As noted above, initially, in the RCF IV case, the two Cayman limited partnerships were the parties to the tax appeal. This was not the case in relation to the Cayman limited partnership in the RCF III case. In the RCF IV case, leave was granted for the general partners in each of the Cayman limited partnerships to be joined as applicants, this enabled RCV IV and RCV V to make submissions, including that:
- no taxable entity, being the (corporate) limited partnership, is created by Division 5A of Part III of the 1936 Act; and
- by virtue of section 94U and 94V of the 1936 Act, only the partners are (jointly and severally) liable for income tax calculated under Division 5A; and
- the corporate limited partnership was not expressed to be liable to tax because it is not a legal personality separate from the partners, as is the case with “general” partnerships subject to the rules in Division 5 of Part III of the 1936 “general” Act.
While not discussed in the RCF IV case judgment, it is interesting to note that under section 94H and 94J of the 1936 Act, if a partnership is a “corporate limited partnership” in relation to a year of income, a reference to a “company” or a “body company” includes (subject to exceptions relating to the definitions of dividend and resident and some R&D provisions) a reference to the partnership. Further, under section 94K of the 1936 Act, a reference to a partnership in the income tax law (which includes the 1997 Act and the 1936 Act other than Division 5A of Part III) does not include a reference to the partnership.
Paragraph (b) of the definition of “limited partnership” in section 995-1 of the 1997 Act refers to certain venture capital limited partnerships which have a legal personality separate from the association of persons who form the partnership.
As noted above, the Cayman limited partnerships in the RCF IV case did not have a separate legal personality from the general partners or the limited partners. The Court found that those limited partnerships fell within paragraph (a) of the definition of “limited partnership” in section 995-1 of the 1997 Act which provides:
“An association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least of those persons is limited.”
Because the Cayman limited partnerships did not have a separate legal personality from the partners under Cayman law, the Federal Court in the RCF IV case looked in vain (in its view) for provisions in Division 5A of part III of the 1936 Act which created a separate taxable entity. By inference, the Federal Court believed it was insufficient to label the entity as a “company” for the purposes of the income tax law (as defined in section 94B of the 1936 Act).
The Federal Court looked at section 94U of the 1936 Act, which is headed “Incorporation” but found that a limited partnership (at least one without a separate legal personality) is only “taken” to be notionally incorporated where it was formed for the purposes of, among other things, its deemed residence under section 94T of the 1936 Act. The Federal Court also stated that section 94U “does not in form, effect or purpose create a taxable entity”. Such a statement is obviously not focusing on “limited partnerships” which have a separate legal personality and are referred to in paragraph (b) of the definition of that term.
The Federal Court then focused on subsection 94V(1) of the 1936 Act which provides, so far as relevant:
“The application of the income tax law to the partnership as if the partnership were a company is subject to the following changes:
(a) obligations that would be imposed on the partnership are imposed instead on each partner but may be discharged by any of the partners;
(b) the partners are jointly and severally liable to pay any amount that would be payable by the partnership; ….”
As noted by the Federal Court:
“Nothing in s.94V, or any other provision of Div 5A, authorises the Commissioner to impose any obligation or liability on any person other than a partner, and if there had been any doubt where the liability and obligation fell, the doubt was expressly removed by s.94V.”
It is relatively clear why section 94V is necessary for a paragraph (a) limited partnership with no separate legal personality (such as the ones in the RCF IV case), but it is less clear in relation to paragraph (b) venture capital limited partnerships which have a separate legal personality.
What the Federal Court did not refer to in the RCF IV case is section 94L and section 94M of the 1936 Act. These provisions generally deem distributions of corporate limited partnerships and drawings from such partnerships to be dividends paid by a company out of profits of the company and to be assessable as dividends under section 44 of the 1936 Act, or subject to or exempted from dividend withholding tax under Division 11A of Part III of the 1936 Act.
There is an obligation on the Commissioner to avoid double taxation in section 94M dealing with drawings. However, subsection 94M(3) limits this obligation to cases where there are further partner distributions after drawings and where the drawings may have anticipated future profits.
What is not covered in Division 5A expressly is the scenario where a partner, who is jointly and severally liable for the corporate limited partnership’s income tax liability, receives both:
- an assessment; and
- a deemed dividend from a distribution or drawing from the partnership.
For Australian resident corporate limited partnerships and partners, the partnership is a “corporate tax entity” which can generally frank dividends. Hence double tax is partly or wholly dealt with in the above circumstances.
However, for non-resident corporate limited partnerships and partners, double taxation may arise if the RCF IV case is correct. This appears to be a surprising result in that it re-introduces the classical system (double taxation of the same profit) for taxing companies and shareholders for foreign residents and in the case of a non-resident partner assessed on the whole of the partnerships taxable income, multiple taxation of that profit.