Edited version of your written advice

Authorisation Number: 1012815867582

Ruling

Subject: Subdivision 124-M of the Income Tax Assessment Act 1997

Question 1

Are you eligible to treat the Delaware Limited Partnership (DLP) as a company?

Answer

Yes.

Question 2

Are you entitled not to treat the DLP as a foreign hybrid limited partnership?

Answer

Yes.

Question 3

Are your units in the DLP treated as shares in a company for the purposes of subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 4

Are you eligible to elect for partial CGT rollover relief under subdivision 124-M of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australia resident for tax purposes.

Company X is a Country A resident private company and only has one class of ordinary share capital called 'common stock'.

You acquired a % of common stock in Company X after 19 September 1985 for US$A million. You and B (the other shareholder, who is also an Australian resident) together held 100% of the stock and were the only voting members.

A special purpose vehicle (Y Co, or Company X Acquisition Corp) in the form of a Country A tax resident private company was incorporated to acquire 100% of the shares in Company X. Y Co is a wholly owned subsidiary of Z LLC (Z). Z is a subsidiary of a DLP (the DLP). Z is the sole direct investment of the DLP.

The Deed of the DLP states at clause 2.3 (in part):

(t)he purpose and business of the partnership shall be to engage in the Business (directly or indirectly through one or more Subsidiaries) and, in the discretion of the General Partner, in any lawful act or activity which may be conducted by a limited partnership organised under the laws of the State of Delaware.

It is entitled 'Amended and restated Limited Partnership Agreement of Z Parent LP'. It states the DLP has filed a certificate of limited partnership, the ways in which the partners are bound by the agreement, that the Preferred Unit Holders have voting rights, that a limited partner is not liable for the obligations of the DLP, and that the distribution of profits are allocated according to the partnership agreement. Further the DLP Deed defines partnership property as property owned by the partnership, and makes clear that partnership interests can be assigned.

The DLP deed does not restrict the term of the partnership to less than 15 years.

The DLP was formed in the United States (US) (in Delaware), and has been advised that US federal and state taxes would apply to them. You have stated that no other foreign country would tax them as a resident entity, they are not an Australian resident, and they have no employees or assets in Australia.

The committed capital of the DLP exceeds $100 million, and another entity has contributed approximately more than half of the capital contribution.

At a later date, you (and the other shareholder) entered into an agreement to transfer all the shares in Company X to Y Co in consideration of cash and units in the DLP (which is the ultimate holding entity of Y Co). The acquisition offer was open to both shareholders of Company X. You now hold less than 40% of units in the DLP. The other former shareholder of Company X holds an equal number of units. The only other Australian stakeholder in the DLP has a less than 1% interest.

None of the relevant parties were associated or affiliated with each other, and all dealings were at arm's length.

You will not make an election under subparagraph 94D(1)(d)(iii) and section 94F of the ITAA 1936 to treat the limited partnership as a partnership for Australian tax purposes.

You will not make an election under subsection 830-10(2)(b) of the ITAA 1997 to treat the limited partnership as a foreign hybrid limited partnership.

You intend to elect to apply the roll-over provisions prior to the lodgment of your tax return.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 94B

Income Tax Assessment Act 1936 Section 94D

Income Tax Assessment Act 1936 Subsection 94D(1)

Income Tax Assessment Act 1936 Subsection 94D(2)

Income Tax Assessment Act 1936 Subsection 94D(3)

Income Tax Assessment Act 1936 Subsection 94D(5)

Income Tax Assessment Act 1936 Section 94J

Income Tax Assessment Act 1936 Section 94P

Income Tax Assessment Act 1936 Section 340

Income Tax Assessment Act 1936 Section 485AA

Income Tax Assessment Act 1997 Paragraph 124-780(1)(a)

Income Tax Assessment Act 1997 Paragraph 124-780(2)(b)

Income Tax Assessment Act 1997 Subsection 830-10(1)

Income Tax Assessment Act 1997 Subsection 830-10(2)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Limited partnership

The object of Division 5A of Part III of the ITAA 1936 is to provide for certain limited partnerships to be treated as companies for tax purposes (Section 94A of the ITAA 1936). As stated in the Explanatory Memorandum to Taxation Laws Amendment Act (No. 6) 1992 (the EM) which introduced the Division:

…the structure of a limited partnership is comparable to that of a limited liability company in that there are 'limited partners' who are similar to shareholders in a company; they do not take part in the management of the business, and their liability generally is limited to the extent of their investment.

A limited partnership is any partnership in which the liability of at least one partner is limited. Generally, their liability is limited to their investment. They are not required to make good losses of their partnership, nor are they liable to meet the obligations of the partnership. If limited partners are treated in the same way as partners in any other partnership, however, they may benefit from distributions of losses that exceed their limited liability.

The term 'limited partnership' is defined in subsection 6(1) of the ITAA 1936 to have the same meaning as in the ITAA 1997. Subsection 995-1(1) of the ITAA 1997 defines 'limited partnership' to mean:

an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited; or ...

This definition is needed, because limited partnerships formed in Australia also include a general partner or partners, whose liability is not limited. The definition is sufficiently general to apply to limited partnerships as formed under legal systems outside Australia.

ATO Interpretative Decision ATO ID 2008/80 Income Tax Foreign Hybrid Limited Partnership: Delaware Limited Partnership (ATO ID 2008/80) also provides some guidance in this area. It states:

A limited partnership (LP) is formed under the Delaware Revised Uniform Limited Partnership Act (Del.) DRULPA by executing a certificate of limited partnership. Under the Delaware legislation, an LP has the following features:

• the LP and the limited partners are bound by the partnership agreement (subsection 17-101(10) of the DRULPA)

• the partnership agreement may provide for classes or group of limited partners with voting rights as specified in the partnership agreement (section 17-302 of the DRULPA)

• the LP has a separate legal existence which continues until the certificate of limited partnership is cancelled (paragraph 17-201(b) of the DRULPA)

• a limited partner is not liable for the obligations of a limited partnership unless they participate in the control of the partnership business (paragraph 17-303(a) of the DRULPA)

• a general partner is jointly and severally liable for obligations of the partnership (though a judgment creditor can only claim against the assets of the general partner in certain circumstances) (section 17-403 of the DRULPA and section 15-306 of the DRUPA) the profits and losses of the limited partnership are allocated, and distributions made, amongst the partners as provided in the partnership agreement or, if no provision is made, on the basis of the partner's contributions (sections 17-503 and 17-504 of the DRULPA)

• property acquired by the partnership is property of the partnership (section 15-203 of the DRUPA) and a partner has no interest in specific partnership property (section 17-701 of the DRULPA),and

• a partnership interest can be assigned and an assignment does not dissolve the LP (section 17-702 of the DRULPA).

In your case, the DLP deed states the DLP has filed a certificate of limited partnership, the ways in which the partners are bound by the agreement, that the Preferred Unit Holders have voting rights, that a limited partner is not liable for the obligations of the DLP, and that the distribution of profits are allocated according to the partnership agreement. Further the DLP Deed defines partnership property as property owned by the partnership, and makes clear that partnership interests can be assigned. Accordingly, the DLP is a limited partnership.

Corporate Limited Partnership

Paragraph 94D(1)(a) of the ITAA 1936 provides that for the purposes of Division 5A of Part III of the ITAA 1936, a limited partnership is a corporate limited partnership in relation to a year of income of the partnership if the year of income is the 1995-96 year of income or a later year of income where none of the exceptions in section 94D apply.

The year of income in question is after the 1995-96 year of income and thus the DLP is considered to be corporate limited partnerships for the income tax year pursuant to paragraph 94D(1)(a) of the ITAA 1936, provided none of the exceptions in section 94D apply.

Section 94D Exceptions

Subsection 94D(2) of the ITAA 1936 provides that a partnership that is a venture capital limited partnership (VCLP), an early stage venture capital limited partnership (ESVCLP), an Australian venture capital fund of funds (AFOF) or a venture capital management partnership (VCMP) cannot be a corporate limited partnership.

In order for a partnership to be a VCLP, an ESVCLP, or an AFOF it must be registered as such under the Venture Capital Act 2002 (Note 1 to subsection 94D(2) of the ITAA 1936).

The DLP would not qualify for registration as a VCLP as you have stated there is no condition in the DLP deed restricting the term of the partnership to not more than 15 years as it is required by subsection 9-1(1) of the Venture Capital Act 2002. Further, the requirements of paragraph (e) (that each investment of the partnership needs to be an eligible venture capital investment, or have investment in a company or a trust that has eligible venture capital investments but for subsections 118-425(3) of the ITAA 1997, and 118-427(3) and (7) of the ITAA 1997) would be unlikely to be satisfied for the following reasons:

• As the DLP has only directly invested in one company, it does not satisfy the 30% investment threshold requirement in section 118-425 of the ITAA 1997

• Z is not an Australian resident company

• Z's employees and assets are not in Australia

• Z's sole investment is in a Country A resident company (Company X)

• The DLP would not qualify as for registration as a ESVCLP as you have stated there is no condition in the DLP deed restricting the term of the partnership to not more than 15 years.

Further, as the committed capital of the partnership exceeds $100 million, one of the partnership has contributed more than 30% of the total committed capital, and the restrictions regarding eligible venture capital investments outlined above when discussing VCLPs have not been satisfied, the DLP will not qualify for registration.

The DLP does not qualify for registration as an AFOF as it is not an Australian entity (regardless of what and how much it has invested in). The DLP is also not a VCMP under subsection 94D(3) of the ITAA 1936 the limited partnership needs to be one or more of either a VCLP, an ESVCLP or an AFOF.

In your case, as discussed above, the DLP does not qualify for registration as a VCLP, an ESVCLP or an AFOF, so it is not a VCMP. The DLP cannot qualify for as a VCLP, ESVCLP, AFOF or VCMP under the Venture Capital Act 2002 or be general partners in one or more of these entities. Accordingly the exceptions in Section 94D of the ITAA 1936 will not apply.

Foreign hybrid limited partnership

Subsection 830-10(1) of the ITAA 1997 states:

Subject to subsection (2), a limited partnership is a foreign hybrid limited partnership in relation to an income year if:

(a) it was formed in a foreign country; and

(b) foreign income tax (except credit absorption tax or unitary tax) is imposed under the law of the foreign country on the partners, not the limited partnership, in respect of the income or profits of the partnership for the income year; and

(c) at no time during the income year is the limited partnership, for the purposes of a law of any foreign country that imposes foreign income tax (except credit absorption tax or unitary tax) on entities because they are residents of the foreign country, a resident of that country; and

(d) disregarding subsection 94D(5) of the Income Tax Assessment Act 1936, at no time during the income year is it an Australian resident; and

(e) disregarding that subsection, in relation to the same income year of another taxpayer:

(i) the limited partnership is a CFC at the end of a statutory accounting period that ends in the income year; and

(ii) at the end of the statutory accounting period, the taxpayer is an attributable taxpayer in relation to the CFC with an attribution percentage greater than nil.

In your case, paragraphs (a) to (d) of subsection 830-10(1) of the ITAA 1997 are satisfied as the DLP was formed in the United States (US) (in Delaware), has been advised that US federal and state taxes would apply to them, and because you have stated no other foreign country would tax them as a resident entity and because they are not an Australian resident.

Paragraph 830-10(1)(e) of the ITAA 1997 is not satisfied as the DLP is not a controlled foreign company (CFC). Whilst the DLP is a foreign entity, no group of 5 or fewer Australian entities (with at least a 1% controlling interest) (either alone or with associates) in the DLP have acquired 50% or more controlling interests in the DLP as all parties in the DLP were independent of each other and the largest single Australian interest in the DLP is less than 50%. Further, there is no single Australian entity whose associate-inclusive control interest is more than 40% and the DLP is not controlled by a group of 5 or fewer Australian entities (either alone or together with associates).

Accordingly, as all of the conditions in subsection 830-10(1) of the ITAA 1997 are not satisfied, the DLP is not a foreign hybrid limited partnership.

Are your units in the DLP treated as shares in a company for the purposes of, and are you eligible to elect for partial CGT rollover relief under, subdivision 124-M of the ITAA 1997?

Subdivision 124-M of the ITAA 1997 contains a number of conditions for, and exceptions to, a shareholder being eligible to choose scrip for scrip roll-over relief.

One condition is that the interest holder exchanges shares in one company for shares in another company (subparagraph 124-780(1)(a)(i) of the ITAA 1997).

Under section 94D of the ITAA 1936, a limited partnership is a corporate limited partnership for the purposes of Division 5A of Part III of the ITAA 1936 for the 1995-96 or later years of income if the exceptions in that section do not apply.

In your case, the DLP is considered to be a corporate limited partnership in accordance with section 94D of the ITAA 1936.

Under section 94J of the ITAA 1936, a reference in the ITAA 1936 or ITAA 1997 to a company or to a body corporate includes a reference to a corporate limited partnership. Further, section 94P of the ITAA 1936 provides that a reference in the ITAA 1936 or ITAA 1997 to a share includes a reference to an interest in a corporate limited partnership.

Therefore, for the purposes of the ITAA 1936 and ITAA 1997, the DLP is treated as a company and/or body corporate, and interests in the DLP as shares.

In your case, the exchange of shares in Company X by you for interests in the DLP can be considered an exchange of shares in a company for shares in another company for the purposes of subparagraph 124-780(1)(a)(i) of the ITAA 1997.

Accordingly, scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 will be available to you for the exchange of your interests in Company X for interests in the DLP provided the other conditions in the Subdivision are satisfied. These conditions are as follows:

• The exchange of shares is in consequence of a single arrangement.

• The arrangement results in the acquiring entity becoming the owner of 80% or more of the voting shares in the original entity.

• The arrangement is one in which at least all of the owners of voting shares in the original entity could participate

• The arrangement is one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity.

• Shares in the original entity were acquired by the original interest holder on or after 20 September 1985.

• Apart from roll-over, the original interest holder would have made a capital gain from a CGT event happening in relation to its shares in the original entity.

• The replacement interest acquired by the original interest holder is a share in the acquiring entity or the ultimate holding company.

• The original interest holder has chosen roll-over.

• The parties dealt with each other at arm's length.

In your case, the above conditions are satisfied as you and the only other shareholder (as voting shareholders) have exchanged shares in Company X in a single arrangement through an agreement. You acquired the shares after 19 September 1985, and, apart from the roll-over, made a capital gain on their disposal. You will choose roll-over and all parties have dealt with each other at arms' length.

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