Withdrawal from partnership 043-03130120

The rights and interests of members of a partnership are defined in a partnership agreement between the people in the partnership, but there is no requirement for a written agreement. Whether a partnership exists or not, is established from the actions of the people involved. Their actions will also determine the interests of partnership members.

Partnership agreements can be written, oral, or inferred by the conduct of the parties. The terms of written partnership agreements can be varied if all partners consent, and that consent may be express (written), oral, or inferred from the conduct of the parties.

If a written agreement exists, it may specify the proportions in which the assets of the business are held for partners, or the interest of a partner in a particular asset. The agreement may also specify the method of distribution of capital between partners upon wind-up of the business. Agreements vary considerably, and while some may contain precise details of the entitlement of partners in each of these situations, many agreements contain only a broad statement of the interests of partners.

A written partnership agreement may be taken as prima facie evidence of the terms of a partnership, but it should not be maintained against evidence provided by a partner that different terms have been adopted.

If an agreement is incomplete, and does not contain any agreement (either written, oral or able to be inferred from the conduct of the parties) about the distribution of capital upon the dissolution of the partnership, then the Partnership Act, as enacted in each state, contains provisions outlining the rights and interests of the partnership members.

Generally, Partnership law requires that profits or losses are divided evenly. All partnership members have legal entitlement to their share of the profits or losses as specified in the partnership agreement, relevant Partnership Act or court ordered agreement for division of profits.

When assessing income received from a partnership by a partner on withdrawing from the partnership, it is also necessary to consider the nature of the activity conducted by the business. For example, a small family business operated as a partnership between members of a couple, frequently earns income mainly from personal exertion of one of the couple, e.g. plumber, builder, hairdresser etc. In this situation, if one of the couple advise they are withdrawing from the business, the customer should be contacted to discuss what further income the business is likely to generate and their entitlement to that income.

In some situations, members of a couple may run a business together as a partnership. If they separate, a Service Officer needs to determine, based on available evidence, if both members of a couple still have access to proceeds of the business. If a salary continues to be paid, it is maintained as income and may be added to profits.

If one partner does not have access to proceeds of the business, their legal entitlement to a share of the proceeds may not be known until after the end of the financial year or in some cases until the Family Court makes an order for payment.

Partnership assets (and the value of a customer's interest in a partnership business) are subject to common law rules upon dissolution or withdrawal from a partnership. Until a settlement is reached to the contrary, all partnership members are legally entitled to their interest in the partnership, as specified in the agreement or partnership law in each state.

If a court makes an order about the division of partnership property, the customer's assets need to be updated in accordance with that order.

When calculating assessable value of a customer's interest in a partnership where there is no agreement about division of partnership property, the customer's ability to access the assets should be kept in mind, especially if it is marital separation.