Q. I run a small restaurant in partnership with my sister. Recently we took in a 3rd partner. Are there any CGT implications? We do not have any assets in the partnership except plant & equipment and goodwill. I understand that there is no CGT on plant & equipment and goodwill.

A. When a new partner is admitted to the partnership, the existing partners effectively dispose of an interest in the partnership and the new partner acquires an interest. For CGT purposes, the new partner acquires a share of each partnership asset and the existing partners are treated as having disposed of part of their interest in each partnership asset, s106-5(4) of the ITAA 1997. This means you and your sister will dispose of a fractional interest in the business goodwill and plant & equipment.

If the restaurant is a post CGT asset then CGT event A1 happens to your interest in the partnership on the goodwill. “To calculate the capital gain/loss”, it is necessary to apportion the disposal proceeds between the goodwill and plant & equipment. To do this you should look at the amount your new partner paid to enter the business and apportion this across the assets acquired in the business. You will also need to calculate your cost base for the goodwill. If you started the business from scratch then this is likely to be nil. If you purchased the business then the purchase price of the goodwill will represent your cost base. You will apportion this amount for the share sold. Where you have legal agreements for the entry of your new partner and any original purchase by you and your sister, these will assist in identifying the numbers.

Plant & equipment is a revenue asset. Where there is a change of partners, a balancing adjustment event occurs. There is a deemed disposal by the old partnership to the new partnership which may give to rise either an assessable or deductible amount to the old partnership. Rollover relief is available if the existing partners and the new partners jointly elect for the rollover to apply under s40-340(3) of the ITAA 1997.

Given that you and your sister will continue to have an interest in the depreciating asset after the new partner is admitted to the partnership, rollover relief is available. The choice must be made in writing within 6 months after the end of the transferee’s income year in which the balancing adjustment event occurred, or within such further time as allowed by the Commissioner s40-340(4) of ITAA 1997.

So there are some tax issues for you and your sister to work through. It may have been preferable to know this prior to bringing in the new partner so that you could quantify the tax effect. To the extent that there is a tax effect it needs to be reported in the income year that your new partner came into the business.

For further information: Tax Strategy & Structuring