D Marks Partnership case – limited partnership and debt interests

Case – limited partnership and debt interests

Jenny Wong analyses a recent decision of the Full Federal Court regarding limited partnerships and debt interests.

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KPMG Australia

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The Full Federal Court handed down its decision on 22 June 2016 in D Marks Partnership by its General Partner Quintaste Pty Ltd v Commissioner of Taxation [2016] FCAFC 86 with the majority concluding the partnership was not a limited partnership (Logan J dissenting) and that redeemable shares issued to the partnership were debt interests for tax purposes.

The first key issue considered by the Full Court was whether D Marks Partnership was a limited partnership. If it was, D Marks Partnership would be taxed as a company and Quintaste would be entitled to imputation credits on the dividends received from HL Securities. 

The tax law defines a ‘limited partnership’ as “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 …”.   The majority of the Full Court found that D Marks Partnership is not a limited partnership, notwithstanding its registration under 1988 Queensland Act. The relationship between the entities did not create a partnership under the relevant state law or under general law, as there was no relationship between the entities of carrying on a business in common with a view to profit.

The second main issue considered was whether the redeemable shares issued to the partnership were equity interests, because if they were the recipients were entitled to claim franking credits. Elements of the meaning of a debt interest were examined, in particular whether there was a ‘financial benefit’ and whether there was an ‘effectively non-contingent obligation’. The Court rejected the taxpayer’s submission that a $10 benefit on HL Securities is inconsequential (and hence arguing no financial benefit) especially having regard to that entity's other assets. The Court also said “the Tribunal correctly considered … the redemption was not made to depend upon any prior payment by Quintaste of the issue price” and hence an ‘effectively non-contingent obligation’ was present.

Whilst the reasoning on the debt/equity analysis seems relatively straightforward, some of the reasoning in the judgement does raise some questions in interpreting the tax law definition of ‘limited partnership’. What are your thoughts?

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