Edited version of private advice

Authorisation Number: 1051993567691

Date of advice: 5 August 2022

Ruling

Subject: International issues - foreign partnership - foreign hybrid company election

Scenario

A foreign partnership, Partnership B, disposed of its equity interest foreign Company A during the relevant financial year, being the 'Sale Transaction'.

At the time of the Sale Transaction, you were a temporary resident for Australian tax purposes. You are, however, proposing to become a permanent resident for Australian tax purposes and make a foreign hybrid company election under Division 830 of the ITAA 1997 in relation to your interest in Partnership B in respect of the relevant financial year.

Question 1

Is the Initial Consideration you received in respect of the Sale Transaction during the relevant financial year treated as assessable income for Australian tax purposes?

Answer

No. As you were a temporary resident when the Initial Consideration was derived, the amount will be NANE income under section 768-910 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Will the Deferred Consideration to be received post relevant date in respect of the Sale Transaction give rise to a capital gain or loss under capital gains tax (CGT) event C2?

Answer

Yes. Where the right to an interest in the foreign partnership's debt receivable ends, CGT event C2 will occur in accordance with subsection 104-25(1) of the ITAA 1997.

Question 3

Will the Deferred Consideration give rise to a forex realisation event 2 happening under Division 775 of the ITAA 1997?

Answer

No. In your circumstances, a forex realisation event 2 will not happen as your right to receive the Deferred Consideration will not be a relevant right within the terms of paragraph 775-45(1)(b) of the ITAA 1997.

This ruling applies for the following periods:

•         Year ending 30 June 2022

•         Year ending 30 June 2023

•         Year ending 30 June 2024

•         Year ending 30 June 2025

•         Year ending 30 June 2026

The scheme commences on:

1 July 2021

Relevant facts and circumstances

Background

•         You are a national of a foreign country and do not hold any other citizenships.

•         Your spouse and children are all nationals of a foreign country and do not hold any other citizenships.

•         You and your family arrived in Australia many years ago and have resided in Australia since on temporary visas.

•         You have been on an assignment in Australia with a foreign company, Company A, since the year that you moved to Australia.

•         You have been a partner of Company A after you moved to Australia.

•         You owned some percentage of the share capital of Company A at the time of the sale transaction.

•         The foreign group was founded in a foreign country, and is a professional services company, with multiple offices around the globe.

Partnership Background

•         Partnership B is an incorporated limited liability partnership formed in a foreign country.

•         Partnership B is treated as a body corporate and is therefore a separate legal entity in that foreign country.

•         Partnership B held 100% of the issued share capital of Company A.

•         Company A acts as the holding company of a trading group which undertakes the trading activities of the group's business globally.

•         Partnership B's only source of income was dividend income distributions received from Company A before the sale transaction.

Sale Transaction

•         In the relevant financial year, a third party, foreign company, Company C, acquired certain percentage of equity interest in Company A from Partnership B, along with Company A's subsidiaries.

•         The sale was completed during the relevant financial year.

•         The purchase price was payable to the partnership by Company C in instalments and subsequently to the individual partners.

•         The deferred payments were fixed and were not contingent on future events or financial performance.

•         All consideration amounts were denominated in a foreign currency.

•         You received the Initial Consideration in a foreign currency during the relevant financial year.

You have provided relevant clauses of your agreement which detail the obligations of the parties.

Relevant legislative provisions

Section 44 of the Income Tax Assessment Act 1936

Section 102-5 of the Income Tax Assessment Act 1997

Section 104-25 of the Income Tax Assessment Act 1997

Section 106-5 of the Income Tax Assessment Act 1997

Section 768-910 of the Income Tax Assessment Act 1997

Section 768-955 of the Income Tax Assessment Act 1997

Section 775-45 of the Income Tax Assessment Act 1997

Division 830 of the Income Tax Assessment Act 1997

Section 830-95 of the Income Tax Assessment Act 1997