TD 2017/21 and TD 2017/22 – Foreign equity distributions to corporate partners and corporate beneficiaries for the purposes of establishing a 10% ‘participation interest’ under Subdiv 768-A

On Wed 18.10.2017, the Commissioner issued 2 Taxation Determinations on the application of the foreign equity distribution rules in Subdiv 768-A of the ITAA 1997 where the recipient is a corporate partner in a partnership or a corporate beneficiary of a trust.

Under Subdiv 768-A, a foreign equity distribution is treated as NANE income if the recipient is an Australian corporate tax entity that “holds” a participation interest of at least 10% in the foreign company making the distribution. This treatment applies whether the distribution is received directly from the foreign company or indirectly through interposed partnerships or trusts.

The ATO view is that a partnership or trust can “hold” a direct control interest in a foreign company for Subdiv 768-A purposes, so that an Australian corporate tax entity can have an indirect participation interest in the foreign company via the partnership or trust.

• Specifically, Taxation Determination TD 2017/21 provides that a corporate partner in a partnership can have a participation interest in the foreign company for the purpose of satisfying the 10% participation test (in s768-15). The Determination finalises Draft TD 2016/D6 and is substantially the same as the Draft.
• Similarly, Taxation Determination TD 2017/22 provides that a corporate beneficiary of a trust can have a participation interest in the foreign company for the purpose of satisfying the 10% participation test. This aspect of TD 2017/22 differs from the Draft (TD 2016/D7), which expressly stated that a corporate beneficiary of a discretionary trust can have a participation interest in a foreign company. However, the finalised Determination notes that because a discretionary trustee will usually only exercise its discretion concerning the trust income and corpus at the end of the income year, a beneficiary would not, in the Commissioner’s view, have an entitlement at the test time if the foreign equity distribution is made before year end.

DATE OF EFFECT: Both Determinations apply from 17 October 2014 (being the date Subdiv 768-A took effect). However, to the extent that TD 2017/22 provides a less favourable outcome than the view outlined in Draft TD 2016/D7, taxpayers can rely on the view in Draft TD 2016/D7 from 17 October 2014 to 18 October 2017.

[ATO website: TD 2017/21, TD 2017/22, TD 2016/D6, TD 2016/D7; LTN 199, 18/10/17; TM Oct 2017]