Edited version of your private ruling

Authorisation Number: 1012520672840

Ruling

Subject: Death of partnership member: depreciating assets & trading stock

Questions and Answers:

1. When a partner passed away, did your partnership ('Old Partnership'), which included the deceased as a partner, end?

2. Yes.

3. Unless your Old Partnership makes an election under subsection 40-340(3) of the Income Tax Assessment Act 1997 (ITAA 1997), will the passing away of the partner result in a balancing adjustment event, in relation to the assets ('Depreciating Assets') of your Old Partnership, with the termination value of those Depreciating Assets being their market value?

Yes.

4. Unless your Old Partnership makes an election under subsection 40-340(3) of the ITAA 1997, will the first element of cost in the acquisition of your Old Partnership's Depreciating Assets by your new partnership ('New Partnership') be their market value at the date the partner passed away?

Yes.

5. If your Old Partnership makes an election under subsection 40-340(3) of the ITAA 1997, will a balancing adjustment event not apply to the Old Partnership and will the New Partnership acquire the Depreciating Assets of the Old Partnership at their adjustable value (rather than market value), just before the balancing adjustment event occurred?

Yes.

6. Unless your Old Partnership makes an election under subsection 70-100(4) of the ITAA 1997, when the partner passed away, will a notional disposal of your Old Partnership's trading stock occur, at the trading stock's market value?

Yes.

7. If your Old Partnership makes an election under subsection 70-100(4) of the ITAA 1997, when the partner passed away, will a notional disposal of your Old Partnership's trading stock occur, at the trading stock's cost price?

Yes.

8. Will the sale of your New Partnership's Depreciating Assets be subject to a balancing adjustment event?

Yes.

9. If the sale price (termination value) of your New Partnership's Depreciating Assets is greater than their adjustable (written down) value, will the difference between their sale price and their adjustable value be included in your New Partnership's assessable income?

Yes.

10. If the sale price (termination value) of your New Partnership's Depreciating Assets is less than their adjustable (written down) value, will the difference between their sale price and their adjustable value be a deductible amount for your New Partnership?

Yes.

11. Will the sale of your New Partnership's trading stock (livestock) result in assessable income to your New Partnership at the sale price?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are a partner in a business of primary production. When one of the partners in the business, passed away you inherited their share of the depreciating assets and livestock of the business. Your tax agent has lodged a TFN application for a new partnership account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-40

Income Tax Assessment Act 1997 Section 40-180

Income Tax Assessment Act 1997 Section 40-285

Income Tax Assessment Act 1997 Section 40-295

Income Tax Assessment Act 1997 Section 40-300

Income Tax Assessment Act 1997 Section 40-340

Income Tax Assessment Act 1997 Section 40-345

Income Tax Assessment Act 1997 Section 70-100

Reasons for decision

Change in the membership of your partnership

The table in section 40-40 of the ITAA 1997 states, at item 7, a depreciating asset that is a partnership asset is 'held' by the partnership and not any particular partner.

When the death of a partner occurs, a partnership will be dissolved, irrespective of the terms of the partnership agreement.

Therefore, ordinarily, on the death of a partner, a balancing adjustment event (under subsection 40-295(2) of ITAA 1997) would occur, at the date of death, for all partnership depreciating assets. Here, the old partnership that was the holder of the depreciating assets must work out a balancing adjustment using the market value of the asset, as the termination value, when the balancing adjustment event occurred (under item 5 in the table in subsection 40-300(2) of the ITAA 1997). Further, after it acquired the asset from the old partnership, the new partnership would work out the first element cost of the depreciating assets at their market value (under item 5 in the table in subsection 40-180(2) of the ITAA 1997).

However, subsection 40-340(3) of the ITAA 1997 states a taxpayer is able to choose roll-over where a balancing adjustment event has occurred in respect to a depreciating asset which is a partnership asset and there has been a partial change in the ownership of the asset. For roll-over relief to apply, the transferor and transferee must jointly elect for that relief to apply. The choice must: (a) be in writing; and (b) contain enough information about the transferor's holding of the property for the transferee to work out how this Division or Subdivision 328-D applies to the transferee's holding of the depreciating asset; and (c) be made within 6 months after the end of the transferee's income year in which the balancing adjustment event occurred, or within a longer period allowed by the Commissioner. The trustee of a partner's deceased estate may be a party to the choice.

Section 40-345 of the ITAA 1997 provides the rollover relief is: (i) section 40-285 does not apply to the balancing adjustment event for the transferor; and (ii) the transferee can deduct the decline in value of the depreciating asset using the same method and effective life (or remaining effective life if that method is the prime cost method) that the transferor was using.

For example, Bill and Jill are partners in a partnership (the B & J Partnership). The partnership's only depreciating asset is a machine. In the 2007-08 income year, the partnership admits Chip as an equal partner. This results in termination of the B & J Partnership and creation of the B & J & C Partnership. The admittance of the new partner results in a balancing adjustment event as both Bill and Jill have disposed of 16.67% of their interests in the depreciating asset (50% - 33.33% = 16.67%). Instead of the B & J Partnership being required to include a balancing adjustment amount in their assessable income, Bill, Jill and Chip can jointly choose to apply roll-over relief. The B & J & C Partnership will continue to calculate the decline in value of the machine using the same method as the B & J Partnership. The B & J & C Partnership is taken to have acquired the machine at its adjustable value just before the balancing adjustment event.

In your case, when the partner passed away, your Old Partnership naturally dissolved, which resulted in a balancing adjustment event occurring in relation to the Old Partnership's depreciating assets. However, if the Old Partnership chooses to make an election under subsection 40-340(3) of the ITAA 1997, the balancing adjustment event will not apply. Therefore, the Depreciating Assets will be rolled over from your Old Partnership into your New Partnership, without any tax implications that affect your Old Partnership's taxable income or loss.

Balancing adjustment events

When a taxpayer stops holding a depreciating asset or stops (or expects to stop) using it, for a taxable purpose, a balancing adjustment event occurs under section 40-295 of the ITAA 1997.

As a result of a balancing adjustment event, an amount may be assessable or deductible, upon comparing a depreciating asset's termination value (generally its proceeds) with its adjustable value (its cost, less its decline in value).

Where the termination value of an asset used wholly for a taxable purpose is greater than its adjustable value, the amount is included in a taxpayer's assessable income as an assessable balancing adjustment (under subsection 40-285(1) of the ITAA 1997).

Where the adjustable value of an asset used wholly for a taxable purpose is greater than its termination value, the amount is a deductible balancing adjustment (under subsection 40-285(2) of the ITAA 1997).

In your case, when your New Partnership sells its Depreciating Assets, a balancing adjustment event will occur. You will be required to calculate and include, in your New Partnership's tax return, for the relevant year, any assessable or deductible balancing adjustment that may occur.

Trading stock

Ordinarily, on the death of a partner, a notional disposal of trading stock occurs, under section 70-100 of the ITAA 1997, at the trading stock's market value.

For example, a grocer decides to take her daughters into partnership with her. Her trading stock becomes part of the partnership assets, owned by the partners equally. As a result, it becomes trading stock on hand of the partnership instead of the grocer. This section treats the grocer as having disposed of the trading stock to the partnership outside the ordinary course of her business.

However, section 70-100 of the ITAA 1997, allows an election to be made to treat the item as having been disposed of for what would have been its value as trading stock of the transferor on hand at the end of an income year ending on that day. In other words, an election under section 70-100 of the ITAA 1997 an item of trading stock to be treated as being disposed of at its cost price.

If this election is made, this value is included in the transferor's assessable income for the income year that includes that day. The transferee is treated as having bought the item for the same value on that day.

This election can only be made if: (a) immediately after the item stops being trading stock on hand of the transferor, it is an asset of a business carried on by the transferee; and (b) immediately after the item stops being trading stock on hand of the transferor, the entities that owned it immediately beforehand have (between them) interests in the item whose total value is at least 25% of the item's market value on that day; and (c) the value elected is less than that market value; and (d) the item is not a thing in action.

Also, the election can only be made before 1 September following the end of the financial year in which the item stops being trading stock on hand of the transferor. However, the Commissioner can allow the election to be made later.

An election must be in writing and signed by or on behalf of each of: (a) the entities that own the item immediately before it stops being trading stock on hand of the transferor; and (b) the entities that own it immediately afterwards.

If a person whose signature is required for the election has died, the legal personal representative of that person's estate may sign instead.

In your case, a notional disposal of your Old Partnership's trading stock occurred, at market value, when the partner passed away. However, if your Old Partnership makes an election under section 70-100 of the ITAA 1997, the notional disposal of trading stock by your Old Partnership and its purchase by your New Partnership can be treated as occurring at the cost price of the trading stock.

If you sell the business and trading stock of your New Partnership, the sale of your trading stock will simply be treated as ordinary sales income in your income tax return (at its sale/market price).