19 Feb 2013, by Tina Chu at Saal & Associates Lawyers
Choosing the correct structure for your business venture is directly correlated with realising the rewards of the venture. In today’s collaborative marketplace, many businesses opt for the structure of a joint venture to optimise leverage and mutual benefit. Whilst the concept resembles with common commercial sense, the practical difficulty is often found with the inadequacy of the joint venture agreement.
In drafting of an adequate joint venture agreement, some factors which require thorough consideration include:
It is important to recognise the various types of joint ventures in order to determine the applicability of each. There are three general types of joint ventures:
There are two sub-categories of Unincorporated Joint Ventures –
As there is no specific legislation that governs the area of joint ventures, an unincorporated joint venture is created and governed by the joint venture agreement. The significance of this is that the rules of the joint venture can be tailored according to any anticipated (or unanticipated) events. For instance, it would provide certainty to the participants with regards to their rights to terminate,dispute resolution methods and transfer of interest in the joint venture etc.
An unincorporated joint venture is not a separate entity and therefore each participant must individually account for their taxation obligations such as GST, input tax credits and capital gains tax.
Incorporated Joint Ventures on the other hand are separate legal entities governed by the Corporations Act 2001 (Cth). Incorporation achieves certainty in the joint venture by heightening the measures for compliance. On the same token, Incorporated Joint Ventures also carry the respective compliance costs. These types of joint ventures are usually adopted in mining, primary production or large scale property development projects.
Trust Unit Joint Ventures are often used by investors in property development projects. A unit trust is established with a trustee (usually a company) and one or more beneficiary. The trustee is responsible for the management of the trust including compliance of the trust and distribution of profits. A unit trust is set up with the trust assets divided into units. The participants under a Trust Unit Joint Venture are referred to as unit holders. Each unit holder owns a portion of the trust. Profit distribution is determined by the type and amount of units held by each unit holder. Units are transferrable to other investors.
Some common issues for unit holders to consider include capital gains tax, duty payable with the transfer the units, finance arrangement and risks associated with the venture.
It is crucial to set up the Trust Unit Joint Venture properly so that each unit holder certain of his/her entitlement, risks and responsibility. There are also specific legal and tax implications associated with the set up and running of a Trust Unit Joint Venture. It is recommended that a professional advisor is engaged to prepare the Joint Venture agreement.