Edited version of private advice

Authorisation Number: 1051637741944

Date of advice: 25 February 2020

Ruling

Subject: Corporate limited partnership

Question 1

Will the taxpayer cease to be corporate limited partnership when it ceases to carry on a business?

Answer

Yes

Question 2

Will the taxpayer be a corporate limited partnership for the full income year in which it ceases to be a corporate limited partnership?

Answer

Yes.

Question 3

Will Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the loans made by the taxpayer whilst it is a corporate limited partnership?

Answer

No

Question 4

Will the taxpayer make a capital gain or loss as a result of it ceasing to be corporate limited partnership?

Answer

No.

Question 5

Will the taxpayer be liable for corporate tax in respect of its retained profits to the extent they represent taxable income of the corporate limited partnership, pursuant to section 94D of the ITAA 1936 and section 94J of the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on:

The scheme has already commenced.

Relevant facts and circumstances

The taxpayer is an Australian tax resident limited partnership.

The taxpayer is an unincorporated limited partnership registered under the Partnership Act 1892 (NSW).

The taxpayer has the following partners:

·         the Company as the general partner;

·         Mr X, now deceased, as a limited partner. Mr X held partnership shares which are now held by his estate; and

·         Ms X as a limited partner. Ms X holds a number of partnership shares.

The Company is an Australian tax resident company. At all relevant times, the Company has had $2 of paid up capital, comprised of 2 ordinary shares.

Mr X and Ms X hold one ordinary share each in the Company.

Mr X passed away. The executors of Mr X's estate consist of three executors - two independent executors and Ms X.

The taxpayer holds all the issued shares in X Co. The taxpayer carries on a business of providing management services to X Co, pursuant to a management agreement between the taxpayer and X Co. The taxpayer employs a number of staff to provide the management services to X Co.

As at 30 June 2018, the taxpayer had retained earnings.

The taxpayer had the following unsecured loans receivable at 30 June 2018:

·         Loan to X Family Trust. This loan was made prior to 1 July 2009 and has had no movement since that date; and

·         Loan to X Co. This loan was made prior to 1 July 2009. This loan arises from, and is made in respect of, the management fee charged by the taxpayer to X Co which remains unpaid. The balance of this loan at 30 June 2018 was $, which relates primarily to the unpaid management fee charged by the taxpayer to X Co.

The business of X Co is in the process of being sold, and the agreement for the provision of management services by the taxpayer will be terminated, as will the employment of the taxpayer's remaining employees. No amount will be received by the taxpayer in respect of the cessation of the management business.

As a consequence, the taxpayer will cease carrying on a business upon the sale of X Co's business. However, until this point in time, the taxpayer will continue to carry on the business of providing management services to X Co.

The taxpayer will distribute its retained earnings to its partners prior to ceasing to be a corporate limited partnership.

The sale of X Co's business is part of the winding up of the taxpayer, and is part of the wish of the executors of the estate of Mr X to distribute all funds through the estate to the beneficiaries of the estate. This process is expected to take a few months as it also necessitates the sale of properties in other entities and the wind up of those entities.

As at the date of this ruling:

·         the taxpayer is and has always been a 'limited partnership' under the terms of section 995-1 of the ITAA 1997, and as referred to in section 94D of the ITAA 1936.

Consistent with the partnership agreement:

-   Mr X and Ms X are only liable for the debts and liabilities of the taxpayer limited to the capital that each has contributed.

-   As Mr X has contributed 90% of the capital in the taxpayer, he (now his estate) is liable for 90% of the debts and liabilities of the taxpayer.

-   Ms X is liable for the remaining 10% of the debts and liabilities of the taxpayer.

·         the taxpayer is and has always been a 'corporate limited partnership' under the terms of section 94D of the ITAA 1936.

At all relevant times, the taxpayer has not been, and will not be, a venture capital limited partnership (VCLP), an early stage venture capital limited partnership (ESVCLP), an Australian venture capital fund of funds (AFOF) or a venture capital management partnership (VCMP).

Following the cessation of its business, the legal and beneficial interest in the assets of the taxpayer continue to be held in the following proportions:

·         Mr X: 90% of the assets;

·         Ms X: 10% of the assets; and

·         The Company - no legal or beneficial interest in the assets.

Relevant legislative provisions

Income Tax Assessment Act 1936 (ITAA 1936), subsection 6(1)

ITAA 1936, Section 94B

ITAA 1936, subsection 94D(1)

ITAA 1936, Section 94H

ITAA 1936, Sections 94J

ITAA 1936, Section 94K

ITAA 1936, Section 94L

ITAA 1936, Section 94M

ITAA 1936, Division 7A

Income Tax Assessment Act 1997 (ITAA 1997), section 9-5

ITAA 1997, subsection 4-10(2)

ITAA 1997, subsection 102-5(1)

ITAA 1997, section 104-10

ITAA 1997, subsection 106-5(1)

ITAA 1997, section 116-25

ITAA 1997, subsection 995-1(1)

Partnership Act 1892 (NSW), section 50A

Partnership Act 1892, section 56

Partnership Act 1892, section 58

Partnership Act 1892, section 60

Partnership Act 1892, section 72

Reasons for decision

Question 1

The taxpayer will cease to be a corporate limited partnership when it ceases to carry on a business.

Detailed reasoning

Both subsection 995-1(1) of the ITAA 1997 and subsection 6(1) of the ITAA 1936 provide that 'corporate limited partnership' has the meaning given by section 94D of the ITAA 1936.

Under subsection 94D(1) of the ITAA 1936, only a limited partnership can be a corporate limited partnership. Subsection 6(1) of the ITAA 1936 states that 'limited partnership' has the same meaning as in the ITAA 1997. Subsection 995-1(1) of the ITAA 1997 relevantly defines 'limited partnership' 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 those persons is limited ...

In Taxation Determination TD 2008/15, the Commissioner concludes that an unincorporated association of persons acting only in Australia who do not carry on a business in common with a view to profit cannot be a corporate limited partnership within the meaning of section 94D of the ITAA 1936. Paragraphs 2 to 4 of TD 2008/15 state as follows:

2. An association of persons cannot be a corporate limited partnership unless it is a limited partnership under paragraph (a) of the definition of 'limited partnership' in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

3. One of the requirements of that paragraph is that the liability of at least one of the associated persons must be limited. For unincorporated associations acting only in Australia - that is, associations that carry on business as partners only in Australia, or that are in receipt of income jointly only in Australia - liability relating to that business or that joint income must be limited in Australia.

4. That can only happen by operation of the Australian State laws relating to limited partnerships. One of the requirements to be a limited partnership under such Australian State laws is that the association is a partnership under the general law which, in itself, requires that the association be carrying on a business in common with a view to profit.

It follows that an unincorporated association of persons acting only in Australia which is in receipt of ordinary income or statutory income jointly, but does not carry on a business, cannot be a limited partnership under subsection 995-1(1) of the ITAA 1997.

The law governing limited partnerships in New South Wales is contained in the Partnership Act 1892 (NSW) (Partnership Act). Subsection 60(1) of the Partnership Act limits the liability of a limited partner to contribute to the liabilities of a limited partnership, and provides as follows:

The liability of a limited partner to contribute to the liabilities of the limited partnership is (subject to this Part) not to exceed the amount shown in relation to the limited partner in the Register as the extent to which the limited partner is liable to contribute.

The term 'limited partnership' is defined in section 49 of the Partnership Act (emphasis in original):

limited partnership means a limited partnership formed in accordance with section 50A(1).

Subsection 50A(1) states that (emphasis added):

A limited partnership is formed by and on registration of the partnership under this Part as a limited partnership.

The existence of a limited partnership is therefore closely linked with its registration as a limited partnership. Subsection 50A(1) makes clear that the existence of a partnership is a precondition to the registration and formation of a limited partnership. This is consistent with other provisions of the Act: for example, paragraph 54(2)(a) provides that a statement lodged with the Registrar for the purpose of registering a limited partnership or incorporated limited partnership must (emphasis added):

contain a statement of whether the partnership is to be registered as a limited partnership or an incorporated limited partnership.

Subsection 1(1) defines 'partnership' as follows:

Partnership is the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership.

Where a limited partnership ceases to carry on a business, it will no longer constitute a partnership within the meaning of subsection 1(1). It follows that it is no longer eligible, and will cease to be, a limited partnership. This is buttressed by the below provisions of the Partnership Act.

Subsection 72(1) of the Partnership Act relevantly addresses the situation where a limited partnership ceases to carry on business. It provides as follows:

If a limited partnership:

(a)  is dissolved, or

(b)  ceases to carry on business,

the general partners who were registered immediately before the dissolution or cessation must, as soon as practicable, lodge with the Registrar a notice of the dissolution or cessation, specifying the date on which it took effect.

Subsection 72(3) provides that the Registrar is required to record in the Register the fact of the dissolution or cessation and the date on which it took effect.

When the taxpayer ceases to carry on a business, the Company, as the general partner, will be required to lodge the above notice. It follows that the taxpayer's registration as a limited partnership will cease, with the result that it is no longer a limited partnership under the Partnership Act.

The intention that a limited partnership which ceases to possess all the requisite characteristics to be so registered will no longer be a limited partnership is also evident from section 56 of the Partnership Act. Subsection 56(1) requires that, if any change occurs in relation to the registered particulars of a limited partnership, a statement setting out the changed particulars must be lodged with the Registrar within 7 days after the change occurred. Subsection 56(4) explicitly contemplates a situation where the change is not to be recorded in the Register because the change results in the limited partnership no longer being eligible to be registered as a limited partnership:

If the statement is duly lodged, the Registrar is to record the change in the Register, unless, in the case of a limited partnership, as a result of a change in relation to the registered particulars, the partnership is not eligible to be registered as a limited partnership.

In any event, the fact that the taxpayer is registered as a limited partnership is not determinative of the question of whether it continues to constitute a limited partnership under the Partnership Act. Under subsection 58(1), the Registrar must, at the time of registering a limited partnership or recording a change in its registered particulars, issue a certificate 'as to its formation and its registered particulars'. Subsection 58(4) sets out the matters to which the certificate provides conclusive evidence:

A certificate under this section:

a)    as to the formation of a limited partnership or incorporated limited partnership is conclusive evidence that the partnership was formed on the date of registration referred to in the certificate, and

b)    as to the registered particulars as at a specified time of the partnership, is (unless the contrary is established) conclusive evidence that the partnership existed at that time, and

c)    as to the general partners and limited partners in a partnership as at a specified time is (unless the contrary is established) conclusive evidence of the general partners and limited partners as at that time, and

d)    as to any other particular of a partnership recorded in the Register as at a specified time, is (unless the contrary is established) conclusive evidence of that particular as at that time.

As there is no dispute regarding the formation of the taxpayer as a limited partnership, paragraph (a) is immaterial for present purposes. Paragraphs (b) to (d) provide conclusive evidence only 'as at a specified time' and, in any event, expressly provide for the contrary position to be established. Thus, notwithstanding the taxpayer's certificate of registration, none of the above paragraphs operate to treat the taxpayer as a limited partnership when it ceases to satisfy the prerequisites to registration as a limited partnership.

Accordingly, when the taxpayer ceases to carry on a business, it will no longer be a limited partnership under the Partnership Act. Consequently, as subsection 60(1) of the Partnership Actcannot have application, it will not be a limited partnership within the meaning of subsection 995-1(1) of the ITAA 1997. It follows that it cannot be a corporate limited partnership under section 94D of the ITAA 1936.

For completeness, the above conclusion is consistent with the Full Federal Court decision in D Marks Partnership by its General Partner Quintaste Pty Ltd v Federal Commissioner of Taxation.^[1] In that case, Pagone J (with whom Griffiths J relevantly agreed^[2]) affirmed the Tribunal's conclusion that two entities which did not carry on business in common with a view to profit (and therefore was not a partnership under the applicable Queensland Act) was not a limited partnership within the meaning of subsection 995-1(1) of the ITAA 1997. This was so notwithstanding the fact that the purported limited partnership was registered under the applicable Queensland Act and a certificate of formation and composition was issued.^[3]

Question 2

The taxpayer will be a corporate limited partnership for the full income year in which it ceases to be a corporate limited partnership.

Detailed reasoning

Subsection 94D(1) of the ITAA 1936, which forms part of Division 5A, provides as follows:

(1)  For the purposes of this Division, a limited partnership is a corporate limited partnership in relation to a year of income of the partnership if:

(a)  the year of income is the 1995-96 year of income or a later year of income; or

(b)  the partnership was formed on or after 19 August 1992; or

(c)  both:

(i)            the partnership was formed before 19 August 1992; and

(ii)           the partnership does not pass the continuity of business test set out in section 94E; or

(d)  all of the following apply:

(i)    the partnership was formed before 19 August 1992;

(j)    a change in the composition of the partnership occurs during the period:

(A)  beginning on 19 August 1992; and

(B)  ending at the end of the year of income;

(iii)          the partners do not elect, in accordance with section 94F, that the partnership is not to be treated as a corporate limited partnership in relation to the year of income.

Section 94B of the ITAA 1936 defines the term 'year of income' for the purposes of Division 5A as follows:

year of income means (except in paragraph 94L(b)) the year of income in which 19 August 1992 occurred or a later year of income.

The meaning of the references to 'year of income' in this definition is given by subsection 6(1) of the ITAA 1936, which provides that:

year of income means an income year as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the ITAA 1997 defines 'income year' as follows:

income year: the basic meaning is given by subsections 4-10(2) and 9-5(2). Some provisions refer to a particular income year. (They may describe it in different ways: for example, as the income year ending on 30 June 1998, or the 1997-98 income year.) For an entity that adopts an accounting period in place of the particular income year, the reference includes:

(a)  the adopted accounting period; or

(b)  if the adopted accounting period ends under section 18A of the Income Tax Assessment Act 1936:

(i)            in relation to the commencing of the income year-the adopted accounting period (as ending under that section); or

(ii)           in relation to the ending of the income year-the accounting period ending under that section on the day on which the adopted accounting period would (but for that section) have ended.

Subsection 9-5(2) of the ITAA 1997 relates to specific kinds of entities, and is immaterial for present purposes. Subsection 4-10(2) of the ITAA 1997 states that:

Your income tax is worked out by reference to your taxable income for the income year. The income year is the same as the *financial year, except in these cases:

(a)  for a company, the income year is the previous financial year;

(b)  if you have an accounting period that is not the same as the financial year, each such accounting period or, for a company, each previous accounting period is an income year.

Note 1: The Commissioner can allow you to adopt an accounting period ending on a day other than 30 June. See section 18 of the Income Tax Assessment Act 1936.

Note 2: An accounting period ends, and a new accounting period starts, when a partnership becomes, or ceases to be, a VCLP, an ESVCLP, an AFOF or a VCMP. See section 18A of the Income Tax Assessment Act 1936.

Subsection 995-1(1) of the ITAA 1997 defines 'financial year' as 'a period of 12 months beginning on 1 July.' Section 18 of the ITAA 1936, as referenced in note 1 above, provides that '[a]ny person may, with the leave of the Commissioner, adopt an accounting period being the 12 months ending on some date other than 30 June.' Accordingly, the reference to 'year of income' in subsection 94D(1) is to the entire income year (subject to the presently immaterial exception in section 18A of the ITAA 1936 concerning VCLPs, ESVCLPs, AFOFs and VCMPs). It follows that, where any of the paragraphs in subsection 94D(1) is satisfied, a limited partnership is a corporate limited partnership for the full income year.

This is consistent with the Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 1992, which introduced Division 5A. In relation to paragraph 94D(1)(c), page 32 states that (emphasis added):

If a limited partnership stops carrying on the same business it carried on before 19 August 1992, or begins to derive income from a new business or new business transactions, it will be a corporate limited partnership for the whole of that year of income under new paragraph 94D(c).

While paragraph 94D(1)(c) is not invoked in the present case, the above passage remains directly relevant in circumstances where paragraph 94D(1)(a) is satisfied, as it reflects the understanding that the words 'in relation to a year of income of the partnership' that appear in the openings words of subsection 94D(1) (which apply to all its subparagraphs) refers to the whole of that year of income. Accordingly, irrespective of which paragraph of subsection 94D(1) applies in a particular case, the same result (that is, treatment as a corporate limited partnership for the entirety of the income year) arises.

Where a limited partnership ceases to exist during the income year, the practical effect of the above interpretation should be noted. Subsection 94D(1) provides that 'a limited partnership is a corporate limited partnership in relation to a year of income of the partnership' (emphasis added). Having regard to the language of the subsection, the reference to 'the partnership' in the emphasised text is a reference to the limited partnership. Any activities performed, income earned or expenses incurred subsequent to the cessation of the limited partnership will not be those of the limited partnership, and therefore not in relation to the year of income of the limited partnership. Rather, they will be in relation to the year of income of the relevant taxpayer entities that exist following cessation.

Question 3

Division 7A of the ITAA 1936 does not apply to the loans made by the taxpayer whilst it is a corporate limited partnership

Detailed reasoning

Division 7A of the ITAA 1936 will only apply where a private company pays or makes a loan to another entity, or forgives a debt owed to it.

While the taxpayer is a corporate limited partnership, section 94N of the ITAA 1936 has application. It provides as follows:

A reference in the income tax law to a private company in relation to the year of income does not include a reference to the partnership.

Note: Division 7A (Distributions to entities connected with a private company) applies to certain corporate limited partnerships in the same way as it applies to private companies: see section 109BB.

However, as referenced in the note, section 109BB provides that Division 7A applies to certain corporate limited partnerships in the same way as it applies to a private company:

This Division applies to a corporate limited partnership in relation to a year of income in the same way as it applies to a private company in relation to a year of income, if, any time during the year of income:

(a)  the partnership has fewer than 50 members; or

(b)  any entity has, directly or indirectly, and for the entity's own benefit, an entitlement to a 75% or greater share of the income or capital of the partnership.

As the taxpayer satisfies this section, it is necessary to consider whether Division 7A applies to the loans made by the partnership.

Loan to X Family Trust

The loan to the X Family Trust was taken out prior to 1 July 2009 and has had no movement since that date.

Section 109BB was inserted by item 11 of Schedule 1 to the Tax Laws Amendment (2010 Measure No. 2) Act 2010. Item 35 of Schedule 1 states that:

The amendments made by this Schedule apply in relation to:

(a)  payments made; and

(b)  loans made; and

(c)  debts forgiven;

on or after 1 July 2009.

Subsection 109D(4) relevantly provides that 'a loan is made to an entity at the time the amount of the loan is paid to the entity by way of loan'. The X Family Trust loan was therefore made prior to 1 July 2009.

It follows that section 109BB has no application in relation to the X Family Trust loan. Accordingly, Division 7A will not apply.

Loan to the Company

The loan to the Company relates to the management fee charged by the taxpayer which remains unpaid.

Pursuant to paragraph 109D(1)(c), section 109D will apply only if Subdivision D does not prevent the private company from being taken to pay a dividend. Subdivision D comprises sections 109H to 109R. Section 109K provides that:

A private company is not taken under section 109C or 109D to pay a dividend because of a payment or loan the private company makes to another company.

As the loan was made by the taxpayer to another company, Division 7A will not apply.

Question 4

The taxpayer will not make a capital gain or loss as a result of it ceasing to be corporate limited partnership.

Detailed reasoning

CGT event A1

Section 104-10 of the ITAA 1997 sets out the circumstances in which CGT event A1 will happen. It provides as follows:

1.    CGT event A1 happens if you *dispose of a *CGT asset.

2.    You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

In Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd, the High Court unanimously held that:^[4]

The nature of a partner's interest in the partnership property has often been explained. The partner's share in the partnership is not a title to specific property but a right to his proportion of the surplus after the realization of assets and the payment of debts and liabilities. However, it has always been accepted that a partner has an interest in every asset of the partnership and this interest has been universally described as a 'beneficial interest', notwithstanding its peculiar character. The assets of a partnership, individually and collectively, are described as partnership property (Partnership Act, 1892, as amended (N.S.W.), s. 20). This description acknowledges that they belong to the partnership, that is, to the members of the partnership.

Under the Limited Partnership Agreement of the taxpayer, during the subsistence of the taxpayer, Mr X has a specified percentage of interest in the assets of the partnership, while Ms X holds the remaining percentage. The general partner, the Company, has no beneficial interest in the assets of the taxpayer.

The Commissioner has been advised that, following the cessation of the limited partnership, the legal and beneficial interest in the assets of the partnership will be held in the same proportions.

Once the taxpayer ceases to carry on a business, it will cease to be a partnership at general law, and will not be considered to be a 'limited partnership' under the Limited Partnership Agreement.

While it does not constitute a partnership at general law, it will be a partnership for tax purposes given that the co-owners of the partnership assets will jointly be in receipt of income from those assets: see definition of 'partnership' under subsection 6(1) of the ITAA 1936. It also appears under the terms of the Limited Partnership Agreement that it will continue to be a 'partnership' for the purposes of the agreement.

Subsection 106-5(1) recognises, for the purposes of assessing capital gains to partnerships, each partner's interest in the partnership assets as specified in the partnership agreement.

The partnership agreement in this case maintains the interests of Mr X and Ms X in the partnership and its assets at the point after it ceases to be a limited partnership and becomes a tax law partnership. We note in this regard that what is referred to as a 'partnership' under the terms of the agreement is not dissolved notwithstanding the cessation of its status as a general law partnership. The agreement continues to bind the parties in accordance with its terms; and the interests of the partners in the 'partnership' continue to be dictated by the terms of the agreement.

As such, the cessation of business itself does not result in a change of ownership of the partnership assets as to invoke the application of CGT event A1.

CGT event C1

The winding down of the business operated by the taxpayer will result in the loss of goodwill associated with the business (if any), upon which CGT events C1 and C2 may apply.

Paragraphs 135 to 141 of TR 1999/16 elaborate on the application of these provisions to the cessation of a business and associated goodwill, stating that if a business permanently ceases, both CGT events C1 and C2 can apply to the goodwill of the business. Subsection 102-5(1) requires that the most specific event apply, and paragraph 136 of TR 1999/16 confirms that the most specific CGT event which happens when a business 'permanently ceases' is CGT event C1. This is so even when the decision to permanently cease conducting a business is a voluntary one.

However no proceeds will be received in respect of the cessation of the associated goodwill. Note that the market value substitution rule in section 116-30 does not apply to CGT event C1: see the table in section 116-25.

Consequently a capital gain will not arise as a result of the cessation of the taxpayer's business.

Question 5

The taxpayer will be liable for corporate tax in respect of its retained profits to the extent they represent taxable income of the corporate limited partnership, pursuant to section 94D of the ITAA 1936 and section 94J of the ITAA 1936.

Detailed reasoning

Section 94H of the ITAA 1936 provides as follows:

If a partnership is a corporate limited partnership in relation to a year of income, the income tax law has effect, in relation to the partnership and in relation to the year of income, subject to the changes set out in the following provisions of this Subdivision.

Two of the changes set out in Subdivision C are contained in sections 94J and 94K. Section 94J relevantly provides that a reference in the income tax law to a company or to a body corporate includes a reference to the corporate limited partnership.^[5] Section 94K states that a reference in the income tax law to a partnership does not include a reference to the corporate limited partnership.

'Income tax law' is broadly defined in section 94B to mean:

(a)  this Act (other than this Division and Division 830 of the Income Tax Assessment Act 1997); and

(b)  an Act that imposes any tax payable under this Act; and

(c)  the Income Tax Rates Act 1986; and

(d)  the Taxation Administration Act 1953, so far as it relates to an Act covered by paragraph (a), (b) or (c); and

(e)  any other Act, so far as it relates to an Act covered by paragraph (a), (b), (c) or (d); and

(f)   regulations under an Act covered by any of the preceding paragraphs.

The effect of the above provisions is that 'a corporate limited partnership is treated as a company for taxation purposes and this includes it being an entity which is liable to pay income tax.'^[6] Accordingly, the retained profits, to the extent they represented taxable income, has been subject to corporate tax at the level of the taxpayer.

While the taxpayer is a corporate limited partnership, the partners will be assessed on the retained profits to the extent they are received as a dividend. In this regard, sections 94L and 94M set out the circumstances in which a dividend will be taken to have been paid by a corporate limited partnership:

94L Dividend includes distribution of corporate limited partnership

A reference in the income tax law (other than subsection 44(1A) of this Act) to a dividend or to a dividend within the meaning of section 6:

(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.

94M Drawings etc. deemed to be dividends paid out of profits

(1)  If the partnership pays or credits an amount to a partner in the partnership:

(a)  against the profits or anticipated profits of the partnership; or

(b)  otherwise in anticipation of the profits of the partnership;

(whether or not the amount of the profits or anticipated profits is ascertainable), the amount paid or credited is taken, for the purposes of the income tax law, to be a dividend paid by the partnership to the partner out of profits derived by the partnership.

(2)  If the partnership makes a subsequent distribution, the Commissioner must take such steps (if any) as are necessary to ensure that the partner is not subject to double taxation.

When the taxpayer ceases to be a corporate limited partnership and a tax law partnership arises, the partners are taxed pursuant to Division 5 of the ITAA 1936. Broadly, under subsection 92(1), the assessable income of a partner in a partnership is calculated by reference to the 'net income' of the partnership of the year of income. Section 90 defines 'net income' to mean 'the assessable income of the partnership, calculated as if the partnership were a taxpayer who was a resident, less all allowable deductions ...' The retained profits of the taxpayer will not form part of the net income of the tax law partnership.

[1] (2016) 245 FCR 247.

[2] Ibid at 268 [96].

[3] Ibid at 280 [145].

[4] (1974) 131 CLR 321 at 327 (McTiernan, Menzies and Mason JJ).

[5] The reference to 'the partnership' in sections 94J and 94K refers to the corporate limited partnership: see Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51 at [15] (Besanko, Middleton, Steward and Thawley JJ).

[6] Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51 at [6] (Besanko, Middleton, Steward and Thawley JJ).