Connie Van Werkum and Gabriella Troy, Financial Services Specialists, outline the ATO's position on corporate limited partnership credit.
On Wednesday 17 May 2017, the Australian Taxation Office (ATO) released Draft Tax Ruling TR 2017/D4 ‘Income tax: when does a corporate limited partnership ‘credit’ an amount to a partner in that partnership?’.
TR 2017/D4 is of particular interest to large investors in foreign limited partnerships such as superannuation funds and managed funds. The object of the corporate limited partnership (CLP) provisions is to tax limited partnerships (LPs) and their partners as though the LP were a company and the partners were shareholders. It is this object on which the Commissioner has anchored his view on the meaning of ‘credited’.
A partner is taken to receive a dividend from an LP when the LP pays or credits an amount to a partner against profits or anticipated profits of the LP.
TR 2017/D4 sets out the Commissioners view that an amount will be credited where the LP ‘in substance … applies or appropriates its resources to confer a benefit on the partner that:
(a) is not subject to a condition precedent and is legally enforceable by the partner, and
(b) is separate and distinct from the partner’s existing interest in the CLP and its assets.
This is essentially akin to the circumstances in which a dividend ‘credited’ by a company to a shareholder would be subject to tax.
Notably, the ATO has confirmed that ‘a mere credit entry in a CLP’s accounts is not a crediting within the meaning of section 94M unless it records an underlying act or transaction’ that meets the above requirements.
TR 2017/D4 is proposed to have retrospective application when finalised.
In the lead up to 30 June 2017, investors should start considering whether there is a potential for amounts to be credited by an LP in line with TR 2017/D4 which will not be received, by reviewing their limited partnership agreements.
Significantly, the ATO specifically states that TR 2017/D4 does not deal with whether an amount credited to a partner is credited ‘against the profits or anticipated profits’ of the LP. This leaves an important question open – having determined an amount has been credited, what are the profits or anticipated profits for that purpose?