Edited version of your written advice

Authorisation Number: 1051341159023

Date of advice: 23 February 2018

Ruling

Subject: Reconstitution of a partnership

Question 1

Will the Partnership be considered to be a reconstituted partnership?

Answer

Yes

Question 2

Is the partnership only required to lodge one partnership tax return for the year ended 30 June 201X?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

The original partnership comprised of Partner A and Partner B (the partnership).

The partnership is a general law partnership.

On XX/XX/ XXXX partner B passed away.

The partnership continued to operate subsequent to the passing of Partner B. In accordance to the Will of Partner B, X testamentary trusts were formed thereby owning a proportionate share of the partnership. A one X share was bequeathed by Partner B to Partner A. The X testamentary trusts formed a partnership with original partner, Partner A.

On XX/XX/201X partner A passed away.

A reconstituted partnership involving the Estate of Partner A and the existing X testamentary trusts effectively commenced from XX/XX/201X.

This partnership formation will continue until the Estate of Partner A is finalised by the Executor which had not yet occurred by the end of the 201X income year.

In accordance with the Will of Partner A, a further X testamentary trusts will be introduced each of which will own a proportionate share of the partnership.

Upon winding up of the Estate of Partner A, the partnership will consist of X testamentary trusts.

The common partner of the partnership before and after reconstitution is Partner A, the Estate of Partner A and the X testamentary trusts established pursuant to the will.

There has been no period that there has been only one partner. The testamentary trusts became partners as provided for in the Estate of Partner B.

There has been no break in the continuance of the enterprise.

There has been no change in assets, business structure, business clients or business name.

The partnership has continued to report to the Australian Taxation Office (ATO) using the same Australian Business Number and Tax File Number.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

The meaning of “partnership” for the purposes of GST is defined in section 195-1 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) by reference to the definition of 'partnership' in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Section 995-1 of the ITAA 1997 provides:

partnership means:

(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.

The first limb of paragraph (a) in the above definition refers to ‘an association of persons (other than a company or limited partnership) carrying on a business as partners’. This reflects the general law definition of a partnership, which is ‘the relation which subsists between persons carrying on a business in common with a view of profit’. The ATO refers to this type of partnership as a ‘general law partnership’.

Goods and Services Tax Ruling GSTR 2003/13 Goods and Services Tax: general law partnerships (GSTR 2003/13) contains the ATO view regarding the treatment of general law partnerships for the purposes of GST, and more specifically, when a partnership is considered to have been ‘reconstituted’.

Paragraph 127 of GSTR 2003/13 advises:

127. A dissolution leading to the winding up of the partnership is called a general dissolution. A dissolution that does not result in the winding up of a partnership is called a technical dissolution. A technical dissolution occurs where the assets and liabilities of the partnership are taken over by the continuing partners (and any new partners) and the partnership business is continued without any apparent break.

The rationale for distinguishing a technical dissolution from a general dissolution is explained at paragraphs163 to164 of GSTR 2003/13:

163. To regard a change in the membership of a partnership as leading to a winding up of an existing partnership and the formation of a new partnership would lead to administrative and compliance difficulties for the partnership and its partners. This would be the case particularly for partnerships that experience frequent membership changes.. Every change in membership would require cancellation of the partnership's GST registration (and Australian Business Number (ABN)) and re-application for a new GST registration (and ABN) by the continuing partners.

164. We consider that, for GST purposes, it is open and appropriate for the Commissioner to accept that a change in membership does not necessarily result in the general dissolution and winding up of the partnership.

Technical dissolution

Paragraph 148 of GSTR 2003/13 states the following:

148. Under general law, any change in the membership of a general law partnership leads to its dissolution. However, as previously discussed in paragraphs 126 and 127 of this ruling, the dissolution may not lead to the winding up of the partnership. The continuing partners and any new partner may conduct the business of the partnership without any break in its continuity. We refer to this as a reconstituted partnership.

Paragraph 149 of GSTR 2003/13 states:

149. Whether or not there is a reconstituted partnership depends on the’ intention of the parties, and the terms and conditions of the partnership agreement’.

In addition to the above, paragraph 150 of GSTR 2003/13 explains that a written partnership agreement may expressly provide for the continuation of the business in the event that there is a change to the membership of the partnership, which is often referred to as a ‘continuity’ or ‘non-dissolution clause’. In the absence of a written agreement, such a clause may be implied by the conduct of the partners following the retirement or death of a partner, or introduction of a new partner.

Continuity clause

As discussed at paragraph 168 of GSTR 2003/13, for a partnership to be treated as reconstituted, there needs to be an express or implied continuity clause in the partnership agreement, and there should be ‘no break in the continuity of the enterprise or firm’. Indicators of continuity of the enterprise or the firm include:

● substantially all of the partnership assets remain with the continuing partnership;

● the nature of the enterprise remains substantially unchanged;

● the client or customer base remains substantially unchanged; and

● the business name or name of the firm remains unchanged.

However according to paragraph 169 of GSTR 2003/13 none of these indicators is conclusive evidence of a reconstituted partnership, nor is its absence necessarily indicators of a dissolution that results in the winding up of the partnership. The position is determined on the facts and circumstances of each case.

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

107. All of 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 or 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.

108. If all of the conditions set out in the above paragraph of this practice statement are not met, the original partnership will be dissolved and a new partnership created. In this case:

● The new partnership will be required to register for a new TFN, GST registration and ABN.

● The former partnership will be required to cancel their GST registration and ABN if they are not carrying on any other enterprise.

● The new partnership will be required to lodge an income tax return for the period from the date of its formation to the end of the income year.

● The former partnership will be required to lodge an income tax return from the beginning of the income year to the date of dissolution.

In this case we agree that the conditions above for a reconstituted partnership are satisfied and we are of the view that you can continue as a reconstituted partnership. Provided the reconstituted partnership lodges its tax return including all the required details above, the partnership will be able to use its existing ABN, TFN and GST registration.