AustLII [Home] [Databases] [WorldLII] [Search] [Feedback]

Administrative Appeals Tribunal of Australia
You are here:  AustLII >> Databases >> Administrative Appeals Tribunal of Australia >> 2015 >> [2015] AATA 654

[Database Search] [Name Search] [Recent Decisions] [Noteup] [Download] [Context] [No Context] [Help]

NR Allsop Holdings Pty Ltd as General Partner of Q Uniform Partnership and Commissioner of Taxation (Taxation) [2015] AATA 654 (31 August 2015)

Last Updated: 31 August 2015

NR Allsop Holdings Pty Ltd as General Partner of Q Uniform Partnership and Commissioner of Taxation (Taxation) [2015] AATA 654 (31 August 2015)

Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2013/5695
2013/5696
2013/5697
2013/5698
Re
NR Allsopp Holdings Pty Ltd as General Partner of Q Uniform Partnership

APPLICANT
And
Commissioner of Taxation

RESPONDENT
File Number
2013/5699
Re
The Trustee for the NKP Sheetmetal Trust

APPLICANT
And
Commissioner of Taxation

RESPONDENT
File Number(s)
2013/5700
2013/5701
2013/5702
2013/5703
Re
The Trustee for the Uniform General Trust

APPLICANT
And
Commissioner of Taxation

RESPONDENT
File Number(s)
2013/5704
2013/5705
2013/5706
2013/5707
Re
The Trustee for the Uniform Trust

APPLICANT
And
Commissioner of Taxation

RESPONDENT

DECISION

Tribunal
Deputy President I R Molloy
Date
31 August 2015
Place
Brisbane

The Tribunal affirms the decision under review.

.........................[Sgd]...............................................

Deputy President I R Molloy

CATCHWORDS

TAXATION – income tax – whether there existed a limited partnership or a corporate limited partnership – whether shares issued were a debt or equity interest – whether deemed dividends arise under Division 7A of the Income Tax Assessment Act 1936 – objection decisions under review affirmed

TAXATION – shortfall penalty – whether position taken by taxpayer reasonably arguable – penalty decisions affirmed

LEGISLATION

Income Tax Assessment Act 1936 (Cth) ss 94D, 92(1), 109D, Division 7A

Partnership (Limited Liability) Act 1988 (Qld)

Partnership Act 1958 (Vic) s 5(1)

Income Tax Assessment Act 1997 (Cth) ss 995-1, 974-5, 974-15, 974-20, 974-160, 974-35

Partnership Act 1891 (Qld) s 5(1)

Taxation Administration Act 1953 (Cth) s 284-15

CASES
D Marks Partnership & Ors v Commissioner of Taxation [2015] AATA 651
Trautwein v Federal Commissioner of Taxation (No 1) [1936] HCA 77; (1936) 56 CLR 63
Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81
Cameron Brae Pty Ltd v Federal Commissioner of Taxation [2007] FCAFC 135; (2007) 161 FCR 468
Allen and Another v Federal Commissioner of Taxation (2011) 195 FCR 416

REASONS FOR DECISION


Deputy President I R Molloy

  1. These are applications to review objection decisions dated 30 August 2013. The applicants are NR Allsopp Holdings Pty Ltd, the trustee for the NKP Sheetmetal Trust, the trustee for the Uniform General Trust, and the trustee for the Uniform Trust (“the applicants”).
  2. The application by the trustee for the NKP Sheetmetal Trust is in respect of the income year 2005. The other applicants apply for review of decisions in respect of the income years 2004 to 2007 inclusive.

ISSUES

  1. There are three main issues.
  2. The first is whether Q Uniform Partnership was a limited partnership, the members of which were the trustees of the Uniform General Trust and the Uniform Trust together (“the partners”). The significance is that only a limited partnership can be corporate limited partnership within the meaning of s 94D of the Income Tax Assessment Act 1936 (Cth) (“ITAA 1936”) and taxed as a company.
  3. The second main issue is whether Z class shares issued by two companies, NK Products Pty Ltd (“NK Products”) and Quality Powdercoating Pty Ltd (“Quality Powdercoating”), were a debt interest or an equity interest. The significance is that if they are an equity interest, the recipient of dividends is entitled to claim franking credits.
  4. The third main issue is whether deemed dividends arise under Division 7A of the ITAA 1936. There are said to be two groups of deemed dividends. The first is said to relate to loans made by NK Products to the trustees of the Uniform General Trust and the Uniform Trust. The second are said to have been made as part of an arrangement through Q Uniform Partnership as an interposed entity, by NK Products to the NKP Sheetmetal Trust.

Limited Partnership

  1. On 29 May 2003, a deed entitled Deed of Limited Partnership, was executed. According to the deed, the trustee for the Uniform General Trust was the general partner and the trustee of the Uniform Trust was the limited partner (“the partners”). The limited partnership was expressed as commencing on the date of the deed.[1]
  2. The deed recorded that the legislation under which the limited partnership was formed was the Partnership (Limited Liability) Act 1988 (Qld) (“PLLA”).
  3. The deed provided that the rights of the partners to share in the capital shall be in proportion to their initial contributions,[2] and that their rights to a distribution of profits shall be in proportion their initial contributions.[3]
  4. The deed also provided that the liability of the partners for debts of the partnership shall not exceed their respective initial contributions. A schedule to the deed recorded the general partner’s initial contribution as $1 and the limited partner’s contribution as $99.[4]
  5. Q Uniform Partnership was registered under the PLLA on 5 June 2013 and a certificate of registration was issued.
  6. On 16 August 2004 Q Uniform Partnership was registered in Victoria under the Partnership Act 1958 (Vic) (“VicPA”). The VicPA, in particular Part 3, provides for limited partnerships in substantially the same terms as the Queensland legislation.
  7. It is said that Q Uniform Partnership was deregistered in Queensland on 17 August 2004.
  8. Under s 995-1(1) of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”), a limited partnership is defined, relevantly, as:
a) 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 one of those persons is limited.
  1. The applicants contend there are three elements to this definition. First, they submit the words “an association of persons carrying on business as partners ...” are referring to a general law partnership.
  2. The second element is said to be constituted by the words “... or in receipt of ordinary income or statutory income jointly...” and is an alternative to the first element. They contend the legislation contemplates a situation in which two or more persons receive ordinary or statutory income jointly, and are not in a general law partnership.
  3. It appears to be common ground that Q Uniform Partnership was in receipt of ordinary or statutory income in the form of dividends.
  4. The third element is said to be constituted by the words: “... where the liability of at least one of those persons is limited”.
  5. The applicants’ primary submission is that what are described as the second and third elements of the definition are satisfied, and consequently Q Uniform Partnership is a limited partnership.
  6. The third element is said to be satisfied by reference to the deed, under which the liability of the partners is limited. I do not accept that.
  7. I have dealt with these issues in D Marks Partnership & Ors v Commissioner of Taxation [2015] AATA 651 (“Marks”) where substantially the same submissions (by the same counsel) were advanced. I adopt what I said in that decision and accordingly will be brief.
  8. In my view what is contemplated by s 995-1(1) of ITAA 1997 is a limitation of liability of at least one of the persons to third parties. That is not achieved simply by the terms of the deed.
  9. The limitation of liability contemplated by s 995-1(1) of ITAA 1997 is achieved by the creation of a limited partnership under legislation enacted for that purpose.
  10. In Queensland, at the time the deed was made, the relevant legislation was the PLLA as referred to in the deed. Since 2004, in Queensland, it has been Chapter 3 of the Partnership Act 1891 (Qld) (“PA”). In Victoria, as I have said, it is the VicPA.
  11. Under both the relevant Queensland legislation, and the VicPA, there are express statutory provisions which apply only to limited partnerships. The intention, however, is that limited partnerships are otherwise subject to the general partnership legislation and the rules of equity and common law applicable to partnerships.
  12. That includes satisfying the statutory definition of partnership. In the PA the definition is found in s 5(1) as follows:
Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.
  1. In the VicPA, the definition, also in s 5(1), is in substantially the same terms:
Partnership is the relation which subsists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership with the meaning of Part 5.[5]
  1. In my view Q Uniform Partnership could not be regarded as a limited partnership, whether registered under the Queensland legislation or the VicPA, unless it satisfied the requirements of a partnership under the general law, in particular the respective statutory definition.
  2. The respondent concluded that Q Uniform Partnership never carried on business satisfying that definition. The applicants have not satisfied me that that conclusion was incorrect.
  3. As there was no partnership under the general law, I find that Q Uniform Partnership was not a partnership as defined under the Queensland legislation or the VicPA.
  4. It was therefore not a limited partnership under the legislation in either state and consequently did not fulfil the requirements of a limited partnership under s 995-1(1) of the ITAA 1997.
  5. Q Uniform Partnership was therefore not a corporate limited partnership for the purposes of s 94D of the ITTA 1936.
  6. However, s 995-1 of the ITAA 1997 defines partnership as follows:
“partnership” means:
  1. an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or
  2. a limited partnership.
  1. The trustees of the Uniform General Trust and the Uniform Trust were in receipt of income jointly. They were therefore “tax partners” pursuant to s 995-1 of the ITAA 1997.

Debt or equity interest

  1. The second main issue is whether Z class shares issued by NK Products and Quality Powdercoating during the years 2004 to 2007 were debt or equity interests.
  2. Variously on 14 June 2004 and 21 June 2004:
  3. At the same time the constitution of each of NK Products and Quality Powdercoating was amended to include the following in respect of such shares:
Each share shall be redeemable at the direction of the directors, at any time, for the issue price, and, at the end of 47 months following its issue, shall be automatically redeemed at its issue price and cease to exist at the expiration of that time, whether or not its redemption price has been paid.
  1. Various dividends were paid by each of NK Products and Quality Powdercoating in respect of the Z class shares. If the Z class shares were a debt interest then the recipient of those dividends will not be entitled to franking credits on them.
  2. Division 974 of the ITTA 1997 determines whether an interest held in an entity, including a share, is a debt or equity interest.
  3. A starting point is s 974-1 which provides, relevantly:
Whether an interest is a debt interest or an equity interest matters because returns on debt interests are not frankable but may be deductible while returns on equity interests are not deductible but may be frankable.
  1. Section 974-5 of the ITAA 1997 provides an overview of the Division, including the following:
Overview of Division
Test for distinguishing debt and equity interests
(1) The test for distinguishing between debt interests and equity interests focuses on economic substance rather than mere legal form (see subsection 974-10(2)). The test is designed to assess the economic substance of an interest in terms of its impact on the issuer's position.
Debt interests
(2) Subdivision 974-B tells you when an interest is a debt interest in an entity. The basic test is in section 974-20.
Equity interests
(3) Subdivision 974-C tells you when an interest is an equity interest in a company. The basic test is in section 974-75.
Tie breaker between debt and equity
(4) If an interest satisfies both the debt test and the equity test, it is treated as a debt interest and not an equity interest.
  1. More specifically, s 974-15(1) of ITAA 1997 provides that a scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) in relation to the entity. It is common ground that there was in each case a scheme.
  2. Section 974-20(1) of ITAA 1997, paragraphs (a) to (e) sets out what the requirements are of a scheme to satisfy the debt test.
  3. Section 974-20(1)(a) provides that “the scheme is a financing arrangement for the entity”. However, this does not need to be satisfied, because shares fall within the following provision to subsection (1):
The scheme does not need to satisfy paragraph (a) if the entity is a company and the interest arising from the scheme is an interest covered by item 1 of the table in subsection 974-75(1) (interest as a member or stockholder of the company).
  1. As to s 974-20(1)(b), the requirement is that "the entity or connected entity, receives, or will receive, a financial benefit or benefits under the scheme". The term "financial benefit" is defined, relevantly, in s 974-160(1)(b) of the ITAA 1997:
“financial benefit”
Means anything of economic value.
  1. NK Products and Quality Powdercoating are respectively the entities in respect of the Z class share issues. Payment of $1 per share for 10 shares, or the entitlement to receive such payment, constitutes a financial benefit. I refer to the decision in Marks in respect of this, and other aspects of s 974-20(1). I am not satisfied that payment for the shares was not received.
  2. The requirement of s 974-20(1)(c) is as follows:
    1. the entity has, or the entity and a connected entity of the entity each has, an effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when:
      1. the financial benefit referred to in paragraph (b) is received if there is only one; or
      2. the first of the financial benefits referred to in paragraph (b) is received if there are more than one;
  3. In my view the amendment to the constitutions satisfies this requirement of the debt test. On my reading of the amendment there is an obligation to pay the redemption price whether the shares are redeemed pursuant to a resolution or automatically.
  4. Subsection s 974-20(1)(d) provides:
  5. I accept that it is substantially more likely than not that the value provided will be at least equal to the value received for the purposes of this provision. Section 974-35(1) provides relevantly:
Value in nominal terms or present value terms
  1. For the purposes of this Subdivision:
  2. Under the amendment the issue price of the Z class shares is the same as the redemption price. The value provided by NK Products and Quality Powdercoating is therefore at least equal to the value received.
  3. Paragraph (e) of s 974-20(1) provides:
  4. As both the value provided and received by NK Products and Quality Powdercoating respectively was not nil, then s 974-20(1)(e) is satisfied.
  5. I conclude that the Z class shares are a debt interest pursuant to s 974-15 of the ITAA 1997. It follows that the recipient of the dividends is not entitled to franking credits on the dividends.
  6. As Q Uniform Partnership is a partnership as defined by s 995-1 of the ITAA 1997, then the partners are assessed on the dividends. The respondent apportions that income in conformity with the partners’ interests under the deed.
  7. The applicants submit that if there is no limited partnership then there is no occasion for giving effect to that apportionment. They contend that if the limited partnership goes, so too must the apportionment. That, in my view, overlooks the taxation partnership.
  8. I accept the respondent’s submissions on apportionment. They are that s 92(1) of the ITAA 1936 provides that assessable income of a partner in a partnership includes so much of the partner’s interest in the net income of the partnership for an income year.
  9. The respondent has apportioned income, including income from dividends, between the partners on a discernible basis consistent with the evidence before the respondent and now before the tribunal. That is, the respondent has apportioned income in accordance with the respective ownership interests of the partners.
  10. It is incumbent on the applicants, in accordance with their onus, to adduce evidence to show that the basis of the apportionment was wrong, and to show what the correct apportionment should be. They have not done that.
  11. The deed provides that the rights of the partners to share in the capital shall be in proportion to their initial contributions,[10] and that the rights of the partners to a distribution of profits shall be in proportion to their initial capital contributions.[11]
  12. The schedule provides that the trustee of the Uniform General Trust is to contribute 1 %, and the trustee of the Uniform Trust is to contribute 99%.[12]
  13. In so far as the trustee of the Uniform General Trust executed and undertook all the relevant transactions and held the shares, it was always on behalf of both the partners. There is no proper basis put before the tribunal to depart from the basis of apportionment adopted by the respondent.
  14. The respondent assessed the applicants on the basis of Division 6 of the ITAA 1936 concerned with the taxation of trusts. There is no evidence that the trustee of the Uniform Trust or the trustee of the Uniform General Trust exercised a discretion to pay or apply the income of the respective trust estates for the relevant years.
  15. The same reasoning applies in respect of loans made by NK Products, which the respondent found were made to Q Uniform Partnership, and not simply to one of the parties. The applicants have not shown that finding to be incorrect.
  16. The loans are caught by s 109D of the ITAA 1936, and properly treated as dividends forming part of each partner’s assessable income in the same proportions as referred to above.

Interposed entity

  1. The respondent decided that payments made in the 2005 financial year by NK Products to Q Uniform Partnership were caught by the interposed entity provisions in Part 7A, Subdivision E of the ITAA 1936. This is the third main issue.
  2. The ITAA 1936, Division 7A, Subdivision E, allows a private company to be taken to pay a dividend to an entity (the “target entity” ) if an entity interposed between the private company and the target entity makes a payment or loan to the target entity under an arrangement involving the private company.
  3. In brief NK Products paid moneys to Q Uniform Partnership. Q Uniform Partnership paid moneys to NR Allsopp Holdings Pty Ltd as trustee for the NK Sheetmetal Trust (“NK Sheetmetal Trust”). The NKP Sheetmetal Trust distributed moneys to Q Uniform Partnership as a beneficiary in the 2005 year.
  4. Pursuant to s 109T(1)(b) of the ITAA 1936, the respondent found that a reasonable person would conclude (having regard to all the circumstances) that NK Products made the payments solely or mainly as part of an arrangement involving a payment to the target entity.
  5. The applicants dispute that the test contained in s 109T(1)(b), being an objective test, has been satisfied. The respondent relies on the “arrangement” identified in its objection decisions.
  6. In summary, according to the respondent, that arrangement included the following facts:
  7. In all the circumstances I accept the respondent’s submission that a reasonable person would conclude that the payments and loans made by NK Products to the Q Uniform Partnership were mainly part of an arrangement whereby the Q Uniform Partnership also made loans to the NKP Sheetmetal Trust.
  8. The applicants take issue with the respondent’s calculations, stating “in the respondent’s documents the figures are confusing.” There are complaints that the respondent has not explained how some figures are characterised or how they relate to other figures. The applicants submit aspects of the respondent’s assessments are not clear, “but on at least one reading ... [the respondent] seems to be taxing the same amount in two or three different entities.”
  9. The applicants bear the onus of establishing that the assessments the subject of the objection decisions are excessive including what correction should be made.[13] There is no onus on the respondent to show that the assessments were correctly made.[14] The applicants have raised questions concerning the assessments but have not discharged this onus.

Penalty

  1. On the issue of penalty the applicants submit that their position was reasonably arguable.
  2. Section 284-15(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) provides:
284-15 When a matter is reasonably arguable
(1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.
  1. Even though a decision on a matter of statutory interpretation is considered “clear”, the question may still satisfy the test of “reasonably arguable” in the sense that it was “open to debate”.[15]
  2. The applicants’ argument that there was a limited partnership, described as the primary issue, involved a strained view of the taxation legislation or a fundamental departure from the nature of a limited partnership under the partnership legislation.
  3. The applicants’ dividend/equity argument also depended on an equally unsustainable view of the relevant legislation. Otherwise the applicants’ arguments generally depended on a view of the facts or circumstances which was not made out.
  4. I am not satisfied that the applicants’ contentions were reasonably arguable as having been correct. The penalty decisions should therefore be affirmed. There is no occasion for remitting any of the penalties.

Conclusion

  1. The objection decisions upholding the respondent’s primary assessments are affirmed.

I certify that the preceding 81 (eighty -one) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Molloy

.........................[Sgd]...............................................

Dated 31 August 2015

Date of hearing
4 March 2015
Date final submissions received
24 March 2015
Counsel for the Applicant
Mr K Wilson
Solicitors for the Applicant
Mr I Collie, Cleary Hoare Solicitors
Counsel for the Respondent
Ms K Mellifont with Mr M Ballans
Solicitors for the Respondent
Ms S Auld, Australian Government Solicitor

[1] s 37(1AB) Statement in Lieu volume 3, p 1015.

[2] s 37(1AB) Statement in Lieu volume 3, p 1018.

[3] s 37(1AB) Statement in Lieu volume 3, p 1019.

[4] s 37(1AB) Statement in Lieu volume 3, p 1027.

[5] An incorporated limited partnership (under Part 5 of the VicPA) is to be distinguished from a limited partnership (under Part 3).

[6] s 37(1AB) Statement in Lieu volume 3, pp 1127 and 1102 respectively.

[7] s 37(1AB) Statement in Lieu volume 3, p 1135.

[8] s 37(1AB) Statement in Lieu volume 3, p 1163.

[9] s 37(1AB) Statement in Lieu volume 3, pp 1137 and 1164 respectively.

[10] s 37(1AB) Statement in Lieu volume 3, p 1018.

[11] s 37(1AB) Statement in Lieu volume 3, p 1019.

[12] s 37(1AB) Statement in Lieu volume 3, p 1027.

[13] Trautwein v Federal Commissioner of Taxation (No 1) [1936] HCA 77; (1936) 56 CLR 63, 88.

[14] Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81, 89.

[15] Cameron Brae Pty Ltd v Federal Commissioner of Taxation [2007] FCAFC 135; (2007) 161 FCR 468 at [70]; Allen and Another v Federal Commissioner of Taxation (2011) 195 FCR 416 at [75].

AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.austlii.edu.au/au/cases/cth/AATA/2015/654.html