By Domenic Festa (Accredited Tax Specialist and Chartered Tax Adviser)
To a lay person, a partnership involves the joint ownership of the business of the partnership, with each partner having a percentage interest in the partnership. With that view in mind, where there is a transfer of a partnership asset to one of the partners, such as on the retirement of a partner or the breakup of the partnership, the exiting partner is acquiring the partial interest owned by the other partners and transfer duty should only be imposed on that partial interest.
For example, where A and B carry on business as partners and in the proportions A60%/B40%, if on termination of the partnership A were to take a partnership asset in satisfaction of his 60% share, A would consider transfer duty should only be imposed on the 40% interest acquired. Let’s say the partnership operates a business with a value of $2 million, A would expect transfer duty is to be charged on $800,000 (40%) rather than $2 million. The difference in transfer duty payable is $66,500 ($95,525 v $29,025).
Unfortunately, the law relating to partnerships is not so simple.
As long ago as 1974, the High Court (following earlier decisions) confirmed that a partner does not have a specific ownership interest or title in any particular asset of the partnership. Rather, a partner’s right is to a proportion of the surplus after realisation of assets and payment of debts and liabilities (Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 2).
This position has recently been confirmed in Danvest Pty Ltd & anor v Commissioner of State Revenue (2016) ATC 20-611.
The result is without following proper processes, transfer duty will be payable on the transfer of property on the amount of $2 million ($95,525) rather than the 40% interest acquired ($29,025). The rules that ordinarily apply for a partition, or transfer of a partial interest, don’t apply for the transfer of a partnership asset.
However, for Queensland clients there is a means of limiting transfer duty to the percentage interest acquired.
A means to overcome this adverse result in Queensland is to implement the transfer to the Partner in a manner that satisfies the requirements for a retirement or partnership dissolution under the Duties Act 2001 (Qld). A simple transfer of property will not be sufficient for this purpose. Documentation supporting the transfer that satisfies the conditions for a retirement or partnership dissolution for transfer duty purposes must be created.
Steps Law have been successful in the design of documentation for the transfer of a partnership asset that was stamped by the Qld Revenue Office with the reduction in transfer duty. In the above example, transfer duty payable was $29,025 rather than $95,525 that would apply on an ordinary transfer.
NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.