Edited version of your written advice

Authorisation Number: 1051351626886

Date of advice: 21 March 2018

Ruling

Subject: A partnership that carries on business

Question 1

Does section 70-100 of the Income Tax Assessment Act 1997 (ITAA 1997) apply on the proposed sale of livestock by a partnership comprising certain members (the “Interposed Partnership”) to another partnership comprising some of the same members and a new discretionary trust that will be established (the “New Partnership”)?

Answer

Yes

Question 2

Can the New Partnership and the Interposed Partnership make an election under section 70-100(4) of the ITAA 1997 to treat the livestock as having been disposed of for an amount equal to the value as trading stock of the Interposed Partnership on hand at the end of an income year ending on the day on which the Interposed Partnership sells the livestock to the New Partnership?

Answer

Yes

Question 3

Can the New Partnership and the Interposed Partnership make an election under section 40-340(3) of the ITAA 1997 to claim rollover relief in respect of the plant and equipment sold by the Interposed Partnership to the New Partnership?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1. On XX/XX/20XX, A, B, C and F (the “Original Partners”) established a partnership (the “Original Partnership”).

2. A and B are the parents of C, D and E. F is married to C.

3. The Original Partnership was governed by an agreement dated XX/XX/20XX by which the Original Partners “agreed to become partners and carry on in partnership the business of farming and grazing under the style “X Pastoral Co””.

4. The Original Partnership obtained an ABN and was registered for GST.

5. The Original Partners operated the business in partnership from XX/XX/20XX until the death of A on XX/XX/20XX.

6. Since XX/XX/20XX, B, C and F personally and B, C, D and E (on behalf of the Estate of A) (the “Interposed Partners”) have continued to operate the business in partnership (the “Interposed Partnership”). Although the Interposed Partners have not executed a partnership agreement governing the Interposed Partnership, they have continued to operate the business under the terms of the partnership agreement governing the Original Partnership. They have also traded under the existing ABN of the Interposed Partnership.

7. On XX/XX/20XX B, C and F personally and B and C (on behalf of the Estate of A) signed a document headed “Section 70-100(4) ITAA 1997 election regarding livestock” by which they elected to transfer livestock at the value of the trading stock as at XX/XX/20XX.

8. B is the primary beneficiary of the estate of A.

9. The Interposed Partners wish to restructure the business operations in a way that provides certainty to C and F in the continued operation of the business, and also ensures that B and the Estate of A are appropriately compensated for their interests in the assets of the business.

10. B personally and B, C, D and E (on behalf of the Estate of A) are proposing to transfer their interests in the assets of the Interposed Partnership to a new partnership (the “New Partnership”) between C, F and a new discretionary trust to be established and to be called the X Trust. This transfer of assets will occur by way of a sale of business by the Interposed Partnership to the New Partnership.

11. The financial statements for the Interposed Partnership identify the value of the livestock owned by the Interposed Partnership on hand as at 30 June 20XX as $XXX, and the value of various items of plant and equipment used in the business as $XXX. The value of the livestock as stated in the financial statements is based on the cost of purchased livestock and the attributed value of natural increase. The value of various items of plant and equipment as stated in the financial statements is based on the cost of that plant and equipment less an appropriate provision for depreciation of the cost of that plant and equipment.

12. The current value of the livestock calculated on the basis of the cost of purchased livestock and the attributed value of natural increase is similar to the value as at 30 June 20XX.

13. The Interposed Partners have identified and agreed that the purchase price for the business assets will be $XXX. This amount was agreed after the Interposed Partners identified the current market value of the livestock on hand at June 20XX as $XXX.

14. The trustee of the X Trust will acquire the 50% interests in the livestock and plant and equipment owned by B personally and B, C, D and E (on behalf of the Estate of A) for the sum of $XXX. C and F will retain their existing 50% interests in the livestock and the plant and equipment.

15. B personally and B, C, D and E (on behalf of the Estate of A) will provide vendor finance to the trustee of the X Trust for the acquisition of the livestock.

16. C, F and the trustee of the X Trust propose to apply for an ABN for the New Partnership and intend to continue to conduct the business under the name “X Pastoral Co”.

17. The Interposed Partnership and the New Partnership intend to:

17.1 Make an election under section 70-100(4) of the ITAA 1997 to treat the Interposed Partnership to have disposed of the livestock owned by the Interposed Partnership for an amount equal to the value of the livestock owned by the Interposed Partnership on hand on the date of sale of the business; and

17.2 Jointly choose rollover relief under section 40-340(3) of the ITAA 1997 in respect of the plant and equipment sold by the Interposed Partnership to the New Partnership.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-100

Income Tax Assessment Act 1997 Section 40-340

Reasons for decision

Question 1 and Question 2

Relevant law

Subsection 70-100(1) of the ITAA 1997 provides:

An item of trading stock is treated as having been disposed of outside the ordinary course of business if it stops being trading stock on hand of an entity (the transferor) and, immediately afterwards:

a) the transferor is not the item's sole owner; but

b) an entity that owned the item (alone or with others) immediately beforehand still has an interest in the item.

Where subsection 70-100(1) of the ITAA 1997 Act applies, subsections 70-100(2) and (3) of the ITAA 1997 provide:

1. As a result, the transferor's assessable income includes the market value of the item on the day it stops being trading stock on hand of the transferor.

2. The entity or entities (the transferee) that own the item immediately after it stops being trading stock on hand of the transferor are treated as having bought the item for the same value on that day.

However, an election can be made to treat an item of trading stock as having been disposed of for what would have been its value as trading stock of the transferor on hand at the end of an income year ending on the day that it stops being trading stock pursuant to subsection 70-100(4) of the ITAA 1997, provided that the conditions in subsection 70-100(6) of the ITAA 1997 are met.

The conditions in subsection 70-100(6) of the 1997 Act are as follows:

a) immediately after the item stops being trading stock on hand of the transferor, it is an asset of a business carried on by the transferee;

b) immediately after the item stops being trading stock on hand of the transferor, the entities that owned it immediately beforehand have (between them) interests in the item whose total value is at least 25% of the item's market value on that day;

c) the value elected is less than that market value; and

d) the item is not a thing in action.

Where the election in subsection 70-100(4) of the 1997 Act is made, the transferor will include the value elected in its assessable income for the income year. The transferee is taken to have bought the trading stock for that same value on the same day: subsection 70-100(5) of the ITAA 1997.

Subsection 70-100(8) provides that the election must be in writing and signed by or on behalf of each of the entities that owned the item immediately before it stops being trading stock on hand of the transferor and signed by or on behalf of the entities that own it immediately after.

The election must be made before 1 September following the income year in which the item stops being trading stock on hand of the transferor. However, the Commissioner may allow the election to be made later: subsection 70-100(7) of the ITAA 1997.

Pursuant to subsection 70-100(10) of the ITAA 1997 an election is not effective if:

a) the items stops being trading stock on hand of the transferor outside the course of ordinary family or commercial dealing; and

b) the consideration receivable by the transferor (or by any of the entities constituting the transferor) substantially exceeds what would reasonably be expected to be the consideration receivable by the entity concerned if the market value of the item immediately before it stops being trading stock on hand of the transferor were the value elected under subsection (4).

Consideration receivable means so much of the value of any benefit as is reasonable to expect that that entity will obtain in connection with the item ceasing to be trading stock on hand of transferor (subsection 70-100(11) of the ITAA 1997).

Your circumstances

Subsection 70-100 of the ITAA 1997 applies to treat the trading stock as having been disposed of outside the ordinary course of business because under the proposed transaction:

a) the trading stock stops being trading stock of the Interposed Partnership as the partnership is dissolved and the New Partnership is formed (i.e. interests in the trading stock change - subsection 70-80(3) of the ITAA 1997);

b) immediately before the proposed transaction, C and F owned the trading stock (with B and the estate of A) because they each had a beneficial interest in the trading stock in their respective partnership interests; and

c) immediately after the proposed transaction, C and F still have an interest in the trading stock (with the X Trust).

As a result of this, under subsections 70-100(2) and (3) of the ITAA 1997:

1. The assessable income of the Interposed Partnership would include the market value of the item on the day it stops being trading stock on hand of the transferor.

2. The New Partnership that owns the item immediately after it stops being trading stock on hand of the transferor are treated as having bought the item for the same value on that day.

However, the New Partnership and the Interposed Partnership can elect under subsection 70-100(4) of the ITAA 1997 to treat the trading stock as having been disposed of for what would have been its value as trading stock of the Interposed Partnership on hand at the end of an income year ending on the date of the proposed transaction (Election Value) because each of the conditions in subsection 70-100(6) of the ITAA 1997 will be met as follows:

a) immediately after the item stops being trading stock of the Interposed Partnership, the trading stock will be an asset of a business carried on by the New Partnership;

b) immediately after the item stops being trading stock of the Interposed Partnership, C and F will hold between them at least 25% of the interest in the trading stock;

c) the Election Value will be less than the market value of the trading stock; and

d) the trading stock is not a thing in action.

Subsection 70-100(10) of the ITAA 1997 will not apply to make the election ineffective because the trading stock stops being trading stock of the Interposed Partnership in the course of ordinary commercial dealings.

Therefore, the New Partnership and the Interposed Partnership can make the election in subsection 70-100(4) of the ITAA 1997 in respect of the trading stock of the Interposed Partnership.

Question 3

Relevant law

Pursuant to subsection 40-285(1) of the ITAA 1997 an amount is included in a taxpayer's assessable income if:

a) a balancing adjustment event occurs for a ^*depreciating asset you ^*held and:

i. whose decline in value you worked out under Subdivision 40-B; or

ii. whose decline in value you would have worked out under that Subdivision if you had used the asset; and

b) the asset's *termination value is more than its *adjustable value just before the event occurred.

The amount included under subsection 40-285(1) of the ITAA 1997 is the difference between the termination value and the adjustable value just before the event occurred.

Subsection 40-285(2) of the ITAA 1997 explains when you can deduct an amount for a balancing adjustment event.

Subsection 40-295(2) of the ITAA 1997 provides that 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 the 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.

Item 5 of the table in subsection 40-300(2) of the ITAA 1997 provides that the termination value of a depreciating asset for a balancing adjustment event referred to in subsection 40-295(2) of the ITAA 1997 occurring will be the market value of the asset when the balancing adjustment event occurred.

Rollover relief for a balancing adjustment event covered in subsection 40-295(2) of the ITAA 1997 is provided under subsection 40-340(3) of the ITAA 1997 as follows:

There is rollover relief 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.

Section 40-345 of the ITAA 1997 provides what the rollover relief is:

1. Section 40-285 does not apply to the *balancing adjustment event for the transferor.

2. The transferee can deduct the decline in value of the *depreciating asset using the same method and *effective life (or *remaining effective life if that method is the *prime cost method) that the transferor was using.

Your circumstances

The proposed transaction involving the sale of the business would trigger a balancing adjustment event under subsection 40-295(2) of the ITAA 1997 because:

a) there is a change in the interests in the depreciating assets as a result of the proposed transaction;

b) C and F had an interest in the assets before the change and after the change; and

c) the depreciating assets were assets of the Interposed Partnership before the proposed transaction.

The Interposed Partnership and the New Partnership can make the election (jointly choose to apply the roll-over relief) under subsection 40-340(3) of the ITAA 1997, as there would be a balancing adjustment event under subsection 40-295(2) of the ITAA 1997 and the Interposed Partnership and the New Partnership are the entities that had an interest in the depreciating assets before and after the proposed transaction.