Edited version of private advice

Authorisation Number: 1052156709383

Date of advice: 15 August 2023

Ruling

Subject: Tax implications from foreign structure

Question

For Australian tax purposes, do you hold an interest in a partnership?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commences on:

20 July 2020

Relevant facts and circumstances

You received business assets in Country A, as well as other assets including real property in Country A, B, C and D.

You provided details of the total assets.

You hold the assets through a foreign structure as a community of co-heirs which does not have a separate legal identity and any contract entered into is done in the names of all co-heirs.

Each co-heir has legal ownership and responsibility for all assets to the extent of their share in the foreign structure and unlimited liability.

Until such time as the net assets are known, no co-heir can demand any amount of the net assets, other than to cover their tax liabilities for amounts assigned to them for tax purposes that may not actually be paid.

Every co-heir may dispose of their share. The contract by which a co-heir disposes of their share is to be recorded by a notary. If the potential buyer is an outsider, that is someone who is not already a co-heir, the other co-heirs have a statutory pre-emption right.

The co-heirs are jointly entitled to the management of the foreign structure. Every co-heir is obliged to the others to cooperate in measures that are necessary for due management; the measures necessary for preservation of their share may be undertaken by each co-heir without the cooperation of the others.

You each as part owners may control your own interests and may control joints objects in its entirety only jointly.

You along with other co-heirs are liable for the joint obligations of the foreign structure as joint and several debtors.

The total holdings are to be divided between a number of individuals.

Particular details were provided in relation to profits from business and company holdings.

Civil law partnerships in Country A were entered into to manage the real estate of which you are members

You received amounts over a number of income years from capital assets, sale of commercial property, repayments of loans and partnership distributions. the following amounts:

Capital assets the foreign structure comprise amounts from:

•         Cash in the bank

•         Maturity/redemptions of bonds held

Amounts assigned to youwithin the foreign structure, but not paid, during a previous year include:

•         an amount of net rental income

•         an amount of net business loss

Documentation shows you have been the legal owners of the assets, and they have not been legally held anyone else other than the co-heirs.

There was no income tax liability for the relevant year in Country A.

You are Australian tax residents.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1936 Subsection 6(1)

Reasons for decision

Whether interests are held in a partnership, it is relevant to consider the arrangement between the individuals and obligations with the foreign structure with respect to assets and income. It is also relevant to consider whether the arrangement and obligations are more akin to another entity such as a trust, to determine whether you as individuals hold an interest in a partnership, despite the arrangement arising because of the passing of the deceased.

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that 'partnership' means:

(a)  an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary or statutory income jointly; or

(b)  a limited partnership.

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines a partnership as having the same meaning as given in subsection 995-1(1) of the ITAA 1997.

Under the extended income tax definition of partnership, it is not necessary that persons carry on a business for their association to be treated as a partnership for income tax purposes. They need only to be in receipt of income jointly. For example, co-owners of rental property come within the definition of 'partnership' for income tax purposes, not because they are necessarily partners at general law, but because they are in receipt of income jointly.

Whether the partnership is 'carrying on a business' or 'in receipt of ordinary or statutory income jointly', impacts on the tax outcomes of the transactions that may be assessable or deductible. For example, a rental property partnership that carries on a business of renting properties are likely to be assessable on accruals basis, while the partners who are simply in receipt of rental income jointly are likely to be assessed on their rents on a receipt basis and deductions limited to the first limb of section 8-1 of ITAA 1997.

For tax law partnerships the net income or loss has to be split in accordance with their interests in the relevant property or venture. They cannot agree a different split. For example, see FCT v McDonald (1987) 18 ATR 957 and Cripps and FCT (1999) 43 ATR 1202. Taxation Ruling TR 93/32 deals with the division of net income or loss between the co-owners of a rental property.

Trusts

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration.

The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.

Beneficiaries (except some minors and non-residents) include their share of the trust's net income as income in their own tax returns. There are special rules for some types of trust including family trusts, deceased estates and superannuation funds.

The term 'fixed trust' is defined in both the ITAA 1997 and the ITAA 1936.

The ITAA 1936 states at section 272-65 of Schedule 2F that "A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust.

Similarly, subsection 995-1(1) of the ITAA 1997 provides that "a trust is a fixed trust if entities have *fixed entitlements to all of the income and capital of the trust.

Subsection 995-1(1) of the ITAA 1997 also provides the definition of a non-fixed trust as a trust that is not a fixed trust.

Application to your situation

You have explained and provided the relevant law of Country A governing the operation of the foreign structure. In considering whether you are considered partners in a partnership for Australian tax law purposes we considered whether the relationship was more akin to a trust or partnership.

The foreign structure which you hold interests in operates as a community of co-heirs does not have a separate legal identity. Any contract entered into is done in the names of all co-heirs. This aligns with the operation of partners in a partnership in Australia, as opposed to a trust relationship where a trustee enters into contracts and holds assets in trust for the beneficiaries.

You each have legal ownership of assets and interests, as well as responsibility for all assets to the extent of their share in the foreign structure. You also have unlimited liability which can be distinguished from a trust relationship.

Every co-heir may dispose of their share. The contract by which a co-heir disposes of their share is to be recorded by a notary. If the potential buyer is an outsider, i.e. someone who is not already a co-heir, the other co-heirs have a statutory pre-emption right.

The co-heirs are jointly entitled to the management of the foreign structure. Every co-heir is obliged to the others to cooperate in measures that are necessary for due management; the measures necessary for preservation may be undertaken by each co-heir without the cooperation of the others.

You each as part owners may control your own interests and may control joints objects in its entirety only jointly.

You along with other co-heirs are liable for the joint obligations of the foreign structure as joint and several debtors.

In your case, you hold an interest in a partnership for tax purposes, where each partner is assessable on their share of the net income of the partnership or may be able to claim a deduction for their share of the net loss of the partnership where certain loss distribution rules are satisfied.

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