Edited version of private advice

Authorisation Number: 1052254836494

Date of advice: 21 June 2024

Ruling

Subject: GST - partnership restructure land transfer

Question One

Does the conversion of the Land to a non-partnership asset in Step 1 of the Restructure constitute a taxable supply within the meaning of s 9-5 of the GST Act?

Answer

Yes.

Question 2

If the answer to Question 1 is yes, will X and Y be entitled to claim an input tax credit for the acquisition of the Land in Step 1 of the Restructure?

Answer

Yes, where the partners make a creditable acquisition of the Land.

Question 3

Does the transfer of X's and Y's interest in the Partnership to P1 Co and P2 Co, respectively, in Steps 5 and 6 of the Restructure, respectively, result in a technical dissolution of the Partnership with the consequences as outlined in GSTR 2003/13?

Question 4

Will there be any GST consequences for the partners both incoming and outgoing of the restructure, in relation to the transfer of X and Y's interest, respectively, in the Partnership?

Answer

Yes, where the partners make a creditable acquisition of the Land.

The transfer of the incoming partners' interests is a financial supply but there is no supply of the extinguished interests of the outgoing partners.

This ruling applies for the following periods:

From the date of issue of this ruling with no end date.

The scheme commenced on:

24 December 2021

Relevant facts and circumstances

X and Y have operated the Business in partnership as X and Y (the Partnership) since the 19XX's. The Business specialises in XXXX.

In its current configuration, the Partnership has not operated under a written partnership agreement since its inception. Under the proposed restructure, the current partnership (of X and Y) has adopted a draft partnership deed (the Partnership Deed) which you provided as part of your private ruling application. You expect that the Partnership Deed will be signed in the coming weeks.

The key terms of the draft Partnership Deed are as follows:

Under 'Background' it states:

B. The Partners, by this Deed, wish to record the terms of their Partnership and to protect their interests on the occurrence of a Succession Event which may result in the sale and purchase of a Retiring Partner's Equity.

1. Definitions and Interpretation

Continuing Partner means on a Succession Date, each Partner other than a Retiring Partner.

Equity means all of a Partner's share and interest in the Partnership including Work in Progress and any money owed on Loan Account

Option means an option given by a Retiring Partner to the Continuing Partner whereby the Retiring Partner must sell their Equity to the Continuing Partner.

Partners means together X and Y initially, and thereafter the persons admitted to the Partnership from time to time.

Partnership means the Partnership and its Business carried on under the Partnership Name by and comprising the Partners.

Retiring Partner means on a Succession Date, the Partner who suffers a Succession Event.

Retiring Partner's Equity means all of the Equity to which a Retiring Partner is legally and beneficially entitled.

Succession Date means each date on which a Succession Event occurs.

Succession Event means respectively the events described in Schedules.

Work in Progress means the on-going work of the Partnership as accounted for in its accounts.

Broadly the agreement deals with:

•         the sale of equity following a succession event,

•         calculation of purchase price with reference to a market value,

•         settlement and manner of payment of purchase price,

•         partners' obligations where there is a succession event,

•         registering charges and other dealings,

•         sale of equity and first right of refusal,

•         dissolution on failure to exercise option or first right of refusal, winding up of partnership, allowing a mechanism for the release of security when a partner leaves and is replaced,

•         retiring partner's restrictive covenant

Succession Events envisaged by the agreement included:

Table 1: Succession events envisaged by the agreement included:

The Partnership holds significant depreciating assets used in the Business, predominantly trucks that are used to carry on the business.

The Business was valued on YY date by a valuer, who placed a going concern asset value of $X Million. Plant and equipment is valued at $X million.

The Business currently operates from commercial property (the Land). A business finance agreement loan was used to fund, among other things, the acquisition of the Land. As at X date, approximately $X million of the outstanding loan balance relates to the Land (the Loan).

In YYY date, the Partnership sought to separate its assets from the Business. XY Pty Ltd was incorporated to acquire new trucks which were to be leased to the Partnership for use in the Business. A Trust owns 100% of the shares in XY Pty Ltd via Y as trustee of the Trust.

The trucks purchased by the Partnership prior to XX Date remained in the Partnership due to significant transfer duty and income tax consequences that would have arisen.

X and Y, the Partnership, the Trust and XY Pty Ltd (collectively, the Group) are considering restructuring to improve asset protection, provide estate planning flexibility and to facilitate the growth of the Business by allowing for the retention of working capital in a corporate environment. The Restructure is intended to be implemented ZZZ Date and will take place in a series of steps set out below.

Step 1 - Conversion of Land to a non-Partnership asset

•         X and Y will execute a deed in which they agree that the Land will cease to be held by them as partners of the Partnership and will instead be held by them as joint tenants separately from the Partnership. That is, the Land will move out of the partnership.

•         For asset protection purposes, the Land will not be transferred with the other Partnership assets. This is to ensure the Land is separate from, and does not continue to be exposed to, the operating risks of the Business.

•         As part of this conversion, any assets fixed to the Land will cease to be held by X and Y as partners of the Partnership and will be held by them as joint tenants separately from the Partnership.

•         As part of the conversion of the Land to a non-Partnership asset, the Loan (to the extent that it relates to the Land) will be assumed by X and Y in their personal capacities.

Step 2 - Amend the Trust deed (including changing the Trustee)

•         The terms of the Trust Deed of the Trust will be amended to reflect the estate planning objectives of X and Y. There will be no changes to the beneficiaries in the Trust Deed. Y will be removed as trustee of the Trust and replaced with a corporate trustee. X will be the sole shareholder and director of the corporate trustee.

Step 3 - Insert a holding company between the Trust and XY Pty Ltd

•         A newly incorporated holding company (H Co) will be interposed between the Trust and XY Pty Ltd. Y will be the sole director of H Co.

•         The shares in XY Pty Ltd will be transferred from the Trust in exchange for shares in H Co.

•         Step 3 will be implemented through a Restructure Deed.

Step 4 - Incorporate 2 new companies to acquire X and Y's Partnership interests

•         Two new companies, PCo1 and PCo2 will be incorporated as wholly owned subsidiaries of H Co. Y will be the sole director of each.

Step 5 - Transfer of X's Partnership interest

•         PCo1 will acquire X's interest in the Partnership for market value, pursuant to a Sale of Partnership Interest Deed. X will provide an at-call loan to PCo1 to fund the transfer. The loan will be for half the enterprise value of the Partnership at the time of the transfer.

•         After this step, the partners in the Partnership will now be X and PCo1.

Step 6 -Transfer of nominated ownership

•         Y and PCo1 will change the nominated owner of each of the Partnership's trucks from Y to PCo1. After this step, the partners in the Partnership will be Y and PCo1 and PCo1 will be the nominated owner of the trucks held by the Partnership.

Step 7- Transfer of Y's Partnership interest

•         PCo2 will acquire Y's interest in the Partnership for market value, pursuant to a Sale of Partnership Interest Deed. Y will provide an at-call loan to PCo2 to fund the transfer. The loan will be for half the enterprise value of the Partnership at the time of the transfer.

•         After this step, the partners in the Partnership will be PCo1 and PCo2, with PCo1 continuing to be the nominated owner of the trucks held by the Partnership.

Step 8 - H Co chooses to form a tax consolidated group

•         H Co, as the head company, will choose to form a tax consolidated group consisting of PCo1, PCo2 and XY Pty Ltd as its members.

Step 9 - Transfer of Plant & Equipment to GMT

•         Once the tax consolidated group has been formed, the Partnership, now consisting of PCo1 and PCo2, will transfer all its plant and equipment to XY Pty Ltd in consideration for XY Pty Ltd taking on all related financing liabilities. XY Pty Ltd will then lease the plant and equipment back to the Partnership and register its interest in them on the Personal Property Securities Register to achieve the desired asset protection outcomes.

Regarding the transfers of partnership interests that will occur at Steps 5 and 7 of the Restructure:

(a)  the nature of the enterprise carried on by the Partnership will continue substantially unchanged following the occurrence of each relevant transfer;

(b)  the client/customer base of the enterprise carried on by the Partnership will continue substantially unchanged following the occurrence of each relevant transfer; and

(c)   the Partnership will continue to use the same business/firm name after the occurrence of each relevant transfer.

The vendor financing liabilities created in Steps 5 and 7 of the Restructure will be treated as accounting liabilities of PCo1 and PCo2 at the joining time in Step 8, in accordance with PCo1 and PCo2's accounting principles.

On DD Date, you provided a copy of a draft deed the Land Deed wherein X and Y (in their individual capacities and in their capacities as partners of the partnership) will agree to cease holding the Land (the Land or the Property) as a partnership asset and to commence holding it as joint tenants in their personal capacities.

You expect that the Land Deed will be executed soon.

The key features of the Land Deed are:

1. Y and X carry on the Business in Partnership.

2. The Land is currently:

a) an asset of the Partnership;

b) held by Y and X as joint tenants; and

c) subject to the Mortgage.

3. Y and X, in both their personal capacities and their capacities as partners of

the Partnership, have mutually agreed that:

a) the Land will no longer be an asset of the Partnership but will instead be held

by each of them in their personal capacities as joint tenants; and

b) following the change to the capacity in which the Land is held:

i) the Loan will be jointly assumed by each of them in their personal capacities to the extent that it relates to the Land;

ii) the Land will continue to be subject to the Mortgage until such time as it is discharged; and

iii) the Partnership accounts should be prepared on the basis that the Land is no longer an asset of the Partnership.

4. The parties have agreed to enter into this Deed to record, formalise and effect their

agreement as set out above.

...

Under clause A

The parties agree and confirm that the Land will no longer be an asset of the Partnership but will instead be held by each of them in their personal capacities as joint tenants on and from the date of this Deed.

Under clause B:

In light of the change to the capacity in which the Land is held as effected by clause A above, the parties agree and confirm that on and from the date of this Deed:

(a) the Loan will be jointly assumed by each of them in their personal capacities to the extent that it relates to the Land;

(b) the Land will continue to be subject to the Mortgage until such time as it is discharged; and

(c) the accounts of the Partnership should be prepared on the basis that the Land is no longer an asset of the Partnership.

Under clause D:

GST

(a) Any reference in this clause to a term defined or used in the GST Act is, unless the context indicates otherwise, a reference to that term as defined or used in the GST Act.

(b) To the extent that GST is payable in respect of any supply made by a party to this Deed (Supplier) under or in connection with this Deed, the recipient of the supply must pay to the Supplier an amount equal to the GST exclusive consideration (or GST exclusive market value if applicable) of that supply multiplied by the rate at which GST is imposed in respect of the supply upon receipt of a valid tax invoice in respect of the supply.

The agreement provides a dictionary and interpretation matrix.

The Land Deed allows for separate signatures by X and Y as individuals and as partners in the partnership.

Regarding the transfers of partnership interests that will occur at Steps 5 and 7 of the Restructure:

(a) the nature of the enterprise carried on by the Partnership will continue substantially unchanged following the occurrence of each relevant transfer;

(b) the client/customer base of the enterprise carried on by the Partnership will continue substantially unchanged following the occurrence of each relevant transfer; and

(c) the Partnership will continue to use the same business/firm name after the occurrence of each relevant transfer.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-10

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Regulations 2019 section 40-5.09

Reasons for decision

In these reasons for decisions

• any legislative reference will be to the A New Tax System (Goods and Services Tax) Act 1999 unless otherwise stated.
• An asterisk represents a legislative defined term.

Issue - Partnership restructure land transfer and GST

Question 1

Summary

The issue is whether, for GST purposes, the Partnership makes a supply of real property. Contrary to the position at general law, under the GST Act partnerships are separate entities to their partners. The question asks about the conversion of the property, but the better word is 'transfer'. The Land moves in connection with consideration in course of the enterprise of the Partnership and is located in the Indirect Tax Zone (Australia). The consideration is in the form of assumption of liability under the loans in a personal capacity. Together these principles amount to a taxable supply of real property by the Partnership.

Question 2

If the answer to Question 1 is yes, will Y and X be entitled to claim an input tax credit for the acquisition of the Land in Step 1 of the Restructure?

Summary

Assuming Y and X are registered for GST and hold a tax invoice. They will be engaged in the enterprise of leasing the land to the partnership. The supply of the land by the partnership will be a creditable acquisition to Y and X as it will be an activity in the commencement of that enterprise.

Question 3

Summary

Yes. The partnership will be subject to a technical dissolution. Consequently, it is anticipated that the partnership may maintain its current ABN, GST registration and income tax related accounts and identifiers as it will be reconstituted.

Question 4

Summary

No. The supplies of interests in the partnership are made by the partnership to the partners. The provision of an interest in a partnership is a financial supply. As these are input taxed, the supply of the interests are not taxable supplies and the acquisition of the interests will not be a creditable acquisition.

Detailed reasoning

Question 1:

Whether or not the Land is a taxable supply is determined by whether the conditions in section 9-5 are met. That section states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

Who makes the supply?

Paragraph 85A of Goods and Service Tax Ruling GSTR 2003/13 Goods and services tax: general law partnerships (GSTR 2003/13) provides that an in specie distribution of partnership property by a partnership to a partner is a supply made in the furtherance of the partnership's enterprise and is for consideration. It states:

In specie distributions during the operation of the partnership

85A. The Commissioner considers that an in specie distribution of partnership property by a partnership to a partner is a supply made by the partnership. The supply is made in the course or furtherance of the partnership's enterprise and is for consideration.

Paragraphs 85B to 85G of GSTR 2003/13 provide that an in specie distribution of partnership property to a partner is in the course or furtherance of an enterprise of the partnership as the application of an asset in an enterprise establishes the necessary connection between the supply of the asset and the relevant enterprise.

In this case, the Land is held by the Partnership and the accounts of the Partnership reflect this, as does the 'Background' to the Land Deed at points one to four. It indicates that the asset is a Partnership asset held by the partners as joint tenants. The Land will become property of the partners as individuals. X and Y as individuals will assume the mortgage responsibility and the Partnership will cease to account for the Land. Clause 2 amplifies the point that the Land will belong to the partners 'in their personal capacities'.

The partnership is an entity as it is listed as such in subparagraph 184-1(e).

Section 184-5 is about supplies etc. by partnerships and unincorporated bodies. It states that:

Supplies etc. by partnerships and other unincorporated bodies

(1) For the avoidance of doubt, a supply, acquisition or importation made by or on behalf of a partner of a *partnership in his or her capacity as a partner:

(a) is taken to be a supply, acquisition or importation made by the partnership; and

(b) is not taken to be a supply, acquisition or importation made by that partner or any other partner of the partnership.

Note: Section 444-30 in Schedule1 to the Taxation Administration Act 1953 deals with the liability of partners for the obligations imposed on a partnership under the GST law.

Therefore, a partnership is an entity separate from its partners for GST purposes and the identifiable entity making the supply is the Partnership.

What is the supply?

The Land is partnership property. Goods and Services Tax Ruling GSTR 2009/1 Goods and services tax: general law partnerships and the margin scheme (GSTR 2009/1) sets out how land can become partnership property at paragraph 17 of GSTR 2009/1:

17. Real property becomes partnership property when the partners make an in kind capital contribution of the property to the partnership, or the real property is acquired by the partners in their capacity as partners in the partnership. An in kind capital contribution of real property by a partner is a supply to the partnership for consideration, being the interest in the capital of the partnership as part of a wider interest in the partnership.

[Footnotes omitted]

Paragraph 18 and 19 of GSTR 2009/1 points out that:

18. A partnership does not have a legal personality separate from its members. This means that a partnership cannot 'hold' the legal interest in real property. The legal interest in real property is normally either held by the partners or held by some of the partners on trust for all the partners.

19. For GST purposes, a transfer of the beneficial (and legal) interest in real property that is partnership property to a partner in its own capacity is taken to be a supply made by the partnership.

[Footnotes omitted]

Subsection 9-10 (1) defines supply broadly as 'any form of supply whatsoever'. Subsection 9-10(2) continues:

(2) Without limiting subsection (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of * real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a * financial supply;

(g) an entry into, or release from, an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Goods and Services Tax Ruling GSTR 2006/9 Goods and Services Tax: Supplies (GSTR 2006/9) sets out 10 propositions in relation to supplies. Of them, proposition 6 is that a supply usually, but not necessarily, requires something to be passed from one entity to another. In this case, we consider that while there is no title registry change recorded over the land, there has been a supply of the land from one entity to another.

Section 195-1 defines 'real property' to include:

(a) any interest in or right over land

(b) a personal right to call for or be granted any interest in or right over land, or

(c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

As a result, we conclude that dealings in real property between a partnership and a partner, there is a supply even where the legal title does not move beyond the current legal title holding as the real property is being held by partners for the partnership.

The first requirement of Subparagraph 9-5(a) that there be a supply is met in this case. The second part of that provision is that the supply be made for consideration.

Supply for consideration

In AP Group Limited v FC of T [2013] FCAFC 105; 214 FCR 301, the Full Federal Court confirmed that there needs to be a sufficient nexus between the supply and the consideration proffered. In this case, we consider the adoption by the partners of the loans owing on the Land (approximately $2 million) to have a sufficient connection to the supply of the Land to the partners by the partnership.

Consideration is defined widely also in section 9-15. It states:

(1) Consideration includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

(2) It does not matter whether the payment, act or forbearance was voluntary, or whether it was by the *recipient of the supply.

(2A) It does not matter:

(a) whether the payment, act or forbearance was in compliance with an order of a court, or of a tribunal or other body that has the power to make orders; or

(b) whether the payment, act or forbearance was in compliance with a settlement relating to proceedings before a court, or before a tribunal or other body that has the power to make orders.

(2B) For the avoidance of doubt, the fact that the supplier is an entity of which the *recipient of the supply is a member, or that the supplier is an entity that only makes supplies to its members, does not prevent the payment, act or forbearance from being consideration.

Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration (GSTR 2001/6) gives our view at paragraph 31 that:

where parties are dealing at arm's length and the consideration is wholly monetary (that is, 'expressed as an amount of money'), you do not need to establish the market value of the consideration to work out the price.

Additionally, at paragraph 35 of GSTR 2001/6, it gives the example of two parties using a set off of mutual debts as monetary.

We consider the consideration can be expressed in an amount of money and is therefore monetary. Even if the amount of consideration is not reflective of the value of the land, Division 72 applies to nullify its impact where the supplier and recipient are associates who are registered for GST.

In this respect we consider that Subparagraph 9-5(a) is fully met.

As stated above, we consider a supply by the partnership to the partners to be made in the course of the partnerships' enterprise. Subparagraph 9-5(b) is met.

As the Land is situated in Australia, it is connected to the indirect tax zone which satisfies Subparagraph 9-5(c).

In relation to subparagraph 9-5(d), the Partnership is *registered for GST.

Is the supply of the Land input taxed or GST free?

On the facts, the Land is commercial property and is taxable. There are no facts suggesting the supply is GST-free as it is not farmland or the subject of a going concern agreement.

On this basis, the supply of the Land by the partnership is a taxable supply as all of the requirements are met.

Question 2:

Detailed reasoning

Under section 11-5 you make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

Section 11-10 mirrors the supply definition and is as broadly defined:

(1) An acquisition is any form of acquisition whatsoever.

(2) Without limiting subsection (1), acquisition includes any of these:

(a) an acquisition of goods;

(b) an acquisition of services;

(c) a receipt of advice or information;

(d) an acceptance of a grant, assignment or surrender of *real property;

(e) an acceptance of a grant, transfer, assignment or surrender of any right;

(f) an acquisition of something the supply of which is a *financial supply;

(g) an acquisition of a right to require another person:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation;

(a)  any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

Section 11-15 defines 'creditable purpose':

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

...

(3) However, acquisition does not include:

(a) an acquisition of *money unless the money is provided as *consideration for a supply that is a supply of money or *digital currency; or

(b) an acquisition of digital currency unless the digital currency is provided as consideration for a supply that is a supply of digital currency or money.

Section 11-20 provides that you are entitled to input tax credits for any creditable acquisition that you make.

Under subparagraph 11-10(2)(d), an acquisition can include an acceptance of a grant, assignment or surrender of real property which is what occurs when the partnership relinquishes its rights over the Land in return for X and Y as individuals to assume obligations in paying the mortgage over the property. As stated above, this is monetary consideration, payable as consideration for the supply. Accordingly, the first requirement of making a creditable acquisition is met - there is an acquisition.

The second element to Subparagraph 11-5(a) definition of 'creditable acquisition' is whether there is a 'creditable purpose'. That is determined by whether the elements of section 11-15 are met. Applying section 11-15, X and Y acquire a thing (the Land) for a creditable purpose to the extent that it is acquired in carrying on their leasing enterprise and the acquisition relates to making supplies that would not be input taxed or private or domestic in nature. The use of the office and the Land as a depot is neither private or domestic nor input taxed. As such, the acquisition is completely used in their enterprise and is for a fully creditable purpose. Subparagraph 11-5(a) is met.

The second element of 11-5 is that the supply to the acquirers must be a taxable supply. Based on our analysis in question one above, the Land was a taxable supply.

The third requirement of section 11-5 is met as Y and X are liable to provide and will provide consideration for the supply to them as they will assume the mortgage debt.

The final requirement of section 11-5 is that the acquirers must be registered for GST. You advised that there is an assumption that the parties will be registered for GST at the appropriate time.

We consider that under section 11-20, X and Y will be able to claim input tax credits on the taxable supply to them as they have a creditable purpose.

It is noteworthy that the Land Deed clause takes GST into consideration as potentially applicable as Subclause '4.1 GST', addresses the situation where GST is payable by any party under the Land Deed, it is to be included upon receipt of a tax invoice.

What is the entity type of the recipient?

X and Y will be recipients as co-owners in equal shares.

Goods and Services Tax Ruling GSTR 2004/6 Goods and services tax: tax law partnerships and co-owners of property (GSR 2004/6) makes some key points.

It repeats the definition of 'partnership' at paragraph 8 taken from section 995-1 of the Income Tax Assessment Act 1997 (ITAA97):

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 995-1(a) of the ITAA97 sets out the definition of a general law partnership which is distinguished from a tax law partnership which is described by the second limb of paragraph 995-1(a) of the ITAA97. Under a tax law partnership, there is no requirement that they be in business as partners, only that they be in receipt of income jointly. Based on the facts we consider that it would be open for X and Y to register for GST as a tax law partnership given their stated purpose to enter into the arrangement as a means to protect their assets (including the joint Land holding). Consequently it is an entity for all relevant purposes capable of making the relevant supplies and acquisitions. This is set out from paragraph 12 of GSTR 2004/6.

Question 3

Detailed reasoning

Y and X commenced their business in May 1985. For the purposes of this ruling there is no dispute that Y and X are a general law partnership. The Partnership has operated under an unwritten agreement DD Date, when the partners entered into a written Partnership Deed.

As explained at paragraph 127 of GSTR 2003/13, a dissolution that results in the winding up of a partnership is called a 'general dissolution', which can occur in a number of different ways, including, a change in a partnership's membership, or by a cessation of its business. Conversely, a dissolution that does not result in the winding up of a partnership is called a 'technical dissolution', which leads to a 'reconstituted partnership'.

Technical dissolution

A technical dissolution occurs when 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.

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.

Therefore, as discussed at paragraph 126 of GSTR 2003/13, if a technical dissolution of a partnership occurs, the ATO takes the view that there is 'no change in the character of the entity for the purposes of GST'.

Continuity clause

Paragraph 149 of GSTR 2003/13 states that 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'.

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 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.

Notwithstanding the above, none of the indicators are conclusive evidence that there has been a reconstitution of a partnership, as the position is determined on the facts and circumstances of each case.

Much of that commentary envisaged three or more partners. However, paragraphs 170-173 of GSTR 2003/13, specifically address two person partnerships and dissolution. At paragraph 171, the ruling indicates that the concession to allow a technical dissolution may apply as long as the indicators of continuity set out at paragraph 168 are present.

Paragraph 172 to 173 give the consequences of a technical dissolution (reconstitution):

172.               A reconstituted partnership retains its GST registration despite the change in its membership. As there is no winding up of the partnership, the change in membership does not give rise to any supplies or acquisitions from one partnership to another partnership.

173.               The GST consequences of a reconstituted partnership for the partners will depend on the circumstances of the reconstitution. A reconstitution may result from a partner selling or assigning their interest in the partnership. Alternatively, a change in membership may occur without any sale or assignment by a partner of their interest in the partnership.

In your case, you have the two partners X and Y. At step 5 of the restructure X will be replaced by 'P1 Co' and in step 7 Y will be replaced by 'P2 Co'. At each step it is accepted that there will be a technical dissolution.

The asset base remains substantially the same at both steps 5 and 7; the nature of the enterprise remains the same as the enterprise of transporting meat in trucks continues in the same way it did before; the client base continues in the same manner; and the business name of XXX continues.

In our view, based on the unique facts of the case, there is evidence of intention to continue the partnership, both before and after the restructure. The original partners had the stated aim of entering into the restructure principally as a means of succession planning and isolating property from risk. The business has continued since GG Date under an oral agreement and more recently, X and Y entered into the Partnership Deed to evince their intention to continue the partnership in the future. The Partnership Deed sets out what are 'succession events' which are defined in Schedule Z. There are 10 events set out in the facts above, and include death, divorce, bankruptcy and retirement of partners. Amongst other clauses, AA.1 looks to ensure continuity:

Notwithstanding any other provision of this Deed, the Partners covenant and agree that the transfer, sale or purchase of a Retiring Partner's Equity to a third party will not:

(a)  dissolve the Partnership or otherwise cause it to end; or

(b)  affect the continued operation of the Partnership and its Business as a going concern (as defined under section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 (Cth)).

Based on these factors we are satisfied the Partnership meets the required conditions in order to be allowed the concessions of maintaining its registration for taxation as a reconstituted partnership under a technical dissolution.

Question 4

Detailed Reasoning

In your submission attached to your private ruling request, you took the view that there be no consequences, particularly as X and Y will be registered for GST in order to alleviate the consequences of the Land moving into their possession as individuals and we did reach that conclusion above. The movement of the Land is a separate issue to the supply of an interest in the partnership as the Land was a supply by the partnership to a partner.

The supply of an interest in the partnership is a supply by an outgoing partner to an incoming partner which is discussed from paragraph 174 to 186 of GSTR 2003/13.

The GST consequences for the parties to a reconstitution of a partnership and adding a new partner are set out in GSTR 2003/13 from paragraphs 176. There will be a supply of a new interest in the Partnership to the new partner. In your case, there are two separate supplies to Partner 1 Co and Partner 2 Co in steps 5 and 7 respectively. Those supplies of new interests are:

a supply of a financial interest in the course or furtherance of the enterprise carried on by the partnership. If the other requirements of subsection 40-5.09(1) are satisfied, it is a financial supply.

Subsection 40-5.09(1) of the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) is about what supplies are financial supplies:

(1) The provision, acquisition or disposal of an interest mentioned in subsection (3) is a financial supply if:

(a) the provision, acquisition or disposal is:

(i) for consideration; and

(ii) in the course or furtherance of an enterprise; and

(iii) connected with the indirect tax zone; and

(b) the supplier is:

(i) registered or required to be registered; and

(ii) a financial supply provider in relation to supply of the interest.

...

(3) For the purposes of subsections (1) and (2), the interest is an interest in or under a matter mentioned in an item in the following table.

Table 2: For the purposes of subsections (1) and (2), the interest is an interest in or under a matter mentioned in an item in the following table.

[The notes to the table are omitted]

GSTR 2003/13 discusses (from paragraph 36) financial supplies and dealing with interests in or under the capital of a partnership. The view taken in that ruling is that a dealing in an interest in a partnership is covered by item 10(d) of the table above.

At paragraphs 54 to 55, the partnership is the entity considered to be making the supplies of interest in the partnership. A general law partnership is a financial supply provider as it creates the interest in the partnership. This is a consequence of viewing a partnership as an entity: see paragraph 56 of GSTR 2003/13. This meets subsection 40-5.06(1)(b)(ii) of the GST Regulations.

The consideration provided for the interest can be any obligations a partner undertakes such as provision of labour, skills or services: paragraph 58, GSTR 2003/13. This satisfies subsection 40-5.06(1)(a)(i) of the GST Regulations.

The supply of the interest is made in the course of the enterprise of the partnership which meets subsection 40-5.06(1)(a)(ii).

The partnership is situated within the indirect tax zone (Australia) which meets subsection 40-5.06(1)(a)(iii).

The supplier is registered for GST in this case which meets subsection 40-5.06(1)(b)(i).

As it is a financial supply provider issuing or assigning interests to Partner 1 and Partners 2 Co, it will be a financial supply.

As stated earlier, the concession allows you to continue under a technical dissolution at steps 5 and 7. Incoming P1Co and P2 Co will receive a new interest in the partnership which is a financial supply by the Partnership to them where the elements of subsection 40-5.09 are made out. Consideration is usually supplied via the offer of skills, labour or services to the partnership. This leads to extinguishment of the interests of the outgoing partners which does not amount to a supply to the incoming partners: paragraph 180, GSTR 2003/13.

The retiring partners, X and Y, remain responsible for the GST liabilities of the partnership pre reconstitution and the incoming partners have those responsibilities post reconstitution, but the partnership via the incoming partners is responsible for GST liabilities of the partnership both pre and post reconstitution: paragraph 184.

We consider it is prudent for a reconstituted partnership to advise the Commissioner of that fact to ensure retired partners are not subject to recovery action: paragraph 185 GSTR 2003/13.

In summary, the supply of an interest in a partnership to a new partner in a reconstituted partnership will result in a financial supply of an interest in the capital of the partnership. This means activities in relation to the transfer of the interest in the partnership will not be taxable supplies and instead are input taxed. This applies to steps 5 and 7.