Edited version of your private ruling

Authorisation Number: 1012533695997

Ruling

Subject: Restructure of partnership assets

Question:

In terms of section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), will your proposed restructure of shares interests, from joint to individual ownership, constitute a disposal of the respective half-interests that are given/transferred to the other partner?

Answer:

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

Your partnership was formed on 1 July 19XX.

The activity of the partnership has comprised of investment in property (residential and rural), cropping, grazing cattle and sheep, guest accommodation and equity investments. Since 20YY, the partnership assets have comprised solely of market listed shares and cash deposits.

Both of you have family considerations, which make it desirable that potential for testamentary conflicts be minimised. Accordingly, consideration is being given to dissolving the partnership.

It is proposed that the re-structure take the following form:

a) Shares being split, each partner taking of each parcel, strictly proportionate to capital which each partner holds; no third party is involved; and

b) Cash being split to retire the remaining capital balances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 106-5

Income Tax Assessment Act 1997 Section 108-7

Income Tax Assessment Act 1997 Section 112-25

Reasons for decision

Section 104-10 of the ITAA 1997 states CGT event A1 happens if you dispose of a CGT asset. It provides you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Section 116-30 of the ITAA 1997 provides if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out as at the time of the event. For example, if you give a CGT asset to another entity, you are taken to have received the market value of the CGT asset.

Section 106-5 of the ITAA 1997 provides any capital gain or capital loss from a CGT event happening in relation to a partnership or one of its CGT assets is made by the partners individually. For example, subsection 106-5(3) of the ITAA 1997 states if a partner leaves a partnership, a remaining partner acquires a separate CGT asset to the extent that the remaining partner acquires a share of the departing partner's interest in a partnership asset.

Under general law, a partnership is not a separate legal entity distinct from the individual partners who comprise the partnership. Accordingly, a partnership does not own property in its own right. Instead, title to the partnership assets is legally vested in the partners, even though an individual partner may have no separate title to specific partnership assets. In the High Court of Australia case of Federal Commissioner of Taxation v. Everett (1980) HCA 6; 143 CLR 440, it was stated:

Although a partner has no title to specific property owned by the partnership, he has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership.

Similarly, section 108-7 of the ITAA 1997 explains individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

In short, whether a CGT asset is regarded as being owned in 'partnership' or as 'joint tenants', the CGT treatment will be the same. For example, Taxation Ruling TR 93/32, which is about rental properties (which are CGT assets), explains the co-ownership of rental property is a partnership for income tax purposes.

Section 112-25 of the ITAA 1997 provides if you split a CGT asset, you are the beneficial owner of the original asset and each new asset, and the splitting is not a CGT event. For example, CGT Determination Number 7 provides the subdividing of land is not itself a CGT event. Therefore, if a CGT asset is split into two parts and one part is retained by the original owner and the other part is sold or given to another owner, a CGT event will not occur in relation to the part of the CGT asset that is retained by the original owner.

In your case, the CGT legislation treats each of your beneficial interests in the partnership/jointly held assets as separate CGT assets. Therefore, if you re-structure your shares interests, from joint to individual ownership, a disposal (in terms of section 104-10 of the ITAA 1997) will occur, at market value, to each half beneficial interest that is given to the other partner. Each of you will dispose of a half interest in the relevant shares and then acquire a half interest in (other) relevant shares. A CGT event will not occur, only in respect of the relevant half interests retained and not disposed of.