Edited version of private advice

Authorisation Number: 1012678588122

Ruling

Subject: Continuity of partnership

Question

Will the amendment and restatement of the Partnership Deed cause a dissolution of the Partnership that gives rise to a CGT event under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) for the Partners or have any consequences pursuant to Division 40 or Division 43 of the ITAA 1997 for the Partnership?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 20xx

The scheme commences on:

Income year ended 30 June 20xx

Relevant facts and circumstances

A general law partnership proposes to amend and restate the Partnership Deed to reflect certain changes. The Partners have not changed since the Partnership was formed. The original Partnership Deed also dealt with the equity contributions and responsibilities of the parties to the Deed in the context of their wider investment in the entities that undertook the Project. As part of the terms of the original Partnership Deed, its amendment was to be allowed provided that each of the parties to the Deed were in agreement pursuant to clause xx which states:

Modification

This deed may only be altered or modified in writing signed by or on behalf of all the parties (including by an Authorised Representative), subject to the provisions of the Project Deed.

As part of a restructure, the original Partnership Deed, in accordance with clause xx, is proposed to be amended. The matters dealt with by the original Partnership Deed are proposed to be covered now by two deeds.

The original Partnership Deed is proposed to be amended by a Deed of Amendment and Restatement. This deed provides the following in the operative clause, being clause x:

Amendment and Restatement

The parties agree that from the Effective Date:

(a) the Deed is amended and restated as set out in Annexure A to this deed; and

(b) the Deed will be known as the x Deed.

Acknowledgement

The parties acknowledge and agree that it is their intention that from the Effective Date the Partners will continue to operate the Partnership on the amended terms of the Deed set out in Annexure A to this deed and that the provisions of the Deed that do not relate to the Partnership will cease to have effect.

As a result, the original Partnership Deed will continue in the form of the Proposed x Deed. There will be no change in the Partners at the time of the amendment and restatement.

Relevant legislative provisions

Income Tax Assessment Act 1997

Division 40

Division 43

Division 104

subsection 960-100(1)

subsection 995-1(1) 'partnership'

Reasons for decision

the Partnership is an association of persons carrying on business as partners. Accordingly, it satisfies paragraph (a) of the definition of "partnership" in subsection 995-1(1), commonly referred to as a general law partnership.

Pursuant to clause xx of the Deed, the relevant jurisdiction is NSW where partnerships are governed by the Partnership Act 1892 (NSW) (Partnership Act).

Section 19 of the Partnership Act allows the mutual rights and duties of partners, whether ascertained by agreement or defined by the Partnership Act, to be varied by the consent of all partners. Such consent may be either expressed or inferred from a course of dealing.

The proposed variations to the Deed will be made by consent of all partners in the Partnership pursuant to clause xx of the Deed. Accordingly, the variation will satisfy section 19 of the Partnership Act.

Under sections 32 to 35 of the Partnership Act, the dissolution of a partnership may be brought about in a number of ways.

The amendment and restatement of the original Partnership Deed as the Proposed x Deed will not result in any of the above sections applying to dissolve the partnership. In particular section 32 of the Partnership Act will not apply as the Partners will agree to continue the partnership and no partner gives notice of an intention to dissolve the partnership.

CGT events - Division 104

Under subsection 106-5(1), 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. Each partner's gain or loss is calculated by reference to the partnership agreement, or partnership law if there is no agreement.

Paragraph 108-5(2)(c) clarifies that an interest in an asset of a partnership is a CGT asset. Therefore, each partner's interest in each of the assets of the Partnership is a CGT asset.

Paragraph 108-5(2)(d) clarifies that an interest in a partnership that is not covered by paragraph 108-5(2)(c) is a CGT asset. Therefore, each partner's interest in the Partnership is a CGT asset.

When a partner disposes of their interest in the Partnership, the partner is taken to have disposed of their interest in all of the assets of the Partnership.

As Partnership will not be dissolved, the amendment and restatement of the Deed (renamed the Partnership x Deed) will not cause CGT event A1, CGT event C2 or any other CGT event under Division 104 to happen to a partner's interest in any of the assets of the Partnership, or a partner's interest in the Partnership.

Division 40

As a general law partnership, Partnership holds depreciating assets under item 7 of the table in section 40-40.

When there is a change in the entity that holds a depreciating asset, such as when a partnership that owns a depreciating asset is dissolved, or when partners join or leave the partnership, there is a change in the interests of the partners in the depreciating asset.

Subsection 40-295(2) states:

A balancing adjustment event occurs for a ^*depreciating asset if:

(a) for any reason, a change occurs in the ^*holding of, or in the interests of entities in, the asset; and

(c) the asset was a partnership asset before the change or becomes one as a result of the change.

As Partnership will not be dissolved, the amendment and restatement of the Deed (renamed the Partnership x Deed) will not cause a balancing adjustment event to occur under subsection 40-295(2) because a change will not occur in the holding of any depreciating asset.

Division 43

As the Partnership is a general law partnership, structural improvements would be partnership assets and owned by the partnership.

Section 43-10 provides that you can deduct an amount for capital works (as defined in section 43-20) for an income year if the capital works have a "construction expenditure area", there is a pool of construction expenditure for that area, and you use "your area" in the income year in a prescribed manner. Under section 43-15, the amount you can deduct is a portion of "your construction expenditure".

Subsection 43-75(1) defines the "construction expenditure area" of capital works begun after 30 June 1997 as the part of the capital works on which the construction expenditure was incurred that, at the time when it was incurred by an entity, was to be owned or leased by the entity or held by the entity under a "quasi-ownership right" over land granted by an exempt Australian government agency or an exempt foreign government agency.

For entities that do not own part of the construction expenditure area, such as the Partnership which holds the relevant land on which the construction expenditure was incurred under a lease from the Crown in right of the Australian State of x, subsection 43-120(1) provides that "your area" is the part of the construction expenditure area that you lease, or hold under a quasi-ownership right over land granted by an exempt Australian government agency or an exempt foreign government agency, and that:

(a) is attributable to a pool of construction expenditure that you incurred; and

(b) you have continuously leased or held since the construction was completed.

Under subsection 995-1(1), a "quasi-ownership right" over land means:

(a) a lease of the land; or

(b) an easement in connection with the land; or

(c) any other right, power or privilege over the land, or in connection with the land.

Under subsection 43-120(3), "your construction expenditure" is the portion of the pool of construction expenditure that is attributable to your area.

When there is a change in the entity that holds the quasi-ownership right, such as when a partnership is dissolved, the entity will cease to be eligible for a deduction for capital works under Division 43 of the ITAA 1997.

As Partnership will not be dissolved, the amendment and restatement of the Deed (renamed the Partnership x Deed) will not cause a change in the interests in the capital works, or a change in the existing holder of the quasi-ownership right for the purposes of section 43-120. Therefore, Partnership will continue to be eligible for a deduction for capital works under Division 43 of the ITAA 1997.