The Federal Court has upheld a decision that a capital gain arising from the disposal of goodwill by a retired partner could not be offset by amounts he owed to the partnership.
The taxpayer was a partner in a firm of solicitors. When he retired from the partnership, he became entitled under the Partnership Deed to a payment for the disposal of goodwill. However, the partnership was entitled (under cl 26 of the Partnership Deed) to be paid, by way of set-off, any amounts that the taxpayer owed to it. When the set-off mechanism was applied, the taxpayer did not receive any amount in respect of the goodwill because the amount he owed exceeded the goodwill amount. The taxpayer, however, was still assessed on the capital gain, although it was discounted by 50%.
In Hedges and Commissioner of Taxation (Taxation) [2020] AATA 5307, the Administrative Appeals Tribunals (AAT) decided that the capital gain could not be offset by the amount the taxpayer was required to repay. The Federal Court has dismissed the taxpayer’s appeal against that decision, on the basis that the capital gain crystallised before the operation of the set-off in cl 26 of the Partnership Deed. Clause 26 was merely a mechanism that provided a convenient method by which the partnership could recover amounts owed by an outgoing partner on their retirement and it was not the source of the relevant obligations in respect of such payments. (See: http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA/2020/5307.html; http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2022/1389.html)
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