Edited version of private advice

Authorisation Number: 1052101669436

Date of advice: 9 May 2023

Ruling

Subject: International issues - foreign partnership

Question 1

Are you able 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 specific date?

Answer

Yes. You are eligible to make a foreign hybrid company election under Division 830 of the ITAA 1997 in relation to your interest in Partnership A. As you satisfy paragraph 485(3)(c) of the ITAA 1997 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 capital gain/loss to you under section 106-5 of the ITAA 1997.

As you were a non-resident of Australia at the time that CGT event A1 occurred and the CGT event is not taxable Australian property you are not subject to CGT in relation to the transaction.

Question 3

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 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 the deferred payments is certain.

Question 4

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 our 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 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 5

You were paid a Pre-Completion dividend payment on a specified date prior to the completion of the Sale Transaction and prior to your arrival in Australia. Will the dividend payment be assessable to you in the specified income year?

Answer

No.

Where you make a foreign hybrid election during the specified 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 specified income year and all future income years under section 830-20 of ITAA 1997.

The Pre-Completion dividend payment made to you by Partnership A is considered as distribution from the partnership and is assessable under section 92 of ITAA 1936.

However, you were a non-resident of Australia when the payment was made as you were not residing in Australia and you were not an Australian resident within the meaning of the Social Security Act 1991, and you did not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.

This income is non-assessable non-exempt income under section 6-5(3) of the ITAA 1997 because:

•         You were a foreign resident of Australia per section 995-1 of the ITAA 1997 when the payment was made; and

•         The payment was received as the ordinary income you derive directly or indirectly from a source other than an Australian source if you are a foreign resident when you derive it.

Question 6

Will the market substitution rule apply where there is a change in partner's 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 a Country A national.

•         You have been working with Company B in the Country B since a specified date.

•         Your spouse is an Australian citizen.

•         You and your spouse arrived in Australia on a specified date on different days. You arrived in Australia with the intention to reside in Australia.

•         You and your spouse were non-residents of Australia for tax purposes prior to your arrival to Australia.

•         Your permanent resident visa was granted by the Home Affairs prior to your arrival to Australia on a specified date.

•         You have been a partner of Partnership A since a specified date. You are not a Board Member of Partnership A.

•         At the time of the Sales Transaction, you are entitled to a specified percentage of the share capital of Partnership A.

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.

•         Prior to the sale transaction you received a Pre-Completion dividend which was paid on a specified date. The remuneration is not for your personal exertion of services rendered in an employment capacity.

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

Relevant legislative provisions

Former Part XI of the Income Tax Assessment Act 1936

Former section 485 of the Income Tax Assessment Act 1936

Part 3-1 of the Income Tax Assessment Act 1997

Subsection 6-5(3) of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 106-5 of the Income Tax Assessment Act 1997

Section 112-20 of the Income Tax Assessment Act 1997

Subdivision 115A of the Income Tax Assessment Act 1997

Section 116-20 of the Income Tax Assessment Act 1997

Section 116-20 of the Income Tax Assessment Act 1997

Division 775 of the Income Tax Assessment Act 1997

Section 775-15 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 830-15 of the Income Tax Assessment Act 1997

Section 830-95 of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the Income Tax Assessment Act 1997