Private ruling: Early stage venture capital limited partnerships
Date of advice: 19 May 2020
Published: February 2022
Ruling period: Years ended 30 September 20XX | Years ended 30 September 20XX | Years ended 30 September 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: If the Company is found liable for an amount under subsection 67A(2) of the Partnership Act 1892 (NSW) will Company A remain a limited partner of the Partnership, as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: If the answer to Question 1 is yes, is the Company entitled to a tax offset under section 61-760 of the ITAA 1997 in the income year in which it contributes to the Partnership? | A2: Yes

Relevant facts and circumstances: 1. Company A is a partner in the Partnership. 2. The Partnership is registered under the New South Wales Partnership Act 1892 (NSW Partnership Act) as an incorporated limited partnership: 3. The Partnership is registered as an early stage venture capital partnership (ESVCLP) under the Venture Capital Act 2020 (VCA). 4. The Company provided copies of the Partnership's partnership deed, management agreement and investment agreement in relation to their application. 5. In relation to the Partnership, the Company is a partner in its own right and not in its capacity as trustee of a trust or as agent for a trust or partnership. 6. We have referred to the relevant clauses within these documents in applying the relevant provisions to the Company's circumstances.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 61-760 | Income Tax Assessment Act 1997 subsection 61-760(1) | Income Tax Assessment Act 1997 paragraph 61-760(1)(a) | Income Tax Assessment Act 1997 subsection 61-760(2) | Income Tax Assessment Act 1997 subsection 118-407(4) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 subsection 94D(2) | Venture Capital Act 2020 section 1-15 | Venture Capital Act 2020 subsection 1-15(1) | Venture Capital Act 2020 subsection 1-15(2) | Venture Capital Act 2020 section 3-1 | Venture Capital Act 2020 section 3-5 | Venture Capital Act 2020 subsection 9-3(1) | Venture Capital Act 2020 subsection 11-1(2) | Venture Capital Act 2020 subsection (3) of Schedule 1 Partnership Act 1892 (New South Wales) section 49 | Partnership Act 1892 (New South Wales) section 51 | Partnership Act 1892 (New South Wales) paragraph 53D(3)(a) | Partnership Act 1892 (New South Wales) subsection 54(2) | Partnership Act 1892 (New South Wales) paragraph 54(2)(j) | Partnership Act 1892 (New South Wales) paragraph 54(2)(k) | Partnership Act 1892 (New South Wales) section 66A | Partnership Act 1892 (New South Wales) subsection 66A(3) | Partnership Act 1892 (New South Wales) section 67A | Partnership Act 1892 (New South Wales) subsection 67A(1) | Partnership Act 1892 (New South Wales) subsection 67A(2) | Partnership Act 1892 (New South Wales) subsection 67A(3)

Reasons for decision: Summary: Yes, if the Company is found liable to pay an amount under subsection 67A(2) of the NSW Partnership Act, the amount it will be liable to pay is tied to specific liability in respect of a loss or injury as a result of an act of the Company as a limited partner (albeit that the liability is calculated as if the Company were a general partner) of the relevant Fund. A liability to pay an amount imposed under subsection 67A(2) of the NSW Partnership Act could alter the Company's liability in relation to the Partnership, but the Company's liability in relation to that Partnership would still be limited. The Company would remain a limited partner of that Partnership as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Background - limited partnership, limited partner, general partner and ESVCLP under the ITAA 1997 7. Subsection 995-1(1) includes the following definitions: limited partner means a partner of a * limited partnership whose liability in relation to the partnership is limited. general partner means a partner of a *limited partnership whose liability in relation to the partnership is not limited. limited partnership means: (a) 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 (b) 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 ESVCLP means an *early stage venture capital limited partnership. early stage venture capital limited partnership has the meaning given by subsection 118-407(4). 8. The definition of early stage venture capital limited partnership references subsection 118-407(4), which states: A *limited partnership is an early stage venture capital limited partnership at a particular time if, at that time, the partnership's registration as an early stage venture capital limited partnership under Part 2 of the Venture Capital Act 2002 is, or is taken to have been, in force. Note 1: For when the registration is, or is taken to have been, in force, see section 13-10 of the Venture Capital Act 2002 . 9. A limited partnership will be an ESVCLP while it is registered as such under the VCA and the Partnership is registered as EVCLPs under the VCA. 10. Whether each partner is limited partner, or a general partner requires an examination of their liability in relation to the partnership. Limited partnership, limited partner, general partner, EVCLP under the ITAA 1997 and interaction with the VCA 11. The definitions used in the VCA are the same as in the ITAA 1997, as subsections 1-15(1) and 1-15(2) of the VCA state: 1-15(1) Many of the terms in this Act are defined in the Dictionary, starting at section 995-1, to the Income Tax Assessment Act 1997 . 1-15(2) Most of the terms that are defined in that Dictionary are identified by an asterisk appearing at the start of the term: as in *Innovation and Science Australia. The footnote with the asterisk contains a signpost to that Dictionary. 12. Section 3-1 of VCA under the heading' What this Act is About' states: This Act provides for some administrative measures that are needed for the operation of: (a) the capital gains tax exemption relating to venture capital under Subdivision 118-F of the Income Tax Assessment Act 1997 (and the related provisions about similar income gains and losses); and (b) the "flow-through" treatment, under Division 5 of Part III of the Income Tax Assessment Act 1936 , of the income of limited partnerships that are used as vehicles for making venture capital investments. Note: Innovation and Science Australia is responsible for the operation of these measures. The Industry Research and Development Act 1986 provides for the establishment and operation of Innovation and Science 13. One of Innovation and Science Australia responsibilities under section 3-1 of the VCA is the registration process, which is the 'Part 2 of the Venture Capital Act 2002 ' referred to in subsection 118-407(4), as section 3-5 of the VCA states: Part 2 provides for: (a) the registration requirements for venture capital limited partnerships, early stage venture capital limited partnerships and Australian venture capital funds of funds; and (b) applications for registration; and (c) registration of limited partnerships by Innovation and Science Australia, including conditional registration; and (d) the obligations imposed on general partners of partnerships that are registered; and (e) revocation of registration. 14. In respect of when a registration is in force for the purposes of subsection 118-407(4), subsection 13-10(1) of the VCA states: Registration of the partnership as a *VCLP, an *ESVCLP or an *AFOF comes into force on the day on which registration under section 13-1 was granted. 15. In respect of the 'applications for registration' under paragraph 3-5(b) of the VCA, subsection 11-1(2) of the VCA states in part (emphasis added): An application must be in writing, and must include the following information: (a) the name and residency status of, and the relevant qualifications and experience of, each *general partner ; (b) the name, address and residency status of each *limited partner ;... (h) the amount of each partner' s committed capital in the partnership;... 16. The effect of the above provisions of the VCA is that when a partnership applies for registration under the VCA, the applicant will clearly identify which partners are limited partners and which partners are general partners. 17. As general partner and limited partner under the VCA has the same definition as the definition in section 995-1, when they complete the application, the applicant has already determined whether each partner in a limited or general partner for the purposes of the ITAA 1997. Once processed, the registration by Innovation and Science Australia confirms what has been included in the application. 18. As Innovation and Science Australia has the administrative responsibility in respect of registering an ESVCLP, the Commissioner relies on the actions taken by Innovation and Science Australia when applying the provisions of the ITAA 1997 and the Income Tax Assessment Act 1936 specified in section 3-1 of the VCA. Background - NSW Partnership Act limited and general partner and interaction between the NSW Partnership Act and the VCA 19. The composition requirements of an incorporated limited partnership are contained in section 51 of the NSW Partnership Act which states: (1) A limited partnership or incorporated limited partnership must have- (a) at least one general partner, and (b) at least one limited partner. (2) A corporation may be a general partner or a limited partner in a limited partnership or incorporated limited partnership. (3) A partnership (including an external partnership) may be a general partner or a limited partner in a limited partnership or incorporated limited partnership. 20. Section 49 of the NSW Partnership Act defines a general partner and a limited partner as (emphasis added): | Detailed Reasoning - general partner:: (a) in a limited partnership-means a partner in the limited partnership who is not a limited partner, and (b) in an incorporated limited partnership-means a person or partnership (including an external partnership) admitted as a partner in the incorporated limited partnership in accordance with the partnership agreement and who is not a limited partner . limited partner : (a) in a limited partnership-means a partner in the limited partnership whose liability for the liabilities of the partnership is limited in accordance with this Part, and (b) in an incorporated limited partnership-means a person or partnership (including an external partnership) admitted and designated as a limited partner in the incorporated limited partnership in accordance with the partnership agreement . 21. The registration process under the NSW Partnership Act also requires that each partner be identified as either a limited or general partner as subsection 54(2) states in part (emphasis added): The statement must be made in the form approved by the Registrar and must- (a) contain a statement of whether the partnership is to be registered as a limited partnership or an incorporated limited partnership, and... (f) contain a statement in relation to each partner or proposed partner that is an individual as to whether that partner or proposed partner is, or is proposed to be, a general partner or a limited partner , and (g) contain a statement in relation to each partner or proposed partner that is a corporation or a partnership that is, or is proposed to be, a partner a statement in relation to the corporation or partnership as to whether it is to be a general partner or a limited partner , and... 22. Subsection 9-3(1) of the VCA states in part: The registration requirements of an ESVCLP, in relation to a *limited partnership, are that: (a) the partnership was established by or under a law in force in, or in any part of: (i) Australia;... 23. A partnership registered under the NSW Partnership Act will be a partnership established by or under a law in force in part of Australia, that part being the State of New South Wales. 24. The NSW Partnership Act contains several provisions in respect of an ESVCLP and in respect of the types of partnerships that may apply for registration as a limited partnership, and paragraph 53D(3)(a) states: The circumstances are- (a) that the partnership is registered under Part 2 of the Venture Capital Act 2002 of the Commonwealth, or a general partner in the partnership or a proposed general partner in the proposed incorporated limited partnership intends to apply for registration of the incorporated limited partnership or proposed partnership under that Part, as- (i) a VCLP within the meaning of that Act, or (ii) an AFOF within the meaning of that Act, or (iii) an ESVCLP within the meaning of that Act, or 25. The NSW Partnership Act allows for provisional registration for a partnership intending to apply for registration as an ESVCLP, as paragraphs 54(2)(j) and (k) of the NSW Partnership Act state: (j) in the case of an application by a partnership or persons or partnerships proposing to be partners in a partnership that intends to apply for registration as a VCLP, AFOF or ESVCLP under Part 2 of the Venture Capital Act 2002 of the Commonwealth, contain a statement that it so intends to apply, and (k) in the case of an application by a partnership that is registered as a VCLP, AFOF or ESVCLP under Part 2 of the Venture Capital Act 2002 of the Commonwealth, be accompanied by a copy of a document evidencing its status as a VCLP, AFOF or ESVCLP, and 26. Should the ESVCLP registration be revoked or never granted in respect of provision registration, subsection 3(3) of schedule 1 to the NSW Partnership Act, in respect of winding up of an incorporated limited partnership, applies and it states (emphasis added): The Registrar may publish in the Gazette a certificate requiring an incorporated limited partnership to be wound up if the Registrar is satisfied (whether by a notice under section 73E (3) or otherwise) that, having been incorporated on the basis that the partnership is or is intended to be - (a) registered as a VCLP, AFOF or ESVCLP under Part 2 of the Venture Capital Act 2002 of the Commonwealth, or (b) a venture capital management partnership within the meaning of section 94D(3) of the Income Tax Assessment Act 1936 of the Commonwealth, the partnership's registration has been revoked , or it has not within the period of 2 years after its incorporation become so registered or it has ceased to meet, or has not in the period of 2 years after its incorporation met, the requirements set out in section 94D(3) for recognition as such a venture capital management partnership. 27. Under these provisions of the NSW Partnership Act a limited partnership established as an ESVCLP can only remain registered under the NSW Partnership Act if it registered as an ESVCLP under the VCA. Therefore, actions that Innovation and Science Australia take in respect of registration, and maintaining registration, of an ESVCLP determine whether the partnership can be registered, and maintain registration, under the NSW Partnership Act. 28. Each partner will agree to be admitted as either a general or limited partner. To comply with the definition of limited partner in Section 49 of the NSW Partnership Act the general and limited partners must be clearly designated within the partnership agreement. When the partnership applies for registration under the NSW Partnership Act, and, in the case of an ESVCLP, the registration by Innovation and Science Australia, the application process requires the applicant to state which partners are limited partner and which partners are general partners. 29. As the VCA definition of limited partner under the ITAA 1997 is also the applicable definition under the VCA, the registration based on the application lodged with Innovation and Science Australia will determine which partner is a limited partner of an ESVCLP for the purposes of the ITAA 1997 and Income Tax Assessment Act 1936 (ITAA 1936) provisions listed in section 3-1 of VCA. Application of the above to the Partnership and the Company at the time of registration 30. The Partnership's partnership agreement (Partnership Agreement) contains a definition of a general partner and a limited partner. The partnership agreement also identifies by name which partners are general partners and which partners are limited partners. 31. In applying the Partnership Agreement to the definition of limited partner in section 49 of the NSW Partnership Act, the Partnership Agreement complies with the Act's admittance and designation requirement, with the Company being admitted and designated as a limited partner of the Partnership. 32. The NSW Partnership Act registration can only take place and remain in effect while the VCA registration is in effect, and the VCA and NSW Partnership Act registration process requires the limited partners be identified. 33. Based on the relevant clauses in the Partnership Agreement, and the registration processes in place for the VCA and the NSW Partnership Act, at the time of registration of the Partnership the Company was a limited partner. 34. As the definition of a limited partner under subsection 995-1(1) is based on the partner's liability in relation to the partnership the partner's limited liability in relation to the partnership would first need to change before they could potentially cease to be a limited partner. For the definition of limited partner to cease to apply to a limited partner, the change in liability would have the result, in relation to the partnership in that partner's liability, that it is no longer limited. The Company as a limited partner takes part in the management of the business of an incorporated limited partnership 35. In applying the definition of Law in the Fund Deeds, the NSW Partnership Act is an applicable Law and section 66A of that act provides the limitation of liability of a limited partner: Limitation of liability of limited partners (1) A limited partner has no liability for the liabilities of the incorporated limited partnership or of a general partner. (2) Nothing in subsection (1) or section 66C or 66D prevents- (a) a contribution of capital or property made by a limited partner to the incorporated limited partnership being used, or (b) an obligation of a limited partner to contribute capital or property to the incorporated limited partnership being enforced by any person to whom the obligation is owed, in satisfaction of a liability of the partnership or of a general partner. (3) This section is subject to section 67A (Limited partner not to take part in the management of incorporated limited partnership). 36. Under section 66A of the NSW Partnership Act a limited partner is not liable for the liabilities of the partnership, but a partnership is allowed to use the capital contribution made by the limited partner. The Partnership Agreement recognises the section 66A limits by setting a limited partner's liability to their committed capital amount. 37. However, under subsection 66A(3) the liability of the limited partner is subject to section 67A, and subsection 67A(1) states: A limited partner in an incorporated limited partnership must not take part in the management of the business of the partnership. 38. The Partnership Agreement also recognises this prohibition and a limited partner of the Partnership cannot take part in the management of the business of the Partnership. 39. Subsection 67A(3) provides a list of activities that are not to be regarded as taking part in the management of the business of a partnership merely because the limited partner or a person is acting on behalf of the limited partner. 40. Potentially the relevant NSW Authority responsible for enforcement of the NSW Partnership Act may look at the Company's activities and conclude that those activities do not fall within the scope of the exclusions in subsection 67A(3), and thus that the Company has taken part in the management of the business of each of the Funds. 41. Should the relevant NSW Authority find that the Company did take part in the management of the business of the Partnership, then subsection 67A(2) of the NSW Partnership Act could potentially apply to impose an additional liability on the Company. This subsection states: If: (a) as a direct result of any wrongful act or omission of a limited partner in taking part in the management of the business of an incorporated limited partnership the limited partner causes any loss or injury to any person other than a partner in the partnership (a "third party"), and (b) at the time of the act or omission the third party had reasonable grounds to believe that the limited partner was a general partner in the partnership, the limited partner is liable for the loss or injury to the same extent that the limited partner would have been liable if the limited partner were in fact a general partner in the partnership. the limited partner is liable for the loss or injury to the same extent that the limited partner would have been liable if the limited partner were in fact a general partner in the partnership. 42. If a liability was raised under subsection 67A(2), then subsection 66A(3) recognises that subsection 67A(2) will apply to a limited partner which would impact the Company's liability as a limited partner if they became liable to an amount under subsection 67A(2). 43. In this case, the Partnership Agreement recognises that a subsection 67A(2) liability could be imposed and the Company's liability for the purposes of could also include any subsection 67A(2) liability. 44. Any subsection 67A(2) liability would, if imposed, change the Company's liability in relation to the partnership. The Commissioner needs to consider how this would impact the definition of limited liability under subsection 995-(1). Under this 995-1(1) definition, the Company's liability in relation to the partnership must remain limited. 45. In the event that the Company is found liable for an amount under subsection 67A(2) of the NSW Partnership Act, that liability will be a specific and limited liability, being the amount of the loss or injury the direct result of the relevant acts and to the same extent that a general partner would be held liable. 46. In other words, subsection 67A(2) transfers the liability for that loss or injury from the general partner to the limited partner. Any remaining liability, excluding the amounts of committed capital which under the VCA would be used by the ESVCLP to make eligible investments, stays with the general partner(s). 47. If the Company was made liable for an amount under subsection 67A(2) of the NSW Partnership Act, that liability would be a specific amount in addition to its already committed capital liability. Any remaining liability either lies with the other limited partner (where the partnership is expending the committed capital of the partners) or with the general partner(s). 48. As a result, the Company's liability in relation to the partnership will remain limited, and thus the Company remains a limited partner, as defined in subsection 995-1(1). Conclusion 49. The Company was recognised and admitted as a limited partner of the Partnership. 50. This has been recorded by both the State of New South Wales and Innovation and Science Australia as part of the registration process under the NSW Partnership Act and the VCA, respectively. 51. If found to be liable for an amount under subsection 67A(2) of the NSW Partnership Act, then the amount determined in accordance with subsection 67A(2) would become part of the Company's liability to the Partnership. 52. Although modified, the Company's liability in relation to the partnership would remain limited, and thus the Company remains a limited partner as defined under subsection 995-1(1) of the ITAA. | Detailed Reasoning - Question 2: If the answer to Question 2 is yes, is the Company entitled to a tax offset under section 61-760 of the ITAA 1997 in the income year in which it contributes to the Partnership? | Summary: Yes, the Company is a limited partner in a Partnership that is registered as an ESVCLP, and thus the Company is entitled to the offset under section 61-760. | Detailed Reasoning - Detailed reasoning: 53. Subsection 61-760(1) states: A *limited partner of an *ESVCLP is entitled to a *tax offset for an income year if: (a) the partner contributes to the ESVCLP during the income year; and (b) the partner is not a trust or partnership. 54. As detailed above, the Company is a limited partner of the Partnership, an ESVCLP. The Company will remain a limited partner if they are found liable for an amount under subsection 67A(2) of the NSW Partnership Act. 55. The Company will make a contribution to Fund II in the years ended 30 September 20XX, 20XX and 20XX and, once made, paragraph 61-760(1)(a) will be satisfied for each specified income year. 56. The Company is not a trust or partnership, so paragraph 61-760(1)(a) is satisfied. 57. Therefore, the Company will satisfy the criteria set down in section 67-760 and will be entitled to an offset in respect of the Partnership under section 67-760 in relation to each income year. 58. Although an entitlement to the offset arises when the Company contributes to the Partnership during the income year, the amount of the offset to which the Company is entitled is determined under subsection 61-765(1), and subsection 61-765(2) may exclude for the purpose of paragraph 61-765(1)(a) all or part of an amount the Company contributes from the calculation of the amount of the offset.

This ruling applies for the following periods: | Reasons for decision: All legislative references are to the ITAA 1997 unless otherwise indicated. | If the Company is found liable for an amount under subsection 67A(2) of the NSW Partnership Act, will it remain a limited partner of Fund I, as defined in subsection 995-1(1) of the ITAA 1997?