German Kommanditgesellschaft and managed investment trusts

Is a German Kommanditgesellschaft (KG) recognised, under a foreign law relating to corporate regulation, as an entity with a similar status to a managed investment scheme for the purposes of paragraph 12-400(2)(d) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Yes. A German KG is recognised, under a foreign law relating to corporate regulation, as an entity with a similar status to a managed investment scheme for the purposes of paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953.

The German KG is a 'member' of an Australian Trust for the purposes of section 12-400 of Schedule 1 to the TAA 1953.

The Australian Trust does not have at least 50 members for the purposes of sub-item 3(c) of the table in paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953.

The German KG has at least 50 members for the purposes of paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953.

The German KG is treated as a limited partnership for German tax law purposes.

The partnership agreement of the German KG is executed in Germany in accordance with the German Commercial Code and is governed by the German Commercial Code.

The German Commercial Code is a foreign law relating to corporate regulation.

Subdivision 12-H of Schedule 1 to the TAA 1953 deals with Pay As You Go withholding obligations for distributions of managed investment trust income. Under subsection 12-400(1) of Schedule 1 to the TAA 1953, there are various conditions that need to be considered in order to determine whether a particular trust is a managed investment trust in relation to an income year.

Sub-item 3(c) of the table in paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953 sets out one of the conditions that must be satisfied in the context of the facts of this case. Sub-item 3(c) requires that, at the time the trustee makes the first fund payment, one of the entities covered by a paragraph of subsection 12-400(2) of Schedule 1 to the TAA 1953 is a member of the trust.

In the context of the facts of this case, the relevant type of entity that must be a member of the trust is described in paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953 as: an entity that is recognised, under a foreign law relating to corporate regulation, as an entity with a similar status to a managed investment scheme and that has at least 50 members.

The term 'similar' is not defined in the tax legislation. Therefore, the term takes its ordinary meaning. The Macquarie Dictionary defines similar as 'having likeness or resemblance, especially in a general way'. Therefore, a 'similar' status does not mean exactly the same status.

The German Commercial Code governs the German KG and accordingly is the relevant foreign law relating to corporate regulation for the purposes of paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953.

A managed investment scheme derives its status as such for the purposes of paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953 by satisfying the definition of that term under Australian law.

Accordingly, determining whether the German KG has a similar status to that of a managed investment scheme involves a comparison of the legal requirements that must be satisfied in order to be considered a KG under the German Commercial Code and the legal requirements that must be satisfied to be considered a managed investment scheme under Australian law.

Australian law

Item 2 of paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953 provides that the term 'managed investment scheme' is 'defined by section 9 of the Corporations Act 2001'. Accordingly, the definition of that term in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) is not applicable for the purposes of subsection 12-400(1) of Schedule 1 to the TAA 1953.

The term 'managed investment scheme' is again referred to in paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953. There is no reference in paragraph 12-400(2)(d) to the term having the meaning in section 955-1 of the ITAA 1997. Therefore, the term 'managed investment scheme' in paragraph 12-400(2)(d) is 'defined by section 9 of the Corporations Act 2001' in accordance with the reference to that definition in item 2 of paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953.

Section 9 of the Corporations Act 2001 relevantly defines a managed investment scheme as: (a) a scheme that has the following features: (i) people contribute money or money's worth as consideration to acquire rights ( interests ) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members ) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); ...

Comparison between Australian and German law

' scheme'

The requirement under section 9 of the Corporations Act 2001 that there be a 'scheme' has been considered by the Courts in Australia and has been given a meaning that broadly includes some plan of action, with a coherent and defined purpose ( Australian Softwood Forests Pty Ltd v. Attorney-General for New South Wales (1981) 148 CLR 121), which almost invariably includes a profit making feature or objective ( Australian Securities and Investments Commission v. Takaran (2002) 43 ACSR 46).

Similarly, subsection 161(1) of the German Commercial Code requires that a KG operates a commercial enterprise. These two requirements of a 'scheme' and a 'commercial enterprise' are similar as they both require some sort of business or profit making purpose or plan.

' contribute money or moneys worth'

The first feature of a managed investment scheme under paragraph (a) of the definition of that term in section 9 of the Corporations Act 2001 is that people make a contribution to the scheme as consideration to acquire rights to the benefits produced by the scheme. Subsection 161(1) of the German Commercial Code similarly requires a partner to make a specific 'capital contribution' to the KG's operation of the commercial enterprise and that their liability is limited to their capital contribution. Furthermore, under sections 121 and 168 of the German Commercial Code, the distribution of the KG's profits and losses to each of the limited partners is calculated by reference to the limited partner's capital contribution.

' pooled contributions'

The second feature of a managed investment scheme under paragraph (a) of the definition of that term in section 9 of the Corporation Act 2001 is that the funds are either 'pooled' or 'used in common enterprise to produce financial benefits ...'. Subsection 105(1) of the German Commercial Code similarly states that the purpose of a KG must be the joint operation of a commercial enterprise. This is broadly consistent with the requirement that the contributions are used in common enterprise to produce the financial benefits.

' no day-to-day control by members'

The third feature of a managed investment scheme under paragraph (a) of the definition of that term in section 9 of the Corporations Act 2001 is that the members of the scheme do not have day-to-day control over the operation of the scheme. Similarly, under section 164 of the German Commercial Code, the limited partners of a KG are excluded from the management of the business of the partnership. The day-to-day control over the operation of the KG is held only by the general partner of the KG.

Accordingly, a KG, to derive its status as such, is subject to similar requirements under the German Commercial Code as that required of a managed investment scheme under Australian law.

Therefore, the German KG is recognised under a foreign law relating to corporate regulation as an entity with a similar status to a managed investment scheme for the purposes of paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953. Note : as the German KG in this case has at least 50 members, the German KG satisfies all of the requirements in paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953. Accordingly, the Australian Trust satisfies item 3 of the table in subsection 12-400(1) of the TAA 1953 and will be a 'managed investment trust' for the purposes of that subsection as long as the other requirements in that subsection are also satisfied.