ATO Interpretative Decision

ATO ID 2011/7

Income Tax

Issue

Can the modifications in subsection 295-85(2) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a venture capital limited partnership when a complying superannuation fund is a partner in the partnership?

Decision

Yes, the modifications in subsection 295-85(2) of the ITAA 1997 can apply to a venture capital limited partnership when a complying superannuation fund is a partner in the partnership such that gains flowing to the complying superannuation fund by reason of being a partner are taxed as capital gains.

Facts

An incorporated limited partnership was formed and registered as such under the provisions of the Partnership Act 1892 (NSW).

The partnership was also registered with Innovation Australia under section 13-1 of the Venture Capital Act 2002 as a venture capital limited partnership (VCLP).

Whilst the VCLP is a corporate limited partnership formed with a legal personality separate from its partners, pursuant to subsection 94D(2) of the Income Tax Assessment Act 1936 (ITAA 1936), the VCLP is excluded from the operation of Division 5A of Part III of the ITAA 1936 which deals with certain limited partnerships and is treated as an ordinary partnership under the provisions of Division 5 of Part III of the ITAA 1936 for income tax purposes.

A complying superannuation fund (CSF) was a partner in the VCLP. There were also partners which were not CSFs.

An asset held by the VCLP was disposed of for more than its cost.

The interest of the CSF partner in the asset was a CGT asset in accordance with subsection 108-5(2) of the ITAA 1997.

CGT event A1 happened when the asset was disposed of.

Reasons for Decision

Subsection 295-85(1) of the ITAA 1997 states that the modifications in subsection 295-85(2) of the ITAA 1997 apply if a CGT event happens involving a CGT asset that was owned by a CSF, a complying approved deposit fund or a pooled superannuation trust just before the time of the event. The modifications in subsection 295-85(2) include that sections 6-5 and 8-1 of the ITAA 1997 do not apply to the CGT event.

Subsection 295-85(2) of the ITAA 1997 does not explicitly state that its operation is limited to taxpayers referred to in subsection 295-85(1) of the ITAA 1997. Rather, it merely lists the modifications that apply to the ITAA 1997 and the ITAA 1936 if a CGT event happens to a CGT asset owned by an entity listed in subsection 295-85(1).

In the present case the interest the CSF partner has in the asset of the VCLP that is disposed of by the limited partnership is itself a CGT asset. Furthermore the disposal of the VCLP's asset necessarily involves a disposal by the CSF partner of its interest in the asset. As such, disposal of the partnership asset results in a CGT event happening to the CGT asset of the CSF partner.

Accordingly, the modifications in subsection 295-85(2) of the ITAA 1997 will apply to the VCLP insofar as the disposal of its asset represents a disposal of the CSF partner's interest in the asset.

This view is supported by an examination of the EM to the Taxation Laws Amendment (Venture Capital) Bill 2002. In particular paragraphs 2.20 and 2.21 contain the following discussion of section 304 of the ITAA 1936 (the predecessor to section 295-85 of the ITAA 1997):

Capital gains

2.20 Capital gains made on assets held by a VCLP, an AFOF* or a VCMP* will be taxable to a partner in the same way as interests on assets held by an ordinary partnership. For example, as the CGT provisions are the primary code for taxing gains and losses made by superannuation funds, approved deposit funds and pooled superannuation trusts (section 304 of the ITAA 1936 ), gains flowing to any of these entities as a limited partner in a VCLP or AFOF will be taxed as capital gains . [emphasis added]

2.21 Any capital gain or loss on the realisation of assets held by the VCLP or AFOF, including the carried interest distributed by a VCMP, will be taxed according to the partner's tax status. Thus, individuals who are partners in a VCMP will qualify for the CGT discount on the carried interest if they satisfy the other requirements for the discount.

(* note AFOF = Australian venture capital fund of funds, VCMP = venture capital management partnership).

This illustrates that there was a specific intent for section 304 of the ITAA 1936 (now section 295-85 of the ITAA 1997) to find application in relation to a venture capital limited partnership that had a CSF as a partner.

Accordingly, the modifications in subsection 295-85(2) of the ITAA 1997 can apply to a VCLP when a CSF is a partner in the partnership.

The effect of this approach is that amounts attributable to the CGT event happening to the CGT asset of the CSF partner are excluded from any amount determined under the provisions listed in subsection 295-85(2) of the ITAA 1997 in relation to the partnership, where the other conditions of section 295-85 of the ITAA 1997 are met.

Accordingly, in this case section 6-5 of the ITAA 1997 (being one of the provisions listed in subsection 295-85(2) of the ITAA 1997) will not apply to the partnership in relation to the CSF's interest in the asset. Any gain on disposal in relation to the CSF's interest in the asset will therefore not be taken into account in calculating the net income of the partnership under section 90 of the ITAA 1936, but rather will fall for consideration under the CGT rules at the level of the CSF partner.

Year of income:  Year ended 30 June 2009

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   section 8-1
   subsection 108-5(2)
   section 295-85
   subsection 295-85(1)
   subsection 295-85(2)

Other References:
Explanatory Memorandum to the Taxation Laws Amendment (Venture Capital) Bill 2002

Keywords
Complying superannuation funds
Partnerships

Siebel/TDMS Reference Number:  1-2F3EVX4

Business Line:  Public Groups and International

Date of publication:  14 January 2011

ISSN: 1445-2782