Edited version of your written advice

Authorisation Number: 1012727121253

Ruling

Subject: Reconstituted partnership

Question 1

Will the Partnership continue as a 'reconstituted partnership' for the purposes of the Capital Gains Tax (CGT) provisions in Part 3-1 of the ITAA 1997, such that no CGT event will occur for the Continuing Partners as a result of the change in partners?

Answer

Yes

Question 2

Will the Partnership continue as a 'reconstituted partnership' for the purposes of the capital allowances provisions in Division 40 of the ITAA 1997 such that the Partnership will be able to continue to claim deductions relating to the asset?

Answer

Yes

Question 3

Will the Partnership continue as a 'reconstituted partnership' for the purposes of the capital works provisions in Division 43 of the ITAA 1997 such that the Partnership will be able to continue to claim deductions relating to the capital works?

Answer

Yes

Question 4

If the Partnership is considered to be a 'reconstituted partnership' for the purposes as outlined in Questions 1 and 2 above, can it retain the original partnership's Australian Business Number (ABN) and Tax File Number (TFN) registrations?

Answer

Yes

Question 5

Will the transfer of partnership interests within the tax consolidated group give rise to any CGT events for the tax consolidated group?

Answer

No

This ruling applies for the following periods:

The year ended 30 June 20xx

The scheme commences on:

During the year ended 30 June 20xx

Relevant facts and circumstances

The Partnership applied for a private ruling. The Partnership is a general law partnership carrying on a business. The Partnership consists of X partners. Y of those partners are subsidiary members of a tax consolidated group and collectively they have the minority interests in the Partnership. Those T partners (Outgoing Partners) will transfer their interests in the partnership to the head company of the tax consolidated group (Incoming Partner). The other remaining partners (Continuing Partners) having the majority interest in the Partnership will continue as partners and the business will continue to be operated as before with the new Incoming Partner.

Relevant legislative provisions

Income Tax Assessment Act 1997

section 106-5

subsection 40-295(2)

subsection 40-340(3)

section 43-120

section 701-1

Reasons for decision

Question 1

Yes. The Partnership will continue as a 'reconstituted partnership' for the purposes of the Capital Gains Tax (CGT) provisions in Part 3-1 of the ITAA 1997, such that no CGT event will occur for the Continuing Partners as a result of the change in partners.

The Commissioner accepts that in the circumstances of this case it is the intention of the partners that the business of the Partnership be continued by the Continuing Partners in partnership with the new Incoming Partner which acquires the interests of the eight Outgoing Partners. The Commissioner accepts that in this instance the Partnership continues as a "reconstituted partnership" i.e. that the Partnership does not undergo a general dissolution and winding-up followed by the formation of a new partnership.

Nevertheless, the above position does not necessarily provide relief for all aspects of the ITAA 1997.

Under the CGT provisions the following is noted:

• 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.

Subsection 106-5(1) provides: any capital gain or 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.

Subsection 106-5(3) provides: 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. Note: The remaining partners would not be affected if the departing partner sells its interests to an entity that was not a partner.

As the remaining partners (Continuing Partners) neither acquire an additional interest nor dispose of their existing interest in the Partnership, and as the Outgoing Partners sell their partnership interest to the head company, it is agreed that there will be no CGT consequences arising for the Continuing Partners as a result of the change in partners.

Question 2

Yes. The Partnership will continue as a 'reconstituted partnership' for the purposes of the capital allowances provisions in Division 40 of the ITAA 1997 such that the Partnership will be able to continue to claim deductions relating to the asset.

The Commissioner accepts that in the circumstances of this case it is the intention of the partners that the business of the Partnership be continued by the Continuing Partners in partnership with the new Incoming Partner which acquires the interests of the Outgoing Partners. The Commissioner accepts that in this instance the Partnership continues as a "reconstituted partnership" i.e. that the Partnership does not undergo a general dissolution and winding-up followed by the formation of a new partnership.

Nevertheless, the above position does not necessarily provide relief for all aspects of the ITAA 1997.

Under Division 40 the following is noted:

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

(b) the entity or one of the entities that had an interest in the asset before the change has an interest in it after the change; and

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

However, subsection 40-340(3) allows a choice of roll-over relief and states, if:

(a) there is a balancing adjustment event for a depreciating asset because of subsection 40-295(2) (about a change in the holding of, or in interests in, the asset); and

(b) the entity or entities that had an interest in the asset before the change (also the transferor) and the entity or entities that have an interest in the asset after the change (also the transferee) jointly choose the roll-over relief.

Furthermore, subsection 40-340(4) provides, the choice must:

(a) be in writing; and

(d) 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;

(e) 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.

It follows that a balancing adjustment event will arise when a change in partners of the Partnership occurs.

The roll-over relief choice will be available under subsection 40-340(3) to the relevant partners as there will be a balancing adjustment event for the depreciable assets held by partners and these partners have indicated to the Commissioner that they will jointly choose the roll-over relief in compliance with the statutory provisions.

Question 3

Yes. The Partnership will continue as a 'reconstituted partnership' for the purposes of the capital works provisions in Division 43 of the ITAA 1997 such that the Partnership will be able to continue to claim deductions relating to capital works.

The Commissioner accepts that in the circumstances of this case it is the intention of the partners that the business of the Partnership be continued by the Continuing Partners in partnership with the new Incoming Partner which acquires the interests of the Outgoing Partners. The Commissioner accepts that in this instance the Partnership continues as a "reconstituted partnership" i.e. that the Partnership does not undergo a general dissolution and winding-up followed by the formation of a new partnership.

Nevertheless, the above position does not necessarily provide relief for all aspects of the ITAA 1997.

Under Division 43 the following is noted:

For entities that do not own part of the construction expenditure area, such as the Partnership which holds a quasi-ownership right under a contract, the entitlement to ongoing deductions under Division 43 would be dependent on satisfaction of either of subsections (1) or (2) of section 43-120.

You have advised that with the change in partners, there will not be a novation, cancellation, change or amendment to the existing contract. The contract will not be terminated and there will be no novation. The existing contract will continue to be held by the nominee as agent for the partners.

Given the above, if it is the case that the "reconstituted" Partnership is to be properly regarded as the same partnership 'entity' (as defined at section 960-100) or the same 'you' (as defined at section 4-5), then subsection (1) of section 43-120 is satisfied and because the contract continues. Or, if not the same 'entity' or 'you', then subsection (2) of section 43-120 is satisfied as the contract interests continue by way of assignment.

It would follow that the Partnership will be able to continue to claim deductions relating to the capital works.

Question 4

Yes. The Partnership is considered to be a 'reconstituted partnership' and therefore can retain the partnership's original Australian Business Number (ABN) and Tax File Number (TFN) registrations.

The Commissioner accepts that in the circumstances of this case it is the intention of the partners that the business of the Partnership be continued by the Continuing Partners in partnership with the new Incoming Partner which acquires the interests of the Outgoing Partners. The Commissioner accepts that in this instance the Partnership continues as a "reconstituted partnership" i.e. that the Partnership does not undergo a general dissolution and winding-up followed by the formation of a new partnership.

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

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

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

(b) There must be an express of 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.

(c) The following must be satisfied:

i. substantially all of the partnership assets remain with the continuing partnership;

ii. the nature of the enterprise remains substantially unchanged;

iii. the client or customer base remains substantially unchanged;

iv. 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.

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

i. the date of the dissolution

ii. the date of the reconstitution

iii. the names of the new, continuing and retiring partners

iv. the TFN or address and date of birth of all new partners

v. details of the changes if the contacts authorised to act on behalf of the partnership have changed.

If all of the conditions set out above are met the Partnership will only be required to complete one income tax return for the income year in which the reconstitution took place and the Partneship will be able to use its existing ABN, TFN and GST registration.

Question 5

The transfer of partnership interests within the consolidated group will not give rise to any CGT events for the head company.

The single entity rule (SER) at section 701-1 operates for the purposes set out in subsections 701-1(2) and (3) (the core purposes). These purposes are to work out the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period.

In this case, as each of the Outgoing Partners are subsidiary members and therefore parts of the tax consolidated group at the time of the transfer of their partnership interests, the transfer will be disregarded under the SER. Accordingly, no CGT event will occur for the head company as the head entity of the tax consolidated group.