Edited version of private advice

Authorisation Number: 1052156185058

Date of advice: 01 November 2023

Ruling

Subject: Hybrid partnership

Status of the Entity under section 830 of the Income tax Assessment Act 1997, assessable income under section 6-1 of the Income Tax Assessment Act 1997, and entitlement to foreign income tax offsets (FITO), under Division 770 of the Income Tax Assessment Act 1997.

Question 1

Is the Entity a foreign hybrid limited partnership or a foreign hybrid company under Division 830 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Is the salary and wages received by the Australian resident shareholders (the Taxpayers) from the Entity assessable income under section 6-1 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 3

Are the Taxpayers, entitled to FITO under section 770-10 of the Income Tax Assessment Act 1997, where assessable income is derived from the Entity?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 2017

Relevant facts and circumstances

The Taxpayers are Australian residents for tax purposes.

The Taxpayers are the only shareholders of a flow through entity registered in a foreign jurisdiction.

The entity elected to be treated as flow through entity for tax purposes in the foreign jurisdiction it was registered in.

The entity is not a Limited liability Company (LLC).

The entity owns and runs a small operation that has outlets in the foreign jurisdiction it was registered in.

The entity's operation owns capital assets and has employees only in the foreign jurisdiction it was registered in.

The entity's mailing and physical address is the foreign jurisdiction it was registered in.

One Taxpayer is a dual citizen the other is an Australian citizen.

The Taxpayers became Australian residents for tax purposes in 20XX.

The Taxpayers own 50% of the entity's shares each.

One Taxpayer performs services within the entity and is remunerated for those services.

One Taxpayer manages the entity from the foreign jurisdiction it was registered in by periodically traveling to that jurisdiction.

The entity has no registered business premises and no daily operations in Australia.

The entity has senior management staff that the managing Taxpayer communicates with while in Australia.

The managing Taxpayer has a more operational role, acts as a General Manager, is decision maker and undertakes planning when in the other jurisdiction.

The non-managing Taxpayer does not do management or operational duties and receives regular payments declared as wages in their Australian income tax return. This Taxpayer also holds two corporate positions in the entity.

The Taxpayers have reported all the wage income amounts in their Australian income tax returns.

The entity has both ordinary business losses and losses carried forward.

The entity accumulated losses during the Covid-19 pandemic and these losses have been carried forward since that year.

In addition, the entity sold property (real or depreciable) and reported it as a gain in the other jurisdiction.

The losses associated with gains have not flowed through to the Taxpayers income tax returns in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 division 830 of the

Income Tax Assessment Act 1997 subdivision 830-A

Income Tax Assessment Act 1997 section 830-10

Income Tax Assessment Act 1997 section 830-15

Income Tax Assessment Act 1997 section 830-60

Income Tax Assessment Act 1997 division 35

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6(1)

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1997 subsection 770-10(1)

Income Tax Assessment Act 1997 section 770-15

Income Tax Assessment Act 1997 section 770-15 (1) (e)

Income Tax Assessment Regulations 1997 reg 830-15.01

International Tax Agreements Act 1953

Limited Liability Partnerships Act 2000 (UK)

ATO view documents

Taxation Ruling TR 2009/6 Income tax: entitlement to foreign income tax offsets under section 770-10 of the Income Tax Assessment Act 1997 where income is derived from investing in fiscally transparent foreign entities

Taxation Ruling TR 2018/5 Income tax: central management and control test of residency

Other relevant documents

Australian Treaty Series 1983 No 16: Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income

Reasons for decision

Issue 1

Status of the Entity under section 830 of the Income tax Assessment Act 1997 (ITAA 1997).

Issue 2

Assessable income under section 6-1 of the ITAA 1997, and entitlement to foreign income tax offsets (FITO), under Division 770 of the ITAA 1997.

Summary

The Entity is not a foreign hybrid limited partnership or a foreign hybrid company under Division 830 of the ITAA 1997. The Taxpayers have received payments attributed to wages; these payments are assessable income under section 6-1 of the ITAA 1997. The Taxpayers are entitled to FITO under section 770-10 of the ITAA 1997.

Detailed reasoning

Issue 1 Question 1

1.    Foreign hybrid companies under Division 830 of the ITAA 1997.

To be a foreign hybrid limited partnership or a foreign hybrid company an entity must satisfy Division 830 of the ITAA 1997.

Division 830 of the ITAA 1997:

a)    provides for foreign hybrids, that are treated as flow-through entities for the purposes of foreign tax, but treated as companies for Australian income tax purposes, to be treated as partnerships for the purposes of the Act

b)    applies special rules to the entities in addition to those that normally apply to partnerships.

The expression 'foreign hybrid' is defined in section 830-5 of the ITAA 1997 to mean a foreign hybrid limited partnership or a foreign hybrid company.

Paragraphs 830-15(1)(a) to (d) of the ITAA 1997 set out the requirements for a company to qualify as a foreign hybrid company. It states that:

A company is a foreign hybrid company in relation to an income year if:

(a) at all times during the income year when the company is in existence, the partnership treatment requirements for the income year in subsection (2) or (3) are satisfied; and

(b) at no time during the income year is the company, for the purposes of a law of any foreign country that imposes foreign income tax (except credit absorption tax or unitary tax) on entities because they are residents of the foreign country, a resident of that country; and

(c) at no time during the income year is the company an Australian resident; and

(d) disregarding this Division, in relation to the same income year of another taxpayer:

                             I.        the company 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 company is required, during the year it was in existence, to meet the requirements of subsection 830-15(2) if it was formed in the USA or subsection 830-15(3) and (4) if it was formed in another foreign country.

Subsection 830-15(2), to satisfy this subsection, the company must be a Limited Liability Company (LLC) for the purposes of USA laws and be either:

•         treated as a partnership, or

•         an eligible entity that is disregarded as an entity separate from its owners.

Subsection 830-15(3) is relevant to companies formed in a foreign country, which may include the USA. To satisfy this subsection, the company must be a foreign hybrid company.

A company will be a foreign hybrid company if:

(1) for the purposes of the foreign income tax laws of that country, the company is treated as a partnership; and

(2) there are regulations in force setting out requirements which the company must meet, and those requirements are satisfied.

Currently, these requirements are met only by companies that are Limited Liability Partnerships for the purposes of the Limited Liability Partnerships Act 2000 (UK) (Income Tax Assessment Regulations 1997 reg 830-15.01).

The requirement in paragraph 830-15(1)(a) is that the Entity satisfy subsection (2)or(3). The Entity in this case does not meet the requirements of paragraph 830-15(2)(b) as it is not a 'limited liability company'. The Entity also does not meet the requirements of paragraph 830-15(3)(c) because the Entity is not a 'limited liability partnership' for the purposes of the Limited Liability Partnerships Act 2000 (UK) under regulation 830.15.01 of the ITAA 1997 Regulations 2021. Therefore, the Entity is not a 'Foreign Hybrid company' or a 'Foreign Hybrid partnership' under division 830 of the ITAA 1997.

Issue 2

Assessable income under section 6-1 of the ITAA 1997, and entitlement to foreign income tax offsets (FITO), under Division 770 of the ITAA 1997

Question 2

Amounts received as wages by the Taxpayers from the Entity are assessable income under section 6-1 of the ITAA 1997.

Subsection 6-5(2) of the ITAA 1997:

If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The Taxpayers are Australian residents for tax purposes; therefore, their worldwide income is assessable income under section 6-1 of the ITAA 1997.

Question 3

Taxpayers, entitlement to FITO under section 770-10 of the ITAA 1997, where assessable income is derived from the Entity?

Section 770-10 of the ITAA 1997 - Entitlement to foreign income tax offset

Section 770-10(1) provides:

The Taxpayers are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if it was paid in respect of an amount that is all, or part of an amount included in assessable income for the year.

In these circumstances the resident Taxpayers are entitled to a foreign income tax offset under subsection 770-10(1) of the ITAA 1997.

Other related issues not considered:

•         Residency of the Entity.

•         Central management and control test of residency for the Entity, as defined under the definition of 'resident or resident of Australia' in subsection 6(1) of the ITAA 1936 and applied in Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 (Bywater).

•         Income which is non-assessable non-exempt (NANE) income pursuant to section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936).

•         Treatment of amounts of income other than salary and wages the Taxpayer receives from the Entity under section 44 of the ITAA 1936 and entitlement to FITO for the foreign country tax imposed on amounts other than salary and wages.