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Edited version of private advice

Authorisation Number: 1051573588503

Date of advice: 28 August 2019

Ruling

Subject: International issues - foreign entities - limited partnerships

Question

Are you a 'limited partnership' covered paragraph 275-20(4)(j) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July 2017 - 30 June 2018

1 July 2018 - 30 June 2019

1 July 2019 - 30 June 2020

1 July 2020 - 30 June 2021

1 July 2021 - 30 June 2022

The scheme commences on:

1 July 2017

Relevant facts and circumstances

  1. You are a related party of a fund established under foreign law.
  2. The foreign fund consists of over 50 members.
  3. The foreign fund has invested into Australian real property investments via part of an arrangement proposed to be withholding managed investment trusts (MIT).
  4. The foreign fund holds its units in the proposed MIT arrangement through you.
  5. You have been registered as a type of investment limited partnership in accordance provisions of foreign legislation.
  6. You were established to carry on the business of making investments such as shares, real estate and derivatives for the benefit of investors.
  7. Only a limited partner can invest into you.
  8. The foreign fund is the limited partner in you and another foreign corporate entity is the general partner.
  9. The foreign fund is the only limited partner, holding a 100% capital/equity interest. Its limited liability for partnership debts have also been lodged on the corporate register.
  10. The other corporate entity is the only general partner. It has assumed unlimited liability for your debts and does not hold an equity interest in you. The other corporate entity actually carries on your management. This includes the appointment of an external capital management company to engage with the investments.
  11. Both the foreign fund and the other corporate entity contribute to your administrative operations.

Relevant legislative provisions

Paragraph 275-20(4)(j) ITAA 1997

Section 995-1 ITAA 1997

Reasons for decision

Limited partnership

Paragraph 275-20(4)(j) applies to an entity that is :

a limited partnership, if, throughout the income year:

(i)       at least 95% of the membership interests in the limited partnership are owned by entities mentioned in the preceding paragraphs of this subsection, or by entities that are wholly-owned by entities so mentioned; and

(ii)     the remaining membership interests (if any) in the limited partnership are owned by a general partner of the limited partnership that habitually exercises the management power of the limited partnership;

Limited partnerships are defined under section 995-1 as:

(a) 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

(b) an association of persons (other than one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for the purpose of becoming a VCLP, an ESVCLP, an AFOF or a VCMP and to carry on activities that are carried on by a body of that kind.

Are you a company?

'Company' is defined in subsection 995-(1) to mean:

a)     a body corporate; or

b)     any other unincorporated association or body of persons; but does not include a partnership or a non-entity joint venture.

You have been registered with the foreign company register as a type of investment limited partnership in accordance with the relevant foreign legislative provisions.

Foreign legislative provisions state that under this entity structure, the liability of one or more of the partners is limited to the amount of a specific contribution of assets (limited partners), while the other partners have unlimited liability (general partners).

Therefore, your legal capacity, powers and liabilities are reliant upon your members.

Accordingly, you are not a company as defined under subsection 995-(1).

Is the liability of one of the partners in you limited?

Foreign legislative provisions state that under this entity structure, the liability of one or more of the partners is limited to the amount of a specific contribution of assets (limited partners), while the other partners have unlimited liability (general partners).

The foreign fund is the only limited partner according to the foreign regime; it holds a 100% capital/equity interest in you. Its limited liability for partnership debts have also been lodged on the corporate register. Additionally, the foreign fund is not obliged to manage you.

Accordingly, the liability of the foreign fund as a partner in your entity is limited.

Are the foreign fund and the second corporate entity carrying on a business as partners?

According to Spriggs & Riddell v FCT [2009] HCA 22, whether entities carry on a business is a question of fact and will depend on a number of indicia including the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions and whether the activities are carried out in a business-like manner (being systematic and organised).

Brookton Co-operative Society Ltd v FCT [1981] HCA 28 per Aickin J (Brookton) also provides that passive receipt of investment income is sufficient to amount to the carrying on of a business.

Accordingly, although your business consists of a passive holding of investments, the foreign fund and the other corporate entity are carrying on this investment as partners. This includes the corporate entity's appointment and management of the external capital manager.

Therefore, the foreign fund and the other corporate entity are carrying on a business as partners in you.

Do you satisfy MIT membership interest requirements?

The foreign fund is the only limited partner in you and it holds 100% of the capital/equity interests. The foreign fund has at least 50 members and therefore is an entity mentioned in the preceding paragraphs of subsection 270-20(4).

The other corporate entity is the only general partner. It is entitled and obliged to carry on your management, and would habitually exercise this management.

Hence, you satisfy the membership interest requirements under subparagraph 275-20(4)(j)(ii).

As the foreign fund holds 100% of the membership interests in a limited partnership, you are a limited partnership that is covered under paragraph 275-20(4)(j).

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