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The Department of Home Affairs has issued its draft guidance “Modern Slavery Act 2018: Draft Guidance for Reporting Entities” (Draft Guidance) for the new Modern Slavery Act 2018 (Cth) (the Act).
On 5 February 2018, the Federal Court’s decision in Resource Capital Fund IV (RCF) shook the Australian private equity (PE) market with a dramatic shift from industry practice. It is important to note that the decision does not purport to address the legal personality of limited partnerships (LPs) in any jurisdiction – just the tax treatment in Australia under specific rules relating to LPs.
The Court found that the correct taxable entity in respect of gains from a sale of shares in an Australian entity was not the LP but the partners themselves (i.e., the investors in the LP). Notwithstanding this finding, the Court held that the partners (who were largely comprised of US residents) were entitled to claim tax relief under the relevant tax treaty.
Following this decision, any structure utilising an LP, whether domestic or foreign, will be impacted by the Court’s decision. We note that Early Stage Venture Capital Limited Partnerships (ESVCLPs) and Venture Capital Limited Partnerships (VCLPs) are not affected.
Broadly, the decision’s findings and implications are as follows:
Unless the appeal is successful (on point (1) above), the decision would result in offshore investors having to potentially lodge Australian income tax returns and Australians having to include LP income in their tax returns before their distribution.
The danger for the industry is whether the ATO withdraws a tax determination that currently provides concessional treatment to certain foreign LPs (such as Cayman limited partnerships) by treating them as flow through entities instead of taxable entities.