When recommending a partnership structure for your clients, you
are likely to be asked whether a written partnership
agreement is necessary. Given that most advisers are aware that a
written agreement is not required to establish a partnership at
law, this can be difficult question to answer.
It is not simply the legal requirements which should dictate
your answer. A well drafted partnership agreement is vitally
important at least for taxation, commercial and business succession
Below are four advantages for your clients in preparing written
Reduce the Impact of Disputes
The primary legal advantage of a written partnership agreement
is that it provides evidence in the event of an internal or
When a dispute arises, a written partnership agreement removes
conjecture and assumption and can prove, amongst other
The parties' intention to form a partnership;
The term of the partnership and the circumstances in which it
will continue or be dissolved (see below);
The joint ownership of assets and joint liability for
The agreed splits with respect to profits; and
The dispute resolution methods to be adopted.
Legal disputes, even for small businesses, can be incredibly
costly. A partnership agreement evidencing the above may
significantly reduce costs and heartache for your client.
Avoid Unwanted Dissolution
There are many ways that a partnership can be dissolved at law,
A partner dies;
A partner become insolvent or bankrupt;
The term of the written partnership agreement expires;
A partner gives written notice to the other partners of their
intention to dissolve the partnership;
One or more partners can no longer legally own a business;
It is unlawful for the members of the partnership to carry on
the business; or
A partner makes an application to the court and the court makes
an order to dissolve the partnership.
In respect of the events in items 5 to 7 above, a
dissolution will occur regardless of the agreement made between the
A partnership will not automatically dissolve, however, where
the events in items 1 to 4 occur and a partnership agreement
Partners therefore have the opportunity to control the impact of
the above events and make their own decisions in regards to whether
or not the partnership should continue under particular
Ability to Reconstitute Partnerships
The situation may occur where your client or their business
associate wants to leave a partnership and have the continuing
partners (as well as any incoming partners) take over the assets
and liabilities of that partnership and have the partnership
In partnership law, dissolution occurs in this situation and a
new partnership is formed.
From the ATO's administrative perspective however, a
partnership may be "reconstituted" and continue
There is at least one continuing partner who is a member of the
partnership prior to and following the reconstitution;
There is an express or implied continuity clause in a
All of the partnership assets remain substantially with the
The nature of the enterprise remains substantially
The client or customer base remains substantially unchanged;
The business name or name of the firm remains unchanged.
'Substantially' in the Commissioner's view means
more than 50%, although each case is assessed on the basis of
its particular facts.
The benefits of reconstituting a partnership are that the TFN,
GST registration and ABN can be retained. Furthermore, the
partnership will only be required to complete one income tax return
for the income year in which the reconstitution took place.
Flexibility in Partner Salaries
If your client seeks to have flexibility about the distribution
of partnership profits from time to time and pay partner salaries,
the ATO looks for evidence of an agreement regarding same.
The ATO has made it clear that any agreement to pay a
'partnership salary' to a partner after the end of the
income year is not effective for tax purposes.
Although it is possible that the Commissioner will accept
written resolutions of the partners or evidence of an oral
agreement, our experience indicates that the path of least
resistance accepted by the ATO as prima facie evidence that an
agreement exists is a written partnership agreement.
A well drafted agreement will offer some flexibility as to
whether a partner's salary is fixed or variable.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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