Private ruling: CGT and partnerships
Published: April 2015
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the LLP be considered a CLP pursuant to section 94D of the ITAA 1936? | A1: Yes | Q2: Will CGT Event A1 in subsection 104-10(1) of the ITAA 1997 occur to the partnership's assets when the GLP converts to the LLP? | A2: No | Q3: Will the CLP be required to apply for new tax registrations and lodge a corporate income tax return? | A3: Yes | Q4: If the answer to Question 2 is yes, is rollover relief under subdivision 122-B of the ITAA 1997 available to CGT event A1 happening in question 2 above? | A4: N/A | Q5: Will assets acquired under the GLP before 20 September 1985 retain their pre-CGT status once the assets are brought under the CLP? | A5: Yes | Q6: Upon wind up, will distributions from the general partner (as liquidator under section 94R of the ITAA 1936), appropriated from the disposal of pre-CGT partnership assets of the LLP retain their tax exempt status? | A6: Yes

Relevant facts and circumstances: A general law partnership (GLP) carries on business and holds a number of pre-CGT assets and post-CGT assets. The partners wish to limit their liability through a restructure by taking the following steps to re-establish their business under a corporate limited partnership (CLP): • distribute any accrued profits as at year end to the partners and convert the existing GLP to a valid Limited Liability Partnership (LLP) the following year. • the valid LLP will be comprised of the same previous partners holding the same equal shares as in the GLP with: • one of the partners being the general partner (GP), and • the remaining partners being limited partners (LPs). • the assets and liabilities of the GLP will become the assets and liabilities of the LLP. In particular, the assets and liabilities belonging to the partners under the GLP remain assets and liabilities of the partners under the LLP in the same proportions. • the same business will be carried on as usual.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 47 | Income Tax Assessment Act 1936 section 94D | Income Tax Assessment Act 1936 section 94J | Income Tax Assessment Act 1936 section 94R | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 149-10

Reasons for decision: Summary: Will the LLP be considered a CLP pursuant to section 94D of the ITAA 1936? | Detailed Reasoning - Reasoning: The LLP, being a valid limited partnership, will be considered a CLP pursuant to section 94D of the ITAA 1936 as: • the relevant years of income are later than the 1995-96 year of income (paragraph 94D(1)(a)), and • the LLP is not a VCLP, an ESVCLP, an AFOF or a venture capital management partnership (subsection 94D(2)). | Detailed Reasoning - Question 2: Will CGT Event A1 in subsection 104-10(1) of the ITAA 1997 occur to the partnership's assets when the GLP converts to the LLP? | Detailed Reasoning - Reasoning: The circumstances are analogous to those in ATO Interpretative Decision 2010/210 Income Tax: CGT event A1: partnership becomes corporate limited partnership (ATO ID 2010/210) in that there is no change of partners, merely a conversion to a limited partnership. Thus, CGT event A1 does not happen as the conversion does not result in a change of ownership of the partnership assets. Please see ATO ID 2010/210 for further explanation. | Detailed Reasoning - Question 3: Will the CLP be required to apply for new tax registrations and lodge a corporate income tax return? | Detailed Reasoning - Reasoning: A CLP is treated as a company for tax law purposes, pursuant to section 94J of the ITAA 1936. It is treated as a separate corporate entity for tax purposes and thus needs to have its own TFN, ABN and lodge its own corporate income tax return. | Detailed Reasoning - Question 4: If the answer to Question 2 is yes, is rollover relief under subdivision 122-B of the ITAA 1997 available to CGT event A1 happening in question 2 above? | Detailed Reasoning - Reasoning: N/A | Detailed Reasoning - Question 5: Will assets acquired under the GLP before 20 September 1985 retain their pre-CGT status once the assets are brought under the CLP? | Detailed Reasoning - Reasoning: A pre-CGT asset is an asset that is taken to be acquired before 20 September 1985 pursuant to section 149-10 of the ITAA 1997. As there is no change in ownership and no other CGT event described that has altered ownership of the assets, the pre-CGT assets held by the partners in the GLP will remain pre-CGT assets held by the partners in the LLP. | Detailed Reasoning - Question 6: Upon wind up, will distributions from the general partner (as liquidator under section 94R of the ITAA 1936), appropriated from the disposal of pre-CGT partnership assets of the LLP retain their tax exempt status? | Detailed Reasoning - Reasoning: Section 47 of the ITAA 1936 discusses distributions by a liquidator and relevantly provides at subsection 47(1) that: Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. In determining the character of these distributions, the obita dicta in Archer Bros Pty Ltd (In Vol Liq) v. FCT (1952-53) 90 CLR 140 at 155; 10 ATD 192 at 201 provides guidance as to the character of distributions given their source. The principle in this case is known as the Archer Brothers principle. Paragraph 2 of Taxation Determination TD 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions? (TD 95/10) explains that the Archer Brothers principle is that generally the source of funds will determine their character upon distribution for the purposes of section 47 of the ITAA 1936, except where a specific provision of the Act produces a different result. Paragraph 4 of TD 95/10 provides other considerations the Commissioner will take into account in determining whether the Archer Brothers principle applies. The Archer Brothers principle applies if: (i) the company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and (ii) it is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution. Pursuant to subsection 47(1A) of the ITAA 1936, a reference in subsection (1) to income derived by a company does not include disregarded capital gains. Disregarded capital gains can relevantly include capital gains on pre-CGT assets such as those disregarded pursuant to subsection 104-10(5) of the ITAA 1997. Thus, a distribution of capital gains on pre-CGT assets will not be included as income pursuant to section 47 of the ITAA 1936 if their source can be readily established. Therefore, the funds that are identifiably appropriated from pre-CGT assets will retain their tax exempt status, provided no specific provision of the Act produces a different result.