Edited version of your written advice

Authorisation Number: 1013072460975

Ruling

Subject: Transfer of trading stock

Question 1

Can the Taxpayer (Partnership) make elections under section 70-100 of the Income Tax Assessment Act 1997 with regards to the transfers of trading stock (or interests in trading stock) from the Partnership to Company X and the tax partnership that is yet to be formed between Company X and the Taxpayer (NewPartnership)?

Answer

No

Question 2

In the event that the answer to question 1 is yes (ie. The Taxpayer can make the election under section 70-100), will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply when;

(a) the Taxpayer makes the election under section 70-100(4) of the ITAA 1997 for transfer 1 under question 1?

(b) the Taxpayer (in its own capacity and as a partner in a yet to be formed tax partnership between Company X and itself), makes the election under section 70-100(4) of the ITAA 1997 for transfer 2 under question 1?

Answer

The answer to Question 1 is no, therefore, an answer to Question 2 in relation to the application of Part IVA of the ITAA 1936 is not required.

This ruling applies for the following periods:

1 July 20XX - 30 June 20YY

1 July 20YY - 30 June 20ZZ

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

• The Taxpayer (Partnership) is a partnership that operates a family run business

• Company X is the manager of the Partnership

• The family are reviewing their businesses for the purposes of

• Family and succession planning. A number of the partners plan to reduce their involvement in the partnership and another member of the family will take over the operational control of the family business. The Partnership states that it is easier for the Company X to operate the business where there are fewer operational participants

• Business development and evolution

• Protection from personal liability

• Easier development of the commercial operations in the future as

• it simplifies tax lodgements

• it is easier to change directorship and members of Company X than partners in the Partnership, and

• decision making as easier as few people are involved in the business management

• The Partnership owns X% interest in its trading stock

• The Partnership wishes to transfer X% interest of its trading stock to Company X, for this purpose a new partnership will be created between the Partnership and Company X.

• The new partnership (NewPartnership) will be formed so that the trading stock will immediately become an asset of that business

• The Partnership and the NewPartnership intend to elect a value for both the proposed first and second transfers of trading stock that is less than market value

• The applicant wishes to treat the trading stock as disposed of at closing value under 70-100(4)

• The NewPartnership will own only the trading stock for a limited time to comply with with section 70-100(4) election purposes

• Once the NewPartnership is formed between the Partnership and Company X the transfer of trading stock will occur using a two stage approach

• The Partnership (Partner A) transfers X% of its interest in the trading stock to Company X (Partner B) and an election made under section 70-100(4) of ITAA 1997 in relation to its disposal at the time of the transfer

• One calendar month later, Partner A in its personal capacity, and as a partner in the NewPartnership, transfers the remaining X% of the X% interest in the trading stock to Partner B and will make the same election under section 70-100(4) of ITAA 1997 in relation to the disposal

• Company X will ultimately own X% of the trading stock

• NewPartnership will no longer exist after X% of the trading stock is transferred to Company X

• The Partnership may retain some assets but the transfer of trading stock to Company X is seriously being contemplated

Relevant legislative provisions

Part IVA of Income Tax Assessment Act 1936

Section 177 of Income Tax Assessment Act 1936

Section 70-75 of Income Tax Assessment Act 1997

Section 70-100 of Income Tax Assessment Act 1997

Section 995 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Notional disposal when an entity holding an item as trading stock makes an election under section 70-100 of the Income Tax Assessment Act 1997.

Question 1

Can the Taxpayer (Partnership) make elections under section 70-100 of the Income Tax Assessment Act 1997 with regards to the transfers of trading stock (or interests in trading stock) from the Partnership to Company X and the tax partnership that is yet to be formed between Company X and the Taxpayer (NewPartnership)?

Detailed reasoning

Partnership

The Partnership is a partnership operating a family run business.

The manager of the Partnership is Company X.

The family are reviewing their businesses for the purposes of family and succession planning. The Partnership wishes to transfer 100% interest of its trading stock to Company X.

The Partnership proposes to form a new partnership between itself and Company X to facilitate the movement of trading stock.

A partnership for income tax purposes

A partnership, for the purposes of general law, is the relationship that exists between persons carrying on business in common with a view to profit. Section 995-1 of the ITAA 1997 defines a partnership as:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b) a limited partnership

This definition not only encompasses the general law concept of a partnership but broadens it by including an association of persons in receipt of ordinary income or statutory income jointly.

Person is defined in section 995-1 of ITAA 1997 as including a company. The legal meaning of person as defined by Butterworths Concise Australian Legal Dictionary is:

                A separate legal entity, recognised by the law as having rights and obligations

Lindley and Banks on Partnership at paragraph 04 of chapter 3 states that a partnership is not a separate legal entity. This view is supported by the ATO in Taxation Ruling IT 2540 Income tax: capital gains: application to disposals of partnership assets and partnership interests which states:

Under general law in relation to partnerships, a partnership is not a separate legal entity…

Further, Case M58 80 ATC 399 (Members Fairleigh and Harrowell) at paragraph 8 states:

… only natural persons and corporate bodies can be members of a partnership (i.e. a partnership as such cannot itself be a member of another partnership)…

Conclusion

A partnership cannot be a member of another partnership, hence, it is not possible for the Partnership to form a new partnership with Company X to undertake the proposed scheme. Therefore, the proposed election under section 70-100 of the ITAA 1997 cannot take place in its current form.

Question 2

In the event that the answer to question 1 is yes (ie. The Taxpayer can make the election under section 70-100), will Part IVA of the ITAA 1936 apply when;

(a) the Taxpayer makes the election under section 70-100(4) of the ITAA 1997 for transfer 1 under question 1?

(b) the Taxpayer (in its own capacity and as a partner in a yet to be formed tax partnership between Company X and itself), makes the election under section 70-100(4) of the ITAA 1997 for transfer 2 under question 1?

The answer to Question 1 is no, therefore, an answer to Question 2 in relation to the application of Part IVA of the ITAA 1936 is not required.