Issue
Where a Partnership is reconstituted can it continue to deduct from the former partnership's Simplified Tax System (STS) pool for the purposes of section 328-185 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The new partnership will not be able to continue to use the former partnership's STS pool for the purposes of section 328-185 of the ITAA 1997.
Facts
A partnership (P1) composed of two Individual partners (partner A and partner B) elected to be an STS taxpayer and allocated its depreciating assets to an STS pool.
Partner B died, causing P1 to be dissolved.
Partner A formed a new partnership (P2) with the Estate of partner B.
Since the death of partner B, the business has expanded and the average turnover exceeded $1,000,000. P2 is therefore ineligible to be an STS taxpayer.
Reasons for Decision
Section 328-185 of the ITAA 1997 provides that an STS taxpayer can deduct amounts for its depreciating assets through a pool. Subsection 328-185(3) provides that this STS taxpayer must 'hold' the asset just before, and at the start of, the first income year for which it is, or last became, an STS taxpayer in order to allocate assets to such a pool.
'Hold' is a defined term in subsection 995-1(1) of the ITAA 1997, where the meaning is equated with the meaning given to the word in section 40-40 of the ITAA 1997.
The table in section 40-40 of the ITAA 1997 states at item 7 that a depreciating asset that is a partnership asset is 'held' by the partnership and not any particular partner.
Subsection 328-220(1) of the ITAA 1997 provides that the STS capital allowances rules in Subdivision 328-D of the ITAA 1997 continue to apply to an entity's STS capital allowances pool(s) in an income year after the income year in which the entity ceases to be an STS taxpayer. This is so regardless of whether the entity has ceased to carry on a business and/or hold the depreciating assets allocated to the STS pool in the later income year. This outcome is set out in paragraph 5.82 of the Explanatory Memorandum of the New Business Tax System (Simplified Tax System) Act 2001.
For the rule in subsection 328-220(1) of the ITAA 1997 to apply, it is necessary that the STS taxpayer continues to exist for tax purposes in the later income year. This is because there needs to be an entity able to claim the relevant amount as an allowable deduction in the later year.
When partner B died, P1 ceased to be an STS taxpayer and importantly ceased to exist for tax purposes when partner B died (see S J Mackie Pty Ltd v. Dalziell Medical Practice Pty Ltd [1989] 2 Qd R 87 at 90).
Subsection 328-220(1) of the ITAA 1997 applies to the entity which was the STS taxpayer and held the assets which had been allocated to the STS pool. In this case, it is P1 who allocated the assets it held to an STS pool and section 328-220 cannot allow P2 to take over deductions for P1's pool.
A balancing adjustment event occurs where there is a change in holding of a partnership asset and an entity that held an interest before the change has an interest in the asset after the change (subsection 40-295(2) of the ITAA 1997).
In this case, P2 acquired the individual assets of P1. As P2 is ineligible to enter the STS it is not entitled to allocate these to an STS pool of its own. However P2 may be entitled to claim deductions under Division 40 of the ITAA 1997.