Connected entities and partnerships, foreign hybrids, non-entity joint ventures and corporate limited partnerships

The Commissioner of Taxation has issued two Draft Taxation Determinations to clarify when certain entities will be connected with each other (which is based on control tests) for the purpose of determining an entity’s aggregated turnover.  They are:

• Draft Taxation Determination TD 2021/D2 re partnerships, foreign hybrids and non-entity joint ventures; and
• Draft Taxation Determination TD 2021/D3 re corporate limited partnerships.

The Draft Taxation Determinations also touch on the application of the affiliate rules to those entities.

The key points from the Draft Taxation Determinations are:

Partnerships

• A partnership is an entity for income tax purposes, separate to its partners.
• An entity (including partners) can control a partnership under the “general control” test (re distributions of income or capital) or the “specific control” test (re the net income of the partnership).
• To determine if a partnership controls another entity, it is the partnership (and not the partners) that is tested as the controlling entity.
• A partnership is not capable of being an affiliate of another entity as only individuals or companies can be affiliates.

Foreign hybrids

• Foreign hybrids (being foreign hybrid limited partnerships and foreign hybrid companies) are treated as partnerships for Australian income tax purposes.
• As such, the discussion above regarding partnerships is equally applicable to foreign hybrids.

Non-entity joint ventures

• A non-entity joint venture is an arrangement that the Commissioner is satisfied is a contractual arrangement under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties, and that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties.
• A non-entity joint venture is not an entity for Australian tax purposes.
• As such, it is the parties to the joint venture in their separate capacities that are tested as the controlling or controlled entities as the case may be.
• Parties to a non-entity joint venture may or may not be affiliates of each, but they will not be affiliates of each other merely because of the nature of their business relationship.

Corporate limited partnerships

• A corporate limited partnership is treated as a company for income tax purposes.
• As such, the control tests for companies applies to corporate limited partnerships, and the control tests for partnerships do not.
• An entity (including partners) can control a corporate limited partnership under the “general control” test (re distributions of income or capital) or the “specific control” test (re voting).
• A corporate limited partnership is capable of being an affiliate of another entity by virtue of being treated as a company for income tax purposes.