ATO ID 2010/125: GST and acquisition of an interest in a Delaware limited liability company
Date of decision: 21 December 2009
Business line: Indirect Tax

Issue
Is an entity acquiring an interest as a single member in a limited liability company (LLC) formed in the United States of America (US), acquiring 'securities' under item 10 in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations)?

Decision
Yes, the entity acquiring an interest as a single member in a LLC formed in the US is acquiring 'securities' under item 10 in the table in subregulation 40-5.09(3) of the GST Regulations.

Facts
The entity carries on an enterprise in Australia and is registered for GST. The LLC is established under the US State of Delaware's Limited Liability Company Act (Del.) (LLC Act). Under the LLC Act, an LLC is not required to issue shares, its 'owners' are called members and sole membership of a LLC is permitted. The LLC is a separate legal entity and a body corporate. When the entity becomes a member of the LLC it acquires the associated interest, called a limited liability company interest (LLC interest), which represents the member's share of the LLC's profits and losses and the member's right to receive distributions of the LLC's assets. Note : the facts above may not apply to all LLC's. Whilst the LLC Act sets out standard rules in relation to the operation of LLC's, in some instances the LLC Act allows an LLC to vary these rules via its operating agreement.

Reasons for decision
Summary: Subregulation 40-5.09(3) of the GST Regulations itemises financial interests that are financial supplies if all of the requirements in subregulation 40-5.09(1) are satisfied in relation to the provision, acquisition or disposal of them. Item 10 in the table in subregulation 40-5.09(3) (Item 10) is about 'securities'. The Dictionary to the GST Regulations, states that 'securities' has the meaning given by subsection 92(1) of the Corporations Law (repealed and re-enacted as the Corporations Act 2001 (Corporations Act)). Under subsection 92(1), 'securities' includes 'shares in a body'. For Item 10 purposes, 'securities' has an extended meaning, which includes 'capital of a partnership'. 'Partnership' is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to have the meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). A single member US LLC may be treated as a partnership for income tax purposes by the operation of the foreign hybrid company provisions in Division 830 of the ITAA 1997. However, Division 830 is not considered to extend the 'meaning' of partnership given by section 995-1 of the ITAA 1997. It follows that the LLC is not a partnership for purposes of the GST Act. As the LLC is a 'body corporate' it is a 'body' for the purpose of the definition of securities (section 9 of the Corporations Act). As a body corporate, it is also a company as defined in section 195-1 of the GST Act. While 'share' is not defined in the Corporations Act, the Corporations Law defined the term to mean 'share in the share capital of a body'. Though now repealed, this was similar, but arguably narrower in scope than the GST Act definition, which is that 'share' in a company means a share in the capital of the company and includes stock. The GST Act definition is the same as paragraph (a) of the definition of 'shares' in section 995-1 of the ITAA 1997. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 7) 2003 (enacted as Taxation Laws Amendment Act (No. 1) 2004 which introduced the foreign hybrids provisions into Division 830 of the ITAA 1997) states that based on the broad meaning of 'share' in the ITAA 1997, 'shareholder' includes a member of a US LLC. While there is no direct referencing to these definitions from Item 10, we consider that contextually for Item 10 purposes, the meaning of a 'share' in a body needs to be consistent with the GST Act definition. The Explanatory Memorandum to the Financial Sector Reform (Amendments and Transitional Provisions) Bill (No. 1)1999 (which as enacted repealed the definition of 'share' in the Corporations Law) indicated the removal of the definition was to allow for the issue of shares (for example membership shares) which had no 'share capital' attached. Other amendments to the Corporations Act have introduced 'no par value' shares and the ability to issue bonus shares without increasing total share capital (see Note 3 of subsection 254A(1) of the Corporations Act). As it is no longer specifically defined for Corporations Act purposes, we consider the meaning of 'share' in these circumstances should take into account the context in which it is used in the GST Act and Regulations. It is recognised that the LLC does not issue share instruments to record the interests of members. However, the entity's LLC interest entitles it to a proportionate share of the LLC's profits, and assets on distribution (in this case 100% as it is the only member). It follows that the entity has a proportionate share in the LLC's capital (as a measure of its interest in the company) which is consistent with the GST Act definition of shares. It is also broadly equivalent to a share in the share capital of a company (limited by shares). We consider that contextually the LLC interest the entity acquires falls within the subsection 92(1) of the Corporations Act meaning of the term 'shares in a body' and therefore the meaning of 'securities' for Item 10 purposes. We therefore conclude that the Australian entity is acquiring an Item 10 interest in or under securities when it acquires a 'limited liability company interest' and becomes the single member of an LLC.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Related ATO interpretative decisions: ATO ID 2010/77
Other references: Explanatory Memorandum to the Financial Sector Reform (Amendments and Transitional Provisions) Bill (No. 1)1999 Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 7) 2003
Subject references: Goods and services tax GST financial supplies Input taxed supplies Securities