Issue
Is a Korean limited joint company specialising in private equity fund investment (a Hapja Hoesa) a 'corporate limited partnership' under Division 5A of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. A Hapja Hoesa is a corporate limited partnership under Division 5A of the ITAA 1936.
Facts
An Australian entity has an interest in a Korean limited joint company known as a 'Hapja Hoesa' in Korean. The Hapja Hoesa is registered as a company specialising in private equity funds investment ('Samo Tooja Cheonmoon Hoesa' in Korean).
The Hapja Hoesa was established under The Republic of Korea's Indirect Investment Asset Management Business Act 2003 (IIAMBA).
Under the IIAMBA the total number of members is limited to 30 with at least one unlimited liability member and at least one limited liability member.
The Articles of Incorporation (articles) of the Hapja Hoesa provides for at least one unlimited liability member and at least one limited liability member.
The articles allow for the issue of an interest in the company referred to in the articles as a 'contribution interest'.
The IIAMBA requires one of the unlimited members to be selected as the Business Performing Member. This member has the right and obligation to conduct the business of the company.
The Hapja Hoesa is liable for corporate income tax on any income.
The Hapja Hoesa can own assets in its own right.
Reasons for Decision
A 'Hapja Hoesa' is a Korean entity that translates as a limited partnership. The particular entity in question is also a Private Equity Fund (PEF) or a 'Samo Tooja Cheonmoon Hoesa' as defined under The Republic of Korea's IIAMBA.
The definition of a partnership in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a partnership includes a limited partnership. However a corporate limited partnership is separately defined in Division 5A of the ITAA 1936 so that such an entity is treated as a company for Australian income tax purposes.
A limited partnership is defined in section 995-1 of the ITAA 1997 as follows: (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 *AFOF or a *VCMP and to carry on activities that are carried on by a body of that kind. * defines a term defined in section 995-1 of the ITAA 1997
Therefore an association of persons in receipt of ordinary income may be a limited partnership provided the liability of at least one person is limited. Further definitions in section 995-1 of the ITAA 1997 turn on the issue of the liability of the partners. A general partner is a partner of a limited partnership whose liability in relation to the partnership is unlimited. A limited partner is one whose liability in relation to the partnership is limited. A Korean Hapja Hoesa does possess the required limited and unlimited partners (as per article 5 of its Articles of Incorporation) and is therefore a limited partnership.
A corporate limited partnership is defined in section 94D of the ITAA 1936 to include limited partnerships formed in the 1995-96 or later years of income, but subsection 94D(2) of the ITAA 1936 specifically excludes a VCLP, AFOF or venture capital management partnership. In this context a VCLP is a Venture Capital Limited Partnership and AFOF means an Australian Venture Capital Fund of Funds.
A VCLP is defined by reference to the Venture Capital Act 2002 . In short a Korean Hapja Hoesa will not be excluded from the definition of a corporate limited partnership as section 9-1(1) of the Venture Capital Act requires of a VCLP that; (a) the partnership be established under a law in Australia or a listed country (Korea is not a listed country) and; (b) the general partner must be resident of either Australia or one of the listed countries. In the given case the general partner is resident of the Republic of Korea.
Therefore a Korean Hapja Hoesa is not a VCLP. Similar problems exist in relation to a Korean Hapja Hoesa being either an AFOF or a venture capital management partnership. Both are defined in Subdivision 118-F of the ITAA 1997 by reference to Part 2 of the Venture Capital Act. A limited partnership may not be either an AFOF or a venture capital management partnership without being an Australian resident. A Korean Hapja Hoesa is not an Australian resident.
Therefore, a Korean Hapja Hoesa is a limited partnership that is not excluded from the definition of corporate limited partnership because of subsection 94D(2) of the ITAA 1936.
A limited partnership could also be a foreign hybrid entity under Division 830 of the ITAA 1997. However, while a Korean Hapja Hoesa is a limited partnership, it is taxed as a corporate entity in Korea, therefore it will fail to satisfy the definition of a 'foreign hybrid limited partnership' provided in paragraph 830-10(1)(b) of the ITAA 1997. Therefore it is not excluded from being a corporate limited partnership via subsection 94D(4) of the ITAA 1936.
Consequently, as a Korean Hapja Hoesa satisfies the Australian income tax definition of 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 conclusion is that a Korean Hapja Hoesa is a 'corporate limited partnership' for Australian income tax purposes.