Edited version of your private ruling

Authorisation Number: 1012442396018

Ruling

Subject: Reconstituted partnership- change in membership

Question 1

Will the Partnership continue as a 'reconstituted partnership' after a change to the existing partners?

Answer

Yes.

Question 2

If the Partnership is considered to be a 'reconstituted partnership', can it retain the original partnership's Australian Business Number ("ABN") and Tax File Number ("TFN") registrations?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013.

The scheme commences on:

21 January 2013.

Relevant facts and circumstances

The partners (the "Partnership"), through their Tax Agent, lodged a request for a private ruling on 21 January 2013. The following questions and issues were raised:

The partners of the partnership are changing. Has there been a continuation of the old partnership and can they continue to use the existing tax file number and Australian Business Number after the partners have changed?

The request contained the following information:

On December 20XX, the Partners signed an agreement to change the partners of an existing partnership. Prior to the change, each partner owned a percentage interest in the partnership. Under the agreement to the change the partners, Y of the partners will sell their partnership interests to a company, X, which will then own a certain share of the partnership. The remaining partner will retain their share in the partnership.

Under the terms of the agreement, there is a continuity of partnership clause.

The partnership runs a business. It is the intention of the remaining partner and the new partner to continue the business operations without interruption. There is no intention to change any part of the general nature of the business. The business will continue without change, from the same location with no change of trading name.

As to the change in interest, both the interest in the business and the share of the buildings from which the business is run are being sold, leaving ownership of the business with the business after the change.

The Partnership has been registered for GST since 1 May 2007.

A copy of the Agreement for the Sale of the Partnership Interest was provided after a request for further information, and the following applies:

Recitals

A The partners in partnership conduct the business

B The partners, along with the Family Trusts and Superannuation Funds, own various real properties and the shares in Y company that are used for the purposes of the Business.

C The seller has agreed to sell, and the Buyer has agreed to buy, the seller's interest in the partnership and the Business for the Purchase Price on the terms set out in this Agreement.

4.1 Settlement

Provided all of the Conditions Precedent are satisfied, at Settlement under clause 4.3 ("Time and Place for Settlement")

(a) The two partners transfer the goodwill of the Business to X ;

(b) The Family Trusts transfer their interest in property to the remaining Family Trust;

(c) The two partners transfer their interest in the Business Names to X; and

(d) The family trusts transferring the shares in Y company to the remaining Family Trust.

5.1 Partnership to Continue

The partnership between the partners to carry on the business is declared to have been dissolved by mutual consent so far as the two partners are concerned on the settlement date, and the Business shall from that date be carried on by the remaining partner and X. The parties agree that the partnership will be a continuous partnership and that an exiting partner may retire from the partnership without the necessity of executing financial instruments of a day to day nature.

Relevant legislative provisions

995-1 of the Income Tax Assessment Act 1997

195-1 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision

Question 1

The meaning of "partnership" for the purposes of GST is defined in section 195-1 of A New Tax System (Goods and Services Tax) Act 1999 ("GST Act") by reference to the definition of 'partnership' in subsection 995-1(1) of the Income Tax Assessment Act 1997 ("ITAA 1997"). Subsection 995-1 of the ITAA 1997 provides:

partnership means:

(a) an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly; or

(b) a limited partnership.

The first limb of paragraph (a) in the above definition refers to 'an association of persons (other than a company or limited partnership) carrying on a business as partners'. This reflects the general law definition of a partnership, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. The ATO refers to this type of partnership as a 'general law partnership'.

General law partnerships

Goods and Services Tax Ruling GSTR 2003/13 Goods and Services Tax: general law partnerships ("GSTR 2003/13") contains the ATO view regarding the treatment of general law partnerships for the purposes of GST, and more specifically, when a partnership is considered to have been 'reconstituted'.

As discussed at paragraph 13 of GSTR 2003/13, at general law, a partnership is not an entity. The general law regards the business as being carried on by the persons that are in the partnership. The term partnership is 'merely descriptive of the relation between persons carrying on business with a view of profit'. However, paragraph 14 of GSTR 2003/13 elaborates by stating:

The position under the GST Act is different. The definition of an entity includes a partnership. A consequence of this is that the GST Act applies to partnership transactions, in particular dealings between partners and the partnership, in a manner that does not reflect the general law treatment of those transactions. Against this background, we have applied the GST law to general law partnerships in a way that best promotes the purpose or object of the GST Act and produces a sensible result.

As explained at paragraph 127 of GSTR 2003/13, a dissolution that results in the winding up of a partnership is called a 'general dissolution', which can occur in a number of different ways-including a change in a partnership's membership, or by a cessation of its business. Conversely, a dissolution that does not result in the winding up of a partnership is called a 'technical dissolution', also known as a 'reconstituted partnership'.

Technical dissolution

A technical dissolution occurs when 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. The rationale for distinguishing a technical dissolution from a general dissolution is explained at paragraphs163 to164 of GSTR 2003/13:

163 To regard a change in the membership of a partnership as leading to a winding up of an existing partnership and the formation of a new partnership would lead to administrative and compliance difficulties for the partnership and its partners. This would be the case particularly for partnerships that experience frequent membership changes.

164 We consider that, for GST purposes, it is open and appropriate for the Commissioner to accept that a change in membership does not necessarily result in the general dissolution and winding up of the partnership.

Therefore, as discussed at paragraph 126 of GSTR 2003/13, if a technical dissolution of a partnership occurs, the ATO takes the view that there is 'no change in the character of the entity for the purposes of GST'.

Continuity clause

Paragraph 149 of GSTR 2003/13 states 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'.

In addition to the above, Paragraph 150 of GSTR 2003/13 explains that a written partnership agreement may expressly provide for the continuation of the business in the event that there is a change to the membership of the partnership, which is often referred to as a 'continuity or 'non-dissolution clause'.

As discussed at paragraph 168 of GSTR 2003/13, for a partnership to be treated as reconstituted, there needs to be an express or implied continuity clause in the partnership agreement, and there should be 'no break in the continuity of the enterprise or firm'. Indicators of continuity 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.

Notwithstanding the above, none of the indicators are conclusive evidence that there has been a reconstitution of a partnership, as the position is determined on the facts and circumstances of each case.

Application to the facts

The Partnership has 3 partners who carry on a dental business. The Partnership has undergone a change in membership, with two partners selling their partnership interests to a company, X, and the a Family Trust, whilst the remaining partner will retain his 1/3^rd share in the Partnership. As the Partnership is a general law partnership, and has been registered for GST since 1 May 2007, GSTR 2003/13 applies.

Based on the facts provided, it is determined that the change in membership will result in a technical dissolution of the Partnership because:

· the assets and liabilities of the Partnership have been taken over by the continuing partner and the company;

· the Partnership's business will continue without any apparent break;

· there is no intention to modify the general nature of the business, which will continue from the same location; and

· Under the terms of the agreement, there is a continuity of partnership clause.

In accordance with the above, the change in membership has resulted in a technical dissolution of the Partnership. However, for the purposes of GST, the Partnership can continue as a reconstituted partnership, with no apparent break to the continuity of the enterprise.

Question 2

Practice Statement Law Administration PSLA 2011/8 provides the following advice as to whether a reconstituted partnership can use the ABN, TFN and GST registration of the original partnership:

23. The following conditions must be satisfied if a reconstituted partnership wishes to continue to use its existing TFN, GST registration or ABN:

· There must be at least one continuing partner who is a member of the partnership prior to and following the reconstitution.

· There must be an express or implied continuity clause agreed to by the continuing, incoming and outgoing partners. This includes a clause in the partnership agreement, a statement signed by the partners or an oral agreement by the partners.

The following must be satisfied:

· 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

· the business name or name of the firm remains unchanged

'Substantially' means largely or considerably. This is taken to mean more than 50%, though each case will need to be decided on its own facts.

When lodging the partnership tax return, the following details must be supplied:

· The date of the dissolution

· The date of the reconstitution

· The names of the new, continuing and retiring partners

· The TFN or address and date of birth of all new partners, and

· Details of the changes if the persons authorised to act on behalf of the partnership have changed.

24. If all of the conditions set out in paragraph 23 of this practice statement are not met, the reconstitution will result in the formation of a new partnership. This new partnership will be required to register for a new TFN, GST registration and ABN. Both partnerships (the old and the new) will need to lodge a partnership tax return. One tax return will be lodged for the old partnership from the beginning of the income year to the date of dissolution and another will be lodged for the new partnership from the date of its formation to the end of the income year.

As discussed at question one, the above conditions are satisfied, and the Partnership can continue as a reconstituted partnership. Provided the Partnership lodges its tax return including the details above, the Partnership will be able to use its existing ABN, TFN and GST registration.