Is the XYZ Limited Partnership (the LP) a resident of Australia within the meaning of section 6 of the ITAA 1936 from XX Date 20XX?
Yes. This ruling applies for the following period : Year ended 30 June 20YY The scheme commences on: 1 July 20XX
The Operating Group The Operating Group is an offshore headquartered portfolio of brands. The Operating Group have an offshore-based senior leadership team representing key decision makers of strategy for the group. SubCo acquisition by the Operating Group SubCo's business originated in Australia and reaches customers through online sales and through stores. SubCo was approached by the Operating Group and entered into a Term Sheet setting out the conditions and structure of the proposed investment by Operating Group to acquire a majority interest in SubCo. XYZ GP Ltd (the GP), the General Partner of the LP, and the LP were established by the Operating Group as part of the acquisition structure in facilitating the transaction. The LP entered into a Share Sale Agreement to acquire a 100% interest in the shares in SubCo. The consideration for the sale principally comprised a cash payment and transfer of an interest in the LP to the original owners (Rollover Shareholders). This partial acquisition was undertaken at arm's length between two independent third parties. Global restructure
Following the acquisition, the Operating Group has undertaken a restructure of its businesses and has listed on an overseas market through an IPO. The restructure was to rationalise and simplify the existing structure. As part of this, Rollover Shareholders sold their remaining interest in the LP. This meant that SubCo was now indirectly wholly owned by the Operating Group. Following the IPO, the LP no longer served any commercial purpose and therefore was dissolved given the unnecessary compliance and ongoing costs. Furthermore, third party lenders imposed a requirement that the LP be removed from the structure. Change of residency of the LP As part of the broader IPO process, a commercial objective of the group was to simplify its legal and tax structure. In order to transition to the desired result of an Australian consolidated group, a series of restructure steps were undertaken which follow the course of other legal / governance changes made by the business, including the below mentioned change in board composition for the GP. The change in board composition was driven by commercial reasons.
The board of directors of the GP manage and control the LP. The GP has business activities centred around the management and control of the LP's investment in SubCo. Prior to XX Date 20XX , there was a majority of overseas directors on the board who exercised their powers from the one jurisdiction. The LP had not previously held any physical Board Meetings in Australia. The directors of the GP all have equal voting rights, however the nominated chairman for each meeting has a second vote. Prior to XX Date 20XX, the only transaction undertaken by the LP was the acquisition of SubCo. The directors were located in their respective jurisdictions at the time of this acquisition. The relevant share purchase agreement was signed by directors based overseas on behalf of the LP. The LP's sole business is managing and providing oversight over investment into SubCo. 17. Following a board meeting on XX Date 20XX, the new composition of the Board of Directors of the GP resulted in the majority of the board being Australian resident directors who exercise their powers from Australia. Since this date, the board has managed the business of the LP.
18. The majority of Board members carry out their duties in Australia. One other Board member carries out their duties overseas. Decisions are expected to take place with physical board meetings in Australia attended by the Australian Board members (one of which will be nominated as Chairperson). The overseas Board member is expected to join the meetings via video conference from overseas. All directors will have equal voting rights in decision making, however the nominated chairman for each meeting will have two votes. 19. The board has made a decision that the GP and LP are to be liquidated and dissolved. The Commissioner has been provided with minutes of a meeting of the board of directors that acknowledge liquidation proceedings for the GP and the LP. The restructured board will continue to manage the LP's investment in SubCo until the LP is liquidated.
Income Tax Assessment Act 1936 section 6
Corporate Residency The term 'resident' in relation to a company is defined within subsection 6(1) of the ITAA 1936, and is defined at paragraph (b) of that term as: (b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. The definition sets the criteria necessary to establish residency of a company. One of the tests provides that if a company is not incorporated in Australia, a company will be a resident under ' the central management and control (CM&C) test ' of company residency in paragraph (b) if it carries on business in Australia and has its CM&C in Australia. Corporate Limited Partnership Residency The test of residence for corporate limited partnerships was intended to be 'closely comparable to the test of residence for companies.' For corporate limited partnerships, section 94T in Division 5A of the ITAA 1936 sets out the applicable residency tests, as reproduced below. 94T(1)For the purposes of the income tax law, the partnership is: (a) a resident; and (b)
a resident within the meaning of section 6; and (c) a resident of Australia; and (d) a resident of Australia within the meaning of section 6; if and only if: (e) the partnership was formed in Australia; or either: (i) the partnership carries on business in Australia; or (ii) the partnership's central management and control is in Australia. Relevantly, with subparagraph 94T(1)(f)(ii) of the ITAA 1936, the same criteria in determining central management and control of a company is equally applicable to determining the central management and control of, and therefore residency of, a corporate limited partnership. Central management and control Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) sets out the Commissioner's view on how to apply the CM&C test of company residency following Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 (Bywater).
As outlined at paragraph 10 of TR 2018/5, CM&C refers to the control and direction of a company's operations. Paragraph 11 of TR 2018/5 states that the key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter. What activities constitute high-level decision-making? Paragraph 16 of TR 2018/5 provides examples of what acts involve exercising CM&C: 16. Exercising central management and control of a company can involve: • setting investment and operational policy including: − setting the policy on disposal of trading stock, and/or the use and development of capital assets − deciding to buy and sell significant assets of the company • appointing company officers and agents and granting them power to carry on the company's business (and the revocation of such appointments and powers) • overseeing and controlling those appointed to carry out the day-to-day business of the company, and
• matters of finance, including determining how profits are used and the declaration of dividends. Who exercises CM&C? Paragraph 19 of TR 2018/5 states that identifying who exercises CM&C is a question of fact. Paragraphs 20-22 of TR 2018/5 provide that: Normally, where a company is run by its directors in accordance with its constitution and the company law rules applicable to that company, which give its directors the power to manage the company, the company's directors will control and direct its operations. It follows that ordinarily it is a company's directors who exercise its central management and control. However, the actions of a company's directors, or others with the legal power and authority to control and manage the company, are not the end of the enquiry as to who exercises central management and control. There is no presumption that the directors of a company will always exercise its central management and control.
When determining who exercises a company's central management and control, all the relevant facts and circumstances must be considered. Facts and circumstances to be considered in determining who exercises a company's central management and control include the role of anyone who assumes the role of the directors' role in managing and controlling the company's affairs or has a role in the decision-making processes or governance of the company. Where is the CM&C carried out? In determining where CM&C of a company is exercised, paragraph 30 of TR 2018/5 provides: 30. A company will be controlled and directed where those making its high-level decisions do so as a matter of fact and substance. It is not where they are merely recorded and formalised, or where the company's constitution, bylaws or articles of association require it be controlled and directed, if in reality it occurs elsewhere. This will not necessarily be the place where those who control and direct a company live.
Paragraph 34 of TR 2018/5 states that where a company's CM&C is exercised is not determined by where the directors, or other persons, who control and manage it, are resident or live. It states that what matters is where they actually perform the activities to control and direct the company. Relevant considerations in determining where CM&C is exercised are provided in paragraphs 35-38 of TR 2018/5. As no single factor alone will necessarily determine where CM&C of a company is exercised, the relevance and weight to be given to each factor will depend on the facts and circumstances of the case and surrounding circumstances. Application to the LP The LP is a limited partnership under paragraph (a) of the definition of limited partnership in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The LP contains at least one limited partner whose liability in relation to the partnership is limited.
Further, the LP is a 'corporate limited partnership' for Australian income tax purposes under subsection 94D(1) of the ITAA 1936. This is on the basis that it is a limited partnership, does not satisfy the exclusions in subsection 94D(2) of the ITAA 1936, and is not a foreign hybrid limited partnership. The formation test in paragraph 94T(1)(e) does not apply in this case as the LP was formed in a jurisdiction other than Australia. The central management and control test in subparagraph 94T(1)(f)(ii) is considered below. The decisions of the LP are exercised by the directors of the GP. The Limited Partnership Agreement provides that the GP has sole authority (with limited exceptions as noted in the Agreement) over the management and control of the LP. Based on the above, it is considered that the LP's CM&C is exercised by the GP's directors.
The GP, in its capacity as General Partner of the LP, conducts the business of managing and controlling the Partnership's investment in the Operating Group. The only activities of the LP have been the acquisition of the Operating Group and oversight over that investment since to maximise value for its partners. Given the intention to ultimately liquidate the Partnership as part of the global restructure, the board's decisions in respect of acquiring, maintaining and divesting the interest in the Operating Group and the location where such decisions are made are the only relevant factors in determining where the LP has its CM&C. Previously, the only transaction undertaken by the LP had been the acquisition of the Operating Group. At the time the Board of Directors of the GP made the decision to undertake this transaction, the board consisted of a majority of board members located in one jurisdiction overseas. Each board member was located at the time of making the joint decision in their 'home' jurisdiction.
Following a recent board meeting on XX Date 20XX, the new composition of the Board of Directors of the GP resulted in the majority of the board being Australian resident directors who exercise their powers from Australia. The majority of Board members carry out their duties in Australia. One other Board member carries out their duties overseas. Decisions are expected to take place with a physical board meeting in Australia attended by the Australian Board members (one of which will be nominated as Chairperson for future meetings). The overseas Board member is expected to join the meetings via video conference from overseas. All directors will have equal voting rights in decision making, however the nominated chairman for each meeting will have two votes. Liquidation proceedings for the GP and the LP were to commence in the near term, as resolved by the restructured board. The restructured board were to continue to manage the LP's investment in SubCo until it is disposed of and the LP is liquidated.
Based on the factors discussed in TR 2018/5, it is considered that the majority of the board of directors of the GP has and will attend board meetings from, and make decisions in, Australia. As such, the Partnership will have its central management and control exercised in Australia from XX Date 20XX. Therefore, the LP, as a corporate limited partnership, will be a resident of Australia for income tax purposes under section 6 of the ITAA 1936 by virtue of section 94T of the ITAA 1936 from XX Date 20XX.