Ruling Compendium

The correct view is that only the residual interest in the partnership in not an active foreign business asset. This is because:

•

Division 768 of the Income Tax Assessment 1997 (ITAA 1997) applies only to 'CGT assets';

•

The definition of a 'CGT asset' has two limbs relating to partnerships, namely:

(c)

an interest in an asset of a partnership;

(d)

an interest in a partnership that is not covered by paragraph (c).

•

The definition recognises that (c) and (d) are separate CGT assets;

Accordingly, the reference in subsection 768-540(2) of the ITAA 1997 to an interest in a partnership is only a reference to one of those CGT assets; namely, a residual interest in the partnership itself.

Firstly, the Commissioner cannot reconcile the alternative view with the general statement in paragraph 1.120 of the Explanatory Memorandum to the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 (the Explanatory Memorandum) that 'the characterisation of interests in partnerships and trusts as not active means that these entities will not be looked through for the purpose of calculating the active foreign business asset percentage of a foreign company'. The Commissioner has considered the argument that paragraph 1.120 of the Explanatory Memorandum can be read narrowly as simply saying that if a share in a foreign company is held by a partnership, the assets of that foreign company will not contribute to the active foreign business asset percentage. The Commissioner has explained why paragraph 1.120 of the Explanatory Memorandum cannot be read so narrowly in the Determination.

Secondly, the provisions in Subdivision 768-G of the ITAA 1997 need to be construed having regard to the controlled foreign company (CFC) provisions contained in Part X of the Income Tax Assessment Act 1936 (ITAA 1936) and section 23AJ of the ITAA 1936. The Commissioner's view outlined in the Determination is consistent with his interpretation of the CFC rules and section 23AJ of the ITAA 1936. The Commissioner has explained his reasoning in the Determination.

Paragraphs 17 and 18 of the Determination expand on the proposition made in paragraph 16. The point is made that an interest in a partnership (be it an interest in each asset of the partnership or the residual interest) was not intended to be treated as active for the purposes of calculating the active foreign business asset percentage. The Determination highlights that the treatment of an interest in a partnership is expressly different to the treatment of a share. Although an investment in a share is ordinarily passive in nature, a share is specifically included in the definition of active foreign business asset, whilst an interest in a partnership is expressly excluded.

Extrinsic materials such as an Explanatory Memorandum can be referred to under the common law independently of being permitted to do so by section 15AB of the Acts Interpretation Act 1901 to ascertain the purpose of the legislation under consideration: see Newcastle City Council v. GIO General Limited (1997) 191 CLR 85 per Toohey, Gaudron and Gummow JJ at 99.

The references to the Explanatory Memorandum in the Determination support the Commissioner's construction of the phrase in subsection 768-540(2) of the ITAA 1997.

The quotes from the Explanatory Memorandum in paragraphs 16 and 17 of the Determination have been included because they explain the rationale for expressly excluding certain CGT assets from the definition of active foreign business asset, that is, the assets are passive in nature.

The quote from the Explanatory Memorandum in paragraph 18 of the Determination is relevant to the conclusion reached in the Determination. The first sentence in the quote is of particular relevance. It reads as follows:

Characterisation of interests in partnerships and trusts as not active means that these entities will not be looked through for the purpose of calculating the active foreign business asset percentage of a foreign company.