Edited version of your written advice

Authorisation Number: 1012758697399

Ruling

Subject: Reorganisation of overseas Group

Question 1

Is Company A a foreign hybrid Company for the purposes of Division 830 of the Income Tax Assessment Act 1997 (ITAA 1997), and if so, will the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 apply as if Company A is a partnership?

Answer

YES

Question 2

Is Partnership B a partnership as defined in subsection 995-1(1) of the ITAA 1997 prior to its conversion from a Delaware general partnership to a Delaware Limited Liability Company?

Answer

YES

Question 3

Are Company A and Partnership B subsidiary members of the XYZ tax consolidated group (XYZ) as defined in paragraph 703-15(2)(b) of the ITAA 1997 for the purposes of section 701-1 of the ITAA 1997?

Answer

YES

Question 4

Is Company C a foreign hybrid Company for the purposes of Division 830 of the ITAA 1997 from 1 July 20xx

Answer

YES

Question 5

Will the XYZ tax consolidated group include any amount in its assessable income pursuant to subsection 456(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of Company C for the income year ending 30 July 20xx?

Answer

NO

Question 6

Will any of CGT events A1, C2 or D1, as defined in subsection 995-1(1) and Division 104 of the ITAA 1997 occur on conversion of Company C from a Delaware domestic corporation to a Delaware Limited Liability Company.

Answer

NO

Question 7

If the answer to Question 6 is "Yes", will XYZ be entitled to apply rollover under section 124-240 of the ITAA 1997 to capital gains arising as a result of the conversion of Company C from a Delaware domestic corporation to a Delaware Limited Liability Company?

Answer

N/A

Question 8

Will a capital gain under CGT event H2, as defined in Division 104 of the ITAA 1997 be made by the XYZ tax consolidated group on conversion of Company C from a Delaware domestic corporation to a Delaware Limited Liability Company?

Answer

NO

Question 9

Will Partnership B continue to be a subsidiary member, as defined in paragraph 703-15(2)(b) ITAA 1997, and for the purpose of section 701-1 of the ITAA 1997, of the XYZ tax consolidated group following its conversion from a Delaware general partnership to a Delaware Limited Liability Company?

Answer

YES

Question 10

Will a capital gain arise on conversion of Partnership B from a Delaware general partnership to a Delaware Limited Liability Company?

Answer

NO

Question 11

Will Company C become a subsidiary member, as defined in paragraph 703-15(2)(b) of the ITAA 1997, and for the purpose of section 701-1 of the ITAA 1997, of the XYZ tax consolidated group from 1 July 20xx?

Answer

YES

Question 12

Will Subdivision 705-A of the ITAA 1997, as modified by Subdivision 713-E of the ITAA 1997 apply to determine the tax cost of Company C's assets at the time Company C becomes a foreign hybrid Company that is a subsidiary member of the XYZ tax consolidated group?

Answer

YES

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Australian group restructuring its offshore subsidiaries that include foreign hybrid companies and partnerships.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(2),

Income Tax Assessment Act 1997 Subsection 104-25(1),

Income Tax Assessment Act 1997 Subsection 104-35(1),

Income Tax Assessment Act 1997 Section 701-1,

Income Tax Assessment Act 1997 Subsection 703-15(2),

Income Tax Assessment Act 1997 Paragraph 703-15(2)(b),

Income Tax Assessment Act 1997 Subdivision 705-A,

Income Tax Assessment Act 1997 Subdivision 713-E,

Income Tax Assessment Act 1997 Division 830,

Income Tax Assessment Act 1997 Section 830-15,

Income Tax Assessment Act 1997 Subsection 830-15(1),

Income Tax Assessment Act 1997 Subsection 830-15(2),

Income Tax Assessment Act 1997 Section 830-20,

Income Tax Assessment Act 1997 Sub section 995-1(1) and

Income Tax Assessment Act 1936 Subsection 456(1).

Reasons for decision

Question 1

Summary

Company A is a foreign hybrid Company under Division 830 of the ITAA 1997 and the ITAA 1936 and ITAA 1997 will apply as if Company A is a partnership.

Detailed reasoning

Foreign hybrid Company is defined in section 830-15 of the ITAA 1997. A Company will be a foreign hybrid Company in relation to an income year if it satisfies the requirements set out in subsection 830-15(1) of the ITAA 1997

In relation to paragraph 830-15(1)(a) of the ITAA 1997 Company A must also satisfy subsection 830-15(2) of the ITAA 1997 which deals with partnership treatment requirements specific to the overseas country.

Having satisfied all the requirements Company A will be a foreign hybrid Company and pursuant to section 830-20 will be treated as a partnership for the purposes of the ITAA 1936 and the ITAA 1997.

Question 2

Summary

Prior to its conversion to an LLC, Partnership B is a partnership as defined in subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

Section 995-1(1) of the ITAA 1997 defines partnership to mean:

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

(b) a limited partnership.

There are no statutory rules in the income tax law for deciding whether persons are carrying on business as partners. The question of whether a partnership exists is one of fact.

Having regard to the factors outlined in Taxation Ruling TR 94/8 the Commissioner considers that Partnership B should be regarded as a partnership for Australian tax purposes prior to its conversion to an LLC.

Question 3

Summary

Company A and Partnership B are subsidiary members of the XYZ tax consolidated group.

Detailed reasoning

Company A and Partnership B, being partnerships for Australian income tax purposes, satisfy the requirements in columns 2, 3 and 4 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 and are therefore subsidiary members of the XYZ tax consolidated group.

Question 4

Summary

Company C is a foreign hybrid Company under Division 830 of the ITAA 1997 from 1 July 20xx.

Detailed reasoning

Company C is currently a Delaware domestic corporation that will convert prior to 1 July 20xx to a Delaware LLC.

Foreign hybrid Company is defined in section 830-15 of the ITAA 1997. A Company will be a foreign hybrid Company in relation to an income year if it satisfies the requirements set out in section 830-15(1) of the ITAA 1997

In relation to paragraph 830-15(1)(a) of the ITAA 1997 Company C must also satisfy subsection 830-15(2) of the ITAA 1997 which deals with partnership treatment requirements specific to the overseas country.

Having satisfied all the requirements Company C will be a foreign hybrid Company and pursuant to section 830-20 of the ITAA 1997 will be treated as a partnership for the purposes of the ITAA 1936 and the ITAA 1997 from 1 July 20xx.

Company C has no substituted income tax year under section 18 of the ITAA 1936 and the 'statutory accounting period' adopted under section 319 of the ITAA 1936 for Company C does not change this. Furthermore, XYZ's own income tax year ending 31 March also does not affect Company C's income tax year. Accordingly, in testing the requirements of Company C under subsection 830-15(1), the reference to 'income year' at paragraphs (a), (b), and (c) of subsection 830-15(1) has been taken to be the standard tax year being the 12 months ending on 30 June.

Question 5

Summary

The XYZ tax consolidated group will not be required to include amounts in it assessable income pursuant to subsection 456(1) of the ITAA 1936 in respect of Company C for XYZ tax consolidated group's income year ending 31 March 20xx.

Detailed reasoning

On the basis that Company C will not be a CFC with a statutory accounting period ending or deemed to be ending during XYZ's income year ended 31 March 20xx, no CFC attributable income in respect of Company C can be included in XYZ's assessable income for the year ended 31 March 20xx.

Question 6

Summary

Neither of CGT events A1, C2 or D1 as defined in subsection 995-1(1) and Division 104 of the ITAA 1997 will occur on conversion of Company C from a Delaware domestic corporation to a Delaware LLC.

Detailed reasoning

CGT event A1 in subsection 104-10(2) of the ITAA 1997 will not apply on conversion of Company C from a Delaware domestic corporation to a Delaware LLC as there is no change in ownership of an asset from XYZ TCG to another entity as a result of the conversion. Prior to the conversion PARTNERSHIP B (a member of the XYZ TCG) will be the sole shareholder in Company C, and following conversion Partnership B will be the sole holder of membership interests in Company C.

CGT event C2 in subsection 104-25(1) of the ITAA 1997 will not apply as Partnership B's ownership of its shares in Company C does not come to an end via a redemption or cancellation of the shares.

The Commissioner notes that under Section 266(g) of the General Corporation Law upon the conversion of Company C to a LLC, the shares of stock of Company C may be exchanged for or converted into cash, property, rights or securities of or interests in the resulting LLC. In addition all of the rights, privileges and powers of Company C, and all property, real, personal and mixed, and all debts due to Company C, as well as other things and causes of action belonging to Company C, vest in the resulting LLC and become the property of the resulting LLC as they were of Company C.

CGT event D1 in subsection 104-35(1) of the ITAA 1997 will not occur as XYZ TCG will not create a right in another entity by Company C converting to an LLC.

Question 7

Summary

N/A. As the answer to Question 6 is in the negative, Question 7 is moot.

Detailed reasoning

N/A

Question 8

Summary

No capital gain under CGT event H2, as defined in Division 104 of the ITAA 1997 will be made by the XYZ tax consolidated group on conversion of Company C from a Delaware domestic corporation to a Delaware Limited Liability Company.

Detailed reasoning

Although CGT event H2 will happen, XYZ will receive no capital proceeds as a result of the conversion of Company C to a LLC and the market value substitution rule in section 116-30 cannot apply in relation to CGT event H2 XYZ will not make a capital gain on the conversion of Company C to a LLC.

Question 9

Summary

Partnership B will continue to be a subsidiary member of the XYZ tax consolidated group following its conversion to a Delaware LLC.

Detailed reasoning

Prior to its conversion Partnership B as a partnership entity is a subsidiary member of the XYZ tax consolidated group as confirmed in question 3 of this ruling.

Upon conversion to a Delaware Limited Liability Company Partnership B as a deemed partnership entity under Division 830 of the ITAA 1997 will continue to meet the requirements in columns 2, 3 and 4 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 and on that basis will continue to be a subsidiary member of the XYZ tax consolidated group.

Question 10

Summary

A capital gain will not arise to XYZ TCG as a result of the conversion of Partnership B to a Delaware LLC as the conversion is disregarded under the single entity rule.

Detailed reasoning

Partnership B will be a member of the XYZ tax consolidated group prior to its conversion and as Partnership B will immediately remain a member of the XYZ tax consolidated group following its conversion from a Delaware general partnership to a Delaware LLC, the conversion will be disregarded as an intragroup transaction under the single entity rule in section 701-1 of the ITAA 1997.

Question 11

Summary

Company C will become a subsidiary member, as defined in paragraph 703-15(2)(b) of the ITAA 1997, for the purposes of section 701-1 of the ITAA 1997, of the XYZ tax consolidated group from 1 July 20xx.

Detailed reasoning

As outlined at question 4 of this ruling, following its conversion to an LLC, Company C will be a foreign hybrid Company treated as a partnership under section 830-20 of the ITAA 1997 from 1 July 20xx and as such will satisfy the requirements in columns 2, 3 and 4 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 and on that basis will be a subsidiary member of the XYZ tax consolidated group from 1 July 20xx.

Question 12

Summary

Subdivision 705-A of the ITAA 1997, as modified by subdivision 713-E of the ITAA 1997 will apply to determine the tax cost of Company C's assets at the time Company C becomes a foreign hybrid Company that is a subsidiary member of the XYZ TCG.

Detailed reasoning

Subdivision 705-A of the ITAA 1997 will have effect when Company C becomes a subsidiary member of the XYZ TCG. Subdivision 713-E of the ITAA 1997 contains special tax cost setting rules that apply where either a partner or a partnership joins a tax consolidated group. Company C will join the XYZ TCG as a deemed partnership under Division 830 of the ITAA 1997 and thus subdivision 713-E will apply.

Section 713-240 of the ITAA 1997 sets out the steps to determine the tax cost setting amount for each asset of the partnership (Company C). Under this section the tax cost of the XYZ TCG's partnership cost setting interest (PCSI) in Company C is calculated based on the tax cost base of XYZ TCG's interest in the assets of Company C or its interest in Company C (held through Partnership B being the sole "partner" in Company C).