ON Monday 15.10.2018, Treasury released draft legislation to give effect to its 2018-19 Budget measure to remove access to the small business CGT measures for partners that (in the main case) assign part, or all of their interest in the partnership – which was done in the well known Everett [1980] HCA 6 and Galland [1984] FCA 402 cases, where the High Court endorsed these arrangements as successfully moving the income away from the partner, to the assignee. [See related Tax Technical Article.]
The effect of such an assignment, at law (including under relevant Partnership Acts) was that the assignee did not become a partner but was entitled to the assigned share of any moneys to be distributed to the partner.
The problem was that partners were assigning an interest in their partnership interest (usually professional firm partnerships) in this way, provoking a capital gain (for reasons canvassed in the draft EM). Assignor partners dealt with the capital gain by claiming (where possible) ‘Small Business CGT Relief under Div 152 of the ITAA97.
In the 2018 Federal Budget, the Government saw fit to announce a change to prevent such assignors being able to claim Div 152 relief, in these circumstances [see Tax Technical Article on this announcement]. The wording of the announcement (see this TT Article) used the word ‘large partnerships’ leading to speculation that they would change relevant definitions to include all other partners (when defining ‘small’).
In fact the approach taken is to just add a further special condition, when defining what capital gains are eligible for Div 152 relief.
The draft legislation proposes adding a new ss(2C) after s152-10(2B) [BUT ss(2B) doesn’t exist as far as I can see – it should be a new ss(2A).
Additional basic condition for CGT events involving certain rights or interests in relation to the income or capital of a partnership
(2C) If the *CGT event involves the creation, transfer, variation or cessation of a right or interest that would entitle an entity to:
(a) an amount of the income or capital of a partnership; or
(b) an amount calculated by reference to a partner’s entitlement to an amount of income or capital of a partnership;
The thrust of this added condition is not immediately apparent and is lost in the meaning of the word ‘membership interest’ in the Partnership. In fact it means that the assignment must be sufficient to make the assignee an actual partners. The draft EM makes this clear, in para 1.29, as follows.
1.29 The small business CGT concessions remain available for genuine disposals and transactions that affect the substance of the operation of the partnership. However, they are not available for assignments and other rights or interests that merely result in the transfer of income or capital that a partner receives from the partnership to other entities without making the other entity a partner.
DATE OF EFFECT: The changes will apply from 8 May 2019 (ie. the date of the Budget announcement).
SUBMISSIONS are due by 31 October 2018.
[Treasury website: Minister’s Media Release, Consultation Page, Draft Bill, Draft EM; LTN 198, 15/10/18; Tax Month – October 2018]
FJM 24.10.18
CPD questions (answers available)
- Is this draft legislation aimed as Assignments of Partnership Interests?
- Would it insert a new condition, for Small Business CGT relief, under Div 152 of the ITAA97?
- Does an assignment of a partnership interest, make the assignee a partner (under relevant partnership law)?
- Does such an assignment typically create a capital gain?
- If so, how would the assignor often deal with it?
- Is the condition that the assignee must actually become a partner (for the assignor to be eligible to Div 152 relief)?
