This session continues last week’s discussion on Harvey v Harvey and the two competing models of partnership property, and turns to s 106-5 of the ITAA 1997. The central question is what CGT event occurs when a partner contributes an asset to a partnership without transferring legal title, and how the resulting gain or loss is attributed between the partners. Contribution of an asset to a partnership under the Barwick model in Harvey, where legal title remains with the contributing partner, is properly characterised as a CGT event D1, not a CGT event A1, and the entirety of any later gain on the contributed asset is attributed to the contributing partner under s 106-5.
Discussion focus
The session will work through the contrasting position where the contributing partner does transfer legal title, the application of s 106-5 under the Menzies/Walsh model, the C2 termination of the D1-created right on dissolution, and the two examples to s 106-5 (in particular whether Example 2 properly fits the Barwick model, the Menzies/Walsh model, or a special-agreement scenario). The session will also work through the accounting treatment on contribution and on dissolution under each of the Barwick and Menzies/Walsh models, including the credit to the contributing partner’s capital account, the absence of any partnership or trust equivalent to a company-law revaluation reserve, and the distinction between the legal effect, the accounting consequence, and the s 106-5 tax outcome.
A briefing note with worked examples will be circulated separately before the session.
Please see below links to case materials which are assumed reading in order to participate in the discussion:
- Harvey v Harvey (1970) 120 CLR 529, with particular attention to the reasons of Barwick CJ at 544-552 (partnership business, improvements, and property characterisation), and the majority reasons of Menzies J at 553-562 and Walsh J at 562-568 (recoupment of expenditure, no proprietary interest of the partnership in the land or its improvements)
- s 106-5 ITAA 1997 (CGT events relating to a partnership or its CGT assets – gains and losses made by partners individually, allocated by agreement or partnership law), including both worked examples
- s 104-35 ITAA 1997 (CGT event D1), particularly the s 104-35(5)(b) exclusion (right requires you to do something that is itself another CGT event happening to you)
- s 104-25 ITAA 1997 (CGT event C2 – cancellation, surrender and similar endings)
Participants are asked to think carefully about the two examples in s 106-5 before the session and to come prepared to take a position on whether Example 2 reflects the Barwick model, the Menzies/Walsh model, or neither. Participants should also consider the case where the contributing partner does transfer 50% of the legal title on contribution, and what that does to the s 106-5 attribution on later sale.
Discussion led by Adrian Cartland.