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Edited version of private ruling
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Ruling
Subject: Section 94D of the Income Tax Assessment Act 1936.
Issue 1 Question 1
Is the entity a 'corporate limited partnership' within the meaning of section 94D of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
No.
This ruling applies for the following periods:
1 July 2012 to completion
Relevant facts and circumstances
1. The Project Members will form an unincorporated joint venture (the entity).
2. The JV Agreement sets out the terms and conditions on which the project members agree to operate the joint venture.
3. Under the JV Agreement:
(a) The rights of the Project Members with respect to capital, net proceeds and liabilities are shared in the agreed proportions.
(b) The terms do not and will not create a relationship of partnership between the Project Members.
(c) The obligations of each Project Member is several (in the agreed proportions) and shall not be, or construed to be, either joint or joint and several.
(d) Where a third party requires the Project Member's to contract on a joint or joint and several basis, provision is made for cross-indemnity between the Project Members.
4. The entity was formed in Australia.
5. The entity is not, and will not become, registered as a partnership in any State or Territory in Australia.
6. The entity is not a Venture Capital Limited Partnership (VCLP), an Early Stage VCLP (ESVCLP), an Australian venture capital Fund of Funds (AFOF), nor a Venture Capital Management Partnership (VCMP).
7. The entity is formed solely to carry on the business activities of, and derive the income earned by, the entity in relation to the Project.
8. The terms and conditions of the Project will be governed by a Project Deed between the entity and the Other Party.
9. Pursuant to the Project Deed, the entity will construct an asset for, and on behalf of, the Other Party then provide management services in relation to that asset for, and on behalf of, the Other Party.
10. Pursuant to the Project Deed, and in consideration for the construction work and management services, Other Party will pay specified amounts to the entity. These amounts are assessable income in the hands of the entity.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 94D.
Income Tax Assessment Act 1997 subsection 995-1(1).
Reasons for decision
Issue 1
Question 1
Is the entity a 'corporate limited partnership' within the meaning of section 94D of the Income Tax Assessment Act 1936 (ITAA 1936)?
Summary
The entity is not a corporate limited partnership within the meaning of section 94D of the ITAA 1936 because the entity is not a limited partnership within the definition in subsection 995-1(1) of the ITAA 1997.
Reasoning
A corporate limited partnership is a limited partnership that is taxed as if it was a company.
Section 94D of the ITAA 1936 defines a corporate limited partnership. To be a corporate limited partnership, the partnership must first be a limited partnership. Limited partnership is definition in subsection 995-1(1) of the ITAA 1997 to mean:
(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.
The entity is not a VCLP, ESVCLP, AFOF, or a VCMP so paragraph (b) of this definition does not apply. To fall within paragraph (a) of the definition of a limited partnership, two tests must be satisfied:
1. Do the Project Members carry on business as partners or are they in receipt of ordinary or statutory income jointly?
The main business of the entity is the construction of the asset for the Other Party in return for ordinary income. This ordinary income is received jointly and shared pursuant to the terms of the JV Agreement. Accordingly, the Project Members are in receipt of ordinary income jointly.
2. Is the liability of either Project Member limited?
Taxation Determination TD 2008/15 considers the meaning of limited liability in the context of paragraph (a) of the definition of limited partnership in subsection 995-1(1) of the ITAA 1997.
The reference to the liability of at least one of the 'partners' being limited is a reference to a limitation of their liability to third parties for, or to contribute to, the debts, obligations or other liabilities of the 'partnership'. Those debts, obligations or other liabilities will be those arising from the partners carrying on business as partners. The Australian State laws relating to limited partnerships are the only applicable laws under which a person's liability as a 'partner' in a 'partnership' either carrying on business as partners only in Australia or receiving income jointly only in Australia could be limited in the sense required by paragraph (a) of the definition of 'limited partnership in subsection 995-1(1) of the ITAA 1997.
The second limb of the definition (the association of persons in receipt of ordinary or statutory income jointly) is intended to apply to an unincorporated association formed other than in Australia which do not carry on a business in common with a view to profit, where the liability of at least one of the members is limited.
On the facts, the liability of either Project Member is not limited in the sense required for the definition in subsection 995-1(1) of the ITAA 1997 and therefore the entity is not a corporate limited partnership within the meaning of section 94D of the ITAA 1936.