Edited version of your written advice

Authorisation Number: 1012971482187

Date of advice: 16 February 2016

Ruling

Subject: Retiring partner income

Question

Is the amount paid to you on your retirement from the partnership assessable under section 92 of the Income Tax Assessment Act 1936?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on

1 July 20XX

Relevant facts

You were an equity partner of entity A until you retired as a partner.

An email states you:

• will cease to be an equity partner

• will leave the firm by a set date

• will receive your full entitlement as a partner

• will be paid an amount in the 20XX-YY financial year.

You were given time to finalise matters pertaining to your prior equity interest in the firm.

You received the payments in the 20XX-YY financial year in instalments.

Entity A provided you with a statement of distribution of taxable profits of the firm for the year ended 30 June 20YY which states that you had a sum distributed to you as a taxable distribution of firm profits for the year ended 30 June 20YY.

You also received a further payment in respect of your share of the firm's work in progress balance at 1 July 20XX and accept that this forms part of your assessable income.

The total taxable distribution to you disclosed in entity A's income tax return for the year ended 30 June 20YY comprises both the above amounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Section 92.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Generally speaking, a receipt will be income according to ordinary concepts if it is a receipt arising out of a taxpayer's employment, business activities or income producing activities. This will be so even if the receipt is not directly related to any service provided by the recipient to the donor (FC of T v Dixon (1952) 86 CLR 540).

The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. Characteristics of ordinary income that have evolved from case law include receipts that:

• are earned,

• are expected,

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

Subsection 92(1) of the Income Tax Assessment Act 1936 (ITAA 1936) requires each partner to include their interest in the net income of the partnership in their income tax return.

Taxation Determination TD 2015/19 Income tax: if a retiring partner is entitled to an amount representing their individual interest in the net income of the partnership for an income year, will section 92 of the Income Tax Assessment Act 1936 apply? is relevant in your circumstances.

TD 2015/19 states that where a retiring partner receives an amount representing their individual interest in the partnership net income, the amount is assessable under section 92 of the ITAA 1936 regardless of how the amount is labelled or described, the timing of the partner's retirement and the timing of any payment. That is, even if the partner has retired by the end of the income year, the payment is assessable under section 92. A payment expressed to be consideration for something provided or given up by the partner, is still assessable under section 92 of the ITAA 1936.

TD 2015/19 is in line with the decision in Case 1/2000 2000 ATC 101 where the AAT held that payments made under the retirement provisions of a merger agreement with a taxpayer partner's former firm were not payments in respect of a capital amount. In that case it was highlighted that payments which bear a sufficient relationship to a taxpayer's former contractual entitlement as a partner to a share in the net income of the partnership from which the taxpayer has recently retired are income.

In your case, the information in relation to your retirement from the partnership as outlined in the email indicates that the payment is your entitlement as an equity partner in the share of the profits.

A distribution of profit is, by its nature, incapable of being an asset of the partnership since it represents the partner's share of the profit due. As such your share of the partnership profit for the year ended 30 June 20YY cannot be considered to be capital in nature.

There is no information to indicate that any of the payment is capital in nature. The payments have the characteristics of ordinary assessable income rather than a capital receipt.

Although the payment may be seen as being in respect of you giving up your rights to a share of future profits from the partnership, it remains that the amount represents your individual interest in the net income of the partnership and is assessable under section 92 of the ITAA 1936.