On Wed 7 Dec 2016, the Commissioner issued 2 draft determinations concluding that first: a ‘partnership’ with a corporate partner and second, a trust with a corporate beneficiary, can have a ‘participation interest’.
Draft Taxation Determination TD 2016/D6 asks:
‘where an Australian corporate tax entity is a partner in a partnership, can the partnership ‘hold’ a direct control interest (within the meaning of section 350 of the Income Tax Assessment Act 1936 ) in a foreign company for the purpose of Subdivision 768-A of the Income Tax Assessment Act 1997?’
It answers: Yes. Therefore a corporate tax entity that is a partner in a partnership can have a participation interest in a foreign company for the purpose of satisfying the participation test in section 768-15.
Draft Taxation Determination TD 2016/D7 asks:
‘where an Australian corporate tax entity is a beneficiary of a trust, can the trust be taken to ‘hold’ a direct control interest (within the meaning of section 350 of the Income Tax Assessment Act 1936 ) in a foreign company for the purpose of Subdivision 768-A of the Income Tax Assessment Act 1997?’
It answers: Yes. Therefore, a corporate tax entity that is a beneficiary of a trust (including a discretionary trust) can have a participation interest in a foreign company for the purpose of satisfying the participation test in section 768-15.
DATE OF EFFECT: When the final Determinations are issued, they will apply to foreign equity distributions made on or after 17 October 2014.
[ATO website: TD 2016/D6 & TD 2016/D7] [LTN 237, 7/12/16]
Extracts from the Income Tax Assessment Act 1997
SECTION 768-1 What this Subdivision is about
If:
(a) an Australian corporate tax entity receives a foreign equity distribution from a foreign company, either directly or indirectly through one or more interposed trusts or partnerships; and
(b) the Australian corporate tax entity holds a participation interest of at least 10% in the foreign company;
the distribution is non-assessable non-exempt income for the Australian corporate tax entity.
SECTION 768-15 Participation test – minimum 10% participation
An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%:
(a) the *direct participation interest the entity would have in the other entity if rights on winding-up were disregarded;
(b) the *indirect participation interest the entity would have in the other entity if:
(i) rights on winding-up were disregarded; and
(ii) section 960-185 only applied to intermediate entities that are not *corporate tax entities.