ATO Interpretative Decision
ATO ID 2010/32
Income Tax
German Kommanditgesellschaft and managed investment trusts: are limited partners 'members'?FOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Are the limited partners of a German Kommanditgesellschaft (KG), that is a unitholder in an Australian trust, 'members' of the Australian trust for the purposes of sub-item 3(b) in paragraph 12-400(1)(b) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?
Decision
No. The limited partners of a German KG, that is a unitholder in an Australian trust, are not 'members' of the Australian trust for the purposes of sub-item 3(b) in paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953.
Facts
There are 1,000 limited partners in the German KG and one General Partner. All the limited partners are individuals who are residents of Germany for German tax law purposes.
The German KG is one of two registered unitholders of an Australian unit trust (the Australian Trust). The other registered unitholder in the Australian Trust is a company that is a resident of Germany (the German Company). The two units are held separately by the German KG and the German Company.
The German KG is registered in Germany and is formed under the laws of Germany.
The German KG is treated as a limited partnership for German tax law purposes.
The partnership agreement of the German KG is executed in Germany in accordance with the German Commercial Code and is governed by German commercial and taxation law.
Under the German Commercial Code and the partnership agreement for the German KG:
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- the legal interests and assets held by the German KG are jointly held by the limited partners of the German KG, with each limited partner having an interest in the undivided whole of the assets of the German KG;
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- the General Partner is entitled to manage and represent the German KG in respect of the day-to-day management of the German KG;
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- the limited partners are not entitled to the day-to-day management of the German KG;
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- the limited partners are not entitled to sell their share in a single asset held by the German KG; and
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- the limited partners are entitled to a distribution of the profits and losses of the German KG, calculated in accordance with the provisions of the German Commercial Code.
The German KG is a limited partnership as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
The German KG is not a foreign hybrid limited partnership as defined in subsection 830-10(1) of the ITAA 1997 because it is not a controlled foreign company as defined in section 340 of the Income Tax Assessment Act 1936 (ITAA 1936).
The German KG is treated as a corporate limited partnership under Division 5A of Part III of the ITAA 1936.
Reasons for Decision
Subdivision 12-H of Schedule 1 to the TAA 1953 deals with Pay As You Go withholding obligations for distributions of managed investment trust income. Under subsection 12-400(1) of Schedule 1 to the TAA 1953, there are various conditions that need to be considered in order to determine whether a particular trust is a managed investment trust in relation to an income year.
One of the conditions that must be satisfied in the context of the facts of this case is that under sub-item 3(b) of the table in paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953, the trust must have at least 50 members (ignoring objects of the trust) at the time the trustee makes the first fund payment in relation to the income year.
Under subsection 995-1(1) of ITAA 1997, the term 'member' in relation to an entity has the meaning given by section 960-130 of the ITAA 1997.
Item 3 of the table in subsection 960-130(1) of the ITAA 1997 provides that a member of a trust includes a unitholder of the trust.
Therefore, for the purposes of subsection 12-400(1) of Schedule 1 to the TAA 1953, the 'members' of the Australian Trust are the unitholders in the Australian Trust. The only two registered unitholders of the Australian Trust are the German KG and the German Company.
Subsection 960-130(2) of the ITAA 1997 provides that 'if 2 or more entities jointly hold interests or rights that give rise to membership of another entity, each of them is a member of the other entity'.
The 'interests or rights that give rise to membership' of the Australian Trust in this case are the interest or rights that give rise to being a unitholder in the Australian Trust.
The German KG and the German Company are the two unitholders of the Australian Trust. The German KG does not jointly hold its unit in the Australian Trust with the limited partners of the German KG.
The partnership agreement for the German KG provides that the limited partners jointly hold the interests and assets held by the German KG, with each limited partner having an interest in the undivided whole of the assets of the German KG.
The interest or rights that the limited partners have as joint holders of the assets of the German KG, however, is not the same as the interest or rights that the German KG has as unitholder of the Australian Trust.
As unitholder, the German KG (through the General Partner) has the right to deal with the unit. For example, the German KG has the right to sell the unit. The limited partners in the German KG do not individually have the right to deal with the unit in the Australian Trust. The German Commercial Code and the partnership agreement exclude the limited partners from the day-to-day management activities of the German KG. Furthermore, each limited partner cannot sell their share in a single asset held by the German KG and therefore they have no right to sell their share of the German KG's unit holding.
The interests or rights of the limited partners under the German Commercial Code are restricted to financial participation, with a right to a distribution of profits and losses of the German KG. This includes income generated from the unit holding in the Australian Trust.
Accordingly the limited partners do not have the interest or rights that give rise to being a unitholder in the Australian Trust for the purposes of subsection 960-130(2) of the ITAA 1997. Only the registered unitholders, the German KG and the German company, hold such interests or rights in this case.
Therefore, the limited partners of the KG are not 'members' of the Australian Trust. As such, the Australian Trust has less than 50 members for the purposes of sub-item 3(b) of paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953.
Date of decision: 27 October 2009Year of income: Year ended 30 June 2010 Year ended 30 June 2011 Year ended 30 June 2012 Year ended 30 June 2013 Year ended 30 June 2014
Legislative References:
Income Tax Assessment Act 1997
section 830-10
paragraph 830-10(1)
subsection 995-1(1)
subsection 960-130(1)
subsection 960-130(2)
Division 5A of Part III
section 340 Taxation Administration Act 1953
Schedule 1, paragraph 12-400(1)(b), Sub-Item 3(b) Related ATO Interpretative Decisions
ATO ID 2007/47
ATO ID 2010/33
Other References:
Peltzer, M and Voight, E, German Commercial Code: German-English Text with an Introduction in English, 5th Revised Edition, 2003, Verlag Dr.Otto Schmidt Köln, Germany.
Keywords
Germany
Investment trusts
Limited partnerships
PAYG withholding
ISSN: 1445 - 2782