Our partnership has just been reconstituted because one of the original partners left. What does that mean for the rest of us?
Lawyer Answers (1): Answers from lawyers are general preliminary responses. They are not formal legal advice and cannot taken account of all your circumstances. They do not create a lawyer–client relationship.
There can be various income tax and duty issues when a partnership is reconstituted.
Firstly, the remaining partners acquire an interest in the departing partner's partnership assets, which is treated as a Capital Gains Tax (CGT) asset. You are all acquiring a new interest in the assets of the departing partner, and this would be considered a 'gain'.
If a new partner takes over the departing partners interest then that new partner will obtain a share in each of the partnership assets which, depending on your state or territory, may bring about a liability to pay duty. The original partners are also seen as having disposed of an interest in each partnership asset, with the new partner acquiring it.
The CGT implications of transitioning partners in and out of a partnership can be a reason to avoid choosing a partnership structure in the first place. Generally, for a business which anticipates a high turnover in terms of management and control, a company may be a more suitable option.