- Why would I choose a partnership structure over another structure?
- Partnership capital: Can partners contribute something other than cash?
- Partnership capital: Does the amount of initial capital have to match the partner's initial proportions?
- Can partners be paid a salary?
- How do partners make decisions about the partnership?
- What is the role of a partner's nominee?
- How do partners sign documents?
- How is the partnership taxed? What taxes is the partnership liable for?
- How are tax losses of the partnership treated?
- What happens when the partnership is reconstituted or terminated?
Why would I choose a partnership structure over another structure?
There are a number of advantages and disadvantages of choosing a partnership structure over a company, joint venture, a trust structure, or any other structures. You should always seek professional advice before deciding on an appropriate structure.
Partnership capital: Can partners contribute something other than cash?
The Cleardocs Partnership Agreement allows partners to contribute only cash as the initial capital of the partnership — that is, no other types of assets are allowed as initial capital (for example, intellectual property or other assets).
However, partners could contribute nominal cash as initial capital and then by unanimous resolution record any additional capital contributions of non-cash assets. To enable this, the Cleardocs Partnership Agreement includes a pro-forma Unanimous Resolution as Schedule 3 to the Partnership Agreement.
Partnership capital: Does the amount of initial capital have to match the partner's initial proportions?
No. The Partnership Product allows you to choose what proportion of the profits each partner is entitled to — there does not need to be a connection between a partner's proportion and the amount of initial capital they contribute to the partnership.
For example, two partners of a partnership may:
- have made unequal contributions to the initial capital; but
- both partners may agree that each is to receive an equal proportion of the partnership's profits (if, for example, the minority partner brings other benefits to the partnership).
This sort of arrangement may have tax consequences for the partners — they should seek professional advice about that tax issue.
Can partners be paid a salary?
The Cleardocs Partnership Agreement allows for partners to be paid a fixed draw from the partnership's profits. This works similarly to a salary, but better reflects the partnership structure.
The Cleardocs Partnership Agreement provides that the partners of the partnership must contribute towards the capital of the partnership, and share in the partnership's profits in accordance with the 'Proportion'.
However, the partners may agree to pay a fixed amount of the partnership profits to one or more partners before the partnership's remaining profits are distributed. These 'fixed drawings' reduce the total amount of profits to be distributed to the partners. If a partner receives fixed drawings, then this will not affect their entitlement to their proportional share of the partnership's remaining profits.
How do partners make decisions about the partnership?
The partners (or their Nominees) make decisions by resolutions. Any exercise of power by the partners that is in accordance with the Partnership Agreement (whether or not in a meeting), binds all the partners.
However, some decisions must be made by Unanimous Resolution of all the partners — these decisions include, for example: decisions about the retirement of a partner and the value of the retiring partner's interest in the partnership.
What is the role of a partner's nominee?
A partner that is a company or a group of people (acting as trustees of a trust) appoints a Nominee to represent it or them. The nominee plays an important role in administering the partnership. In particular:
- the nominee can make decisions on behalf of the partner; and
- if the nominee suffers an Insolvency Event (as that term is described in the Partnership Agreement), then that is effectively an Insolvency Event in relation to the partner, and the interest in the partnership can be bought by the other partners; and
- if the nominee dies or becomes permanently disabled or incapacitated, then that partner's interest can be bought by the remaining partners.
How do partners sign documents?
There are no specific rules in the Partnership Agreement about how partners are to sign documents on behalf of the partnership. Generally, a partner who is acting within its authority may bind the partnership if the action is for, and on behalf of, the partnership. Accordingly, one partner may sign documents which will bind the partnership as a whole.
However, when you set-up your partnership using Cleardocs, you will be given the option to chose which partners (or their Nominees) can sign cheques, authorities etc for the partnership's bank account.
How is the partnership taxed? What taxes is the partnership liable for?
Income tax (including CGT)
Each partner pays income tax (including CGT) on the net income and loss of the partnership proportionate to their partnership interest: section 92 of the Income Tax Assessment Act 1936 (ITAA36).
Although the partnership doesn't pay tax, it must provide an annual tax return to the Australian Taxation Office (ATO): section 91 ITAA36.
Each State has its own duty rules for partnerships.
If the partnership's assets include dutiable property, then the transfer of a partnership interest is likely to produce a change in the beneficial ownership of the partnership property.
In this case, a duty liability is triggered for the receiver of the transfer to the extent of the partnership interest they acquire.
Under GST legislation, the partnership is treated as an entity for GST purposes. As an entity:
- the partnership may register for GST;
- is liable for GST on taxable supplies that it makes; and
- is entitled to input tax credits for creditable acquisitions.
Supplies and acquisitions that are made by, or on behalf of, partners in their capacity as partners are treated as supplies and acquisitions by the partnership.
For more information on how the ATO will treat the GST liability of the partnership see here.
How are tax losses of the partnership treated?
Tax losses flow through a partnership to the level of individual partners.
If a partnership incurs a loss in a year of income, then (under section 92(2) of the ITAA36) a partner is allowed to deduct:
- so much of the partner's interest in the partnership loss attributable to a period when the partner was a resident in Australia for tax purposes; and
- so much of the partner's interest in the partnership loss attributable to a period when the partner was not a resident in Australia for tax purposes but is attributable to sources in Australia.
What happens when the partnership is reconstituted or terminated?
The reconstitution or termination of a partnership gives rise to unique income tax and duty questions.
If a partner leaves a partnership, then the remaining partners acquire separate CGT assets to the extent that the remaining partners acquire a share of the departing partner's interest in a partnership asset.
If a new partner is admitted, then:
- the new partner acquires a share of each partnership asset, potentially triggering a duty liability for the new partner if those assets include dutiable property; and
- for CGT purposes, the existing partners are treated as having disposed of part of their interest in each partnership asset to the extent that the new partner has acquired it.
The ATO considers that continuity clauses like the one in clause 2 of the Cleardocs Partnership Agreement mean that there can be continuity of a partnership for GST purposes after there has been a change in membership (that is, the entry or exit of a partner will not necessarily trigger a winding up of the partnership).