Supreme Court New South Wales Medium Neutral Citation: Deputy Commissioner of Taxation v McGuire [2013] NSWSC 184 Hearing dates: 4 February 2013 Decision date: 11 March 2013 Jurisdiction: Equity Division Before: Gzell J Decision: Partnership Act 1892, s 60(1) inapplicable. Judgment to be entered for RBA deficit debt including GIC. Catchwords: TAXES AND DUTIES - Running Balance Accounts - limited partnership - Taxation Administration Act 1953 (Cth), Sch 1, s 444-30 - RBA deficit debt including GIC of partnership imposed on partners - whether liability to contribute to the liabilities of the limited partnership under the Partnership Act 1892, s 60(1) Legislation Cited: A New Tax System (Goods and Services Tax) Act 1999 (Cth) Commonwealth Constitution Income Tax Assessment Act 1997 (Cth) Partnership Act 1892 (NSW) Taxation Administration Act 1953 (Cth) Category: Principal judgment Parties: Deputy Commissioner of Taxation (Plaintiff) Bradley Peter McGuire (First defendant) David Matthew Gray (Second defendant) Representation: Counsel: M O'Meara (Plaintiff) V Thomas/ R Withana (Defendants) Solicitors: Australian Government Solicitor (Plaintiff) Jackson Lalic Lawyers (Defendants) File Number(s): SC 2011/136834 Judgment 1These proceedings are brought by a Deputy Commissioner of Taxation for the recovery of an income tax liability with respect to a limited partnership, of which the defendants, Bradley Peter McGuire and David Matthew Gray, were limited partners, each with a liability limit of $5. They submit that that is the extent of their liability to the Deputy Commissioner because of s 60(1) of the Partnership Act 1892 (NSW) (Partnership Act). It was in the following terms: "The liability of a limited partner to contribute to the liabilities of the limited partnership is (subject to this Part) not to exceed the amount shown in relation to the limited partner in the Register as the extent to which the limited partner is liable to contribute." 2Section 50A(1) of the Partnership Act provided that a limited partnership was formed by and on registration of the partnership under the Act as a limited partnership. C & C Combined was registered as a limited partnership under the Act with BM & DG Enterprises Pty Ltd as the general partner and Mr McGuire and Mr Gray as the limited partners. 3The Taxation Administration Act 1953 (Cth) (Administration Act), s 8AAZC provided that the Commissioner might establish one or more systems of accounts for primary tax debts, each of which was to be known as a Running Balance Account (RBA). An RBA might be established for any entity. 4Entity was defined in s 8AAZA of the Administration Act to include a partnership. 5The Commissioner established an RBA in the name of the three members of the C & C Combined limited partnership. 6Section 8AAZD(1) of the Administration Act provided that the Commissioner might allocate a primary tax debt to an RBA that had been established for that type of tax debt. 7Pay as you go (PAYG) liabilities and liabilities under A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) were allocated to the RBA. They were primary tax debts as defined in s 8AAZA of the Administration Act as they were amounts due to the Commonwealth directly under a taxation law. 8The PAYG system is contained in Sch 1 (Schedule) to the Administration Act. Section 12-35 in Division 12 provided that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it paid to an individual as an employee. The limited partnership being an entity for the purposes of the PAYG system was bound by that provision. While the Schedule did not say that a partnership included a limited partnership, s 3AA(2) provided that an expression had the same meaning in the Schedule as in the Income Tax Assessment Act 1997 (Cth) (1997 Tax Act) and s 995-1 of that Act defined a partnership to include a limited partnership. 9Section 16-70 of the Schedule provided that an entity that withheld an amount under Division 12 must pay the amount to the Commissioner. That amount was a primary tax debt of the limited partnership. 10The same position arose with respect to liabilities created under the GST Act. An entity included a partnership under s 184-1 and the dictionary in s 195-1 stated that partnership had the meaning given to it by s 995-1 of the 1997 Tax Act. 11The limited partnership was liable to pay GST on any taxable supply that it made under s 9-40 of the GST Act. That it was the liability of the limited partnership rather than the partners was enforced by s 184-5(1) of the GST Act. It was in the following terms: "For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner of a partnership in his or her capacity as a partner: (a) is taken to be a supply, acquisition or importation made by the partnership; and (b) is not taken to be a supply, acquisition or importation made by that partner or any other partner of the partnership. Note: Section 444-30 in Schedule 1 to the Taxation Administration Act 1953 deals with the liability of partners for the obligations imposed on a partnership under the GST law." 12Thus the primary tax debts under the GST Act allocated to the RBA were primary tax debts of the limited partnership and not primary tax debts of the partners. 13In terms of the definition in s 8AAZA of the Administration Act, an RBA deficit debt arose in relation to an RBA of an entity if there was a balance in favour of the Commissioner. In this case there was such a balance. 14Section 8AAZH(1) of the Administration Act provided that if there was an RBA deficit debt on an RBA at the end of a day, the tax debtor was liable to pay to the Commonwealth the amount of the debt. 15Tax debtor in relation to an RBA was defined in s 8AAZA of the Schedule to mean the person or persons who were liable for the tax debts that were allocated to the RBA. 16It follows from the discussion above that the limited partnership was liable to pay the Commonwealth the amount of the RBA deficit debt. 17Another consequence of there being an RBA deficit debt was the imposition of the general interest charge (GIC). 18Section 8AAZF of the Administration Act provided that if there was an RBA deficit debt at the end of a day, then GIC was payable by the tax debtor on that RBA deficit debt for that day and the balance of the RBA was altered in the Commissioner's favour by the amount of the GIC payable. 19Section 8AAE of the Administration Act provided that the GIC for a day was due and payable to the Commissioner at the end of that day. 20In consequence, there was an increase in the RBA deficit debt for which the limited partnership was liable. 21In the table to s 250-10(2) of the Schedule, an RBA deficit debt was item 85 and was a tax-related liability. The GIC was item 70 and was also a tax-related liability. Section 255-5(1) provided that an amount of a tax-related liability that was due and payable was a debt due to the Commonwealth and was payable to the Commissioner. 22While the legislation provided that the limited partnership was liable to pay the RBA deficit debt and the GIC to the Commissioner, it was not a legal entity. Hence the reference to s 444-30 of the Schedule in the note to s 184-5(1) of the GST Act set out above. Materially for present purposes, it provided: "(1) Obligations that are imposed under this Schedule or an indirect tax law on a partnership are imposed on each partner, but may be discharged by any of the partners. (2) The partners are jointly and severally liable to pay any amount that is payable under this Schedule or an indirect tax law by the partnership." 23The PAYG obligations allocated to the RBA were imposed under the Schedule. 24The GST obligations so allocated were imposed under an indirect tax law. Pursuant to s 3AA(2) of the Administration Act, that term had the same meaning for the purposes of the Schedule as it had in the 1997 Tax Act and the dictionary in s 995-1 of the 1997 Tax Act defined the term to include the GST Act. Resolution 25Section 9(1) of the Partnership Act provided that every partner in a firm was liable jointly with the other partners for all debts and obligations of the firm incurred while the partner was a partner. 26The definition of liability in s 49 of the Partnership Act was widely drawn and included any debt, obligation or other liability of any kind, wherever and howsoever incurred. 27Section 60(1) speaks of the liability of a limited partner to contribute to the liabilities of the limited partnership. It was submitted on behalf of Mr McGuire and Mr Gray that there was no difference in this liability and that arising under s 9(1). The liabilities of the limited partnership were the collected debts, obligations and liabilities incurred by each partner. It was submitted that there was no difference between the liability of the partners to pay an RBA deficit debt including GIC and the liability of limited partners to contribute to the liabilities of the limited partnership under s 60(1) of the Partnership Act. 28It was submitted that the liability of partners can arise under the doctrine of agency when a partner incurs a liability to contribute to a debt incurred by another partner or directly if a partner incurs the liability in the course of carrying on the partnership business. 29It was submitted that either way the liability was imposed directly on each partner. Because of the width of the definition of liability, it was submitted that a distinction could not be drawn between partnership liabilities incurred directly and those to which a partner had to contribute. 30It was submitted that the liability of all of the partners of the limited partnership in respect of the RBA deficit debt was a liability of the limited partnership within the meaning of s 60 of the Partnership Act, having regard to the expansive definition of liability in s 49. It was submitted that Mr McGuire and Mr Gray had a liability to contribute to the RBA deficit debt because they had, in common with all of the partners of the limited partnership, a liability to meet or discharge those liabilities. 31Thus, it was submitted the liability of Mr McGuire and Mr Gray for the RBA deficit debt including GIC of the limited partnership, was limited to $5 each. 32The above submissions are a rather broad approach to the issue. Liabilities of a partnership are incurred on its behalf by one or other or all of the partners. In the case of a limited partnership, the limited partners play no part in the management of the partnership. Section 67(1) of the Partnership Act prohibits them from doing so. Section 67(2) provides that if a limited partner takes part in the management of the business of the limited partnership the limited partner is liable as if the partner were a general partner for the liabilities of the partnership incurred while the limited partner took part in the management of the business. 33Thus, from a practical point of view, it can be assumed that neither Mr McGuire nor Mr Gray would incur a liability on behalf of the limited partnership. Neither would wish to lose his limited liability. 34All liabilities of the limited partnership will be incurred by BM & DG Enterprises Pty Ltd as the general partner. They will be incurred as agent for the limited partnership for which Mr McGuire and Mr Gray will be jointly and severally liable to the extent of the limitation upon their liability. 35Thus it is for a liability already incurred by the general partner, that Mr McGuire and Mr Gray may be called upon to contribute in terms of s 60(1) of the Partnership Act. And, in terms of s 60(2), if they do make a contribution towards the liabilities of the limited partnership, their liabilities will be reduced to such part of the amount shown in the register as remains unpaid. 36For the Commissioner it is put that BM & DG Enterprises Pty Ltd as the general partner does not incur the RBA deficit debt including the GIC to which Mr McGuire and Mr Gray can be called upon to contribute in terms of s 60(1). 37Section 444-30(1) of the Schedule imposes liability upon each partner. Thus far from liability being imposed on BM & DG Enterprises Pty Ltd as the general partner and Mr McGuire and Mr Gray being called upon to contribute thereto, s 444-30(1) imposes the liability directly upon BM & DG Enterprises Pty Ltd, Mr McGuire and Mr Gray. 38It was submitted on behalf of Mr McGuire and Mr Gray that where liability to pay an amount was involved, s 444-30(2) of the Schedule applied and s 444-30(1) was limited to liabilities that did not involve a liability to pay. 39I do not accept that submission. There is nothing in the text that warrants the drawing of such a distinction. The structure of the provision is that by s 444-30(1) of the Schedule the obligations of a partnership imposed by the Schedule and the GST Tax are imposed on each partner, and s 444-30(2) creates a joint and several liability on each partner to pay an amount imposed by the Schedule and by the GST Act on the partnership. The provisions are complementary. 40In my view, s 444-30 of the Schedule creates liabilities directly upon partners and their liability is not to contribute to liabilities already incurred by one or other or all partners to which they are called upon to contribute in terms of s 60(1) of the Partnership Act. 41In the context of this limited partnership the liabilities in question were not imposed upon the general partner with right to call upon Mr McGuire and Mr Gray as the limited partners to contribute to the liability of the limited partnership. By force of s 444-30 of the Schedule the liabilities were imposed upon Mr McGuire and Mr Gray directly. 42In my view, s 60(1) of the Partnership Act does not limit the liability of Mr McGuire or Mr Gray to the RBA deficit debt including the GIC and their defence to the claim of the Deputy Commissioner fails. 43In light of my conclusion that s 60(1) of the Partnership Act does not apply to the liability of Mr McGuire and Mr Gray with respect to the RBA deficit debt including the GIC, it is unnecessary for me to deal with the alternative argument of Mr McGuire and Mr Gray that there is no inconsistency for the purpose of s 109 of the Commonwealth Constitution between s 60 of the Partnership Act and s 8AAZH of the Administration Act, and s 255-5 and s 444-30 of the Schedule. 44I will enter judgment for the appropriate amount of the RBA deficit debt including the GIC and I will order Mr McGuire and Mr Gray to pay the Deputy Commissioner's costs. I direct the parties to bring in short minutes of order reflecting these reasons. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 March 2013