Edited version of private ruling

Authorisation Number: 1011771636708

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Ruling

Subject: Reconstitution of Partnership

Question 1

Will the Partnership be considered to be a reconstituted partnership as a result of B Company Pty Ltd as trustee for B Trust ("the B partner") disposing its interest in the Partnership to C Company Pty Ltd as trustee for C Company ("the C partner") and D Company Pty Ltd ("the D partner")?

Answer

Yes.

Question 2

If the Partnership is considered to be a reconstituted partnership after the sale by the B partner, can it continue to rely on the previous Australian Taxation Office Private Binding Ruling authorisation number XXXXX ("the original ruling") relating to the Partnership, pursuant to subsection 357-60(1) of schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

Yes.

This ruling applies for the following period:

1 July XX - 30 June XX

The scheme commences on:

1 July XX

Relevant facts and circumstances

The partnership

At all times the Partnership has been a general law partnership.

On XX the Partnership executed the Partnership Deed.

In accordance with the Partnership Deed:

· F Company Pty Ltd as trustee for F Company ("the F partner") and

· G Company Pty Ltd as trustee for G Trust ("the G partner")

each held an interest in the Partnership.

On XX, the Partnership was issued the original ruling, authorisation number XXXXX, by the Australian Taxation Office.

On XX, the B Group acquired the G Group and the G partner became "the B partner" of the Partnership. This change occurred at a tier above the partnership level and not at the partnership level.

In summary, the change of the G partner to the B partner in the Partnership was purely a name change to an existing partner.

Therefore, since the inception of the Partnership on XX there have been no changes at the partnership level to the partners forming the partnership.

The first change to the partners of the Partnership will occur at the time that B partner disposes of its interest in the Partnership to the C partner and the D partner.

The Sale

B partner intends to sell X% of its interest in the Partnership to the C partner and X% of its interest in the Partnership to the D partner ("the sale").

The Partnership Deed contains the following provisions in relation to continuity:

· Clause Q states that the terms and conditions of this deed bind the Partners from the date of this deed and the Partnership continues until dissolved; and Clause R provides that the Partners may by mutual agreement dissolve the Partnership at any time with immediate effect.

The Partnership Deed contains the following provision in relation to the change of partners in the Partnership:

· the definition of Partner in clause Z means a person who is for the time being a Partner under this deed;

In accordance with clause S of the sale agreement, after the sale, the C partner and the D partner will replace the B partner under the Partnership Deed with respect to the B partner's share in the Partnership.

The C partner and the D partner ("the new partners") will take over the existing assets and liabilities of the B partner after the sale.

The B partner will not retain any of the Partnership assets after the sale.

There will be no break in the trading activities of the Partnership after the sale.

There are no current plans to change the trading name of the Partnership after the sale of the B partner's interest.

There are no current plans to change the name of the Partnership after the sale of the B partner's interest.

There will not be a permanent or temporary cessation of the Partnership's business after the sale.

The F partner will be common to the Partnership both before and after the sale.

The applicant states, that the outgoing partner (the B partner) has agreed in writing, that the Partnership will continue and not be wound up.

Relevant legislative provisions

Taxation Administration Act 1953 section 357-50 to schedule 1,

Taxation Administration Act 1953 subsection 357-60(1) to schedule 1, and

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Issue 1

Question 1

Summary

The Partnership will be considered to be a reconstituted partnership because although a technical dissolution of the partnership occurs, it is considered that there is a reconstituted partnership as per the principles set out Goods and Services Tax Ruling GSTR 2003/13.

Detailed reasoning

GSTR 2003/13 provides guidance on general law partnerships. Paragraph 126 of GSTR 2003/13 explains the circumstances that result in the dissolution of a general law partnership.

126. At general law, dissolution of a partnership may be brought about in a number of different ways, including by a change in its membership or by a cessation of its business. Where the partnership no longer carries on a business, it is dissolved and wound up. However, on departure of a partner (upon resignation, retirement or death), the partnership is either wound up or the continuing partners agree that the business or firm may be carried on by the continuing partners, with or without new partners. In the latter situation, there may be no change in the outward appearance of the partnership business or firm.

Thus, a change in the membership of a partnership results in the dissolution of the partnership at general law. The dissolution may be a general dissolution or a technical dissolution as explained in paragraph 127 of GSTR 2003/13.

127. A dissolution leading to the winding up of the partnership is called a general dissolution. A dissolution that does not result in the winding up of a partnership is called a technical dissolution. A technical dissolution occurs where the assets and liabilities of the partnership are taken over by the continuing partners (and any new partners) and the partnership business is continued without any apparent break.

In a technical dissolution (reconstitution) the partnership trading name and business does not change after the change in membership. The partnership business is continued without any apparent break. The partnership is considered to be a reconstituted partnership in the case of a technical dissolution where the factors set out in paragraph 168 of GSTR 2003/13 are satisfied.

Paragraph 149 of GSTR 2003/13 explains that whether or not there is a reconstituted partnership depends on the intention of the parties and the terms and conditions of the partnership agreement.

Paragraph 150 of GSTR 2003/13 further explains that a written partnership agreement may expressly provide for the continuation of the firm or business in the event of a change in the membership of the partnership. This provision is often referred to as a continuity or non-dissolution clause. In the absence of a written agreement, such a clause may be implied by the conduct of the partners following the retirement or death of a partner, or introduction of a new partner.

Therefore, consideration of the conduct of the partners is required to determine whether the business of the Partnership will be continued following a change in membership of the Partnership.

The factors that indicate that the business is being continued are explained in paragraph 168 of GSTR 2003/13 and include:

· substantially all of the partnership assets remain with the continuing partnership;

· the nature of the enterprise remains substantially unchanged;

· the client or customer base remains substantially unchanged; and

· the business name or name of the firm remains unchanged.

The Partnership Deed may suggest a continuity of the business upon a change in membership of the partnership. The applicant states, that the B partner has agreed in writing that the Partnership will continue and not be wound up.

The business of the Partnership with the change in membership of the exit of the B partner and the admission of the C partner and D partner, with the F partner will continue, for the following reasons:

· the C partner and D partner, will take over the existing assets and liabilities of the B partner after the sale. The B partner will not retain any of the Partnership assets after the sale;

· there will be no break in the trading activities of the Partnership after the sale;

· there are no current plans to change the trading name of the Partnership after the sale of the B partner's interest;

· there are no current plans to change the name of the Partnership after the sale of the B partner's interest;

· there will not be a permanent or temporary cessation of the Partnership's business after the sale; and

· the F partner will be common to the Partnership both before and after the sale.

Change in membership of two-partner partnership

Paragraph 170 of GSTR 2003/13 explains that a partnership can be a reconstituted partnership only where two or more partners remain. However, paragraph 171 states:

171. However, we accept that a two-person partnership can be reconstituted. This occurs where a partner in a two-partner partnership sells or assigns an interest in the partnership to an incoming partner, or where a partner dies and the partnership agreement allows for continuity of the partnership with either the executor, trustee or beneficiary of the deceased partner's estate. The continuity clause may be express, or implied by way of conduct. Where this happens and the firm continues without any break in the continuity of the enterprise, we consider there is a change in members and a reconstituted partnership.

On the facts set out in this ruling, there will be a sale from one of the two existing partners in the Partnership directly to the two incoming partners. As the partnership will continue without any break in the continuity of the enterprise, it is considered that there is a change in the members and a reconstituted partnership according to the principles set out GSTR 2003/13.

Question 2

Summary

The Partnership will continue to be able to rely on the original ruling authorisation number XXXXX, issued to them, as the sale by the B partner leading to the reconstitution of the partnership will not of itself affect the validity of the original ruling.

Detailed reasoning

Subsection 357-60(1) of schedule 1 to the TAA 1953 provides as follows:

Section 357-60 When rulings are binding on the Commissioner

(1)     a ruling binds the Commissioner in relation to you (whether or not you are aware of the ruling) if

(a)     the ruling applies to you; and

(b)     you rely on the ruling by acting (or omitting to act) in accordance with the ruling.

Section 357-50 of schedule 1 to the TAA 1953 provides:

This Division applies to public rulings, private rulings and oral rulings.

Paragraph 20 of the Taxation Ruling TR 2006/11 provides:

A private ruling applies to you if it is given in response to an application by you and the facts, assumptions or conditions set out in the ruling or accompanying documents are met. A private ruling applies for the specified period, so long as the law to which it relates remains in force.

On the facts of the current case, subsection 357-60(1) of schedule 1 to the TAA 1953 is met as the original ruling was issued to the Partnership. The rulee to whom the ruling applies is unchanged by the reconstitution of the partnership, and the partnership intends to rely on the ruling for the years ended XX to XX inclusive.

In respect of the factors set out in TR 2006/11, the Commissioner considers that the change of partner leading to the reconstitution of the partnership will not of itself affect any of the facts, assumptions and conditions set out in the original ruling. Therefore the reconstitution of the partnership will not of itself affect the validity of the original ruling or the partnership's ability to rely on it.

Note however, that the Commissioner has not considered in this ruling whether any of the other facts, assumptions and/or conditions set out in the original ruling continue to be met such that the partnership can continue to rely on the ruling.

The original ruling applied from the years ended XX until XX inclusive. The years ended XX to XX have already elapsed. However, as the years ended XX to XX inclusive have not yet elapsed, the original ruling may continue to be relied on in respect of those periods so long as the law that the original ruling related to remains in force.