A recent High Court case considered the financial statements of a farming partnership established by a couple during their 20 year de facto relationship. 

At issue was whether the parties were entitled to share equally in all or just some of the partnership assets.  In particular, whether a residential property owned by one party pre-relationship, and later transferred to the partnership, remained that party’s separate property.

During the relationship, one party transferred a residential property in Auckland (“the Auckland Property”) to the partnership.  The Court recorded that the transfer took place so that “the income from the Auckland Property could be set off against the partnership’s losses, and the parties’ collective income tax thereby minimised”. 

The partnership’s financial statements and the parties’ respective income tax returns showed that they equally shared in all partnership property, including the Auckland Property following its introduction to the partnership.  Partnership profit/loss was apportioned equally.  Each party recorded the net income from the Auckland property in their tax return, together with related depreciation. 

The former owner of the Auckland property claimed that the property remained his separate asset.  He argued that nothing should be read into the financial statements and tax returns as they were compiled with a view to minimising tax, rather than reflective of the parties’ intentions or the reality of their arrangements.  However, the Court dismissed that argument, noting that the parties had signed their respective tax returns as true and correct and were bound by them.  The Court held that the Auckland Property, being a partnership asset and therefore relationship property, was to be shared equally between the couple. 

This case serves as a reminder that the financial arrangements of a partnership or company have implications in the event of a relationship breakdown.  If you are considering a change to your current financial structures or would like those reviewed, expert advice should be sought.

To discuss these issues further, please contact our Wellington based family lawyers Debbie Dunbar, email debbie.dunbar@morrisonkent.com, phone (04) 495 9940 or Maretta Twentyman, email maretta.twentyman@morrisonkent.com, phone (04) 495 8918.

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