The Benefits Of Reconstituted Partnerships

Changes happen in businesses all the time, and that applies to partnerships as much as other types of business. One of the partners might die or retire, or a new partner might need to be added to the business structure. To do this you can use what the Australian Tax Office (ATO) calls a reconstituted partnership.

If you don't go through this process, there is more administration work to change the structures of a partnership. You have to get a new tax file number, and a new goods and services tax number. You also have to file two tax returns - one up to the point of dissolution, and one from the start of the new partnership arrangement to the end of the tax year.

Using a reconstituted partnership process avoids much of this administration and makes it easier to make changes. The tax authorities made these changes because they recognised that there was no real dissolution when a change of partnership takes place in most situations. The business continues to trade, so things like getting new tax file numbers don't make sense. In addition, you only have to file one tax return, and you don't need a new goods and services tax registration.

When Can You Use A Reconstituted Partnership?

You have to meet a number of basic tests before you can use the rules under reconstituted partnerships to make changes to the structure of your business:

  1. It has to be a general law partnership, not a tax law partnership
  2. At least one of the partners must be involved in both the old and new arrangements
  3. There must be no break in the trade of the business - this means continuous trading without any changes of asset ownership, name of business, customer base, or business sector.

There is no period where only one partner exists - the exception to this is when one of the partners dies

Steps To Take

To become a reconstituted partnership you have to do two main things:

  • Notify the ATO and apply for the continued use of your tax file number
  • Lodge a tax return

In both of these situations you need to supply a number of things. Firstly, you have to notify the ATO of the change in structure within 28 days of it happening. You have to make a clear statement of what has taken place, including the date of the change. You must also include the names, addresses and dates of birth of everyone involved - old, continuing and new partners. And you must show that the new arrangement meets the criteria outlined above.

When you submit your tax return at the end of the financial year you have to supply similar information. It must also include details of monies paid to all partners throughout the year, including those who are no longer with the company.

Only one tax return is required, though, covering the full financial year period.

So there is some additional work and communication with the ATO required to become a reconstituted partnership, but it is much less onerous than the alternative.