Australia

Details

  • Service: Tax
  • Industry: Financial Services
  • Type: Regulatory update
  • Date: 26/09/2013

Tax Insights

KPMG's analysis of tax issues and developments.

Connie Van Werkum

Connie Van Werkum
Director, Tax

+61 3 9288 6516

cvanwerkum@kpmg.com.au

Hybrid or not? 

by Connie Van Werkum, Financial Services Specialist

Australian investment in foreign hybrid entities such as limited partnerships and US limited liability companies has grown significantly in the past 10 years. Australian investors in such entities need to consider the foreign hybrid provisions contained in Division 830 of the Income Tax Assessment Act 1997.

Division 830 provides for certain foreign hybrid entities that are partnerships for foreign tax purposes and companies for Australian tax (including corporate limited partnerships), to be treated as partnerships for Australian tax purposes.

 

Partnership treatment can be automatic (if the foreign hybrid is a Controlled Foreign Company (CFC) and the Australian partner / shareholder is an attributable taxpayer) or by way of irrevocable election. If an election is made, partnership treatment only applies to the electing partner’s interest in the partnership.

 

The election requires a weighing up of the expected benefits of flow-through partnership treatment against an additional compliance burden. For example, partnership treatment may provide increased access to the capital gains tax discount for eligible entities, a broader range of foreign income tax offsets and the branch profits exemption.

 

However, a minority partner may experience difficulty accessing all the information required to calculate partnership net income (which can include CFC calculations) and prepare an Australian tax return. This may make the election not viable. Having said this, in certain circumstances, the tax savings from making the election can be significant.

 

If you have not made the election for a particular investment now may be the time to revisit that decision.

 

The election must be made on or before the day on which the partner lodges their tax return for the income year (or within a further time allowed by the Commissioner).

 

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