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Edited version of your written advice
Authorisation Number: 1051393600884
Date of advice: 3 July 2018
Ruling
Subject: Income tax: capital gains tax implications of proposed capital contribution
Issue 1
Capital gains tax (CGT) – CGT event D1
Question 1
Would the contribution of further capital to the Partnership by Partner 1 cause CGT event D1 to occur to the Partner 2?
Answer
No
This ruling applies for the following period
Year ended 30 June 2019
The scheme commences on
The date on which the proposed capital is contributed by Partner 1 to the Partnership
Relevant facts and circumstances
Partner 1 and Partner 2 are partners in a partnership.
Partner 2 owns land acquired post 19 September 1985.
Under the terms of the Partnership Agreement, the corporate trustee of a trust makes the land and buildings available to the Partnership for the purposes of the business and the company makes a capital contribution.
The business carried on by the partners in partnership is redevelopment of the land and buildings for commercial purposes.
The Partnership Agreement was varied twice with the company making additional capital contributions with a corresponding increase in its share of the net profits and losses made by the partnership on each occasion.
Partner 1 has made additional capital contributions to fund significant alterations to the land and buildings for commercial purposes.
Partner 1 will contribute the proposed capital, but its share of the net profits and losses made by the partnership will remain unchanged.
Summary
The proposed scheme will not give rise to CGT Event D1.
Detailed reasoning
CGT event D1 will happen if you create a contractual right or other legal or equitable right in another entity (provided no exclusions apply).
In this case funding has occurred from Partner 1, a partner within the partnership.
The Partnership will use these funds will be used to pay for the various works and other expenses still required for the project. Partner 2 will not draw down on these funds and the portion of profit will not be impacted. This is a fundamental element which determines whether a right has been created.
The proposed transaction does not create a right to profit sharing. It follows that as there is no change to Partner 1’s profit sharing proportion, Partner 2 will not create a contractual right to a share of income in favour of Partner 1. Therefore CGT event D1 does not arise from the proposed transaction.