Edited version of private advice

Authorisation Number: 1052123481207

Date of advice: 15 June 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 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

Where you have made a foreign hybrid company election under Division 830 of the ITAA 1997 in relation to your interest in the Partnership A with effect from a specified date, will the Deferred Consideration payments be considered separate CGT assets?

Answer

Yes.

The Deferred Considerations payments are a separate CGT asset to the underlying specified shareholding that Partnership A sold in Company B.

When calculating the capital gain, you should adopt the appropriate reset cost base amount having regard to section 830-95 of the ITAA 1997.

Question 3

Will CGT event C2 occur upon ending of your right to the debt receivable ending under subsection 104-25(1) of the ITAA 1997?

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 4

Are you eligible to a 50% discount capital gain in respect of the CGT event C2 happening relating to the debt receivable in the relevant income year that the debt is extinguished?

Answer

Yes. You are eligible to the 50% CGT discount as the time that you acquired the interest in the debt receivable of Partnership A under section 830-125 of ITAA 1997 occurred greater than 12 months prior to the CGT event C2 and you meet other requirements under Subdivision 115-A of the ITAA 1997.

Question 5

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.

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 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 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.

At the time of the Sale 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 initial consideration of a specified percentage will be made at the same time that the first deferred consideration payment is made (unless you leave Partnership A).

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 will receive your initial consideration and first deferred 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

Former Part XI of the Income Tax Assessment Act 1936

Former section 485 of the Income Tax Assessment Act 1936

Section 104-25 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 116-30 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