ATO ID 2010/9: Capital gains tax: scrip for scrip roll-over - Delaware limited partnerships
Date of decision: 2 September 2009
Year of income: Year ended 30 June 2009
Business line: Public Groups and International

Issue
Is scrip for scrip roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) available for the exchange of interests in a Delaware Limited Partnership (DLP) formed under the Delaware Revised Uniform Limited Partnership Act (Del.) for interests in another DLP?

Decision
Yes. Scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 is available for the exchange of interests in a DLP for interests in another DLP provided the conditions in the Subdivision are satisfied.

Facts
An Australian resident holder of interests in DLP A transfers their interests to DLP B in exchange for interests in DLP B. DLP B will become the owner of 100% of the interests in DLP A. DLP A and DLP B are foreign residents for Australian income tax purposes. DLP A and DLP B are 'limited partnerships' within the meaning of that term as defined in subsection 995-1(1) of the ITAA 1997 and are not Controlled Foreign Companies under Part X of the Income Tax Assessment Act 1936 (ITAA 1936). The partnership agreement for DLP A provides interest holders with voting or decision making rights similar to those of an ordinary company shareholder. The Australian resident holder has not made an election under section 485AA of the ITAA 1936 to treat their interests in DLP A and DLP B as foreign hybrid limited partnerships.

Reasons for decision
Summary: Subdivision 124-M of the ITAA 1997 contains a number of conditions for, and exceptions to, a shareholder being eligible to choose scrip for scrip roll-over relief. One condition is that the interest holder exchanges shares in one company for shares in another company (subparagraph 124-780(1)(a)(i) of the ITAA 1997). Under section 94D of the ITAA 1936, a limited partnership is a corporate limited partnership for the purposes of Division 5A of Part III of the ITAA 1936 for the 1995-96 or later years of income if the exceptions in that section do not apply. On the facts of this case, DLP A and DLP B are considered to be corporate limited partnerships in accordance with section 94D of the ITAA 1936. Under section 94J of the ITAA 1936, a reference in the ITAA 1936 or ITAA 1997 to a company or to a body corporate includes a reference to a corporate limited partnership. Further, section 94P of the ITAA 1936 provides that a reference in the ITAA 1936 or ITAA 1997 to a share includes a reference to an interest in a corporate limited partnership. Therefore, for the purposes of the ITAA 1936 and ITAA 1997, DLP A and DLP B are treated as a company and/or body corporate and interests in them as shares. Accordingly, the exchange of interests in DLP A by the Australian resident holder for interests in DLP B can be considered as an exchange of shares in a company for shares in another company for the purposes of subparagraph 124-780(1)(a)(i) of the ITAA 1997. However, the conditions for scrip for scrip roll-over specified in paragraphs 124-780(2)(a) and 124-780(2)(b) of the ITAA 1997 relate to voting shares in the original entity. Subsection 995-1(1) of the ITAA 1997 defines the term 'voting share' as follows: Voting share in a company means: if the company is a body corporate - a voting share as defined by section 9 of the Corporations Act 2001; and otherwise - a share that would be a voting share as defined by that section if the company were a body corporate. Accordingly, a reference to a voting share will include a reference to an interest in a corporate limited partnership if the corporate limited partnership was a body corporate and the interest would be a voting share as defined by section 9 of the Corporations Act 2001 . In specifying the attributes required, section 9 of the Corporations Act 2001 provides that a: voting share in a body corporate means an issued share in the body that carries any voting rights beyond the following: (a) a right to vote while a dividend (or part of a dividend) in respect of the share is unpaid; (b) a right to vote on a proposal to reduce the body's share capital; (c) a right to vote on a resolution to approve the terms of a buy-back agreement; (d) a right to vote on a proposal that affects the rights attached to the share; (e) a right to vote on a proposal to wind the body up; (f) a right to vote on a proposal for the disposal of the whole of the body's property, business and undertaking; (g) a right to vote during the body's winding up. In determining whether interests in a corporate limited partnership can be considered as voting shares, the provisions of Division 5A of Part III of the ITAA 1936 will not alter the attributes of the partnership interests. Consequently, in applying the provisions of the Corporations Act 2001 , the interests in the corporate limited partnership must be voting interests and their attributes must entitle the interest holders with voting rights in accordance with the concept of voting shares under section 9 of the Corporations Act 2001 . In this case, the partnership agreement for DLP A entitles the interest holders with voting rights that are in accordance with the concept of voting shares and the exchange of those interests can therefore be considered as an exchange of voting shares for the purposes of subparagraphs 124-780(2)(a) and 124-780(2)(b) of the ITAA 1997. Accordingly, scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 will be available to the Australian resident holder for the exchange of their interests in DLP A for interests in DLP B provided the other conditions in the Subdivision are satisfied.

Legislative references: Income Tax Assessment Act 1936 section 94D section 94J section 94P section 485AA
Subject references: Capital gains tax Scrip for scrip roll-over Exchange of shares Limited partnerships