 June 1995 inclusive, Mrs Ryvitch claimed the following deductions in respect of losses incurred as a result of the development of the units: · $600,569 in the year ended 30 June 1993 · $2,303 in the year ended 30 June 1994 · $23,401 in the year ended 30 June 1995. In her returns for the 1994, 1995 and 1996 years Mrs Ryvitch carried forward losses of: · $448,613 in the year ended 30 June 1994 · $405,154 in the year ended 30 June 1995 · $382,571 in the year ended 30 June 1996. In or about February 1997 the Commissioner commenced an audit of the taxation affairs of Mrs Ryvitch and Santop. In consequence of the audit the Commissioner formed the view that the deductions claimed by Mrs Ryvitch in respect of the losses should be disallowed. On 10 June 1997 the Commissioner issued notices of assessment for the years of income ended 30 June 1993 to 30 June 1995 inclusive. A notice of assessment for the year ended 30 June 1996 was issued on 15 September 1997. By notices of objection dated 26 August 1998 Mrs Ryvitch objected to each of these assessments. By notice dated 15 March 1999 the Commissioner disallowed the objections. By application filed on 5 May 1999 Mrs Ryvitch appealed to the Court against the Commissioner's decision to disallow her objections. KEY ISSUE IN DISPUTE: PARTNERSHIP OR COMPANY? 3 Section 92(2) of the Income Tax Assessment Act 1936 (Cth) provides that: "Where a partnership loss is incurred by a partnership in a year of income, there shall be allowable as a deduction to a partner in the partnership: (a) so much of the individual interest of the partner in the partnership loss as is attributable to a period when the partner was a resident…." Mrs Ryvitch contends that the units were purchased, developed and sold by a partnership of which she, Dr Simmelmann, Mr J Simmelmann and Mrs Simmelmann were the members, and that Santop merely acted as the partnership's nominee. Although there is no written partnership agreement, partnership correspondence or record of meetings of partners, and although no partnership income tax returns were lodged, Mrs Ryvitch claims there was an oral agreement between the partners made in or about March/April 1990, the terms of which were to the effect that: · the four individuals would enter into a partnership to purchase, subdivide and develop the property at 1105‑1107 Malvern Road, Toorak into four units; · a company would be acquired to purchase the property as a nominee for the partners; · Mr J Simmelmann, through his company Naeroa Pty Ltd, would be responsible as builder and project manager for effecting the subdivision and development of the units; · Dr Simmelmann and Mrs Ryvitch would finance the construction; and · Mr J Simmelmann and Mrs Simmelmann would be entitled to 50% of the profits with the balance of the profit going to Dr Simmelmann and Mrs Ryvitch. Alternatively, Mrs Ryvitch contends that the existence of a partnership is to be inferred from the conduct and statements of the shareholders in Santop. Specifically, she points to the following: · the negotiations between Mrs Ryvitch and Mr J Simmelmann about who would be liable for the losses from the joint venture. Because there was no suggestion in any of the correspondence from Mr J Simmelmann or his solicitors that he could rely upon his limited liability as a shareholder to protect him from liability for any losses, it was to be inferred that the losses were to be borne personally; · the claim by Mr J Simmelmann that he was to retain one unit upon completion of the venture; · some accounts were prepared on the basis that the joint venture parties were in partnership and that Santop was a mere nominee; · Santop had only nominal paid up capital; · all funds were provided by Mrs Ryvitch and Dr Simmelmann from their personal resources; · the use of the phrase "joint venture" in correspondence, indicating that the parties regarded themselves as in a contractual relationship independent of their shareholdings in Santop and that this relationship was in fact one of partnership; and · references to sharing profits equally in correspondence. In support of the Commissioner's submission that there was no partnership, attention is drawn to: · the absence of a written partnership agreement, partnership correspondence, records of meetings of partners or partnership income tax returns; · the absence of a partnership interest in the inventory of assets of Dr Simmelmann's estate (though his share in Santop is recorded); and · the fact that Mrs Ryvitch did not claim any partnership loss in her tax return for the year ended 30 June 1993. As to the use of the term "joint venture", the Commissioner submits that whilst it is true that a joint venture may be a partnership, care should be taken not to read too much into the use of this term by the parties. It is said that the mere fact that the relationship was given a particular label is not determinative of the way in which that relationship actually operated. The Commissioner also contends that all that is demonstrated by the negotiations between Mrs Ryvitch and Mr J Simmelmann over who would be liable for the losses from the joint venture is that there was no agreement relating to fundamental issues such as the entitlement to units on completion of the project and the liability for losses. The Commissioner also notes that in the letter of 15 October 1990 which prompted these negotiations, Mr Madder, Mrs Ryvitch's accountant, outlines his understanding of the joint venture arrangement to Mrs Ryvitch but does not discuss losses. The Commissioner contends that this is because at that time Mr Madder understood Santop to be conducting the venture and accordingly, as shareholders, none of the parties was personally liable for losses. Further, the Commissioner argues that the use of a corporate structure was consistent with Dr Simmelmann's intention that the joint venture would assist and benefit his brother, since it would avoid the problem of unlimited liability incident upon a partnership incurring losses. 4 The Commissioner contends that the only arrangement consistent with all the evidence is that Mrs Ryvitch, Dr Simmelmann, Mr J Simmelmann and Mrs Simmelmann agreed to enter into a joint venture in which they would be equal shareholders in Santop with any profits to be distributed by the company as dividends. Consistent with this, the only taxpayer entitled to claim a deduction was Santop. The Commissioner claims that Santop: · was established to carry on property development (evidenced by the shelf company order form); · purchased the property; · contracted and paid for the development of the units from funds lent to it by companies controlled by Mrs Ryvitch and Dr Simmelmann; · paid $1400 per month to Mr J Simmelmann to carry out the development; · leased the units; · received the rent; · sold the units; and · until Mrs Ryvitch's income tax return for the year ended 30 June 1993 was prepared in July 1995, accounted for the purchase and development of the units as if it were the owner. 5 The Commissioner stresses that Mrs Ryvitch has not produced a single document sent to or by Santop prior to 30 June 1993 in which the company is described as, or expresses itself to be, the trustee for, or acting on behalf of, a joint venture. According to the Commissioner, the only documents that suggest such a joint venture are the annual returns and directors reports in respect of the accounts of Santop for the years ended 30 June 1994 and 30 June 1995 and a set of joint venture accounts for the year ended 30 June 1993, all of which were prepared in 1995. Rather than looking to these documents, the Commissioner says the Court should focus on the annual returns for the years ended 30 June 1990‑1993, since these are contemporaneous documents in which Mrs Ryvitch effectively declares that Santop carried on the development in its own right and did not act as trustee or nominee. The Commissioner also relies on trial balances for the years 1990‑1993 prepared by Santop's accountants to further his claim that Santop was the developer and not merely a nominee. 6 In response, Mrs Ryvitch asserts that: · the reference in the shelf company order form to Santop undertaking property development is ambiguous and that, in any event, the form has no particular significance; · the indications in the annual return that Santop owned assets and had liabilities are ambiguous and equally consistent with the existence of a trust relationship; · Mr Madder did not personally draw up the trial balances, which were merely working papers prepared by standard computer software used to create the balance sheets and profit and loss statements; and · the failure to indicate that Santop was acting as a trustee in the earlier annual returns was most likely an oversight by a member of Mr Madder's staff or the result of a failure to appreciate the nature of the nominee relationship. In response to this last point, the Commissioner claims that if this failure was an oversight, it was a very peculiar one. This is because the evidence of Mrs Ryvitch and Mr Madder is that shortly before Dr Simmelmann died in October 1990 they were concerned to establish precisely what the terms of the joint venture arrangement were. Throughout the period 1991‑1993 there was a heated dispute between Mrs Ryvitch and Mr J Simmelmann as to the details of this arrangement. The Commissioner argues that in these circumstances, if there was a partnership, the accountants would have proceeded on that basis rather than on the basis that Santop was carrying on the enterprise. 7 The Commissioner drew attention to the applicant's failure to call Mr J Simmelmann and Mrs Simmelmann to give evidence. Mr J Simmelmann negotiated the original venture with Dr Simmelmann, and both he and Mrs Simmelmann were present at a meeting in April 1990 at which Mrs Ryvitch says the joint venture was discussed and Santop documents were signed. CONCLUSIONS 8 Whilst Mrs Ryvitch, Dr Simmelmann, Mr J Simmelmann and Mrs Simmelmann did not commit the terms of their alleged partnership agreement to writing, this is not necessarily fatal. A partnership agreement may be made orally or may arise as a matter of inference from a course of dealing between the parties. See Robinson v Federal Commissioner of Taxation 86 ATC 4784 at 4786 and Higgins & Fletcher ‑ The Law of Partnership in Australia and New Zealand 8th ed (2001) 37. Was there an oral partnership agreement? 9 Mrs Ryvitch has not satisfied me that in or about March/April 1990 the parties reached an oral agreement to enter into a partnership for the redevelopment of the units, and that Santop would act as nominee for the partners. The evidence regarding the meetings at which it was alleged that the partnership agreement was finalised was highly unsatisfactory, lacking in both content and specificity. It is not clear how many meetings or discussions took place before the meeting of 4 April 1990 at which Mr Madder was present. He was not involved at any earlier stage. Mrs Ryvitch stated that since these meetings were all held at her home, she "would have been in and out of the room and around but not perhaps actually [having] sat there and listened right through." 10 Mr Madder's recollection of the meeting on 4 April 1990 was that it was held to discuss the project and "sign the documentation for the joint venture company". His evidence was hazy, and of no assistance in establishing that an oral partnership agreement had been made or confirmed at that meeting. In the course of cross‑examination the following exchange took place: "MR MURPHY: When you say 'discussing the project to proceed', that's the details of the purchase of the property and the …? MR MADDER: I don't think it went into great depth, the discussion. I think the initial meeting was to just sign the documentation for the joint venture company but I don't – the discussion I think did arise in relation to that type of thing but it's very hard to recollect the exact events 10 years ago. MR MURPHY: You say, 'The meeting was more sociable than formal and I do not recall that the parties specifically discussed the terms of the joint venture.' Did they ask you any questions about the company? MR MADDER: Look, other than the fact they were signing documentation as directors and such like I don't think anything significant was asked in relation to the company or anything else." Mrs Ryvitch's affidavit evidence regarding this meeting was similarly vague. She said: "I do not have any recollection of discussing specific matters however I recall that we signed the company secretarial documents, and discussed the proposal in a general way." She said she relied on her husband to decide how the "joint venture" would be set up. She is a nurse by training, and did not understand the term "joint venture" to have any special legal significance. 11 The material before the Court detailing the parties' attempts to ascertain and define the scope of their business relationship, well after March/April 1990, shows that there was no clearly defined partnership agreement. Shortly before her husband's death on 16 October 1990 Mrs Ryvitch displayed her uncertainty about the relationship when she asked Mr Madder what he understood it to be. His reply, dated 15 October 1990, took the form of a question "Would you please advise me if my understanding in relation to the joint venture project on the above property is incorrect." As contended by counsel for the Commissioner, it is apparent that neither of them had any distinct view of the parties' business relationship. It was "a classic case of the blind leading the blind". 12 In cross examination of Mrs Ryvitch, this exchange occurred: "MR MURPHY: Are you able to say whether or not you had any interests in any partnerships over the period from the late 1980s to the middle 1990s? MRS RYVITCH: I'm not sure what you mean by 'partnerships'. MR MURPHY: Were you the partner of anybody, including your husband, in any business project ‑ and by that I mean where you have used a company? MRS RYVITCH: Not to my knowledge, no." Mr Madder was also of little assistance in confirming the existence of any oral partnership agreement: "MR MURPHY: Do you recall [Dr Simmelmann] ever being a partner? MR MADDER: I think he had levels of partnerships I think, but I can't recollect which individual situations that would apply to. MR MURPHY: When I say 'partnership' I mean partnership in the sense of two people getting together, not being directors of, you know, trustees or anything of that nature? MR MADDER: Dr Simmelmann had fairly complex affairs and was doing a lot of different projects all the time. But we're talking back – I think he died in 1990 and I'll be frank, I just cannot remember the various projects that he was involved in prior to that. … MR MURPHY: Are you able to say whether Mrs Ryvitch was ever a partner – and I use partner in the sense as being a partner… in any partnership? MR MADDER: Again, I'm sorry, I just can't recollect whether she may or may [not] have been. I don't recollect." 13 Further, the parties (or at least Mrs Ryvitch and Mr J Simmermann) were not ad idem about the terms of the arrangement that was reached in March/April 1990. The balance of Mr Madder's letter to Mrs Ryvitch of 15 October 1990 was as follows: "1. Dr & Mrs L G Simmelmann advanced the company funds for the acquisition and renovation of the property. Interest is payable on these funds at the current bank lending rates. 2. Mr Jeffrey Simmelmann is to undertake the renovation work and is to be paid a salary during the period of renovation. 3. The company will sell all the completed units and as and when the funds are received from the sale they will be applied as follows:‑ (a) Repayments of funds advanced and interest to Dr & Mrs L G Simmelmann. (b) Any profit after repayment of the loan funds and interest and expenses will be distributed. 50% to the interests of Dr & Mrs L G Simmelmann. 50% to the interests of Mr Jeffrey Simmelmann. 4. The total cost of the project would be all costs of property acquisition. Stamp duty etc, renovations, salary to Mr Jeffrey Simmelmann and interest on loan. If you have any variations to the above I would appreciate your advice on the matter." A copy of the letter was sent to Mr J Simmelmann. He did not respond for nearly a year, but when he did, it was to insist that while Mrs Ryvitch may have believed the arrangement accorded with the 15 October letter, in fact the brothers had agreed that Mr J Simmelmann was to retain a unit on the completion of the project. He added that Mrs Ryvitch may well have been unaware of this agreement. He went on to say that the arrangement with his brother was that his (Mr J Simmelmann's) interest was to be risk free and he was to incur no liabilities. "This matter seems to be omitted from … the letter of 15 October 1990." 14 In Mr J Simmelmann's solicitors' letter of 21 January 1992 a different claim is made, namely that the arrangement between the brothers was that Mr J Simmelmann "or his nominee" would receive one unit on completion of the project "or alternatively would share in the profits of the venture but not in any losses". At another stage (8 November 1991) Mr J Simmelmann asserted that "the bottom line had been between him and George … that he would get two flats". 15 Mrs Ryvitch had no real knowledge of what the brothers had agreed. Nor did Mr Madder. Mr J Simmelmann did have the requisite knowledge, and his account of the agreement differed in important respects from what Mrs Ryvitch and Mr Madder thought was the position. But he did not give evidence. Nor did his wife. This uncertainty, and the conflicting understandings about the terms of the alleged agreement, confirm the impossibility of accepting that there was an oral agreement as alleged by Mrs Ryvitch. 16 Whilst there is evidence to suggest the parties believed themselves to be entering into a "joint venture", this term is not necessarily synonymous with a partnership. As Mason, Brennan and Deane JJ said in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10: "The term 'joint venture' is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture … will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership such as a company, a trust, an agency or joint ownership." I am not persuaded that the parties' use of the term "joint venture" evidences the existence of an oral partnership agreement rather than a corporate structure. Even if it did point to the existence of a partnership, for the reasons I have given, the terms of the agreement were not proved with the requisite certainty to be enforceable. I am not satisfied that there was an oral partnership agreement as alleged. Is a partnership to be inferred? 17 Mrs Ryvitch identified conduct and statements from which she claims the Court should infer that the parties were in a partnership. The first matter relied on was the negotiations between Mrs Ryvitch and Mr J Simmelmann over who would be liable for the losses. It was submitted that the absence of any suggestion in the correspondence from Mr J Simmelmann or his solicitors that he could rely upon his limited liability as a shareholder in Santop points to the parties' relationship being that of partners. In his letter of 5 December 1991 Mr J Simmelmann states: "I am prepared to accept the general proposal outlined on 15.10.1990, save and except that my interest in the project is not in any way responsible for any losses incurred …. The proposal was always to be funded by my brother, whether or not a profit is made …. … my arrangement with my brother was that I would be involved in this venture 'risk free' and incur no liabilities." Since Mr J Simmelmann is neither a lawyer nor an accountant, it is not surprising that he should set out the terms of his arrangement with his brother as he understood them rather than seek to exculpate himself from liability for losses by reason of his limited liability as a shareholder. It is quite unreal to impute to Mr J Simmelmann, as a result of his letter, an acceptance that the parties to the joint venture were personally liable for the losses. 18 When Mr J Simmelmann put the matter in the hands of his solicitors, they understandably persisted with their client's contention that his arrangement with his brother was as he had stated in the 5 December 1991 letter. The fact that they did not refer to the limited liability incident upon membership of a company may have been because they thought it unnecessary to do so in view of their instructions that their client was not liable for the reason he gave in the letter. Alternatively, it may have been an oversight. In such circumstances, the solicitors' failure to assert Mr J Simmelmann's right to rely on his limited liability as a shareholder in Santop does not suggest that the relationship between the parties was one of partnership. 19 The second matter relied on to justify the inference of a partnership was Mr J Simmelmann's claim in his letter of 5 December 1991 and in subsequent correspondence that he was to retain one unit upon completion of the venture. Mrs Ryvitch submitted that such an agreement would be more consistent with a partnership relationship than if Santop were carrying on the business of developing the units. Whatever strength this matter has is dependent upon it being accepted that the arrangement was as Mr J Simmelmann asserted. I am not satisfied that it was. He did not give evidence. His claims varied from time to time ‑ at first that the arrangement was that he was to have two units, then one, then one with the alternative of a share of the profits. He took a year to respond to Mr Madder's 15 December 1990 letter, and the claim, first made in November/December 1991, to one or two units may well have been prompted by a realisation that there might not be much, if anything, in the project by way of profit. Finally, it is not clear from his correspondence whether he was at all times purporting to lay out the terms of the agreement made with his brother, or was bargaining for better terms. There is a strong suggestion of bargaining in his letter of 5 December 1991. 20 The third matter relied on by Mrs Ryvitch was that accounts had been prepared on the basis that the joint venture parties were in partnership and that Santop was merely the partners' nominee. However, these documents (a set of joint venture accounts for the year ended 30 June 1993 and Santop's annual returns and directors' reports for the years ended 30 June 1994 and 30 June 1995) were prepared much later in the piece in 1995. In my view the documents to be preferred are the annual returns for the years ended 30 June 1990‑1993. As a result of their contemporaneity, these documents should be regarded as a more reliable guide to the relationship between the parties and Santop. The fourth matter is Santop's nominal paid up capital. Whilst it is true that a nominee company often has this characteristic, that does not of itself justify the inference that Santop was in fact acting as a nominee. 21 The fifth matter relied on was that all the funds for the project were provided by Mrs Ryvitch and Dr Simmelmann from their personal resources. This does not point to the existence of a partnership. It simply reflects a business relationship whereby Mrs Ryvitch and Dr Simmelmann were to lend Santop the funds, Mr J Simmelmann was to do the renovations and, at the conclusion of the project, the fund providers were to get their money back along with interest. 22 The sixth matter relied on was the constant use by the parties of the term "joint venture" as opposed to company. Mrs Ryvitch contends that this indicates that the parties regarded themselves as in a contractual relationship independent of their shareholdings in the company, and that this relationship was one of partnership. In regard to those instances where the parties have simply referred to the building project as a joint venture, I reiterate what is said above in para 16. However, when arguing that a partnership was to be inferred, Mrs Ryvitch drew the Court's attention to two letters. The first, dated 21 January 1992, is from Mr J Simmelmann's solicitors to Mrs Ryvitch's solicitors. Counsel laid stress upon the opening sentence: "As you know we act on behalf of Naeroa Pty Ltd ('Naeroa') and Mr and Mrs J Simmelmann in their respective relationships with Santop Pty Ltd ('Santop') and in relation to the joint venture building project at the above property." Read in isolation, this passage may suggest that Santop and the joint venture are two different things and that the parties have a separate relationship with each of them. Counsel contended that if "all that was involved here was as the Commissioner contends, a company running a project, there wouldn't be any need to make that second reference." However, when this passage is read in context, it assumes a very different complexion. The letter goes on to discuss two separate issues: firstly, a contractual dispute between Santop and Naeroa, and secondly, the details of the joint venture agreement. The opening sentence relied on does nothing more than identify these two issues. In no way does it support the inference that counsel asks the Court to draw. 23 The second letter, dated 6 February 1992, is from Mr J Simmelmann's solicitors to Mrs Ryvitch's solicitors. Counsel drew the Court's attention to the sentence: "Accordingly, our clients reserve all rights outlined in previous correspondence in respect to the issue of not only the Joint Venture, but their shareholding and Directorship." Once again, whilst at first blush this extract may indicate a relationship independent of Santop, when read in context with the "previous correspondence", the sentence evidences no such thing. When one looks at the earlier letter dated 21 January 1992 from Mr J Simmelmann's solicitors, one sees that the references to shareholding and directorship in the later letter are simply references to the solicitors' previous settlement offer, the relevant part of which was: "1. Mr and Mrs J Simmelmann will transfer to Mrs H Simmelmann or her nominee, their shares in … Santop …. Thereafter the joint venture be terminated. … 3. Mr J Simmelmann retire as an officer of Santop subject to the giving by Mrs H Simmelmann of a release and indemnity in respect of any liabilities arising out of his directorship of Santop…" Clearly all the solicitors are saying in the 6 February letter is that their clients reserve their rights in regard to the joint venture in a general sense and, in light of their previous settlement offer, they also reserve their rights in relation to the specific issues of their shareholding and Mr J Simmelmann's directorship. Accordingly, this extract also fails to point to existence of a partner relationship. 24 The final matter was the references in the correspondence to sharing profits equally. It was said that this was indicative of the existence of a partnership. Reliance was placed on rule 3 in s 6 of the Partnership Act 1958 (Vic) which is that "The receipt by a person of a share of the profits of a business is prima facie evidence that that person is a partner in the business, but the receipt of such a share or of a payment contingent on or varying with the profits of a business does not of itself make that person a partner in the business …." The venture made no profits and there was nothing to share. Thus the rule has no application. But even if an agreement to share profits is to be assimilated with the receipt of a share of profits, neither is to be viewed in isolation. All the circumstances of the particular case must be examined. Higgins & Fletcher, op cit, at 43, quoting Lord Lindley's judgment in Badeley v Consolidated Bank (1888) 38 Ch D 238, a case decided before the passing of the Partnership Acts though accepted in cases such as Elkin & Co Pty Ltd v Specialised Television Installations Pty Ltd [1961] SR (NSW) 165 as an exposition of the way in which rule 3 is to be applied, says: "On this view, the rule merely means that where a business is being carried on and two or more people share the profits derived from it, a partnership may be inferred provided that the actual agreement between the parties, their conduct towards each other or other surrounding circumstances do not indicate a contrary intention. On the other hand, a partnership may not be presumed from the mere fact of a profit sharing agreement without an examination of all the terms agreed between the parties and of all the circumstances existing at the time of that agreement." Whilst an agreement to share profits may indeed be consistent with the existence of a partnership, it would also be consistent with a corporate arrangement in which all parties hold an equal number of shares, as is the case here. 25 When the agreement to share profits is viewed as part of the whole of the material before the Court, it becomes clear that the competing inference urged by the Commissioner is to be preferred to that propounded by Mrs Ryvitch. The following matters in particular (some of which have already been mentioned above), are to be noted in this connection: · there is no record of a partnership interest in the inventory of Dr Simmelmann's assets, yet his share in Santop is recorded; · Mrs Ryvitch does not claim any partnership loss in her tax return for the year ended 30 June 1993; · a corporate structure would be more consistent than a partnership with Dr Simmelmann's intention to assist and benefit his brother; · given that there was a heated dispute between Mrs Ryvitch and Mr J Simmelmann as to the details of the business arrangement from 1991‑1993, if there was some partnership‑type arrangement consistent with that claimed by Mrs Ryvitch, one would expect that during this period her accountants would have proceeded on that basis rather than on the basis that Santop was carrying on the enterprise; · the use of the term 'joint venture' makes sense when used in reference to a corporate structure; · in the annual returns for 30 June 1990‑1993 Mrs Ryvitch effectively declares that Santop carried on the building development in its own right; · the trial balances for the years 1990‑1993 proceed on the same basis as the annual returns; and · Mrs Ryvitch accepted that she had never been involved in a partnership with her husband or anyone else. 26 It is to be remembered that the question is not simply whether the conduct and statements of the parties point to a partnership‑type arrangement. The terms of the arrangement must be identified with sufficient certainty. For the reasons given for concluding that there was no oral partnership agreement, those terms have been identified with sufficient certainty. 27 The Commissioner submitted that the failure of Mrs Ryvitch to call Mr J Simmelmann and his wife justified the drawing of the inference that their evidence would not have assisted her case, so as to entitle the Court more readily to conclude that no partnership existed. Since I am clearly of the view that the proper inference to draw from all the circumstances is that there was no partnership, I need not decide whether the rule in Jones v Dunkel applies to the failure to call Mr and Mrs Simmelmann. 28 For the foregoing reasons the loss incident upon the development was incurred by Santop and not by the alleged partnership. It is not necessary to decide whether, had I concluded that there was such a partnership, Mrs Ryvitch was entitled to claim the whole of the partnership loss. PENALTIES 29 The Commissioner imposed additional tax on Mrs Ryvitch ‑ $32,566.38 in respect of the 1993 year, $6,663.57 in respect of the 1994 year, $6,509.44 in respect of the 1995 year and $12,235.01 in respect of the 1996 year. The material before the Court does not disclose the basis upon which the additional tax was imposed. However counsel for the Commissioner informed the Court that it was imposed under s 226H of the Act, and the matter proceeded on that basis. Section 226H provides: "Subject to this Part, if: (a) a taxpayer has a tax shortfall for a year; and (b) the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations; the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part." Although Mrs Ryvitch has failed to persuade me that the partnership alleged in fact existed, I do not think she or Mr Madder's firm were reckless in proceeding on the basis that there was a partnership. As a reading of these reasons will indicate, there were in the material available to the accountants some matters that made it arguable that a partnership existed. Although those matters, at least when viewed in the light of all the available material, were outweighed by other indications, I am unable to characterise the accountants' conduct as reckless ‑ that is to say, grossly negligent. Nor do I think it was reckless to have proceeded on the basis that Mrs Ryvitch was entitled to claim the whole of the loss. On 31 January 1992 Mrs Ryvitch's solicitors wrote to her reporting on settlement discussions they had had with Mr J Simmelmann and his solicitors. They said: "In relation to Joint Venture claims Mr Kiven for Mr & Mrs J Simmelmann indicated that they were prepared to settle any claims under the Joint Venture dispute and to resign as Directors and transfer shares held in Santop Pty Ltd on the basis that Mr & Mrs Simmelmann were released from any claims arising out of any loss that may … have occurred in the Joint Venture or by Santop Pty Ltd in relation to the project." On 27 April Mrs Ryvitch's solicitors wrote to Mr J Simmelmann's solicitors that Mrs Ryvitch: "is agreeable to resolving the current dispute between our respective parties on the basis of the shares held by J & M Simmelmann being transferred to Mrs [Ryvitch] in consideration of a full release of all claims for loan accounts and loss of Santop Pty Ltd." On 1 May Mr J Simmelmann's solicitors replied confirming their client's agreement to settlement on those terms. Later the parties disagreed about the precise content of the sale of shares agreement and release. On 10 September Mr J Simmelmann's solicitors complained that new matters could not be raised by Mrs Ryvitch's solicitors as "we believe settlement has been effected by our acceptance of your letter of the 27th of April, 1992 which makes no mention of the estate matters". Formal documents were not signed until much later, but Mrs Ryvitch and her advisers were in my view not reckless in proceeding on the basis that as a result of the exchange of correspondence culminating in Mr J Simmelmann's solicitors' letter of 1 May, Mrs Ryvitch was solely liable for the losses. It may be that on a close analysis of what happened after that date they were wrong to treat the matter as having been resolved (see Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 662, 669, 671‑672), but that does not make them reckless. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg. Associate: Dated: 28 June 2001 Counsel for the Applicant: M T Flynn Solicitors for the Applicant: Kahns Counsel for the Respondent: T P Murphy Solicitors for the Respondent: Australian Government Solicitor Dates of Hearing: 30 April, 1 May 2001 Date of Judgment: 28 June 2001