Private ruling: CGT- Foreign shares
Date of advice: 19 May 2016
Published: August 2016
Ruling period: October 20xx to September 20xx | October 20xx to September 20xx | October 20xx to March 20xx | April 20xx to March 20xx | April 20xx to March 20xx | April 20xx to March 20xx | April 20xx to March 20xx
Date scheme commenced: August 20xx

Ruling: Q1: Will the transfer of Foreign Company A shares from Australian Company B to Foreign Partnership C be disregarded under the single entity rule (SER) contained in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and accordingly not give rise to a CGT event? | A1: Yes | Q2: Is Foreign LLP Partnership D a foreign hybrid company? Will the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 apply as if Foreign LLP Partnership D is a partnership? | A2: Yes | Q3: Is Foreign LLP Partnership D a subsidiary member of the Head Company Tax Consolidated Group (Head Company-TCG) for the purposes of section 701-1 of the ITAA 1997? | A3: Yes | Q4: Will interest income derived by Foreign LLC Company E in connection with the Loans be foreign income of the Head Company-TCG as defined in section 6AB and subsection 23AH(15) of the ITAA 1936? | A4: Yes | Q5: Will interest income derived by Foreign LLP Partnership D in connection with the Foreign LLP Partnership D investments be foreign income of the Head Company-TCG as defined in section 6AB and subsection 23AH(15) of the ITAA 1936? | A5: Yes | Q6: Will services income derived by Foreign Partnership C pursuant to the Foreign Partnership C services agreements be foreign income of the Head Company-TCG as defined in section 6AB and subsection 23AH(15) of the ITAA 1936? | A6: Yes | Q7: Will the Head Company-TCG have a single permanent establishment (the "PE of the MGL-TCG") comprising of the permanent establishments of Australian Company F, Foreign LLC Company E, Foreign Partnership C and Foreign LLP Partnership D? | A7: Yes | Q8: Will the income derived in Questions 4, 5 and 6 be treated as having been derived in carrying on a business at or through the PE of the Head Company-TCG? | A8: Yes | Q9: Will the income referred to in Question 8 be NANE income of the Head Company-TCG pursuant to the operation of subsection 23AH(2) of the ITAA 1936 with the exclusion in subsection 23AH(5) of the ITAA 1936 having no application? | A9: Yes

Relevant facts and circumstances: Australian group operating a permanent establishment and restructuring its offshore subsidiaries that include foreign hybrid companies and partnerships. Foreign Company A's sole member was Australian Company B. Foreign Partnership C's members are Australian Company B and Foreign LLC Company E. Foreign LLP Partnership D's members are Australian Company B and Foreign LLC Company E. Foreign LLC Company E's sole member is Australian Company B.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6AB, | Income Tax Assessment Act 1936 Section 23AH, | Income Tax Assessment Act 1997 Section 701-1, | Income Tax Assessment Act 1997 Section 703-15 | Income Tax Assessment Act 1997 Section 830-15, and | Income Tax Assessment Act 1997 Section 830-20.

Reasons for decision: Summary: The transfer of Foreign Company A shares from Australian Company B to Foreign Partnership C will be disregarded under the single entity rule (SER) contained in section 701-1 of the ITAA 1997 and accordingly will not give rise to a CGT event. | Detailed Reasoning - Detailed reasoning: The SER in section 701-1 of the ITAA 1997 provides that: (1) If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period. Head company core purposes (2) The purposes covered by this subsection (the head company core purposes ) are: (a) working out the amount of the *head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the head company's loss (if any) of a particular *sort for any such income year. Entity core purposes (3) The purposes covered by this subsection (the entity core purposes ) are: (a) working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the entity's loss (if any) of a particular *sort for any such income year. The transfer of the Foreign Company A shares from Australian Company B to Foreign Partnership C was by agreement. In this case Australian Company B and Foreign Partnership C were at all material times, members of the same tax consolidated group (Head Company-TCG). Consequently the transfer of the Foreign Company A shares from Australian Company B to Foreign Partnership C is not treated for income tax purposes as a disposal or acquisition in the hands of the Head Company-TCG. Although the legal transfer of the CGT asset between Australian Company B and Foreign Partnership C occurred at general law, it has no income tax consequences as the Head Company-TCG is taken to have been the owner of the Foreign Company A shares both before and after the transfer. Consequently no CGT event occurred on the transfer of the Foreign Company A shares from Australian Company B to Foreign Partnership C. | Summary: Foreign LLP Partnership D is a foreign hybrid company under Division 830 of the ITAA 1997, and the ITAA 1936 and ITAA 1997 will apply as if Foreign LLP Partnership D is a partnership. | Detailed Reasoning - Detailed reasoning: Foreign LLP Partnership D was incorporated as a LLP. Foreign hybrid company is defined in section 830-15 of the ITAA 1997. A company will be a foreign hybrid company in relation to an income year if it satisfies the requirements set out in subsection 830-15(1) of the ITAA 1997. In relation to paragraph 830-15(1)(a) of the ITAA 1997 Foreign LLP Partnership D must also satisfy subsection 830-15(3) of the ITAA 1997 which deals with partnership treatment requirements relating to any foreign country. Having satisfied all the requirements Foreign LLP Partnership D will be a foreign hybrid company and pursuant to section 830-20 will be treated as a partnership for the purposes of the ITAA 1936 and the ITAA 1997. | Summary: Foreign LLP Partnership D is a subsidiary member of the Head Company-TCG. | Detailed Reasoning - Detailed reasoning: Foreign LLP Partnership D, being treated as a partnership for Australian income tax purposes, pursuant to section 830-20 of the ITAA 1997, satisfies the requirements in columns 2, 3 and 4 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 and is therefore a subsidiary member of the Head Company-TCG. See also ATO ID 2009/149. All the membership interests in Foreign LLP Partnership D are owned by entities who are also subsidiary members of the Head Company-TCG. | Summary: The interest income derived by Foreign LLC Company E in connection with the loans will be foreign income of the Head Company-TCG as defined in section 6AB and subsection 23AH(15) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Foreign LLC Company E is a LLC and is treated as a partnership for Australian income tax purposes pursuant to section 830-20 of the ITAA 1997 and a member of the Head Company-TCG. In December 20xx, Foreign LLC Company E acquired the loans. The term 'foreign income' is defined in subsection 6AB(1) of the ITAA 1936 as follows: A reference in this Act to foreign income is a reference to income (including superannuation lump sums and employment termination payments) derived from sources in a foreign country or foreign countries, and includes a reference to an amount included in assessable income under section 102AAZD, 456, 457 or 459A of this Act, or section 305-70 of the Income Tax Assessment Act 1997 . In accordance with Taxation Ruling 2005/2 the reference to 'income' in the definition is to be interpreted broadly to include both income according to ordinary concepts (whether assessable or not) and amounts included in assessable income under a statutory provision. Foreign Income is also defined in subsection 23AH(15) to include an amount that: (a) apart from this section, would be included in assessable income under a provision of this Act other than Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (CGT); and (b) is derived from sources in a listed country or unlisted country. In Australia, the source of interest is to be ascertained by reference to a range of factors. In FCT v Spotless Services Ltd (1995) 62 FCR 2 it was held that the most significant factors are: (a) the place where the contract for the loan was made; and (b) the place where the money was lent. Subject to specific statutory provisions, the source of interest income is determined according to the general principle set out by Isaacs J in Nathan v FCT (1918) 25 CLR 183. This general principle is that in determining the source of interest income each case must be looked at on its own facts, and the source is determined as a "practical, hard matter of fact". Foreign LLC Company E has assumed all creditor rights under each of the Loan agreements, and so Foreign LLC Company E should be respected as the owner of the Loans. As such, Foreign LLC Company E should be viewed as deriving the interest on the Loans paid by the borrowers under the facilities. The following factors are those which the Commissioner considers relevant to determining the source of the interest income on the loans: • The funds for the acquisition of the loan were settled outside of Australia. • The Loans Borrowers are mainly non-resident persons. None of the Loans Borrowers are resident in Australia. • Interest on the Loan is paid and received outside Australia. Based on these factors the Commissioner considers that the interest income derived by Foreign LLC Company E in connection with the Loans is foreign income as defined in Section 6AB of the ITAA 1936. | Summary: Interest income derived by Foreign LLP Partnership D in connection with the Foreign LLP Partnership D investments will be foreign income of the Head Company-TCG as defined in section 6AB and subsection 23AH(15) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Foreign LLP Partnership D was incorporated as a LLP under and treated as a partnership for Australian income tax purposes and a subsidiary member of the Head Company-TCG. Foreign LLP Partnership D carries on an investment business involving the making of loans to affiliates. The term 'foreign income' is defined in subsection 6AB(1) of the ITAA 1936 as follows: A reference in this Act to foreign income is a reference to income (including superannuation lump sums and employment termination payments) derived from sources in a foreign country or foreign countries, and includes a reference to an amount included in assessable income under section 102AAZD, 456, 457 or 459A of this Act, or section 305-70 of the Income Tax Assessment Act 1997 . In accordance with Taxation Ruling 2005/2 the reference to 'income' in the definition is to be interpreted broadly to include both income according to ordinary concepts (whether assessable or not) and amounts included in assessable income under a statutory provision. Foreign Income is also defined in subsection 23AH(15) to include an amount that: (a) apart from this section, would be included in assessable income under a provision of this Act other than Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (CGT); and (b) is derived from sources in a listed country or unlisted country. In Australia, the source of interest is to be ascertained by reference to a range of factors. In FCT v Spotless Services Ltd (1995) 62 FCR 2 it was held that the most significant factors are: (a) the place where the contract for the loan was made; and (b) the place where the money was lent. Subject to specific statutory provisions, the source of interest income is determined according to the general principle set out by Isaacs J in Nathan v FCT (1918) 25 CLR 183. This general principle is that in determining the source of interest income each case must be looked at on its own facts, and the source is determined as a "practical, hard matter of fact". The following factors are those which the Commissioner considers relevant to determining the source of the interest income on the Foreign LLP Partnership D investments • The entering into of the Foreign LLP Partnership D Investments was approved by the Foreign LLP Partnership D Managers outside Australia. • Foreign LLP Partnership D negotiated, executed, administered and managed the Foreign LLP Partnership D Investments from outside Australia. • Foreign LLP Partnership D will not advance funds that are to be used by the borrower in connection with the carrying on of a business in Australia. • The moneys used to fund the Foreign LLP Partnership D Investments were, at the time of the advances, located outside Australia. Based on these factors the Commissioner considers that the interest income derived by Foreign LLP Partnership D in connection with the Foreign LLP Partnership D investments is foreign income as defined in section 6AB of the ITAA 1936. | Summary: Services income derived by Foreign Partnership C pursuant to the Foreign Partnership C Services Agreements will be 'foreign income' of the Head Company-TCG as defined in section 6AB and sunsection 23AH(15) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Foreign Partnership C was established as a general partnership and a member of the Head Company-TCG. Foreign Partnership C carried on a business consisting of the provision of contract services to affiliate companies. The term 'foreign income' is defined in subsection 6AB(1) of the ITAA 1936 as follows: A reference in this Act to foreign income is a reference to income (including superannuation lump sums and employment termination payments) derived from sources in a foreign country or foreign countries, and includes a reference to an amount included in assessable income under section 102AAZD, 456, 457 or 459A of this Act, or section 305-70 of the Income Tax Assessment Act 1997 . In accordance with Taxation Ruling 2005/2 the reference to 'income' in the definition is to be interpreted broadly to include both income according to ordinary concepts (whether assessable or not) and amounts included in assessable income under a statutory provision. Foreign Income is also defined in subsection 23AH(15) as an amount that: (a) apart from this section, would be included in assessable income under a provision of this Act other than Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (CGT); and (b) is derived from sources in a listed country or unlisted country. Income from personal services in a conventional employer/employee relationship would ordinarily have its source in the place in which the services are performed ( FCT v French (1957) 98 CLR 398; 7 AITR 76; 11 ATD 288). However, other considerations may apply in cases where special skills or creative talents are being exercised ( FCT v Mitchum (1965) 113 CLR 401; 9 AITR 559) where the remuneration consists of directors' fees or where independent personal services are being rendered. In such cases, factors such as the place of negotiation and conclusion of the contract and the place of payment will be relatively more important. The income of Foreign Partnership C will have a source outside of Australia as all of the relevant activities are undertaken offshore (by the offshore Staff) and the Services Business contracts are executed offshore. Accordingly services income derived by Foreign Partnership C pursuant to the Foreign Partnership C Services Agreement should be foreign income as defined in section 6AB of the ITAA 1936. | Summary: The Head Company-TCG will have a single permanent establishment (the "PE of the Head Company-TCG") comprising of the permanent establishments of Australian Company F, Foreign LLC Company E, Foreign Partnership C and Foreign LLP Partnership D. | Detailed Reasoning - Detailed reasoning: Subsection 23AH(15) of the ITAA 1936 provides as follows: "permanent establishment" or "PE", in relation to a listed country or unlisted country: (a) if there is a double tax agreement in relation to that country - has the same meaning as in the double tax agreement; or (b) in any other case - has the meaning given by subsection 6(1)." As there is a double tax agreement between Australia and the offshore PE country, the term "PE" is to be interpreted in accordance with the definition contained in the double taxation convention. As a result the activities of Australian Company F, Foreign LLC Company E, Foreign Partnership C and Foreign LLP Partnership D conducted at the relevant space, the space will give rise to a permanent establishment for the Head Company-TCG. Although each entity carries on a unique business, they operate from the same space and each of these businesses form's part of the broader business. In addition to this each entity is a member of the Head Company-TCG for Australian tax purposes. Finally it is also noted that all board meetings are conducted through the same designated location. As a result, the activities of each entity should be construed as part of a coherent commercial whole at a singular place and should therefore be attributable to a single PE of the Head Company-TCG. | Summary: The income derived in Questions 4, 5 and 6 will be treated as having been derived in carrying on a business at or through the PE of the Head Company-TCG. | Detailed Reasoning - Detailed reasoning: The permanent establishments of Australian Company F, Foreign LLC Company E, Foreign Partnership C and Foreign LLP Partnership D give rise to a single permanent establishment of the Head Company-TCG. In order for section 23AH of the ITAA 1936 to apply, income must be derived in carrying on business at or through a permanent establishment. The interest income derived by Foreign LLC Company E in connection with the loans, the interest income derived by Foreign LLP Partnership D in connection with the Foreign LLP Partnership D Investments and the services income derived by Foreign Partnership C pursuant to the Foreign Partnership C Services Agreements will constitute the carrying on of a business and will be attributable to the PE of the Head Company-TCG. | Summary: The income referred to above in Question 8 will be NANE income of the Head Company-TCG pursuant to the operation of subsection 23AH(2) of the ITAA 1936 and the exclusion in subsection 23AH(5) will have no application. | Detailed Reasoning - Detailed reasoning: As outlined above the income addressed in Questions 4, 5 and 6 constitute foreign income derived by the Head Company-TCG in carrying on business at or through a PE. Subsection 23AH(2) of the ITAA 1936 provides that: Subject to this section, foreign income derived by a company, at a time when the company is a resident in carrying on a business, at or through a PE of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company. As such, subsection 23AH(2) of the ITAA 1936 applies to treat the income addressed in Questions 4, 5 and 6 as NANE income of the Head Company-TCG for Australian taxation purposes. For completeness it is noted that as none of the relevant income derived will be Eligible Designated Concession Income within the meaning of Section 317 of the ITAA 1936, the exclusion in subsection (5) of section 23AH of the ITAA 1936 should have no application.