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Changing the makeup of a partnership through ‘reconstitution’ – February 2015

Over time, or due to circumstances, the composition of a partnership can change – for example, a partner may retire or die, or a new partner is admitted. In many such situations, the existing partnership may need to be dissolved and a new partnership formed at general law.

The new partnership will need a new tax file number (TFN), Australian business number (ABN), and goods and services tax (GST) registration. Both partnerships will generally need to lodge a separate partnership tax return – one return for the old partnership from the beginning of the income year to the date of its dissolution, and another for the new partnership from the date of its formation to the end of the income year.

At general law, dissolution leading to the winding up of a partnership is called a “general dissolution”. But a Tax Office ruling recognises that there can alternatively be what is known as a “technical” dissolution.

A technical dissolution does not result in the winding up of the existing partnership, and 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 Tax Office refers to this as a reconstituted partnership.

Reconstituted partnership

As a reconstituted partnership, the business does not need a new TFN and ABN, and only one partnership tax return is required covering the full income year. For the purposes of the GST, the partnership does not need new GST registration (where the partnership was already required to register).

Generally, the Tax Office will treat a changed partnership as a reconstituted partnership, and the following factors apply:

  • the partnership is a general law partnership (as opposed to a tax law partnership; contact us if you are unsure of the difference)
  • at least one of the partners is common to the partnership before and after reconstitution
  • the partnership agreement includes an express or implied continuity clause
  • there is no break in the continuity of the enterprise or firm (the partnership’s assets remain with the continuing partnership and there are no changes to the nature of the business, the customer or customer base, the business name or name of the firm)
  • there is no period where there is only one partner (in a two-person partnership, there is a direct transfer of interest from the outgoing partner to a new partner).

Note that a two-person partnership can be reconstituted. This may occur where a partner dies, and the partnership agreement allows for continuity of the partnership with either the executor, trustee or beneficiary of the deceased partner’s estate. The continuity clause may be express, or implied by way of conduct. Where this happens, and the firm continues without any break in the continuity of the enterprise, the Tax Office generally considers there is a change in members and that the entity is a continuing reconstituted partnership.

Continued use of the partnership’s TFN

To apply for continued use of the partnership’s TFN, the partners or a partner, or an authorised contact, must inform the Tax Office within 28 days of the change of registration.

The following information will be required:

  • a clear statement by an authorised continuing partner that all new, continuing and retiring partners agree to the continuity and reconstitution of the partnership
  • the date of the reconstitution
  • the names of the new, continuing and retiring partners
  • the TFN or address and date of birth of all new partners
  • any changes to persons authorised to act on behalf of the partnership
  • a statement that
    • the partnership is a general law partnership
    • at least one of the partners is common to the partnership before and after reconstitution
    • there is no period where there is only one “partner” (that is, in a two-person partnership, there is a direct transfer of interest)
    • the partnership agreement contains a continuity clause, or in absence of written partnership agreement, the conduct of partners is consistent with continuity
    • there is no break in the continuance of the enterprise.

 Lodging the tax return

At the end of the financial year, a reconstituted continuing partnership needs to lodge only one partnership tax return covering the full financial year. The tax return must include the distributions made to every person who was a partner at any time during the financial year, including those who left the partnership during the year.

When lodging the partnership tax return, the following details will need to be supplied via a schedule of additional information:

  • the date of dissolution
  • the date of the reconstitution
  • the names of the new, continuing and retiring partners
  • the TFN or address and date of birth of all new partners, and
  • details of the changes, if the persons authorised to act on behalf of the partnership have changed.

See this office for more guidance should the makeup of your partnership change, or if you know such changes are imminent.

DISCLAIMER:All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication (including Taxpayers Australia Incorporated, each of its directors, councilors, employees and contractors and the editors or authors of the information) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The Copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284).


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