Edited version of your private ruling

Authorisation Number: 1012582983519

Ruling

Subject: Distributions from limited partnerships

Question 1

a) Are the cash distributions paid from the limited partnership to the taxpayer deemed to be dividends or dividends within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) by section 94L of the ITAA 1936?

b) If the cash distributions are deemed to be dividends by section 94L of the ITAA 1936, are those 'deemed dividends' included in the taxpayer's assessable income under subsection 44(1) of the ITAA 1936?

Answers

a) Yes

b) Yes

Question 2

a) Is an amount arising from an allocation to the taxpayer's capital account by the limited partnership deemed to be a dividend paid out of profits of the partnership to the taxpayer by subsection 94M(1) of the ITAA 1936?

b) If the allocation deemed to be a dividend by subsection 94M(1) of the ITAA 1936, is that deemed dividend included in the taxpayer's assessable income under subsection 44(1) of the ITAA 1936?

Answers

a) No

b) Not applicable

This ruling applies for the following period:

1 July 2012 to 30 June 2013

Relevant facts and circumstances

1. A resident taxpayer invested into a corporate limited partnership (CLP) that is registered in a foreign country, where the resident taxpayer and other CLP partners are not subject to income tax.

2. Pursuant to the limited partnership agreement (LPA), the management, control, operation and determination of the policy of the partnership is vested in the general partner. Limited partners do not take part in the conduct of the business of the CLP and their liability is limited to their capital contributions.

3. A capital account for each partner is established on the books and records of the CLP.

4. The LPA provides that cash distributions shall be distributed to the partners at such times as determined by the general partner in its sole discretion.

5. The partner's share of income or gains in the CLP for a period is based on the partner's initial capital contribution.

6. During the income year ended 30 June 2013, the taxpayer received two cash distributions from the CLP.

7. In addition, the CLP also recorded in the taxpayer's capital account an amount being the taxpayer's share of the CLP's income and gains for the period ending 31 December 2012. However, the taxpayer has no legal right to receive this amount on demand.

8. The taxpayer's financial reports are prepared in accordance with the Australian Accounting Standards (AAS). AAS requires that any change in fair value of ABC's assets since the beginning of the financial year is to be included in the operating statement. Specifically, any movements in the ending capital value from quarter to quarter is recognised as an unrealised gain or loss in the operating statement.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Subparagraph 44(1)(a)(i)

Income Tax Assessment Act 1936 Division 5A of Part III

Income Tax Assessment Act 1936 Section 94L

Income Tax Assessment Act 1936 Section 94M

Income Tax Assessment Act 1936 Subsection 94M(1)

Reasons for decision

Question 1 (a)

Summary

The cash distributions from the CLP are deemed dividends under section 94L of the ITAA 1936.

Detailed reasoning

Section 94L of the ITAA 1936 provides that

…A reference in the income tax law to a dividend or to a dividend within the meaning of section 6 of the ITAA 1936:

(a) includes a reference to a distribution made by the partnership, whether in money or in other property, to a partner in the partnership; and

(b) does not include a reference to a distribution to the extent to which the distribution is attributable to profits or gains arising during a year of income in relation to which the partnership was not a corporate limited partnership.

In the 2013 income year, the CLP made two distributions. These were distributions out of the profits of the CLP. Section 94L of the ITAA 1936 applies to deem these distributions to be a dividend paid by the Fund in the 2012-2013 year.

Question 1 (b)

Summary

The distributions are included in the taxpayer's assessable income under subsection 44(1) of the ITAA 1936.

(a) if the shareholder is a resident:

(i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

(ii) all non-share dividends paid to the shareholder by the company; and

…..

The taxpayer is a resident for income tax purposes. The distributions are deemed to be dividends (as discussed above) and the distributions are paid out of profits of the CLP.

Accordingly, the distributions are assessable income and are included in the taxpayer's assessable income under subparagraph 44(1)(a)(i) of the ITAA 1936.

Question 2 (a)

Summary

Subsection 94M(1) of the ITAA 1936 does not deem the allocation to be a dividend.

Detailed reasoning

Subsection 94M(1) of the ITAA 1936 provides that if a partnership pays or credits an amount to a partner from the profits or anticipated profits, or otherwise in anticipation of the profits, the amount paid or credited is taken to be a dividend paid by the partnership to the partner out of profits derived by the partnership.

In the present case, the amounts credited to the taxpayer occurred in the account of the CLP. It was not paid as a matter of fact or at law. There being no corresponding money or other assets passing from the CLP to the taxpayer, no agreed set-off or agreement to loan the credited amounts back to the CLP, nor anything else capable of giving rise to a payment at law.

The allocation in the capital account did not record the creation of a new interest of the taxpayer in the CLP or its assets. No new rights passed to the taxpayer as a result, nor did it record the appropriation of assets of the CLP for the benefit of the taxpayer.

As such, it is not a crediting within the meaning of subsection 94M(1) of the ITAA 1936.

As there is no payment or credit, subsection 94M(1) does not apply to deem the capital account allocation to be a dividend.

Question 2 (b)

Summary

Not applicable.

Detailed reasoning

It is not necessary to answer this question because, as stated in response to question 2(a), the relevant amounts were not credited within the meaning of subsection 94M(1).