Private ruling: Corporate limited partnership
Published: July 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the rulee be a limited partnership for Australian income tax purposes as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the rulee be a corporate limited partnership for Australian income tax purposes as defined in section 94D of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes. | Q3: Will the rulee be liable for Australian tax on profits on activities arising or conducted outside Australia? | A3: No.

Relevant facts and circumstances: The rulee is a limited liability partnership formed under the laws of foreign country. It carries on a business of legal practice in foreign country (and in other countries globally) and intends to expand this business into Western Australia to the extent that it is permitted by the Legal Profession Act 2008 (WA) . The rulee has almost 200 partners and provides advice to clients on a range of legal matters. Each of the partners has equal control of the partnership owning equal rights in relation to the strategic decision making of the partnership. The rulee is looking to establish activities in Australia and will have one of its partners establish an office in Western Australia to assist with the provision of foreign legal advice to Australian clients. The rulee may eventually provide Australian legal advice to Australian residents. The partner will become an Australian resident for income tax purposes. The central management and control of the rulee will at all times remain in foreign country and the strategic decisions in relation to its Australian operations will be made in foreign country. The rulee is not a separate legal entity from the partners who compose it. The income or loss of the business carried on by the partnership is determined at the partnership level and is then allocated to the partners in proportion to their respective interests in accordance with foreign country partnership law and foreign country tax law principles. Under foreign country law the rulee was unable to incorporate under a business corporation statute as it carries on a legal practice. Under the laws of foreign country the liability of partners of the rulee is limited insofar as a partner is not personally liable for the negligence, wrongful acts or omissions, malpractice or misconduct of another partner, or an employee of the rulee, unless the partner knew of the negligence, wrongful act or omission, malpractice or misconduct at the time it was committed and failed to take reasonable steps to prevent its commission. The rulee is not a venture capital limited partnership (VCLP), an early stage venture capital limited partnership (ESVCLP), an Australian venture capital fund of funds (AFOF) or a venture capital management partnership (VCMP). Assumption Permanent establishments of the rulee located in unlisted countries will pass the 'active income test' for the purposes of subsections 24AH(5) and 24AH(7) of the ITAA 1936. Permanent establishments of the rulee located in listed countries will either pass the 'active income test' for the purposes of subsections 24AH(5) and 24AH(7) of the ITAA 1936 or, if the test is not passed, the foreign income of these permanent establishments is both 'adjusted tainted income' and 'eligible designated concession income'.

Relevant legislative provisions: Part X of the Income Tax Assessment Act 1936 | Section 23AH of the Income Tax Assessment Act 1936 | Section 94D of the Income Tax Assessment Act 1936 | Section 94T of the Income Tax Assessment Act 1936 | Section 386 of the Income Tax Assessment Act 1936 | Section 830-10 of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997

Reasons for decision: Summary: The rulee will be a limited partnership for Australian income tax purposes as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The definition of a limited partnership is defined in subsection 995-1(1) of the ITAA 1997 to mean: · an association of persons (other than a company) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly, where the liability of at least one of those persons is limited; or · an association of persons (other than one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for the purpose of becoming a *VCLP, an *ESVCLP, an *AFOF or a *VCMP and to carry on activities that are carried on by a body of that kind. In determining whether the liability of at least one of the partners is limited, Taxation Determination TD 2008/15 states at paragraph 13: The reference to the liability of at least one of the 'partners' being limited is a reference to a limitation (applying under the legal system applicable to the association) of their liability to third parties for, or to contribute to, the debts, obligations or other liabilities of the 'partnership'. Those debts, obligations or other liabilities will be those arising from the partners carrying on business as partners, or from their joint receipt of income, whichever character their association has. The rulee carries on a business of legal practice in foreign country through a group of partners. It is therefore considered that the rulee is an association of persons carrying on a business as partners. Further to the definition of 'limited partnership' in section 995-1 of the ITAA 1997 is that the liability of at least one of the persons, in the association of persons carrying on a business as partners, is limited. Under the laws of foreign country, the liability of partners of the rulee is limited insofar as a partner is not personally liable for the negligence, wrongful acts or omissions, malpractice or misconduct of another partner, or an employee of the rulee, unless the partner knew of the negligence, wrongful act or omission, malpractice or misconduct at the time it was committed and failed to take reasonable steps to prevent its commission. Where there is no such knowledge, a partner's liability is limited to their interest in the partnership property. Based on this, it is determined that the liability of the respective partners of the rulee is limited. Accordingly, the rulee satisfies the requirement for a limited partnership in paragraph (a) of the definition in subsection 995-1(1) of the ITAA 1997. It is therefore not necessary to consider paragraph (b) in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Question 2: Will the rulee be a corporate limited partnership for Australian income tax purposes as defined in section 94D of the Income Tax Assessment Act 1936 (ITAA 1936)? | Summary: The rulee will be a corporate limited partnership for Australian income tax purposes as defined in section 94D of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 94D(1) of the ITAA 1936 provides that a limited partnership is a corporate limited partnership in relation to a year of income of the partnership if the year of income is the 1995-96 or a later year of income. However, subsection 94D(2) of the ITAA 1936 provides that a partnership that is a venture capital limited partnership (VCLP), an early stage venture capital limited partnership (ESVCLP), an Australian venture capital fund of funds (AFOF) or a venture capital management partnership (VCMP) cannot be a corporate limited partnership. It has been previously been determined that the rulee is a limited partnership. As this private ruling related to the 2011-12 and later years of income, the rulee satisfies the definition of corporate limited partnership in subsection 94D(1) of the ITAA 1936. The rulee is a partnership that is not a VCLP, an ESVCLP, an AFOF or a VCMP and therefore, does not satisfy the conditions in subsection 94D(2) of the ITAA 1936. Further to this, a limited partnership is not a corporate limited partnership if it is a foreign hybrid limited partnership in relation to a year of income because of subsections 830-10(1) of the ITAA 1997. For a limited partnership to be a foreign hybrid limited partnership it must satisfy all of the requirements of section 830-10 of the ITAA 1997. Subsection 830-10(1) of the ITAA 1997 provides that a limited partnership is a foreign hybrid limited partnership in relation to an income year if: · it was formed in a foreign country; and · foreign income tax (except credit absorption tax or unitary tax) is imposed under the law of the foreign country on the partners, not the limited partnership, in respect of the income or profits of the partnership for the income year; and · at no time during the income year is the limited partnership, 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 · disregarding subsection 94D(5) of the Income Tax Assessment Act 1936 , at no time during the income year is it an Australian resident; and · disregarding that subsection, in relation to the same income year of another taxpayer: · the limited partnership is a CFC at the end of a statutory accounting period that ends in the income year; and · 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. The rulee was formed in foreign country and under the foreign country tax laws, it is the partners, not the rulee, who are taxed on the profits of the partnership. The rulee is not a resident of foreign country for tax purposes. It is an Australian resident pursuant to section 94T of the ITAA 1936 as it carries on a business in Australia. However, the rulee is not a controlled foreign company (CFC), as defined in section 340 of the ITAA 1936, as it will not be controlled by Australian entities. Therefore, paragraph 830-10(1)(e) of the ITAA 1997 is not satisfied and the rulee is not a foreign hybrid limited partnership. The rulee meets the definition in section 94D of the ITAA 1936 and is a corporate limited partnership in relation to the relevant years of income. | Detailed Reasoning - Question 3: Will the rulee be liable for Australian tax on profits on activities arising or conducted outside Australia? | Summary: The rulee is an Australian resident and therefore, is assessed on its income from all sources, whether in or out of Australia. However, section 23AH of the ITAA 1936 will apply so that the income derived by the company from its foreign branches will be non-assessable non-exempt income. | Detailed Reasoning - Detailed reasoning: Sections 6-5 and 6-10 of the ITAA 1997 provides that an Australian resident's assessable income includes the ordinary income and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. The residence of a corporate limited partnership is determined in accordance with section 94T of the ITAA 1936 which states that a partnership is a resident of Australia if and only if: · the partnership was formed in Australia, or either: · the partnership carries on business in Australia, or · the partnership's central management and control is in Australia. It has previously been determined that the rulee is a corporate limited partnership as it meets the definition provided in section 94D of the ITAA 1936. Therefore, its residence will be determined in accordance with section 94T of the ITAA 1936. Although the rulee was not formed in Australia, it intends to carry on a business of legal practice in Western Australia to the extent that it is permitted by the Legal Profession Act 2008 (WA) . Accordingly, as the rulee will carry on business in Australia, it is an Australian resident for Australian tax purposes and its income, whether derived in or out of Australia will be assessable in Australia. Subsection 23AH(2) of the ITAA 1936 provides that foreign income derived by a company 1 that is a resident of Australia in carrying on a business at or through a permanent establishment (PE) in a listed or unlisted country is not assessable income and is not exempt income. Subsection 23AH(15) of the ITAA 1936 defines foreign income as including amounts that are assessable income (other than under the capital gains tax provisions) and derived from sources in a listed or unlisted country. One of the conditions for the exemption in section 23AH of the ITAA 1936 to apply, is that subsections 23AH(5) and 23AH(7) of the ITAA 1936 states that the PE passes the 'active income test'. The active income test is defined in subsection 23AH(12) of the ITAA 1936 and requires certain assumptions to be made which are outlined in subsection 23AH(14) of the ITAA 1936. Where the active income test is not passed, the exemption provided in section 23AH of the ITAA 1936 can still apply providing that the foreign income of the PE is not: · adjusted tainted income and eligible designated concession income if the PE is in a listed country, or · adjusted tainted income if the PE is located in an unlisted country. Adjusted tainted income is defined in subsection 23AH(13) of the ITAA 1936 which refers to the definition provided in section 386 of the ITAA 1936. Broadly, adjusted tainted income is passive income, tainted sales income and tainted services income with certain adjustments. Eligible designated concession income, for the purposes of section 23AH of the ITAA 1936, has the same meaning provided in Part X of the ITAA 1936. Broadly, designated concession income is income or profits that either is not taxed at all (for example, capital gains), or is taxed at reduced rates to attract particular forms of business or financial activity. As the rulee is a corporate limited partnership, section 23AH of the ITAA 1936 will apply so that any foreign income derived by it is non-assessable non-exempt subject to the provisions of the section. For each PE of the rulee that is located in an unlisted country, the active income test is passed. Where the PE of the rulee is located in a listed country (for example, foreign country) and does not pass the active income test, the foreign income is not adjusted tainted income or eligible designated concession income. Accordingly, subsection 23AH(2) of the ITAA 1936 will apply to treat the foreign branch income as non-assessable non-exempt income.

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