Foreign Investment Fund exemption and foreign hybrid

Does the exemption in Division 11A of Part XI of the Income Tax Assessment Act 1936 (ITAA 1936) apply to a trustee of a complying superannuation entity that is a member of a foreign hybrid limited partnership that holds an interest in a foreign investment fund (FIF)?

No. The exemption in Division 11A of Part XI of the ITAA 1936 does not apply to a trustee of a complying superannuation entity that is a member of a foreign hybrid limited partnership that holds an interest in a FIF.

The taxpayer is a resident of Australia for Australian taxation purposes and is a complying superannuation fund as defined in the Superannuation Industry (Supervision) Act 1993 .

The taxpayer invests in a limited partnership (US LP) formed in the United States. The US LP is a foreign hybrid limited partnership under section 830-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

The US LP invests in a US corporate limited partnership (CLP). The CLP is a corporate limited partnership within the meaning of section 94D of the ITAA 1936, and is therefore treated as a company for Australian tax law purposes, pursuant to Division 5A of the ITAA 1936. The CLP is not a foreign hybrid limited partnership within the meaning of section 830-10 of the ITAA 1997 as US LP has not made an election under section 485AA of the ITAA 1936.

The CLP is also not a Part XI Australian resident and, as such, is a foreign investment fund.

As a foreign hybrid limited partnership under section 830-10 of the ITAA 1997, US LP is treated as a partnership for Australian taxation purposes (see subsection 94D(5) of the ITAA 1936 which provides that a foreign hybrid limited partnership is not a corporate limited partnership pursuant to Division 5A of Part III of the ITAA 1936). As a result, the normal partnership provisions of Division 5 of Part III of the ITAA 1936 will apply to US LP.

Section 90 of the ITAA 1936 provides that the 'net income' of a partnership means all the assessable income of the partnership, calculated as if the partnership were a resident taxpayer, less allowable deductions except for deductions allowable under section 290-150 or Division 36 of the ITAA 1997.

'Assessable income' in section 90 of the ITAA 1936 includes any FIF income that accrues to a taxpayer by virtue of section 529 of the ITAA 1936. However, for section 529 to apply, section 485 of the ITAA 1936 must be satisfied.

Section 485 of the ITAA 1936 provides that section 529 of the ITAA 1936 will apply where: • the taxpayer had an interest in a FIF at the end of the income year • the income year is the 1992-1993 income year or later, and • the taxpayer is a 'Part XI Australian resident' at any time in that year of income.

Subsection 485A(1) of the ITAA 1936 provides that for the purposes of working out the net income of a partnership, the operative provision applies as mentioned in section 485, subject to subsection 485A(2) of the ITAA 1936. Subsection 485A(2) in turn ensures that a partnership is regarded as a taxpayer who is a Part XI Australian resident for the purposes of applying section 485 and section 529 of the ITAA 1936 in calculating the net income of that partnership. Subsection 485(1) further provides that section 485A also has effect when section 529 is applied to work out the net income of a partnership.

Due to the interactions between sections 485, 485A and 529 of the ITAA 1936, US LP will include in its net income, such amount as is applicable under the operative provision (that is, section 529) in respect of its FIF interest in CLP (unless a specific FIF exemption provision applies).

FIF exemption for complying superannuation entities

Division 11A of Part XI of the ITAA 1936 exempts taxpayers who are trustees of complying superannuation entities, as defined in the Superannuation Industry (Supervision) Act 1993 from taxation under the FIF measures by ensuring section 529 of the ITAA 1936 does not apply to the taxpayer in relation to a FIF (see subsection 519B(2) of the ITAA 1936).

Subsection 519B(2) of the ITAA 1936 provides: If a taxpayer is the trustee of a complying superannuation entity in relation to a year of income, the operative provision does not apply to the taxpayer in relation to a FIF in respect of the notional accounting period of the FIF that ends in the year of income.

Therefore, to be eligible for the exemption, the trustee of the complying superannuation entity must be the taxpayer to which section 529 of the ITAA 1936 applies. In this arrangement, the taxpayer that holds an interest in a FIF, and is subject to the operation of section 529, is US LP. The exemption in subsection 519B(2) of the ITAA 1936 will not apply, as US LP is not a complying superannuation entity.

Accordingly, the exemption in Division 11A of the ITAA 1936 does not apply to the trustee of the complying superannuation entity in respect of any FIF income that is indirectly included in its assessable income, through the operation of section 92 of the ITAA 1936.