Discretionary Partnership Agreement

This is a highly flexible form of business structure which can be used for almost any business. It also allows maximum flexibility of distributions from year to year (particularly since the 29 June 2010 restrictions on trust streaming) and a flexible flow through of losses to the partners. Each partner has a defined interest in the business of the partnership although these too may be varied in some circumstances. A discretionary partnership can assist to resolve current and potential future issues with unpaid present entitlements to private companies. Including a Blood Descendent Class Trust as one of the partners assists in keeping family assets in the family providing additional protection against “unfortunate entanglements”.

The Hacker Family Problem

Jim and Annie are the directors of Hacker Nominees Pty Ltd (Hacker Nominees).

Hacker Nominees is the trustee of the Hacker Trust (Hacker Trust).

As trustee it carries on a business of supplying administrative services and software packages.

Assets of the Hacker Trust include goodwill, plant & equipment and trading stock.

Over the years the business has derived significant profits.

The profits from the business were validly distributed to beneficiaries; principally to Jim and Annie, their daughter Lucy and Red Box Pty Ltd (Red Box).

Red Box has consistently called on Hacker Trust to pay 30% of each amount distributed in cash. The remaining 70% of each distribution now forms an UPE worth approximately $700,000.

The cash representing the $700,000 UPE has been used in the business and although the business is worth $3M it does not have the cash to immediately pay the full amount.

Jim and Annie are also getting concerned about Lucy who takes no interest in the family business and is currently running a nature conservation activist group. She is on a relatively low income apart from the regular distributions she receives from the Hacker Trust. Jim and Annie fear that Lucy may end up in a relationship with someone who will then try to access the family wealth.

Humphrey’s Advice

Jim and Annie go to their accountant Humphrey for advice and Humphrey recommends that they set up a discretionary partnership with the following partners:

  • Hacker Nominees as trustee for the Hacker Trust
  • Red Box
  • A new company as trustee for a Blood Descendent Class trust – MP Pty Ltd (MP) as trustee for MP Trust (MP Trust)
  • A new company – PM Pty Ltd (PM)

Humphrey then explains:

  • how the discretionary partnership is to be set up
  • the tax consequences of setting up the discretionary partnership

NB: This is a general example and many variations, simpler or more complex, may be used.

discretionary_partnership_agreement

Formation

Hacker Nominees as trustee for the Hacker Trust contributes 100% of its business to the partnership and receives a (3m/3.7m x 100) = 81% capital interest in partnership.

Red Box calls its UPE so that the trust owes it the full sum and this is then novated to the partnership to create a capital contribution. Red Box has a capital balance which must be of the same value as the UPE otherwise Division 7A will be triggered.

The other two partners, MP as trustee for MP Trust and PM P/L contribute nominal dollar amounts to the partnership.

Tax Issues on Formation

The contributions to the partnership constitute: the contribution of a business, being a going concern, the two contributions of dollar amounts and the novation of the UPE, being financial supplies. Thus, there is no GST on the formation of the partnership provided the discretionary partnership is registered for GST and the relevant transfer agreement(s) specify in writing that the transfer of the business is a supply of a going concern.

Hacker Nominees as trustee for the Hacker Trust receives a direct exchange of an interest in a business for an interest in the business of a partnership. Subsection 106-5(4) indicates that CGT will apply only to that portion of the business transferred by the Hacker Family Trust.

There will also be stamp duty on the 19% transferred to the other partners as the conveyance on sale allows the continuing interest to be taken into account.

A partnership capital account is an asset of the partner not a loan or a form of financial accommodation. Thus, a partnership capital account is not an issue from a Division 7A perspective.

Legal Enquiry

Need assistance? Describe the matter and we’ll be in touch asap.

Legal Enquiry Form

News Subscription

Stay up to date. Key legal developments, firm news and events.

Subscribe Now

footer_logo

Level 14, 100 King William Street Adelaide SA 5000

CALL +61 8 8124 1811

Connect with us

© Copyright - DW Fox Tucker Lawyers - Commercial Lawyers Adelaide