Edited version of private advice

Authorisation Number: 1051815847627

Date of advice: 15 March 2021

Ruling

Subject: Foreign hybrid limited partnership and foreign income tax offset

Question 1

Will Partnership X be treated as a foreign hybrid limited partnership for the purposes of section 830-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in an income year where the only income that the Partnership consists of is income on which foreign trade tax is not payable?

Answer

Yes

Question 2

If the answer to question 1 is yes, will you as Australian resident partner of Partnership X include your share of the capital gain (net of 50% CGT discount where applicable) in your income tax return and claim a foreign tax credit to the extent of half of the foreign tax paid where the 50% CGT discount is applied?

Answer

Yes

Question 3

In relation to question 2, if you elect for the rollover relief available under foreign income tax law (which is not applicable for Australian tax purposes), will you be entitled to amend your income tax return for the relevant income year from when increased or reduced foreign income tax is paid for the purposes of section 770-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Years ended 30 June 20XX to 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Partnership

Partnership X is a foreign limited liability partnership (the Partnership) which was established in Country A and is a tax resident of Country A.

The general partner of Partnership X is Company Y which is a limited liability company and the only partner with the power to represent the company. It is understood that the effective management of the Partnership is in Country A.

A Limited Liability Partnership is regarded as a transparent entity for income tax purposes in Country A. Where the Partnership has deemed trading income, it is liable to trade tax in Country A.

The trade tax in Country A is a combination of a uniform tax rate of a base rate and a municipal tax rate depending on where the Permanent Establishment of the business is located.

Partnership X is generally subject to trade tax in Country A with its income. However, under the income tax law of Country A the 'extended reduction' exception to the general rule would apply to Partnership X.

Partnership X rents out commercial and residential property and occasionally sells property held long term. The turnover generated by the Partnership is around xx million per annum.

The Partnership properties are all located in Country A.

Partnership X has recently disposed of a commercial property. In the income year of the disposal the Partnership was not subject to trade tax in Country A.

It is confirmed that in the case of rental income and capital gains derived from the sale of a property by Partnership X, these amounts are exempt from trade tax in Country A.

Examples of income that Partnership X would be subject to trade tax in Country A (if any) are interest from interest bearing loans or dividends from investments in corporations. It is confirmed that in the relevant years, the Partnership has no such income. Accordingly, the Partnership will not be subject to trade tax in Country A.

It is confirmed that at no time during any income year has Partnership X been an Australian resident. Furthermore, the Partnership has not had any other foreign taxes imposed on it (other than taxes in Country A) as it is not considered to be a resident of any other foreign country.

Resident partner of the Partnership

You are a tax resident of Australia holding a portion of limited liability interest in Partnership X. You inherited additional portion of such limited liability interest from a relative after she passed away in November 20XX.

You and your non-Australian resident associates who are your relatives all together hold a 50% interest in Partnership X.

Your interest and those of your associates' interest are defined control interests according to paragraph 350(1)(d) of the Income Tax Assessment Act 1936 (ITAA 1936). You advised the voting rights, decision making, and distribution of profits correspond to your and to your associates' respective economic interest in Partnership X.

You are subject to taxation in Country A with limited tax liability with regards to your interest in Partnership X within the limits of the tax treaty between Australia and Country A.

You are the only Australian tax resident with an interest in Partnership X. You advised that at least one partner of the Partnership has limited liability.

The partners of Partnership X are subject to tax in Country A on the rental income and capital gains distributed to them.

It is submitted that in accordance with income tax law in Country A there is a rollover relief which can be granted under certain conditions.

According to the roll over relief provision, any capital gain on disposal of the commercial property will not become liable to tax in Country A (it is instead deferred), where re‐investment in a newly acquired property will occur within a certain time frame (generally four years after the sale) and acquisition costs are sufficient.

Each partner of Partnership X (individually) will have to make the relevant election for the roll over relief in their income tax return in Country A; if the conditions are fulfilled.

The newly acquired property may be subsequently disposed of by Partnership X.

Relevant legislative provisions

Income Tax Assessment Act 1997

Division 115

section 770-10

section 830-10

section 995-1

Income Tax Assessment Act 1936

section 317

section 318

section 340

section 349

section 350

section 356

section 361

section 362

Other references

ATO ID 2010/175

ATO document QC 62063

Reasons for decision

Question 1

Foreign hybrid limited partnership

Subsection 830-10(1) of the ITAA 1997 provides (subject to subsection 2) that 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 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 tax on entities because they are residents of the foreign country, a resident of that country; and

d)    disregarding subsection 94D(5) of the ITAA 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.

Subsection 995-1(1) of the ITAA 1997 defines a limited partnership. Relevantly, it states:

limited partnership means:

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)    .....

Relevantly, section 340(a) of the ITAA 1936 provides that a company is a CFC at a particular time if, at that time, there is a group of 5 or fewer Australian 1% entities the aggregate of whose associate-inclusive control interests in the company is not less than 50%.

Associate-inclusive control interest in a company includes direct control interests held by an entity in the company under section 349 of the ITAA 1936.

Direct control interest is defined in section 350 of the ITAA 1936.

An Australian resident entity will qualify as an 'attributable taxpayer' where its associate-inclusive interest in the CFC is greater than 10% (see section 317 and paragraph 361(1)(a) of the ITAA 1936). The attribution percentage of an attributable taxpayer is the sum of the taxpayer's direct attribution interest and indirect attribution interest held in the CFC (sections 356 and 362 of the ITAA 1936).

Application to your circumstances

You advised that Partnership X is a limited liability partnership of Country A with at least one partner of the Partnership has limited liability. Hence, the definition of 'limited partnership' in subsection 995-1(1) is satisfied.

The condition is paragraph 830-10(1)(a) of the ITAA 1997 is satisfied because Partnership X was formed and registered in Country A.

Partnership X owns commercial and residential properties which are all located in Country A and are rented out. It is submitted that the rental income derived by the Partnership is exempt from trade tax in Country A.

Partnership X disposed of a commercial property and made a capital gain. It is submitted that the capital gain made by the Partnership from the disposal of the property is also exempt from trade tax in Country A.

It is confirmed there were no other income streams for Partnership X which were subject to trade tax in Country A. In this case, the Partnership would not be the taxpayer under the income tax law of Country A.

The condition in paragraph 830-10(1)(b) of the ITAA 1997 would be satisfied because the income tax in Country A would have been imposed on the partners instead and the partners are liable to tax themselves.

The condition in paragraph 830-10(1)(c) of the ITAA 1997 is satisfied because Partnership X has not had any other foreign taxes imposed on it (other than taxes in Country A) as it is only considered a resident of Country A and not a resident of any other foreign country for tax purposes.

The condition in paragraph 830-10(1)(d) of the ITAA 1997 (disregarding subsection 94D(5) of the ITAA 1936) is satisfied because Partnership X has never been an Australian resident for tax purposes.

You and your associates together hold a 50% direct control interest in the Partnership. Consequently, your associate-inclusive control interest in the partnership is also 50%.

Therefore, Partnership X qualifies as a CFC under section 340(a) of the ITAA 1936.

As your associate-inclusive interest in Partnership X is greater than 10%, you will be an 'attributable taxpayer' under section 361 of the ITAA 1936. Your attribution percentage in the Partnership is also greater than 10% being your direct attribution interest in the Partnership (sections 356 and 362 of the ITAA 1936).

The condition in paragraph 830-10(1)(e) of the ITAA 1997 (disregarding subsection 94D(5) of the ITAA 1936) is therefore satisfied because Partnership X is a CFC and you are an attributable taxpayer in relation to the CFC with an attribution percentage greater than nil.

Therefore, as the conditions in section 830-10 are satisfied, Partnership X will be treated as a foreign hybrid limited partnership in an income year where the only income that the Partnership consists of is income on which trade tax in Country A is not payable and you continue to meet the other conditions in section 830-10.

Question 2

ATO Interpretative Decision ATO ID 2010/175 expresses the view that where a tax resident of Australia pays foreign income tax on the whole of a foreign capital gain which is only partly assessable in Australia, only a proportionate share of the foreign income tax paid would count towards the foreign income tax offset under subsection 770-10(1) of the ITAA 1997.

This is described in the ATO ID as an 'apportionment approach' to the allowance of a foreign income tax offset. The apportionment approach would apply to a situation where only 50% of the gain is assessable in Australia because the resident taxpayer is entitled to the 50% CGT discount in Division 115 of the ITAA 1997.

Application to your circumstances

As an Australian resident partner of Partnership X, you include your share of the capital gain (net of 50% CGT discount where applicable) in your income tax return and claim a foreign tax credit to the extent of half of the tax paid in Country A where the 50% CGT discount is applied.

Question 3

Special amendment rules for foreign income tax offsets

Differences between the Australian and foreign tax systems may lead to you paying foreign income tax in a different income year to that in which you include the related income or gains in your income for Australian income tax purposes.

If you paid foreign income tax after the year in which the related income or gains have been included in your income, you can amend your assessment for that year to claim the offset. You can lodge an amended assessment within four years of paying foreign income tax that counts towards your tax offset. This time period applies irrespective of when the income or gains were included in your income for Australian income tax purposes. In this situation, the foreign income tax must be paid after you have lodged your Australian income tax return for the relevant year.

The four-year amendment period also applies where there has been an increase or decrease in the amount of foreign income tax paid that counts towards your tax offset. The special amendment rules also apply to amendments initiated by us, which may have the effect of extending the normal period of review. In these cases, the four-year period starts when the increase in foreign income tax has been paid or when the foreign income tax has been reduced, for example, by way of a refund.

The special amendment rules apply only where you have paid foreign income tax or there has been an increase or decrease in the tax paid that counts towards your tax offset. In all other circumstances, the normal amendment rules apply.

Application to your circumstances

In respect of the rollover relief under the income tax law of Country A, it is submitted that this is available on a partner by partner basis and for the purpose of Australian tax it does not matter if other partners have requested it or not.

If you are eligible for the rollover relief and you choose to receive it, you will not be able to receive any tax offsets in respect of the capital gain in which you receive relief from tax. This is because foreign income tax offsets are only available for tax paid in a foreign authority.

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