Ever wondered what happens when a business partner decides to hang up their boots and retire or one of the partners passes away? Or what if you decide to bring in a fresh face to the business partnership?
In the world of partnerships, unplanned changes can lead to some unwanted consequences. Let’s break it down together, shall we?
What happens when a Business Partner Disappears
When a partner retires or dies, we use the terminology ‘dissolution.’ In this scenario, the original partnership dissolves, and a new partnership emerges in its place. It’s akin to witnessing the phoenix rise from the ashes, albeit with more paperwork involved.
Now, let’s explore the two possible scenarios that can unfold. If it’s a ‘technical dissolution,’ the partnership may continue with one or two new partners joining. It’s comparable to recasting a character in a play, and everything carries on as usual. However, if it goes beyond a technical dissolution, leading to the winding up of the partnership, a completely new partnership comes into existence. Welcome to the sequel, a fresh start!
The Reincarnation: Reconstituting a Business Partnership
Let’s talk about ‘technical dissolution.’ It’s like witnessing a magic trick where a magician vanishes but reappears almost instantly. In the business context, a technical dissolution refers to a situation where a partnership dissolves but reconstitutes almost immediately. During this process, the assets and liabilities of the partnership are taken over by the remaining partners, and the business continues without any apparent break. Notably, the customer base and business model remain unchanged, and there is no period where the partnership only has one partner.
In essence, the reconstituted partnership assumes the facade of the original partnership, as if nothing has changed.
The advantage of a technical dissolution is that the reconstituted partnership does not need to obtain a new Tax File Number (TFN) and Australian Business Number (ABN). Additionally, only one partnership tax return is required for the entire income year, covering distributions to all partners, including the outgoing partner. It proves to be a convenient solution.
As the leading accountants in Inner West Sydney (Ashfield) and Belrose Northern Beaches, our team of professional accountants is equipped to assist you in filing the correct partnership tax return when your partnership undergoes changes in its composition.
Keeping Up With the Paperwork
If the partnership undergoes dissolution beyond the technical dissolution, then both the old and new partnerships must lodge separate partnership tax returns. The new partnership will need to apply for a new Tax File Number and Australian Business Number.
The Final Act: Other Legal Obligations
And, of course, like any good story, you have to follow some rules. We have simplified things a bit for the sake of your sanity, but there are some legal obligations you must meet. Think of them as the ‘terms and conditions’ of being in a partnership. They include complying with accounting standards, income tax requirements, and the relevant state partnership Act. They might not be as exciting as a cliffhanger ending, but they are just as important.
One of the most important things the new reconstituted partnership needs to do is to submit an application form to the Australian Taxation Office(ATO) to inform them that they will use the existing TFN and ABN, if you failed to do, the new reconstituted partnership runs the risk of not being able to use the existing partnership ABN and TFN.
So there you have it, we’ve covered the ins and outs of changing the makeup of a partnership. Remember, in the thrilling drama that is business partnerships, knowing your lines (or in this case, your legal requirements) can make all the difference!
If you have a partnership and are searching for a business tax accountant to assist with the business tax return, look no further! As the leading accountant and registered tax agent in Inner West Sydney (Ashfield) and Belrose Northern Beaches, our team of professional accountants will help you lodge the partnership tax return, ensuring an improved tax position.