Edited version of private advice

Authorisation Number: 1052101750550

Date of advice: 3 April 2023

Ruling

Subject: Foreign hybrid limited partnerships

Question

Is the Partnership a foreign hybrid limited partnership (FHLP) under subsection 830-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The Partnership is a FHLP under subsection 830-10(1) of the ITAA 1997 as it satisfies the conditions set out in the provision.

This ruling applies for the following periods:

Year ended DDMMYYYY

Year ended DDMMYYYY

Year ended DDMMYYYY

Year ended DDMMYYYY

Year ended DDMMYYYY

Year ended DDMMYYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

Foreign Investment Firm (FIF)

1.    FIF is a foreign investment firm, with its headquarters in Foreign Country.

2.    FIF is part of the FIF Group, which is an asset management and banking group.

3.    The FIF Group is a foreign country domiciled foundation.

4.    Under its proposed mandates with Australian Fixed Trust (AFT), FIF will be appointed as the investment manager to manage funds that will be invested on behalf of the AFT to achieve long-term capital appreciation from a globally diversified portfolio of private equity investments. The investments can be made globally. There is no specific intention that investments will be located in Australia, but it cannot be excluded that investments will be located in Australia. The AFT has committed $XXX million to be invested on its behalf by FIF.

The Partnership

5.    The Partnership, as the investment vehicle for the AFT, has been established as a Special Limited Partnership.

6.      The Partnership was formed under the laws of the Foreign Country. The Partnership was initially formed by Foreign Company 1 (FC1) as the original general partner, and Foreign Entity 1 (FE1) as the original limited partner, on DDMMYYYY. FC1 provided nominal capital to the Partnership in accordance with a Limited Partnership Agreement (LPA) on or around the date of formation of the Partnership.

7.    FC1 transferred its general partner interest to Foreign Company 2 (FC2), on DDMMYYYY, which has been appointed the managing general partner (GP) of the Partnership.

8.    On the Initial Closing Date of DDMMYYYY, the AFT subscribed for a limited partner interest, and FE1 immediately thereafter withdrew its limited partner interest.

9.    The LPA details the subscriptions of the Partnership. The AFT subscribed $ XXX million on the DDMMYYYY. No other Subscription Agreements have been made with FC2 as GP for the purchase of a limited partnership interest in the Partnership.

10.  The Partnership is intended to qualify as an Alternative Investment Fund (AIF) as defined in the Foreign Country Law.

11.  Foreign Investment Firm 2 (FIF2), a Foreign Country incorporated company and member of the FIF Group, has been appointed as the alternative investment fund manager (the AIFM) of the Partnership.

12.  The AFT will continue as the sole limited partner, although further limited partners can be admitted subject to the prior written consent of the AFT. This ruling applies only so long as the AFT remains the sole limited partner.

13.  Following the admission of the AFT, the LPA was amended and restated in its entirety. The executed LPA forms part of the Scheme to which this Ruling is made.

14.  No side letters were entered into by the AFT with the GP, AIFM or any other party in respect of its subscription for a limited partner interest in the Partnership.

15.  The central management and control of the Partnership is not located in Australia. There is no other foreign country that taxes the Partnership on the basis of it being a resident of that country.

LPA

16.  The Partnership is governed by the LPA the terms of which in their entirety form part of this private ruling.

17.  The key terms of the LPA which are relevant for the purposes of this application are summarised below:

a.    Place of business - The Registered Office of the Partnership is in Foreign Country.

b.    Limited liability - The liability of the Limited Partners is limited to the capital they contribute, and they have no rights to participate in the management of the Partnership.

c.     Liabilities of the Partnership - The GP has unlimited liability for the debts and obligations of the Partnership, except as otherwise stated in the LPA.

d.    General Partner contributions - The GP may make further contributions to the Partnership, provided that the General Partner will not hold a 5% or greater interest (in respect of voting interest, entitlement to profits or any other legal, equitable or economic interest) in the Partnership (or any Alternative Investment Vehicle of which the Limited Partner is a partner or member) at any time.

e.    Management - The GP exclusively manages and controls the Partnership.

f.      Distributions and tax liability of the partners - The GP retains the right to determine the amount, timing and form of distributions.

g.    Allocations - The General Partner maintains each Partner's capital account ("Capital Account") with the books and records of the Partnership.

h.    Distributions of Income - All items of income, gain, loss or deduction of the Partnership will be allocated to each Partner in accordance with each Partner's economic interest in the respective items (based upon the Denominated Currency), as determined by the General Partner.

i.      Distributions on liquidation - The liquidator(s) shall cause the Partnership to pay or provide for the satisfaction of the Partnership's liabilities and obligations to creditors (whether by payment or the making of reasonable provision for payment thereof) and oversee the disposition of the assets of the Partnership in accordance with the Partnership Law.

j.      Voting and consents - Limited Partner may vote or consent to matters under the LPA which require the approval of a specified percentage in Interest of the Limited Partners.

k.     Duration - The Partnership shall continue for an indefinite period unless terminated with the consent of 75% of the limited partners (on the fifth anniversary of the Initial Closing Date or on each subsequent anniversary of the Initial Closing Date thereafter (or any other agreed date on an annual basis)). The Partnership is dissolved upon a withdrawal from the Partnership by the GP, where an election is made by the GP to dissolve the Partnership, or if there is at any time less than one limited partner and one general partner of the Partnership. The Partnership therefore does not have perpetual succession in the same manner as a company.

l.      Transfers of limited partner interests - The limited partners are not permitted to transfer their partnership interests without the prior written consent of the GP.

Foreign Country legal and tax treatment of the Partnership

18.  The Partnership has the following legal status and tax treatment:

a.      Separate legal personality - the Partnership does not have separate legal personality from its partners.

b.      Body corporate - Foreign Legislation does not contain any specific reference to a partnership being regarded as a "body corporate".

c.      Holding of property - assets held by the Partnership are registered in the name of the Partnership and not in the name of the general partner or manager. However, the assets of the Partnership are only available to satisfy the rights of creditors of the Partnership. The Partnership does not have any general power to deal in property in its own name.

d.      Entering into legal contracts - the Partnership cannot enter legal contracts by itself, it is the GP conducting the business that has the power to conclude contracts on behalf of the Partnership.

e.      Legal proceedings - The GP represents the Partnership vis-à-vis third parties and in legal proceedings. Writs served on behalf of or upon the Partnership are validly served in the name of the Partnership alone, represented by the GP. The GP may also commence legal proceedings to collect from a Defaulting partner.

f.       Tax transparency - the Partnership is treated as being tax transparent for Foreign Country income tax purposes. It is not the Partnership but the Partners that would be taxed on the income of the Partnership if Foreign Country were to impose its income tax.

g.      Liability for other taxes - The Partnership does not carry on a commercial activity (nor is it deemed to) and is not subject to Foreign Country taxation in its own right.

h.      Regulatory regime- the Partnership is subject to the AIFM regime. The Partnership qualifies as an alternative investment fund within the meaning of Foreign Legislation.

The AFT

19.  The AFT is a resident of Australia for Australian income tax purposes and, is managed and controlled in Australia.

20.  The Partnership invests through FIF managed vehicles, which will generally be set up as Foreign Country special limited partnerships. The Partnership may invest through a feeder fund vehicle or directly into a master fund vehicle. The FIF managed partnerships in turn will make portfolio investments as primary investors or co-investors in foreign partnerships or companies, or make such investments in the secondary market. The Partnership may also make portfolio investments by investing directly in other master funds that are managed by non-FIF mangers and that are generally established as foreign partnerships.

21.  The underlying investments are private equity style investments that are spread across a number of different industry sectors. The investment strategy is to build a well-diversified portfolio across vintages (year of investment), industry, and geography to deliver strong returns.

22.  The profits of the Partnership are expected to be derived mainly from the growth in value of the underlying investments (i.e. gains on exit) rather than from the distributions of income or profits during the investment holding period.

23.  There are no formal restrictions of what the Partnership can invest in. The Partnership is able to invest in investments that may be taxed to the partners in Foreign Country.

24.  The AFT does not have (nor intends to have) a Foreign Country permanent establishment or taxable presence, and is not otherwise deemed to have a permanent establishment as a result of its partnership interest for the purposes of Foreign Country tax.

Assumptions

1.    The Partnership will not carry on business in Australia for the ruling period.

2.    The Partnership itself will not be subject to Foreign Country taxation for the ruling period.

3.    The AFT will be the sole Limited Partner in the Partnership for the ruling period.

Relevant legislative provisions

Subsection 830-10(1) of the Income Tax Assessment Act 1997

Section 770-15 of the Income Tax Assessment Act 1997

Section 94D of the Income Tax Assessment Act 1936

Section 94T of the Income Tax Assessment Act 1936

Section 340 of the Income Tax Assessment Act 1936

Reasons for decision

Question

Is the Partnership a FHLP under subsection 830-10(1) of the ITAA 1997?

Summary

The Partnership is a FHLP under subsection 830-10(1) of the ITAA 1997 as it satisfies the conditions set out in the provision.

Detailed reasoning

Subsection 830-10(1) of the ITAA 1997 sets out that a limited partnership is a FHLP if it meets certain conditions listed in paragraphs (a) through (e):

a)    it was formed in a foreign country: paragraph 830-10(1)(a)

b)    foreign income tax is imposed under the law of the foreign country on the partners, not the limited partnership, in respect of the income or profits of the partnership for the income year: paragraph 830-10(1)(b)

c)    at no time during the income year is the limited partnership, for the purposes of a law of any foreign country that imposes foreign income tax on entities because they are residents of the foreign country, a resident of that country: paragraph 830-10(1)(c)

d)    disregarding subsection 94D(5) of the ITAA 1936, at no time during the income year is it an Australian resident: paragraph 830-10(1)(d)

e)    paragraph 830-10(1)(e): disregarding that subsection, in relation to the same income year of another taxpayer:

i)      the limited partnership is a CFC at the end of a statutory accounting period that ends in the income year, and

ii)     at the end of the statutory accounting period, the taxpayer is an attributable taxpayer in relation to the CFC with an attribution percentage greater than nil.

The Partnership must be a limited partnership

It is necessary to first consider whether the Partnership meets the definition of a limited partnership.

Subsection 6(1) of the ITAA 1936 states:

limited partnership has the same meaning as in the Income Tax Assessment Act 1997.

Subsection 995-1(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') states:

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; or

(b)  an association of persons (other than one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for the purpose of becoming a *VCLP, an *ESVCLP, an *AFOF or a *VCMP and to carry on activities that are carried on by a body of that kind.

As a limited partnership will not include an association of persons that is a company (under paragraph (a) of the definition), it is important to consider what is a company for the purposes of the income tax law.

A company is defined in subsection 995-1(1) of the ITAA 1997 to mean:

(a) a body corporate, or

(b) any other unincorporated association or body of persons, but does not include a partnership or a non-entity joint venture.

Miscellaneous Tax Ruling MT 2006/1: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business number (at paragraphs 30 to 31) sets out guidance on the definition of body corporate - taking into account the common law meaning:

30. 'Body corporate' is not a defined term. The term takes its meaning from the general law. 'Body corporate' is a general term to describe an artificial entity having a separate legal existence. A body corporate has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, hold property, enter into legal contracts, sue and be sued in its own name, just as a natural person can.

31. A body corporate may be created:

•                     By common law, for example a chartered corporation;

•                     By statute, for example a Corporations Act company; or

•                     By registration pursuant to a statute, for example, building societies, credit unions, trade unions and incorporated associations.

Based on the above guidance and common law principles, the general features of a body corporate (and therefore a company) include:

•                     a separate legal existence;

•                     an indefinite life, and

•                     the power to act, hold property, enter into legal contracts, and sue and be sued in its own name.

The Partnership exhibits the following features to establish that it should be regarded as a limited partnership rather than as a company:

•                     The Partnership is formed under the laws of Foreign Country governing limited partnerships.

•                     The relationship of the partners is formalised through and governed by a partnership agreement (being the LPA), as opposed to a memorandum of association.

•                     The Partnership does not have a separate legal personality.

•                     The Partnership does not have perpetual succession in the same manner as a company, insofar as the Partnership will be dissolved upon withdrawal of the GP, and other events specified under the LPA.

•                     The business is managed by the GP on behalf of the partners.

•                     Assignment of a Limited Partner interest requires the written consent of the GP.

•                     All items of income, gain, loss or deduction of the Partnership will be allocated to each Partner in accordance with each Partner's economic interest in the respective items, as determined by the General Partner.

Based on the above, it is considered that the AFT and the GP of the Partnership are "an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly".

Under paragraph (a) of the definition of 'limited partnership', there is also the requirement establishing whether the liability of at least one of the persons in the association is limited.

Paragraph 13 of Taxation Determination TD 2008/15 Income tax: Can an unincorporated association of persons acting only in Australia who do not carry on a business in common with a view to profit be a corporate limited partnership within the meaning of section 94D of the Income Tax Assessment Act 1936? states:

The reference to the liability of at least one of the 'partners' being limited is a reference to a limitation (applying under the legal system applicable to the association) of their liability to third parties for, or to contribute to, the debts, obligations or other liabilities of the 'partnership'. Those debts, obligations or other liabilities will be those arising from the partners carrying on business as partners, or from their joint receipt of income, whichever character their association has.

Under the LPA, the liability of the Limited Partners is limited to the capital they contribute, and they have no rights to participate in the management of the Partnership. The AFT has invested in the Partnership as the sole limited partner. The Partnership therefore satisfies the definition of a limited partnership because the liability of at least one of the partners is limited.

Therefore, the Partnership satisfies paragraph (a) of the definition of 'limited partnership' in subsection 995-1(1) of the ITAA 1997. The Partnership is therefore considered a limited partnership for the purposes of applying subsection 830-10(1) of the ITAA 1997.

Paragraph 830-10(1)(a) of the ITAA 1997

The Partnership is a Foreign Country limited partnership formed and existing under the laws of the Foreign Country. The GP is a Foreign Country incorporated company; and the domicile of the Partnership is its registered office, which is, and must remain in, Foreign Country.

Therefore, paragraph 830-10(1)(a) of the ITAA 1997 is satisfied.

Paragraph 830-10(1)(b) of the ITAA 1997

Paragraph 830-10(1)(b) requires foreign income tax to be imposed at the level of the partners and not the limited partnership in respect of any income or profit derived by the partnership.

Taxation Determination TD 2009/2 'Income tax: when is 'foreign income tax... imposed...on the partners, not the partnership' under paragraph 830-10(1)(b) of the Income Tax Assessment Act 1997 for the purpose of determining whether a foreign limited partnership is a foreign hybrid limited partnership under Division 830 of that Act?' sets out the ATO's view of the circumstances:

1. Paragraph 830-10(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) contains two requirements: that foreign income tax is imposed on the partners of the limited partnership in respect of the income or profits of the limited partnership; and that foreign income tax in respect of the income or profits is not imposed on the limited partnership itself.

2. In determining whether foreign income tax is imposed on the partnership or the partners for these purposes, consideration must be given to characteristics specific to the limited partnership in question where they affect its status, and/or the status of the partners, as taxpayers. For example, whether the limited partnership has elected corporate or entity tax treatment which affects how the income or profits of the partnership are taxed, and/or whether it engages in activities that result in the partnership being a taxpayer, will be relevant.

3. The tests do not require the limited partnership or the partners to have earned actual taxable income or profits in the income year: it is only necessary to consider whether the limited partnership or the partners would be the taxpayer(s), were there such income or profits. Therefore, the requirement that income tax is imposed on the partners can still be satisfied in an income year in which the partnership has a loss for tax purposes, or only earns income that is exempt from tax. The provision does not require the partners to have an actual foreign income tax liability. It simply requires that, were the limited partnership to have income or profits that would have been taxable in the foreign jurisdiction, the tax liability would have been incurred by the partners.

...

6. The requirement that income tax is not imposed on the limited partnership will not be satisfied merely by virtue of the partnership not having an actual tax liability in the particular income year, for example, because it had a loss for tax purposes. It is necessary to consider what the tax treatment of the limited partnership would have been if it had derived income or profits that would have been taxable in the foreign jurisdiction.

Both requirements must be satisfied, being firstly, that the limited partnership must not be subject to foreign income tax on its income or profits in its country of formation and secondly, the partners in such partnership must be subject to such tax (as opposed to the limited partnership itself).

However, paragraph 830-10(1)(b) does not require the limited partnership or the partners to have earned actual taxable income or profits in the income year. Therefore, the requirement that income tax is imposed on the partners can still be satisfied in an income year in which the partnership has a loss for tax purposes, or only earns income that is exempt from tax.

Thus, paragraph 830-10(1)(b) requires that, were the limited partnership to have income or profits that would have been taxable in the foreign jurisdiction, the tax liability would have been incurred by the partners.

Therefore, in determining whether the conditions in paragraph 830-10(1)(b) are satisfied, regard should be given to the hypothetical question of where the tax liability would rest if there were income or profits of the partnership of the kind that would have been taxable in the foreign jurisdiction.

First requirement - limited partnership must not be subject to income tax

A Foreign Country partnership is not subject to tax on its income, but the partners are liable for their share of tax on any Foreign Country sourced income. Therefore, with regard to Foreign Country income tax, the Partnership should satisfy the condition of paragraph 830-10(1)(b).

A Foreign Country partnership may be subject to Foreign Country Taxation if it carries on a commercial activity (as opposed to a passive investment) or is deemed to carry on a commercial activity where the general partner owns 5% or more of the capital or economic interests of the partnership. The Partnership is not subject to Foreign Country Taxation.

Consequently, the Partnership satisfies the first requirement in paragraph 830-10(1)(b).

Second requirement - partners bear the tax on income or profits of the limited partnership

In terms of the second requirement, paragraph 4 of TD 2009/2 states:

Where the foreign country does not impose any tax on income or profits, or does not impose a tax on income or profits earned by limited partnerships in any circumstances, the requirement that tax is imposed on the partners cannot be satisfied.

TD 2009/2 provides the following examples in relation to the taxation of partners in a partnership:

Example 4: no income tax

29. LP3 is a limited partnership formed in Country X.

30. Country X does not impose tax on income or profits in any circumstances. Therefore, the requirement in paragraph 830-10(1)(b) that income tax is imposed on the partners is not satisfied, and as a result LP3 is not a foreign hybrid.

...

Example 6: only tax certain classes of income

35. LP4 is a limited partnership formed in Country Z. Country Z has an income tax that applies to income earned from transactions with residents of Country Z and exempts all other income. In relation to limited partnerships formed in Country Z, any applicable Country Z tax liability in respect of partnership income is a liability imposed on the partners, and not on the partnership itself.

36. LP4 does not, and does not propose to ever, transact with residents of Country Z. Therefore, the partners will not have a liability for income tax in Country Z.

37. However, if the partnership were to earn income from transactions with residents of Country Z, the partners would be subject to tax. Therefore, for the purposes of paragraph 830-10(1)(b), foreign income tax is imposed on the partners. Assuming that the other requirements of subsection 830-10(1) are satisfied, LP4 is a foreign hybrid."

These examples demonstrate that where the Foreign Country does not impose any tax on the income or profits of the partnership in any circumstances, then it will not satisfy the second requirement of paragraph 830-10(1)(b). However, this requirement does not mean that the partners must be liable for actual income tax, rather if they were to earn income then that income would be taxed at the level of the partners.

Under Foreign Country taxation law, a limited partner will only be taxable on the income it derives from the Partnership when it is a resident of Foreign Country or in the case of a foreign tax resident, in certain circumstances including where it derives certain income with a Foreign Country source or has a permanent establishment in Foreign Country.

The AFT does not have (nor intends to have) a Foreign Country permanent establishment or taxable presence, and is not otherwise deemed to have a permanent establishment as a result of its partnership interest for the purposes of Foreign Country taxation. Whilst it is not expected that the partners in the Partnership would earn income that would be subject to tax in Foreign Country, were they to do so, the partners of the Partnership would be liable to pay tax in Foreign Country and file a Foreign Country income tax return.

Therefore, paragraph 830-10(1)(b) of the ITAA 1997 is satisfied.

Paragraph 830-10(1)(c) of the ITAA 1997

This paragraph requires that at no time during the income year is the limited partnership, for the purposes of a law of any foreign country that imposes foreign income tax on entities because they are residents of the foreign country, a resident of that country.

This condition ensures that if there is another foreign country (apart from the country of formation) which taxes the limited partnership as a resident entity, it will not qualify as a foreign hybrid limited partnership.

There is no other foreign country that taxes the Partnership on the basis of it being a resident of that country.

Therefore, paragraph 830-10(1)(c) of the ITAA 1997 is satisfied.

Paragraph 830-10(1)(d) of the ITAA 1997

Paragraph 830-10(1)(d) requires that the Partnership is not an Australian resident, assuming that subsection 94D(5) is disregarded. In other words, on the assumption that the Partnership is a corporate limited partnership, it must not be an Australian resident. Subsection 94T(1) of the ITAA 1936 sets out when a corporate limited partnership is resident of Australia. It states that:

For the purposes of the income tax law, the partnership is:

(a) a resident; and

(b) a resident within the meaning of section 6; and

(c) a resident of Australia; and

(d) a resident of Australia within the meaning of section 6;

if and only if:

(e) the partnership was formed in Australia; or

(f) either:

(i) the partnership carries on business in Australia; or

(ii) the partnership's central management and control is in Australia.

Section 94T requires the following conditions to be satisfied if the Partnership is not to be regarded as resident in Australia.

First condition - the Partnership was not formed in Australia

As the Partnership was formed in Foreign Country under the laws of Foreign Country, this condition is satisfied.

Second condition - the Partnership does not carry on business in Australia

It is not intended that the Partnership should hold any Australian investments and it does not intend to carry on any business in Australia, such that this condition should be satisfied.

Third condition - the Partnership's central management and control is not in Australia

In the case of a corporate limited partnership, a limited partner may not take part in the management of the business of the partnership, and therefore the central management and control of the partnership should be found in the general partner.

Under the LPA the management and control of the Partnership is vested exclusively in the GP. It is stated in the LPA that the management decisions made by the GP will be made in Foreign Country.

A limited partner cannot carry out acts of management vis-à-vis third parties, otherwise it will have unlimited and joint liability with the limited partnership for the commitments and obligations of the limited partnership. The LPA establishes that the GP exercises the central management and control in respect of the Partnership. The GP is a Foreign Country private company incorporated in Foreign Country and will be making all material decisions and approvals in connection with the Partnership in Foreign Country. The fact that the GP may delegate the risk and portfolio management activities to an AIFM does not mean that the central management and control of the Partnership is not found in the GP.

As such, it is concluded that the central management and control of the Partnership is not located in Australia.

On the basis that the Partnership is formed in Foreign Country, it will not carry on business in Australia, and its central management and control rests with the GP outside of Australia, it should not be regarded as an Australian resident. Therefore, paragraph 830-10(1)(d) of the ITAA 1997 is satisfied.

Paragraph 830-10(1)(e) of the ITAA 1997

Paragraph 830-10(1)(e) of the ITAA 1997 states:

(e) disregarding that subsection, in relation to the same income year of another taxpayer:

(i)            the limited partnership is a CFC at the end of a statutory accounting period that ends in the income year, and

(ii)           at the end of the statutory accounting period, the taxpayer is an attributable taxpayer in relation to the CFC with an attribution percentage greater than nil.

The words 'that subsection' incorporate the reference in paragraph 830-10(1)(d) to subsection 94D(5) of the ITAA 1936. Corporate limited partnerships are treated as companies under section 94J of the ITAA 1936, and only entities which are defined as companies are capable of being CFCs under section 340 of the ITAA 1936. However, subsection 94D(5) says a limited partnership that is a foreign hybrid limited partnership because of section 830-10 of the ITAA 1997 is not a corporate limited partnership. Therefore, the effect of the words 'disregarding that subsection' in paragraph 830-10(1)(e) of the ITAA 1997 is to avoid a circular test: the possibility that the entity could be a foreign hybrid limited partnership is ignored when working out whether the entity is a CFC, for the purposes of the foreign hybrid rules.

To summarise, the test in paragraph 830-10(1)(e) of the ITAA 1997 requires that (assuming it was not a foreign hybrid) the limited partnership:

•                     would be a CFC in relation to another taxpayer; and

•                     that taxpayer is an attributable taxpayer in relation to the CFC.

The Partnership needs to establish that, if the foreign hybrid rules did not apply, it:

•                     would be a CFC in relation to another taxpayer; and

•                     that taxpayer is an attributable taxpayer in relation to the CFC, with an attribution percentage greater than nil.

The Partnership, if it was a company, would be a resident of Foreign Country, so it would be a resident of an unlisted country for the purposes of section 340 of the ITAA 1936.

Broadly, the Partnership will be classified as a CFC where any of the following conditions apply:

(a) There is a group of 5 or fewer Australia residents that hold at least a 1% interest, and together hold not less than 50% of the interests in Partnership (on an associate inclusive basis); or

(b) A single Australian entity has an interest of not less than 40% in the Partnership (the assumed controller), and the Partnership is not otherwise controlled by a group of entities not being or including the assumed controller or any of its associates; or

(c) The Partnership is under the de facto control of 5 or fewer Australian entities, either alone or together with associates (whether or nor any associate is also an Australian entity).

The treatment of corporate limited partnerships as companies, and what that means is extensively covered in Division 5A of the ITAA 1936. Of particular importance is section 94P, which states that a reference in the income tax law to a share includes a reference to an interest in the partnership, and section 94Q of the ITAA 1936, which states that a reference in the income tax law to a shareholder includes a reference to a partner in the partnership. This deeming is important as it allows for AFT's control interests in the Partnership to be properly identified to determine if the Partnership is a CFC.

As set out in the LPA, the subscription by the AFT for an economic interest in the Partnership contains with it certain rights including rights to paid up share capital, votes, and rights to distributions of capital/profits (including on winding-up). As the AFT is the sole limited partner, and the GP cannot hold an economic interest of 5% or more, the AFT satisfies (a) and (b) above, and therefore the Partnership should be regarded as a CFC for this purpose.

Under section 361 of the ITAA 1936, an attributable taxpayer is an Australian entity (which includes an Australian trust) which has an associate inclusive control interest in the CFC of at least 10%. The AFT satisfies this test.

Under section 362 of the ITAA 1936, the attribution percentage of an attributable taxpayer is calculated by aggregating the direct and indirect interests in the CFC held by the taxpayer at that time.

Given that it is the sole limited partner in the Partnership, the AFT holds an attributable percentage that is greater than nil.

On the assumption the Partnership is regarded as a company, it should be treated as a CFC, and the AFT is treated as an attributable taxpayer with an attribution percentage that is greater than nil. Therefore, the Partnership will meet the conditions in subparagraph 830-10(1)(e) of the ITAA 1997.

Conclusion

The Partnership is a foreign hybrid limited partnership in relation to the AFT's sole limited partnership interest. This is because the Partnership meets all the conditions in subsection 830-10(1) of the ITAA 1997 in relation to the AFT's interest in the Partnership.