This session moves past PCG 2026/D2 to examine the question that sits underneath it: when land is made available to a partnership but not contributed to it, what is the legal character of the accretions to that land produced by partnership activity, and what are the accounting and tax consequences that follow?
Harvey v Harvey [1970] HCA 11 presents three members of the High Court reaching fundamentally different conclusions about this question. Barwick CJ held that the land became a partnership asset in equity and that the landowner was accountable for the improvement uplift even if it did not. The majority (Menzies and Walsh JJ) held that the land remained the landowner’s property entirely, that the accretion belonged to the landowner as landowner, and that the partnership’s only claim was recoupment of the cost of improvements through the accounts. These two models produce entirely different balance sheets, entirely different profit and loss treatments, and entirely different tax outcomes — and neither may be wholly satisfactory.
The case was decided before CGT, before the constructive trust cases (Baumgartner v Baumgartner (1987), Muschinski v Dodds (1985)), and before section 106-50 ITAA 1997. Each of these developments creates difficulties for one or both models that the 1970 court did not have to confront. There may also be a third model — a Baumgartner-style constructive trust giving the contributing partner a proportionate equitable interest — that Harvey does not consider but which may be the better answer in some cases. This session will work through all three.
Discussion Focus
- Three models of partnership and land. Model 1 (Barwick): land becomes a partnership asset in equity, landowner credited with fluctuating capital amount, improvement uplift is partnership property. Model 2 (Walsh/Menzies): land remains the landowner’s entirely, partnership has no proprietary claim to the accretion, only a personal claim for expense recoupment. Model 3 (Baumgartner constructive trust): contributing partner acquires a proportionate equitable interest in the land by reason of their contributions. Participants should read each of the three judgments with attention to the reasoning that supports or undermines each model.
- The bifurcation problem. You cannot have ownership of a value. An increment of value is not a right in rem. The accretion to the land is inseparable from the land itself. Barwick’s model requires the land’s value to be split into “landowner’s underlying value” and “partnership’s improvement uplift,” but these are not separate proprietary interests. Under modern CGT, section 106-50 does not contemplate this bifurcation — it treats the entire asset as a partnership asset and allocates the gain in partnership shares. This was not a problem in 1970 because there was no CGT. It is a problem now. Walsh/Menzies avoids the bifurcation entirely because the land is simply not a partnership asset. Participants should consider whether the Barwick model is workable under the current tax law, or whether it was always a model that could only exist in a pre-CGT world.
- Accounting treatment under each model. For each of the three models: where does the land sit on the balance sheet? Where does the improvement expenditure sit? Where does the accretion in value sit? If the partnership incurs $10 million improving land it does not own, what is the accounting entry — expense, asset, or something else? If it is WIP, what is the asset — the right to be reimbursed, or the improvements themselves (which are physically attached to land the partnership does not own)? Under the Barwick model, how do you account for the fluctuating capital credit when the land increases in value due to market forces versus partnership improvements? Under Walsh/Menzies, the partnership balance sheet does not include the land at all. I want us to map out the complete accounting for each model.
- Tax treatment and the recognition question. Accrual accounting begins with an invoice, not with work. You do not pay tax on WIP. If the land is not a partnership asset (Walsh/Menzies), the trading stock provisions cannot apply through the partnership. The landowner’s land may or may not be trading stock depending on the landowner’s own circumstances. If it is, the s 70-45 election determines recognition. If it is on capital account, the accretion is not recognised until realisation. If the land is a partnership asset (Barwick), s 106-50 applies but does not accommodate the bifurcation, and the trading stock provisions apply to the entire land — the landowner loses the ability to hold the land on capital account. Participants should consider which model produces workable tax outcomes and whether the Commissioner understands the consequences of arguing partnership.
- Whether Harvey is rightly decided and the equitable dimension. Harvey was decided before the constructive trust cases. Barwick CJ’s reasoning at [33] — that it would be inequitable, unjust and a breach of the good faith required between partners for the landowner to retain the full benefit — is essentially the Baumgartner principle articulated 17 years early. The majority rejected it, but their reasoning may not survive Baumgartner. However, the constructive trust remedy produces a proportionate interest (a right in rem), not an accounting obligation for a value — which may be a better answer than either Barwick or Walsh/Menzies.
- Multi-dimensional accounting. The accretion exists simultaneously in multiple dimensions: partnership expense, landowner’s capital uplift, unrealised gain, potential trading stock value. Traditional accounting forces a collapse into a single number. The PCG assumes a particular collapse (assessable trading stock uplift). Harvey tells us different models produce different collapses. Is there a framework — drawing on vector-based or multi-dimensional accounting theory — that better represents the simultaneous economic realities without forcing a premature collapse? We will introduce this in week one and develop it further in the following session.
Conclusion
The question of whether land made available to a partnership becomes a partnership asset, and the accounting and tax treatment of the accretions that follow, is the question that PCG 2026/D2 assumes away and that will determine the outcome of any audit of these structures.
Please see below link to case materials which is assumed reading in order to participate in the discussion:
Harvey v Harvey [1970] HCA 11; (1970) 120 CLR 529.
All three judgments. Pay particular attention to Barwick CJ at [27]–[33], Menzies J at [5]–[13], and Walsh J at [4]–[8].
Discussion led by Adrian Cartland.