Primary production: election to spread profit from forced disposal of livestock - election of new partnership to be treated as a continuation of an old partnership

If two new partnerships take over the assets of an old primary production partnership, can the new partnerships elect under section 385-165 of the Income Tax Assessment Act 1997 (ITAA 1997) to be a continuation of the old partnership?

No. Neither of the two partnerships can elect to be a continuation of the old partnership because neither of the new partnerships takes over the relevant primary production business of the old partnership.

A family partnership (old partnership) was dissolved during the 2004-05 income year. The assets of the old partnership were divided between two new partnerships. The new partnerships used these assets to carry on separate businesses.

Partners in each of the new partnerships were entitled to 40% of the income of the old partnership.

The old partnership carried on a primary production business and in the 2001-02 income year made a profit from the forced disposal of livestock. The old partnership made an election under Subdivision 385-E of the ITAA 1997 to spread the profit from the forced disposal of livestock over the 2001-02 income year and the next four income years.

For the 2004-05 income year, each new partnership sought to make an election under section 385-165 of the ITAA 1997 to be treated as a continuation of the old partnership

Broadly speaking, subsection 385-165(1) of the ITAA 1997 allows a new partnership to elect to be treated as a continuation of an old partnership and obtain the benefit of elections made by the old partnership under Subdivisions 385-E, 385-F or 385-G of the ITAA 1997. It states: Under Subdivision 385-E, 385-F or 385-G a new partnership can elect to be treated as a continuation of an old partnership that would otherwise cease to exist if: (a) it immediately takes over the relevant primary production business of the old partnership; and (b) partners, together entitled to at least 25% of the income of the new partnership were also partners in the old partnership.

In order for the election under section 385-165 of the ITAA 1997 to be effective, paragraph 385-165(1)(a) of the ITAA 1997 requires the new partnership to continue to carry on the relevant primary production business of the dissolved partnership.

In determining whether the new partnership meets this requirement, it is necessary to: • identify the relevant primary production business of the dissolved partnership, and • determine whether the new partnership is carrying on that relevant primary production business.

This involves examining all the things done and the activities carried on by the dissolved partnership in the course of that business and in this case examining all activities of each new partnership to see if they are carrying on the business formerly conducted by the dissolved partnership.

The question of whether the new partnerships continue to carry on the relevant primary production business formerly conducted by the dissolved partnership is a matter of fact and degree to be determined on a case by case basis. Merely dividing the assets of the dissolved partnership and using them in the conduct of a separate business by each new partnership means that neither of the new partnerships takes over the relevant primary production business of the old partnership.

Accordingly, neither partnership is able to elect to be treated as a continuation of the old partnership under section 385-165 of the ITAA 1997.