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Edited version of your written advice
Authorisation Number: 1051234915219
Date of advice: 7 June 2017
Ruling
Subject: Income - Partnership
Question 1
Can the partners of the Partnership contract to change the partnership interest for the 2015 financial year under section 92(1)(a) of the Income Tax Assessment Act 1997?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The partnership is made up of three family trusts. Each family trust is controlled by one each of the three brothers and their respective spouses. Each family trust is a discretionary trust for the benefit of each respective brother and their immediate families.
The partnership has a business.
An election under section 70-100(4) of the ITAA 1997 has been made for the 30 June 2015 Financial Year and signed by the three partners of the Partnership. This allows for the in-specie distribution of three units to the Trust, to be valued at cost (trading stock value) instead of market value.
There is no written partnership agreement and no implied agreement that the partnership distribution is anything other than a one third split. In the prior financial year the Partnership’s net profit had been split one third for each of the three partners.
An application has been made to adjust the net profit distribution to the partners after the end of the relevant financial year.
Relevant legislative provisions
Subsection 92(1) of the Income Tax Assessment Act 1936
Reasons for decision
Partnership Distribution - Section 92 of Income Tax Assessment Act 1936
Subsection 92 (1) of the Income Tax Assessment Act 1936 (ITAA 1936) states:
The assessable income of a partner in a partnership shall include:
(a) so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was a resident; and
(b) so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was not a resident and is also attributable to sources in Australia
Taxation Ruling TR 2005/7 Income tax: the taxation implications of 'partnership salary' agreements determines, at paragraph 10, that a contractual agreement among partners to vary the interests of the partners in the partnership is only effect for tax purposes in an income year if the agreement was entered into before the end of that income year.
Paragraph 19 of Taxation Ruling TR 2005/7 Income tax: the taxation implications of 'partnership salary' agreements states:
Under subsection 92(1) of the ITAA 1936 the individual interest of a partner in the net income of the partnership is included in the assessable income of the partner. A partner’s assessable income from a partnership is ordinarily derived at the end of the income year when the net income of the partnership is ascertained (Gallard).
Paragraph 24 of Taxation Ruling TR 2005/7 Income tax: the taxation implications of 'partnership salary' agreements states:
The various State Partnership Acts provide that all partners share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the partnership. However, this can be varied by express or implied agreement between the partners.
In this Partnership there is no written partnership agreement and no implied agreement that the partnership distribution is anything other than a one third split.
Paragraph 26 of Taxation Ruling TR 2005/7 Income tax: the taxation implications of 'partnership salary' agreements states:
An agreement to pay a 'partnership salary' to a partner made after the end of the income year when the net income or partnership loss of the partnership is ascertained is not effective for tax purposes to alter what has been derived or incurred at the close of the income year. As discussed earlier at paragraph 19, a partner derives income from a partnership under section 92 at the end of the income year when the net income of the partnership is ascertained (Galland). An agreement made after this time cannot alter retrospectively the respective share of the partners in that income as ascertained (AAT Case 5303 (1989) 20 ATR 3905; Case W79 89 ATC 705).
At 30 June 2015 no partnership agreement exists so each partner must share equally in the net income of the partnership. Under section 92(1) of ITAA 1936 the net income of the partnership is ascertained at the end of income year and at that point in time a partner derives its individual share in the net income of the partnership.
Once the net income of a partnership is determined a partner is considered to have derived its share in the net income of the partnership. Therefore, since there is no partnership agreement existing at 30 June 2015 to vary the interest of the partners, the partnership profit distribution for the 2015 year cannot be varied and each partner’s distribution remains an equal one-third share.