A general law partnership is an association of two or more individuals or entities that carry on business in common with a view to making a profit or gain.
A partnership agreement should be entered into which sets out the contractual relationship between the parties operating under a general law partnership. It can be a verbal agreement, or it can be put into writing. While a verbal agreement will suffice at law, a written agreement is preferable so that there is no misunderstanding amongst the partners, especially concerning the terms under which partners are admitted or retire or how profits and losses are shared.
CPA Australia requirements
A member, with prior approval, may practice with a member or members of a body specified in Appendix 2 of CPA Australia’s By-Laws. A member may practice with other persons or entities that the Board may approve provided the partnership:
- has a majority of capital under the control of members with a CPA Australia public practice certificate (PPC) and abide with the By-Laws regulating the holding of a PPC
- ensures that partners who are members are liable for the provision of professional services and conduct of any non-member partners
- abides with all other regulatory matters including quality assurance, professional and mandatory standards and professional indemnity insurance
- discloses on all stationery and other information provided to clients and potential clients the qualification and professional and business affiliations of partners.
Partners under a general law partnership are exposed to the risk of joint and several liability for the debts of the partnership and their liability is unlimited. In the event that the partnership is sued, the personal assets of the individual partners will therefore be potentially available to litigants and creditors.
If a partner is sued personally, the partner’s portion of the assets of the business will be available to creditors/trustee in bankruptcy. To partly mitigate such a liability, a prospective partner may consider holding their interest in a general law partnership via a company (or a trust with a corporate trustee) rather than as an individual partner.
Partnerships do not provide for easy passing of control between generations. Where partnerships are used significant tax planning and the use of tax elections in respect of trading stock and depreciating assets must be relied upon to cost-effectively pass control to the next generation of partners.
The ATO will treat a changed partnership as a reconstituted continuing entity if the original partnership agreement incorporated a provision for a change in membership of the partnership and the following factors apply:
- the partnership is a general law partnership
- at least one of the partners is common to the partnership before and after the reconstitution
- there is no period where there is only one ‘partner’
- the partnership agreement includes an express or implied continuity clause or, in the absence of a written partnership agreement, the conduct of the parties is consistent with the continuity of the partnership’s business
- there is no break in the continuity of the enterprise or firm.
In other circumstances, where an existing partner retires or a new partner is admitted, the partnership is deemed to cease and a new partnership created. This requires two tax returns to be lodged in the income year the change occurs, among other steps. Further, each partner of the old partnership is taken to have disposed of part of their interest in the partnership asset and a CGT liability may arise. There are also separate tax implications arising from the transfer of trading stock and depreciating assets as well as collecting income from work-in-progress and debtors.
Method of accounting
If the practice consists solely of the income producing activities of the partners, then the cash method of accounting should be adopted. If the practice is conducting an accounting business with multiple employees, then the accruals method of accounting is most likely to be appropriate.
Tax losses are allocated to the partners, generally in the same proportions as partnership income is distributed. In certain circumstances, the application of the non-commercial loss rules will need to be considered.
The ATO’s view is that, with the exception of a partnership carrying on an activity without a reasonable expectation of profit or gain, a general law partnership carries on an enterprise and may register for GST from the time it is formed. A partnership is required to register if its projected annual turnover meets the registration turnover threshold, which is currently $75,000 for business taxpayers. Upon formation, the partners each acquire an interest in the entity. The partners’ consideration for their interests can include capital contributions or the promise to provide services, labour or skills.
Individual partners can claim a deduction for personal superannuation contributions made to a complying superannuation fund, subject to conditions, including capping concessional contributions to $25,000.
Alternatively, individual partners can set up administration companies to provide themselves with access to employer-sponsored superannuation contributions, as long as the company is established for the purpose of providing employer-sponsored superannuation benefits for professional practitioners. Individuals automatically include an amount equal to the sum of any excess concessional contributions in their assessable income but can claim a non-refundable tax offset equal to 15 per cent of their excess concessional contributions.
Capital contributions can be made from after-tax profits of each partner. Interest deductions on borrowed funds are available where a general law partnership borrows money to refine partnership capital. Only the partners’ contributed capital can be refinanced using interest deductible loans. Interest incurred on borrowings used to finance a distribution from an asset revaluation reserve or an unrealised profit is not deductible.
CPA Australia regulations restrict partnerships to suitably qualified parties holding a public practice certificate. Partnerships otherwise meet all form of regulatory requirements simply.
As most partnerships have the size to meet the taxation business test, taxation planning through the use of service trusts (or other service entities) is typically possible. Individual income tax rates apply to a partner’s share of a partnership’s net income but Capital Gains Tax rollovers and exemptions are potentially available, including the CGT discount and the CGT small business concessions on the disposal of a partner’s fractional interest in a partnership asset or business.
See the tax considerations section below.