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Edited version of private ruling
Authorisation Number: 1011551158521
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Ruling
Subject: Treatment of transfer of interests in corporate limited partnership
Question 1
Will section 94S of the Income Tax Assessment Act 1936 (ITAA 1936) operate to ensure that Aust Partnership continues as a corporate limited partnership for tax purposes rather than dissolving and being replaced by a new corporate limited partnership as a result of the transaction?
Answer
Yes. Section 94S of the ITAA 1936 will operate to ensure that Aust Partnership continues as a corporate limited partnership for tax purposes rather than dissolving and being replaced by a new corporate limited partnership as a result of the transaction.
This ruling applies for the following period/s:
Other/Substituted Accounting Period 1 January 2010 to 31 December 2010;
Other/Substituted Accounting Period 1 January 2011 to 31 December 2011;
Question 2
Will section 855-10 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any capital gain or loss realised by the existing partners in Aust Partnership as a result of the transaction?
Answer
Yes. Section 855-10 of the ITAA 1997 will apply to disregard any capital gain or loss realised by the existing partners in Aust Partnership as a result of the transaction.
This ruling applies for the following periods:
Other/Substituted Accounting Period 1 January 2010 to 31 December 2010;
Other/Substituted Accounting Period 1 January 2011 to 31 December 2011;
Relevant facts and circumstances
Aust Partnership is a limited partnership registered under the Partnership Act 1958 (Vic)
Aust Partnership is not registered under the Venture Capital Act 2002 (Cth) nor is it a 'venture capital management partnership' as defined under subsection 94D(3) of the ITAA 1936.
The relevant Limited Partnership Deed (LPD) states that:
Partner A and Partner B are the existing partners of Aust Partnership (the 'existing partners');
Partner A is the general partner with an economic interest in the limited partnership of 1%;
Partner B is a limited partner with an economic interest of 99%.
The partnership carries on business activities. Both existing partners are foreign residents
Transaction
The existing partners of Aust Partnership will transfer their respective holdings in the partnership to two other foreign residents.
One new partner will be a general partner with a 1% interest and the other will be a limited partner with a 99% interest; that is, reflecting the current structure.
After the transaction, the new partners will be the only partners of Aust Partnership.
Detailed reasoning
Question 1
Will section 94S of the Income Tax Assessment Act 1936 (ITAA 1936) operate to ensure that Aust Partnership continues as a corporate limited partnership for tax purposes rather than dissolving and being replaced by a new corporate limited partnership as a result of the transaction?
Answer
Yes. Section 94S of the ITAA 1936 will operate to ensure that Aust Partnership continues as a corporate limited partnership for tax purposes rather than dissolving and being replaced by a new corporate limited partnership as a result of the transaction.
On the facts of this case, none of the exceptions under section 94D of the ITAA 1936 apply to Aust Partnership.
Aust Partnership was established for the purpose of carrying on a business in common with a view to profit.
Aust Partnership is therefore a corporate limited partnership as defined in section 94D of the ITAA 1936.
As Aust Partnership is a corporate limited partnership for the purposes of Division 5A of the ITAA 1936, for income tax purposes:
· Aust Partnership is treated as a company pursuant to section 94J of the ITAA 1936;
· an interest in the Aust Partnership is treated as a share pursuant to section 94P of the ITAA 1936; and
· the partners of Aust Partnership are treated as shareholders pursuant to section 94Q of the ITAA 1936.
The exchange of interests in Aust Partnership pursuant to the above transaction can be considered as a sale of shares such that the new partners of Aust Partnership will be considered to be the new shareholders of Aust Partnership.
Pursuant to section 94S of the ITAA 1936, where there is a change in the composition of Aust Partnership, i.e. by the introduction of new partners, the continuity of Aust Partnership as a corporate limited partnership is not affected.
Therefore in regard to the transaction to replace the existing partners of Aust Partnership with new partners, section 94S of the ITAA 1936 will ensure that Aust Partnership continues to operate as a corporate limited partnership for income tax purposes rather than dissolving and being replaced by a newly constituted corporate limited partnership.
Detailed reasoning
Question 2
Will section 855-10 of the ITAA 1997 apply to disregard any capital gain or loss realised by the existing partners in Aust Partnership as a result of the transaction?
Answer
Yes. Section 855-10 of the ITAA 1997 will apply to disregard any capital gain or loss realised by the existing partners in Aust Partnership as a result of the transaction.
The existing partners in the Aust Partnership will be foreign residents just before the transaction to dispose of their membership interests in the partnership takes place. As Aust Partnership is a corporate limited partnership pursuant to Division 5A of the ITAA 1936, the disposal by the existing partners of their membership interests is treated as a disposal of shares in a company for income tax purposes (the CGT event). As such, the existing partners membership interests in Aust Partnership are the relevant CGT assets for the purposes of subsection 855-10(1) of the ITAA 1997.
Relevantly, Item 2 of the table states that taxable Australian property includes a CGT asset that is an 'indirect Australian real property interest' (as defined by section 855-25 of the ITAA 1997).
Non-portfolio interest test
Each of the existing partners holds an associate-inclusive direct participation interest in Aust Partnership of 100%.
Therefore as the sum of the existing partners direct participation interests in the Aust Partnership will exceed 10% at the time of the transaction, the requirements of subparagraph 855-25(1)(a)(i) of the ITAA 1997 will be met.
Principal asset test
Based on the facts and assumptions of this case, the membership interests held by the existing partners in the Aust Partnership will not pass the principal asset test at the time of the transaction pursuant to the requirements of subparagraph 855-25(1)(b) of the ITAA 1997.
Accordingly, the existing partners' membership interests in the Aust Partnership will not be an indirect Australian real property interest at the time of the transaction as defined by section 855-25 of the ITAA 1997.
As such, the existing partners interest are not taxable Australian property pursuant to section 855-15 of the ITAA 1997 and any capital gain or loss resulting from the transaction is disregarded pursuant to subsection 855-10(1) of the ITAA 1997.
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