ATO ID 2006/149: Classification of a Bermudan Exempted Limited Partnership for Australian income tax purposes
Date of decision: 18 May 2006
Year of income: Year ending 30 September 2006
Business line: Public Groups and International

Issue
Is a Bermudan exempted limited partnership a corporate limited partnership under Division 5A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. A Bermudan exempted limited partnership is a corporate limited partnership under Division 5A of the ITAA 1936.

Facts
A Bermudan exempted limited partnership formed under the Bermuda Exempted Partnerships Act 1992 , is subject to the laws and regulations of Bermuda. The relevant Limited Partnership Agreement (LPA) provides for one partner to be the General Partner and the other partners to be Limited Partners. The limited partnership was formed in an income year later than the 1995-96 income years by the General Partner and the Initial Limited Partner. The partnership was established for the purpose of investing in real estate and real estate related assets.

Reasons for decision
Summary: The definition of a partnership in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) includes a limited partnership. A limited partnership is further defined in section 995-1 of the ITAA 1997 as: Therefore, an association of persons in receipt of ordinary income may be a limited partnership provided the liability of at least one person is limited. Other definitions in section 995-1 of the ITAA 1997 refer to the liability of the partners. A General Partner is a partner of a limited partnership whose liability in relation to the partnership is unlimited. A Limited Partner is a partner whose liability in relation to the partnership is limited. As the LPA provides for one partner to be the General Partner and the other partners to be Limited Partners, the Bermudan Exempted Limited Partnership will be a limited partnership. A 'corporate limited partnership' however, is separately defined in Division 5A of the ITAA 1936 so that such an entity is treated as a company for Australian income tax purposes. A 'corporate limited partnership' is defined in section 94D of the ITAA 1936 to include limited partnerships formed in the 1995-96 or later years of income, but subsection 94D(2) of the ITAA 1936 specifically excludes a VCLP, AFOF or venture capital management partnership. In this context a VCLP is a Venture Capital Limited Partnership and AFOF means an Australian Venture Capital Fund of Funds. A VCLP is defined by reference to the Venture Capital Act 2002 . The Bermudan Exempted Limited Partnership will not be excluded from the definition of a corporate limited partnership as subsection 9-1(1) of the Venture Capital Act requires of a VCLP that: The Bermudan Exempted Limited Partnership is not established under Australian law, but instead under Bermudan law which is not a listed country nor a country prescribed in the regulations of the Venture Capital Act. Therefore, the Bermudan Exempted Limited Partnership will not be a VCLP. Similar problems exist with the Bermudan Exempted Limited Partnership being either an AFOF or a venture capital management partnership. A limited partnership may not be either an AFOF or a venture capital management partnership without being an Australian resident. The Bermudan Exempted Limited Partnership is not an Australian resident. Therefore, the Bermudan Exempted Limited Partnership is a limited partnership which is not excluded from the definition of corporate limited partnership because of subsection 94D(2) of the ITAA 1936. A limited partnership can also be a foreign hybrid entity (for example, a foreign hybrid limited partnership) under Division 830 of the ITAA 1997. A limited partnership that is a foreign hybrid limited partnership is excluded from being a corporate limited partnership via subsection 94D(4) of the ITAA 1936. A 'foreign hybrid limited partnership' is defined in section 830-10 of the ITAA 1997. Paragraph 830-10(1)(b) of the ITAA 1997 requires that foreign tax must be imposed under the law of the foreign country on the partners, not the partnership. Bermuda as the foreign country in question does not impose any tax on income, profits, dividends or wealth. Therefore, Bermuda does not impose tax on the partners and as a result, this paragraph will not be satisfied. Also, paragraph 830-10(1)(e) of the ITAA 1997 requires that the limited partnership be a controlled foreign company (CFC) at the end of a statutory accounting period and that at the end of the statutory accounting period, there is a taxpayer that is an attributable taxpayer in relation to the CFC with an attribution percentage greater than nil. In situations where a Bermudan Exempted Limited Partnership fails to be a CFC, then the partnership will also fail to satisfy the requirements of paragraph 830-10(1)(e) of the ITAA 1997. Therefore, as the Bermudan Exempted Limited Partnership fails to satisfy the requirements of paragraph 830-10(1)(b) of the ITAA 1997, and where it is not a CFC it will neither satisfy paragraph 830-10(1)(e) of the ITAA 1997, then as a result it will fail to satisfy the definition of a 'foreign hybrid limited partnership' in subsection 830-10(1) of the ITAA 1997. Therefore, it would not be excluded from being a corporate limited partnership pursuant to subsection 94D(4) of the ITAA 1936. Consequently, the Bermudan Exempted Limited Partnership: In conclusion, the Bermudan Exempted Limited Partnership will be a 'corporate limited partnership' for Australian income tax purposes as per the definition in section 94D of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 Division 5A section 94D
Other references: The Limited Partnership Act 1883 (Bermuda) The Exempted Partnerships Act 1992 (Bermuda) The Partnership Act 1902 (Bermuda)
Subject references: Bermuda Controlled foreign companies Foreign hybrid limited partnership Foreign hybrids International tax Limited partnerships Ownership, interests, control & rights Tracing of ownership & interests