Private ruling: Capital gains tax
Published: February 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will a capital gains tax (CGT) event occur when the title of the property is transferred to the Limited Liability Company (LLC)? | A1: No.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You purchased an investment property located in Country A. Title to the property is held in your name. You want to obtain finance for the property. In order to do this, the bank has recommended that you move the property into a single member LLC. In order to obtain the loan you intend to set up a single member LLC registered in Country A and you will be the sole member of the LLC. The property's title will then be transferred to the LLC via a Warranty Deed. The LLC is not an Australian resident company. The LLC is treated, for Country As taxation purposes, as a partnership or disregarded entity. The LLC is not treated as a resident taxable entity in any other country.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(2) | Income Tax Assessment Act 1997 Division 830 | Income Tax Assessment Act 1997 paragraphs 830-15(1)(a) | Income Tax Assessment Act 1997 paragraphs 830-15(1)(b) | Income Tax Assessment Act 1997 paragraphs 830-15(1)(c) | Income Tax Assessment Act 1997 paragraphs 830-15(1)(d) | Income Tax Assessment Act 1997 subsection 830-15(2)

Reasons for decision: Summary: CGT event A1 happens if you dispose of a CGT asset as per subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. | Detailed Reasoning - ATO ID 2010/77 - Foreign hybrid company: ATO ID 2010/77 discusses whether or not a LLC formed in the United States can be treated as a partnership for income tax purposes. Division 830 of the ITAA 1997 provides for foreign hybrids, that are treated as flow-through entities for the purposes of foreign tax, but treated as companies for Australian income tax purposes, to be treated as partnership for the purposes of the Acts. Paragraphs 830-15(1)(a) to (d) of the ITAA 1997 set out the requirements for a company to qualify as a foreign hybrid company. It states that: A company is a foreign hybrid company in relation to an income year if: a) at all times during the income year when the company is in existence, the partnership treatment requirements for the income year in subsection (2) or (3) are satisfied; and b) at no time during the income year is the company, for the purposes of a law of any foreign country that imposes foreign income tax (except credit absorption tax or unitary tax) on entities because they are residents of the foreign country, a resident of that country; and c) at no time during the income year is the company an Australian resident; and d) disregarding this Division, in relation to the same income year of another taxpayer: i. the company is a CFC at the end of a statutory accounting period that ends in the income year; and ii. at the end of the statutory accounting period, the taxpayer is an attributable taxpayer in relation to the CFC with an attribution percentage greater than nil. According to paragraph 830-15(2)(a) of the ITAA 1997, the LLC has to satisfy the 'partnership treatment requirements' in subsection 830-15(2). Subsection 830-15(2) of the ITAA 1997 states: For the purposes of paragraph (1)(a), the partnership treatment requirements are satisfied if: a) the company was formed in the United States of America; and b) for the purposes of the law of that country relating to foreign income tax (except credit absorption tax or unitary tax) imposed by that country, the company is a limited liability company that: i. is treated as a partnership; or ii. is an eligible entity that is disregarded as an entity separate from its owner. Section 830-20 of the ITAA 1997 provides that if a company is a foreign hybrid company in relation to an income year it is treated as a partnership for the purposes of the income tax law. | Detailed Reasoning - Application to your circumstances: In this case, the LLC was formed in the Country A and you will be the only member. The LLC will be treated as a partnership or disregarded entity Country A tax purposes. Therefore, subsection 830-15(2) of the ITAA 1997 and consequently paragraph 830-15(1) of the ITAA 1997 will be satisfied. Paragraphs 830-15(1)(b), (c) and (d) are also satisfied. Therefore, the LLC will be treated as a partnership and you, as the single member of the LLC, will be treated as the only partner in the partnership. Although title of the property will be transferred to the LLC, you will maintain your 100% ownership interest in the property as the only partner in the partnership. Therefore, as there has been no change in ownership, a CGT event will not occur when the property is transferred.