ATO Interpretative Decision

ATO ID 2010/8 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as it does not accurately reflect the ATO view.
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Issue

Does section 23AJ of the Income Tax Assessment Act 1936 (ITAA 1936) apply to a distribution when it is paid by a foreign limited partnership that is a corporate limited partnership (not being a Part X Australian resident), to an Australian resident company which receives it in its capacity as a limited partner in the foreign limited partnership?

Decision

No. Section 23AJ of the ITAA 1936 does not apply to a distribution when it is paid by a foreign limited partnership that is a corporate limited partnership to an Australian resident company which receives it in its capacity as a limited partner in the foreign limited partnership.

Facts

The taxpayer is an Australian resident company.

The taxpayer is a limited partner in a partnership with a foreign company. The foreign company is the general partner.

The taxpayer holds 99% of the interest in the foreign limited partnership and is entitled to cast 99% of the votes in a general meeting of the partners.

The foreign limited partnership is a corporate limited partnership for the purpose of Division 5A of Part III of the ITAA 1936.

The taxpayer receives a distribution from the partnership in its capacity as a limited partner.

Reasons for Decision

All references are to the ITAA 1936 unless otherwise indicated.

Section 23AJ provides that:

A non-portfolio dividend (as defined in section 317) paid to a company is not assessable income, and is not exempt income, of the company if:

(a)

the company is an Australian resident and does not receive the dividend in the capacity of a trustee; and

(b)

the company that paid the dividend is not a Part X Australian resident (as defined in that section).

Section 317 defines a 'non-portfolio dividend' to be:

a dividend (other than an eligible finance share dividend or a widely distributed finance share dividend) paid to a company where that company has a voting interest, within the meaning of section 334A, amounting to at least 10% of the voting power, within the meaning of that section, in the company paying the dividend.

Subsection 334A(1) provides that a company shall be taken to have a voting interest in another company, if the first-mentioned company is the 'beneficial owner' of shares in the other company that carry the right to vote on all matters at a general meeting in that other company, and there is no arrangement in force which would allow any person to affect those rights. The phrase 'beneficial owner' is not defined for the purposes of section 334A. Accordingly, the phrase 'is to be construed in context and must reflect the purposes of the section in which it occurs' (Federal Commissioner of Taxation v. Linter Textiles Australia Ltd (in Liq) [2005] HCA 20; (2005) 220 CLR 592; (2005) 59 ATR 177; 2005 ATC 4255).

In Taxation Determination TD 2008/24, the Commissioner stated that the term 'beneficial owner' of shares for the purposes of subsection 334A(1) needs to be considered having regard to the context of former section 160AFB. Having regard to the context, TD 2008/24 states at paragraph 9 that a company will be the beneficial owner of shares for the purposes of subsection 334A(1) when it holds the bundle of rights associated with ownership of those shares for its own benefit, and not for the benefit of others.

Limited partnership

As a corporate limited partnership, the foreign limited partnership is deemed to be a company under section 94J and the distribution from the partnership is deemed to be a dividend under section 94L. The taxpayer's interest in the partnership is deemed to be a share under section 94P.

However no provision deems a partner in a corporate limited partnership to have voting rights similar to that of a shareholder in a company.

At general law, a partner is not separate from the partnership. The rights of a partner in a partnership are held and must be exercised for the benefit of each and every partner in the partnership. Deane J in Federal Commissioner of Taxation v. Westraders Pty Ltd (1979) 9 ATR 558; 79 ATC 4089 said:

In the absence of agreement to the contrary, a member of a partnership has no definite or separate share or interest in any particular item of partnership property. He has an undivided beneficial interest in the totality of partnership assets and is entitled to insist that they be applied for legitimate purposes of the partnership (see, generally, Livingstone v. Commr. of Stamp Duties (Qld.) (1960) 107 C.L.R. 411 at p. 453 and Canny Gabriel Castle Jackson Advertising Pty. Limited v. Volume Sales (Finance) Pty. Limited (1974) 131 C.L.R. 321 at pp. 327-328).

It follows the voting rights held by a partner in a partnership (including limited partnership) must be exercised subject to the partner's obligation to the other partners. A partner cannot exercise its voting rights exclusively for its own benefit. Thus, a taxpayer who is a partner in a partnership cannot satisfy subsection 334A(1) because it cannot exercise the voting rights associated with its interest in the partnership for its own benefit as required by subsection 334A(1). Accordingly, a distribution paid to the taxpayer, in its capacity as a limited partner in a limited partnership is not a non-portfolio dividend as defined in section 317, and section 23AJ does not apply to the distribution.

Year of income:  Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1936
   Division 5A, Part III
   Part X
   section 23AJ
   section 94J
   section 94L
   section 94P
   section 160AFB
   section 317
   section 334A
   subsection 334A(1)

Case References:
Canny Gabriel Castle Jackson Advertising Pty Limited v Volume Sales (Finance) Pty Limited
   (1974) 131 CLR 321

Related Public Rulings (including Determinations)
Taxation Determination TD 2008/24

Keywords
Dividend income
International tax
Limited partnerships
Voting rights

Business Line:  International Centre of Expertise

Date of publication:  8 January 2010

ISSN: 1445-2782