CASE NOTE: McDonald v Commissioner of Taxation [2001] FCA 305

This case commonly referred to as McDonald’s case was a significant decision in Australian tax law. The meaning of a partnership at general law was further clarified by the Federal Court.  

The case involved Mr McDonald and Mrs McDonald who purchased two strata title units as joint tenants. Both were subsequently rented out. A record of discussion between the couple indicated that net profits would be distributed 25% to Mr McDonald and 75% to Mrs McDonald, but Mr McDonald would bear any of the net loss.

In his tax return for the year ended 1978, Mr McDonald claimed a deduction of $1,941 in respect of a loss incurred by him in connection with the two rental properties. However, the Commissioner of Taxation (‘the Commissioner’) disputed that there was a partnership between him and his wife and said that the only relevant relationship between the parties was that of co-ownership.

The Commissioner allowed the deduction claimed as to one-half only, that is, $971. Mr McDonald objected to this assessment and subsequently appealed to the Administrative Appeals Tribunal, which ruled in his favour and upheld his claim.

The Commissioner then appealed to the Federal Court on the grounds that the Tribunal should have held that there was no partnership under general law. The presiding Judge, Justice Beaumont agreed with the Commissioner’s submission that the relationship between Mr McDonald and his wife was one of co-ownership, not a partnership.

Justice Beaumont concluded that for a relationship to be termed a partnership, the parties must be carrying on a business and purely domestic transactions are excluded from this definition. Mr McDonald and Mrs McDonald’s relationship involved little, if any, active participation from either party, which meant there could not be a partnership. This was inevitable because Mr McDonald was in full-time employment and Mrs McDonald was fully committed at home.

Justice Beaumont held that given Mr McDonald’s minor participation in the business affair and given Mrs McDonald’s lack of commercial expertise and her passive role, it was more accurate to describe them as co-owners in investments rather than as partners in a business operation.