• Service: Tax, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 9/30/2013

Australia - Foreign hybrid entities treated as partnerships 

September 30:  Australian investment in foreign hybrid entities—such as limited partnerships and U.S. limited liability companies—has grown significantly over the past 10 years.

Australian investors in such foreign hybrid entities need to keep in mind the foreign hybrid provisions of Division 830 of the Income Tax Assessment Act 1997. Division 830 provides that certain foreign hybrid entities that are partnerships for foreign tax purposes and companies for Australian tax (including corporate limited partnerships) are 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 an 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 to prepare an Australian tax return. This may make the election not viable. In some circumstances, the tax savings from making the election can be significant.

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

Read a September 2013 report prepared by the KPMG member firm in Australia: Hybrid or not?

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