On 10 August 2016, the Commissioner issued this draft determination, asking the relatively technical question: Income tax: can a foreign resident elect to treat their interest in a limited partnership as an interest in a foreign hybrid limited partnership under paragraph 830-10(2)(b) of the Income Tax Assessment Act 1997? The draft answer given is: No. How do we make sense of this.
[ATO website – TD 2016/D2] [LTN 153, 10/8/16]
Div 830 of the ITAA97 is about ‘Foreign Hybrids’.
Section 830-1 says that, under this Division, companies that are taxed like partnerships, in foreign jurisdictions, are taxed as partnerships in Australia (in some circumstances). Likewise, in some circumstances, limited partnerships that are treated like companies in Australia, but taxed as partnerships overseas, are treated as partnerships in Australia (undeeming the deemed corporate treatment).
The purpose of Div 830
The draft determination states that the purpose of deeming foreign hybrids to be taxed as partnerships in Australia as follows.
4. Generally, limited partnerships are taxed like companies for Australian income tax purposes. However Division 830 provides an exception. It was introduced to change the way investments in certain foreign limited partnerships (and other ‘foreign hybrids’) are taxed in Australia.
5. Prior to the enactment of Division 830, Australian resident taxpayers with interests in foreign hybrids were potentially taxed on their share of the income derived by the foreign hybrid entity under Australia’s controlled foreign company (CFC) or former foreign investment fund (FIF) rules. The application of these rules led to inappropriate outcomes:
(a) sometimes comparably taxed income was attributed
(b) the active income test could not be satisfied
(c) there was a risk of double taxation, and
(d) there were significant compliance costs.
- 6. Under Division 830, an entity that qualifies as a ‘foreign hybrid’ is treated as a partnership, rather than a company, for Australian tax purposes. As a consequence, an attributable taxpayer [as defined in the CFC provisions, disregarding s94D(5)] in relation to a foreign hybrid limited partnership is taxed on their share of the foreign hybrid’s net income under Division 5 of the ITAA 1936 (dealing with partnerships) instead of on their share of the foreign hybrid’s attributable income calculated under the CFC rules.
- 7. However a limited partnership is still treated like a company in relation to partners who are not attributable taxpayers (that is, where a partner’s interest would have been dealt with under the FIF rules rather than the CFC rules) unless they have made an election under former subsection 485AA(1) of the ITAA 1936 or under paragraph 830-10(2)(b) [the s830-10(2)(b) election replaces the s485AA(1) election in the FIF rules, before they were repealed in 2010].
Section 830-10(2) of the ITAA97
(2) If a partner is not an *attributable taxpayer in relation to a *limited partnership, then, for the purposes of applying the Income Tax Assessment Act 1936 and this Act in relation to the partner’s interest in the limited partnership, the limited partnership is a foreign hybrid limited partnership in relation to an income year for the partner if, and only if, the partner:
(a) has made an election under former subsection 485AA(1) of the Income Tax Assessment Act 1936; or
(b) makes an election under this paragraph;
in relation to the partner’s interest in the partnership.
The Draft Determination – explanation
The explanation for this view is long and technical and beyond the scope of this article. It suffices to say that there is an ‘alternative view’ to all this technical explanation, which is set out in ‘Appendix 2’ (para 20 and following). Readers, who are interested, can access the draft determination via the above link and follow the reasoning through and make your own assessment as to which is right.