Edited version of your written advice

Authorisation Number: 1051374499625

Date of advice: 17 May 2018

Ruling

Subject: Corporate Limited Partnership

Question 1

Is the X Limited Partnership (XLP) a limited partnership in terms of the definition in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the answer to question 1 is affirmative, is the XLP as a limited partnership treated as a corporate limited partnership within the meaning of section 94D of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

As this question is predicated upon an affirmative answer to Question 1 and that question has been answered in the negative, this question has not been answered.

Question 3

If the answer to question 2 is affirmative, is the XLP to be taxed as a company and to receive franked dividends in respect to an equity interest without further tax being paid on those franked dividends?

Answer

As this question is predicated upon an affirmative answer to Question 2 and that question has not been answered in view of the negative answer given to Question 1, this question has not been answered.

This ruling applies for the following period:

1 July 2013 to 30 June 2014

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

1. The XLP was formed under a limited partnership agreement by:

(a) P;

(b) L;

(c) R as trustee for the M Trust; and

(d) R as trustee for the N Trust.

A copy of the XLP agreement has been provided.

2. Under the XLP agreement:

(a) P is the General Partner with a x% interest in the partnership;

(b) L, R as trustee for the M Trust and R as trustee for the N Trust are limited partners, each with a x% interest in the partnership respectively; and

(c) XLP is to carry on the business of investment, or as partners may from time to time resolve.

3. The XLP agreement sets out the rights and obligations of the parties, including:

(a) contributions to the capital of the partnership;

(b) the liabilities of the partners;

(c) the distribution of a profit and a loss;

(d) maintaining the books and accounts of the partnership; and

(e) that the management and control of the partnership rests on the General Partner.

4. XLP was registered as a limited liability partnership under a State law.

A copy of the registration document has been provided.

5. XLP has not received any distributions to date, and has not acquired any investment.

In your email you state:

1. The nature of the business carried on

The business to be carried on is investment activities.

2. The dates on which the business was carried on

The business activities have not been commenced.

3. The nature of the activities undertaken in carrying on the business

The nature of the activities will be investment activities.

4. The dates on which the activities were undertaken in carrying on the business

The activities will be undertaken after a favourable ruling is received by the ATO.

5. The date the application was made for registration as a limited partnership

The client has not retained a record of this.

Further you state:

In our application, we accept that there is no business activity, …

Relevant legislative provisions

Income Tax Assessment Act 1936

Division 5A, Subdivision C

Section 6

Subsection 94D(1)

Section 94J

Income Tax Assessment Act 1997

Division 355

Subsection 995-1(1)

Reasons for decision

Question 1

Summary

The XLP is not a limited partnership in terms of the definition in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

The XLP was formed under a limited partnership agreement.

On an unspecified date an application was lodged for registration of the XLP as a limited partnership under a State law.

A copy of the registration document as issued under the State law to the XLP has been provided.

It is therefore accepted that the XLP exists as a limited partnership for the purposes of a State law.

However, it is necessary to determine whether the XLP satisfies the definition of a limited partnership in terms of the Income Tax Assessment Act 1997 (ITAA 1997).

The definition of a limited partnership appears in subsection 995-1(1) of the ITAA 1997 which relevantly reads as follows:

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 the partners is limited;

(b) …

It is accepted that the XLP is an association of persons and that it is not a company.

However, the balance of the definition needs to be considered.

First, the XLP needs to be carrying on a business in the income year ended 30 June 2014.

This can be ascertained from an examination of the activities of the XLP in that year.

The examination commences from when it was established by execution of the limited partnership agreement.

Subsequently an application for registration as a limited partnership was lodged and in due course the registration document was issued.

The term “carrying on business” is not defined in the ITAA 1997 and therefore in determining whether the XLP is carrying on a business it is necessary to consider the decisions of the courts in which they have considered the meaning of this term and associated relevant terms.

The examination will consider the concept of what is a business.

In FC of T v Murry [1998] HCA 42; 98 ATC 4585; (Murry) Gaudron, McHugh, Gummow and Hayne JJ, at 98 ATC 4596 said:

54. In his evidence, the taxpayer's husband, who had considerable experience in the industry, said ``that the shares and the licence are regarded as the business''. However, this statement is not decisive of the question whether they disposed of a business to Mr and Mrs Wilkins. Indeed, as a matter of law, Mr Murry's conclusion is incorrect. A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions.^[79] (emphasis added)

Next in relation to the expression “carry on business” (being an undefined term), Gibbs J stated in Smith v Capewell 142 CLR 509; 26 ALR 507 (Smith v Capewell)

… The expression "carry on business", in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts, and not simply the effecting of one solitary transaction.

The existence of a business is a matter considered in Spriggs v FC ot T [2009] HCA 22; 2009 ATC 20-109; (Spriggs) where the High Court said:

59. The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative^[37]. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner^[38].

In addition there are ATO pronouncements in ATO public rulings.

In Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) your attention is drawn to paragraphs 176 to 179 inclusive.

Applying the above law to the facts of this case the decision is as set out below.

On the facts of this case, in the year of income ended 30 June 2014 it cannot be said that the activities of the XLP represents “ a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions” as required by the decision in Murry above. Therefore the activities of the XLP were not a business in that year.

Similarly, in the year of income ended 30 June 2014, the solitary act by the XLP of applying for registration as a limited partnership under a State law does not come within the interpretation of the expression “carry on business” as requiring “a course of conduct involving the performance of a succession of acts: see Smith v Capewell, above. Therefore, the XLP did not carry on business in that year.

Further, consider the decision in Spriggs case above. In the year of income ended 30 June 2014 the solitary act of the XLP of applying for registration as a limited partnership means that the relevant factors identified in the decision including “the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised” are not met. Note that each of these factors is expressed in the plural implying multiple and repetitive activities such that the single activity of the XLP does not fall within this description. Therefore in terms of the decision in Spriggs case the sole activity of the XLP does not evidence the existence of a business in the income year ended 30 June 2014.

Turning to the ATO publications regarding carrying on a business, namely MT 2006/1 and Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) the indicators of a business as listed in paragraph 178 of MT 2006/1 will be examined. There are 11 indicators listed of which 10 are considered relevant. Note that given the nature of the proposed business to be carried on by the XLP, namely “the business of investment” the indicator “commercial sales of product” is not relevant.

Thus there are 10 indicators to be considered in determining whether the XLP is carrying on a business in the income year ended 30 June 2014. In the circumstances where the only activity of the XLP was to lodge an application for registration as a limited partnership with the State government it cannot be said that the following indicators of a business were present with respect to the XLP:

● a significant commercial activity

● the recurrent or regular nature of the activity

● the activity is carried on in a similar manner to that of businesses in the same or similar trade

● activity is systematic, organised and carried on in a businesslike manner …

● the activities are of a reasonable size and scale

Therefore the XLP was not carrying on a business in the income year ended 30 June 2014

The conclusion drawn from this examination of the court decisions and the ATO publications is that the XLP does not meet the definition of a limited partnership in subsection 995-1(1) of the ITAA 1997 in that it is not an association of persons (other than a company) carrying on business as partners.

However the legislation contains an alternative definition which relevantly reads

limited partnership means:

(a) an association of persons (other than a company) … in receipt of *ordinary income or statutory income jointly, …

With respect to the receipt of ordinary income or statutory income as those terms are defined in the legislation the XLP did not receive any ordinary income or statutory income in the income year ended 30 June 2014 and therefore does not meet this definition of a limited partnership.

The third limb of the definition relevantly reads:

limited partnership means:

(a) an association of persons (other than a company) … where the liability of at least one of the partners is limited;

This part of the definition is satisfied by the XLP as evidenced by the terms of the XLP limited partnership agreement and the registration document as issued by the State government.

However, as the XLP does not meet the first or second limb of the legislative definition of a limited partnership it is not a limited partnership in terms of subsection 995-1(1) of the ITAA 1997.

Question 2

Summary

Not answered.

Detailed reasoning

As this question is predicated upon an affirmative answer to Question 1 and that question has been answered in the negative this question has not been answered.

Question 3

Summary

Not answered.

Detailed reasoning

As this question is predicated upon an affirmative answer to Question 2 and that question has been answered in the negative this question has not been answered.