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Edited version of private advice
Authorisation Number: 1051557339919
Date of advice: 30 July 2019
Ruling
Subject: Foreign income
Question 1
Is your interest in Company 1 LLP (the LLP) an interest in a foreign hybrid company within the meaning of section 830-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
The Commissioner is satisfied the requirements of section 830-15 of the ITAA 1997 are met and your interest in the LLP will be an interest in a foreign hybrid company for the purpose of Division 830 of the ITAA 1997.
Question 2
Will you include in your assessable income your respective interest of any franked distribution declared by Company 2 in respect of the LLP, and will you be entitled to a tax offset in respect of the franking credit on the distribution?
Answer
Yes.
The Commissioner is satisfied that you are deemed a partner of the LLP and are subject to taxation in Australia under section 92 of the Income Tax Assessment Act 1936 (ITAA 1936) as a partner of the LLP. Where Company 2 declares a franked distribution in favour of its shareholder, the LLP, you will be deemed entitled to your partnership interest in the franked distribution.
Accordingly, your interest in the franked distribution will be included in your assessable income and you, as an Australian tax resident, will be entitled to a tax offset in respect of the franking credit forming part of the distribution.
Question 3
Will dividend withholding tax be payable in respect of your interest in any unfranked dividends declared by Company 2 to the LLP?
Answer
No
As you are treated as a partner in a partnership, you are treated as deriving your share of the dividend paid by Company 2, and not the LLP. This means that your proportion of the dividend paid by Company 2 will be derived by an Australian resident taxpayer and dividend withholding tax will not apply.
Question 4
Will you be entitled to foreign income tax offsets for foreign income tax paid in respect of your share of the net income of the LLP?
Answer
Yes
You will be entitled to a foreign income tax offset in respect of any foreign income tax payable in respect of the income included in your assessable income, whether the foreign tax is paid by you, the foreign hybrid or some other entity.
This ruling applies for the following periods:
Year ended 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
The scheme commenced on:
1 July 2018
Relevant facts and circumstances
You are a resident of Australia for taxation purposes.
You are a member of a LLP.
The LLP is an incorporated limited liability partnership under country Y company law.
The LLP operates in various jurisdictions but in the 2019 financial year has decided to establish a permanent Australian subsidiary.
For Country Y tax purposes, it is treated as a flow through or fiscally transparent entity.
The income of the LLP will be subject to income tax in the Country Y and the individual members will be taxed on their share of LLP profits.
You will make an election under paragraph 830-15(5)(b) to treat your interest in the LLP as a share in a foreign hybrid company.
You are the sole director of Company 2.
100% of the shares in Company 2 are owned by the LLP.
The directors of Company 2 will be partners of the LLP.
Company 2 will pay dividends to the LLP. Each member will be entitled to their respective partnership proportion of the dividends paid by Company 2.
You may receive distributions of profits from the LLP that consist of income other than dividends paid by Company 2. This will be foreign sourced income.
You will pay Country Y income tax on those amounts as a partner in the LLP.
Relevant legislative provisions
Income Tax Assessment Act 1936 Division 5
Income Tax Assessment Act 1936 Section 92
Income Tax Assessment Act 1936 Subsection 128B(1)
Income Tax Assessment Act 1997 Division 207
Income Tax Assessment Act 1997 Division 770
Income Tax Assessment Act 1997 Division 830
Income Tax Assessment Act 1997 Section 830-15
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