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Edited version of your written advice
Authorisation Number: 1051220455239
Date of advice: 4 May 2017
Ruling
Subject: GST and the supply of a partnership interest
Question
Was the supply of the 50 percent interest in the partnership to the other partner a taxable supply pursuant to section 9-5 of the GST Act?
Answer
No. The supply of the interest was an input taxed supply pursuant to section 40-5.
Relevant facts and circumstances
X and Y conducted a grazing business as a partnership since at least 20XX. The Business was conducted over two properties. There are two houses on the properties including a manager's residence and the main farm house.
Y died and their spouse and X were appointed co-executors of the will.
Under the partnership agreement, X as the surviving partner had the option of acquiring Y's interest in the partnership subject to certain conditions.
Y was the director of Company A which was trustee for Trust A. Trust A had lent funds to the partnership earlier. On ddmmyyyy the loan funds lent by Trust A to the partnership was valued at $XX.00.
On ddmmyyyy the executors, Trust A and Trust B (a trust controlled by X) entered into a Heads of Agreement (Agreement) to sell Y's 50% interest in the partnership to X. The agreed sale price of the 50% interest was valued at $XX.00 and was calculated following a valuation of the farm. You supplied copies of the agreements and valuation. X intends for farming to continue on the property.
Heads of Agreement
The Background of the Heads of Agreement contract provided that X has exercised the option to acquire Y's interest in the capital and assets of the Partnership.
The Bank Loan is defined to mean the loan to the partnership granted by the Bank.
Y's Loan means the loan granted by Trust A to the Partnership which as at DDMMYYYY was $XX.00
Clause X provides that X will be responsible for paying interest, fees and charges relating to the Bank loan up to Completion and will refinance or discharge the bank loan or procure the release of the estate and the other executor from liability under the Bank Loan on and from Completion.
Clause Y provides that on completion, the estate will give X or their nominee a direction that $XX.00 of the purchase price be paid to Trust A and Trust A will apply this amount in repayment of Y's Loan.
Clause Z provides that, in consideration of the payment of $X.00 from X to the estate and subject to Completion occurring on and from the date of these Heads of Agreement, the Executors assign to X or their nominee all the Estates interests in the profits of the partnership arising from ddmmyyy and the responsibility for expenses incurred by the Partnership on or after that date.
Clause W provides that X is responsible for the management of the Business until completion.
On ddmmyyy, the same parties entered into an Agreement for Sale of the partnership interest (Sale Agreement). The sale was completed and transferred on the same day. You also supplied a copy of the Sale Agreement:
Clause X provides that completion is conditional on:
(a) The Bank loan being refinanced by X or discharged, and
(b) The Company Mortgages being discharged and removed from title to the two farms Clause 3.1 provides that the executors agree to sell and X agrees to purchase the interest for the Purchase price of $XX.00
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Section 9-5
A New Tax System (Goods and Services Tax) Act 1999 Section 40-5
A New Tax System (Goods and Services Tax) Regulations 1999 Sub-regulation 40-5.09(1)
Reasons for decision
In this reasoning, unless otherwise stated,
● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au
● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act
Reasons for our decision.
Goods and Services Tax Ruling GSTR 2003/13 Goods and services tax: general law partnerships (GSTR 2003/13) explains how the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to transactions involving general law partnership.
Paragraph 26 of GSTR 2003/13 provides that the concept of a partnership as an entity separate from the partners has been extended under the GST Act. We consider that the GST Act treats a partnership as an entity for all purposes of the Act.
Paragraph 27 and 28 explain further that:
27. As an entity, a general law partnership may register for GST, is liable for GST on taxable supplies that it makes, and is entitled to input tax credits for creditable acquisitions it makes.
28. Supplies and acquisitions that are made by or on behalf of partners in their capacity as partners are treated as supplies and acquisitions by the partnership. This position is confirmed by subsection 184-5(1) which provides:
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.
As explained in paragraph 128 of GSTR 2003/13 a general dissolution of a partnership is bought about by several means, including the death of a partner as in your case.
Paragraphs 129 of GSTR 2003/13 explains that when a partnership dissolution leads to its winding up, the partners retain their authority to bind the other members of the partnership for the purpose of winding up the affairs of the partnership, and only for that purpose.
Paragraph 174 provides that:
Sale or assignment of an interest in a partnership - partner to partner transaction
174. A sale or assignment of an interest in a partnership may be made by a continuing partner to an incoming partner, or by an outgoing partner to either a continuing or an incoming partner. The supply is a partner-to-partner transaction and does not involve the creation or supply of any new interest by the partnership. Such a sale or assignment is a supply by the partner of a financial interest, and is a financial supply if the requirements of Subregulation 40-5.09(1) are satisfied. If the partner making the supply is unregistered, or the supply is not made in the course or furtherance of an enterprise carried on by the partner, no GST consequence arises in relation to the supply.
Paragraph 187 and 190 of GSTR 2003/13 provides the following additional information:
One partner acquires all the other interests in the partnership and continues as a single entity
187. Where one partner takes over the business of the partnership, this is usually achieved by the purchase of the other partners' interests in the partnership.
188. It makes no difference whether the sale or assignment of an interest in a partnership by an outgoing partner is to either an incoming or a continuing partner. Therefore, where one partner acquires the partnership interests of all the other partners, the outgoing partners make supplies of financial interests to the acquiring partner. The supplies by the outgoing partners, and the acquisition-supply by the acquiring partner, will be financial supplies if the requirements of Subregulation 40-5.09(1) are met.
189. By acquiring all of the other partnership interests, the acquiring partner effectively takes over all of the assets and liabilities of the partnership and carries on the enterprise in its own right.
190. Upon the supply of all the other interests in the partnership to the acquiring partner, the partnership is dissolved. Since the partnership is no longer carrying on the enterprise, the partnership GST registration (and ABN) must be cancelled. The purchaser may apply for a new GST registration (and ABN) and must do so if it is required to be registered.
On this basis the supply of the interest in the partnership to X was an input taxed supply pursuant to section 40-5.
As the supply was input taxed it was not a taxable supply.
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