Partnership of trusts. Our starting point. Break-up of rights. When is there a partnership? Structuring Partnerships. What is a partnership:

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1 Copyright notice The Taxation Institute of Australia website and all the content downloaded (except Third Party Products*) from the Taxation Institute of Australia website remains the property of the Taxation Institute of Australia and shall not be reproduced, distributed, displayed or disclosed without the written permission of the Taxation Institute of Australia. *Copyright of the Third Party product applies Disclaimer notice Structuring Partnerships The material published in this paper is published on the basis that the opinions expressed are not to be registered as the official opinions of the Taxation Institute of Australia. The material should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests. Christopher Knott Rankines Solicitors Our starting point Partnership of trusts What is a partnership: Is the relation which subsists between persons carrying on a business in common with a view of profit For taxation: Partnerships potentially fragile Is a more permanent structure preferred? Division 7A Add: association of persons in receipt of income jointly When is there a partnership? Break-up of rights Rental properties FCT-v- McDonald: 2 properties Case X48: 1 property + significant renovation Type of partner IT2423 and TR 93/32 Cripps -v- CT: 16 properties Manager and business owner Brinkley -v- CT: fishing enterprise Joint ventures Partnership Acts assume: (1) equality in: Sharing of trading profit Sharing of losses Distribution of surplus (ie sharing of capital profit) (2) loss share = profit share (3) surplus share = profit share **subject to any agreement to the contrary**

2 What does a partner have? Sharing in profits Partner s share in a partnership is a fractional interest in the surplus of assets over liabilities on a winding up The right to receive profits is inherent in the partner s interest in the partnership [unless it be excluded by the partnership agreement] Does a partner have to share in profits? For the life of the partnership In any particular year What if there is such a requirement and a partner is not so entitled? Does sharing profits make you a partner? Involvement Partnership capital Dormant partners One person conducting business One principal Husband/wife: Non-working spouse $ contributions Meaning: quantified sum contributed by partners for partnership business and to be risked in that business Can a non-partner contribute? Does it affect partnership entitlement? Does it affect share of surplus? Is there an entitlement to return of capital? Obligation to make good deficiency in capital Loss share = profit share Partnership share = profit share Third parties PBR No liability for losses at all How & third parties Still a partnership? What is the partnership share? The partnership agreement may provide that a partner s share of profits is greater or lesser than his share in the partnership itself: Everett IT 2316: True interest in the partnership assets Participation in the business

3 Personal exertion income Partnership property Alienation PSI provisions Getting benefit of non-partnership property Improving non-partnership property Benefit of increase in value Non-assignable property Tax law land partnerships Everett assignments Beneficial interests (IT2423) Leasehold rights What are they: disposing of part of interest in partnership Issues: Trust for assignee losses Retrospective Dissolution Part IVA IT2501: valid assignments on all fours with Everett and Galland = ok and no Part IVA CGT Everett - CGT Everett CGT Valuable partnership rights CGT event E9 future property and no current beneficial interest: discretionary trust with partner as trustee CGT event D1 create rights in another: including a discretionary trust with another person trustee E9 problems: No discount No look and see Value as if partnership interest existed D1: value the right (at time of creation) Right = right to have an interest in the partnership Uncertainty & timing

4 Everett & ATO Salaried partners ATO treatment of Everett assignments: Senior associate corporate partner Salaried partner Employees or partners? Share in the partnership? Consequences TR 2005/7 carrying forward of partnership income Alteration of profit share Stamp duty Ability Timing Discretionary Failure to do it properly NT and Qld: (i) if entitlement can vary - value partner s entitlement as a partner (ii) otherwise greater of capital contribution percentage or loss percentage NSW proceed on a valuation basis WA s.33 Partnership Act SA income variation is dutiable CGT UK comparison In the UK capital gains tax is imposed at the partner level. Tax liability is worked out in the following order: If the partners have agreed as to how capital assets are allocated If the partners have agreed how capital profits are shared If the partners have agreed how income profits are shared Equally Each partner s gain or loss is calculated by reference to the partnership agreement or partnership law if there is no agreement: s (1) Admissions and departures results in acquisitions and disposals of shares in partnership assets Cost base exists for each partnership interest Based on principle: partner has no title to specific property but has a beneficial interest in each and every asset of the partnership

5 CGT Australia Partnership sells an asset: ITAA says work out each partner s gain or loss. On principle no argument that each partner has given up a beneficial interest. Question is: to what extent? Do the partners all have to have an interest? Eg salaried partners Example 2 in s (1) does two things: (1) shows gain or loss on a particular asset can be different from interests in other assets and profit sharing; (2) implies that the partners are allocated a specific interest in each asset CGT Australia In the absence of agreement what happens: Partnership Act assumes equality in all respects What if income share is different to surplus share - which do you choose? At law a partner has a fractional interest in the surplus, not a fractional interest in each asset Livingston (although see FCT-v- Lisa Marie Walsh and WA Act) Presumption would be based on the partner s share in surplus (which in effect is the capital profit share) Not clear why it is necessary to identify a particular interest in an asset at a particular time If profit shares can be discretionary, what about the share on surplus as well? If gain or loss is calculated by reference to the partnership agreement why not wait until CGT event occur to allocate gain? What if wait until after? Sub-partnerships Partnership interest on trust losses trapped Partnership interest held as partnership asset of a sub-partnership: different result.