Edited version of private advice

Authorisation Number: 1052100090842

Date of advice: 31 March 2023

Ruling

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

Question 1

Are you eligible to make a foreign hybrid company election under Division 830 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to your interest in Partnership A with effect from a specified date?

Answer

Yes. You, as a resident of Australia, are eligible to make a foreign hybrid company election under Division 830 of the ITAA 1997 in relation to your interest in the partnership. Partnership A is a foreign hybrid company pursuant to subsection 830-15 of the ITAA 1997.

Question 2

Did you make a capital gain/loss from CGT event A1 happened to Partnership A under section 106-5 of the ITAA 1997 when Partnership A sold its interest in Company B, being the 'Sale Transaction', during the relevant income year?

Answer

Yes. Where you make a foreign hybrid election for the relevant income year under subsection 830-15(5)(b) of the ITAA 1997, the normal partnership provisions for Australian taxation purposes will apply to Partnership A for the relevant income year and all future income years under section 830-20 of the ITAA 1997.

The Sale Transaction triggered CGT event A1 in respect to the assets of Partnership A under section 104-10 of the ITAA 1997 and gave rise to a capital gain/loss to you under section 106-5 of the ITAA 1997.

Question 3

Are you eligible to a 50% discount capital gain in respect of the CGT event A1 happening in relation to the interest in Partnership A's assets sold during the relevant income year?

Answer

Yes. You are eligible to the 50% CGT discount as the time that you acquired the interest in the assets of the Partnership A under section 830-125 of ITAA 1997 occurred greater than 12 months prior to the CGT event A1 and you meet other requirements under Subdivision 115-A of the ITAA 1997.

Question 4

Will the Initial consideration and Deferred Consideration payments form part of the capital proceeds from the CGT event A1 pursuant to section 116-20 of the ITAA 1997?

Answer

Yes. The Initial consideration and Deferred Consideration payments form part of the capital proceeds from the CGT event A1 under section 116-20 of the ITAA 1997. The Deferred Consideration payments relating to the proceeds to be received on the third and fourth anniversary are not a separate CGT asset as there is no contingency and the amount of deferred payments is certain.

Question 5

Where a foreign hybrid company election has been made for the relevant income year, would the Deferred Consideration payments be considered taxable under Division 775 of the ITAA 1997 at the time of receipt?

Answer

Yes. In your circumstances, a forex realisation event 2 occurs under subparagraph 775-45(1)(b)(iv) of the ITAA 1997. The right to receive the Deferred Consideration payments was created or acquired in return for the occurrence of a of CGT Event A1 (a realisation event) happening to the interest in Company B. Subsection 775-15(1) of the ITAA 1997 states that your assessable income for an income year includes a forex realisation gain you make as a result of a forex realisation event that happens during that year.

Question 6

Will the market substitution rule apply where there is a change in your interest in Partnership A for the purposes of section 112-20 and section 116-30 of the ITAA 1997?

Answer

No. The Commissioner considers the Administrative treatment: acquisitions and disposals of interests in 'no goodwill' professional partnerships, trusts and incorporated practices (ato.gov.au QC48882) will apply and the market value substitution rule does not apply when calculating the cost base under section 112-20 and the capital proceeds under section 116-30 of the ITAA 1997 of the CGT event will not apply. The cost base and capital proceeds will be equal to the amount paid/received.

This ruling applies for the following periods:

Year ended 30 June 20XX to year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Assumption

You will make a foreign hybrid company election under Division 830 of the ITAA 1997 in relation to your interest in the Partnership A in respect of the year ended 30 June 20XX.

Relevant facts and circumstances

Background

•                     You are an Australian tax resident and will continue to be an Australian tax resident at the time of receipt of both the Initial and Deferred Consideration payments.

•                     You have been a partner of Partnership A since the year beginning 1 July 20XX. You are not a Board Member of Partnership A.

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

Partnership Background

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

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

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

•                     Company B acts as the holding company of a trading group (Group C) which undertakes the trading activities of the group's business globally.

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

•                     The Foreign Group C was founded in a foreign country, and they are now a world-leading professional services company, with multiple offices around the globe. The Group C offers independent advice for its clients across multiple industries.

Sale Transaction

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

•                     The sale was completed during the relevant income year.

•                     The purchase price was payable to the partnership A by Company D 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 income year.

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

Relevant legislative provisions

Income Tax Assessment Act 1936 Former Part XI

Income Tax Assessment Act 1936 Former section 485

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-5

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 subdivision 115A

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 section 775-15

Income Tax Assessment Act 1997 section 775-45

Income Tax Assessment Act 1997 Division 830

Income Tax Assessment Act 1997 section 830-15

Income Tax Assessment Act 1997 section 830-95