Submission No. 292 Back to full list of submissions
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11 June 1999

Dr Alan Preston
Review of Business Taxation
Department of Treasury
Parkes Place
Canberra ACT 2600

Dear Dr Preston

A Platform for Consultation - Taxation of foreign limited partnerships

We refer to the earlier submissions made by Lend Lease on the second discussion paper released by the Review of Business Taxation ("RBT") of ("the Review") titled A Platform for Consultation. This submission is made jointly by Lend Lease and its wholly owned subsidiary MLC Limited, and on behalf of MLC Lifetime Company Limited. The MLC group has $28 billion in assets under management and, in addition to its funds management business, is Australia's second largest life insurance group.

We would also like to reiterate our thanks for the opportunity which has been afforded to us to participate in the review process. We appreciate the consultative process and the availability of the Review staff to meet and discuss issues.

This Lend Lease/MLC submission is concerned with particular aspects of the proposals contained in Chapter 32 which deals with foreign source income of residents.

1 Outline of Lend Lease's concerns with the taxation of foreign limited partnerships

Lend Lease/MLC is concerned that the re-characterisation of foreign limited partnerships as companies is inhibiting the development of the Australian funds management industry and is penalising Australian investors who participate in foreign capital markets through the medium of foreign limited partnerships.

It is the view of Lend Lease/MLC that a "flow through" treatment of foreign limited partnerships for taxation purposes is the appropriate model rather than the current "entity" classification.

The rationale for the introduction of the limited partnership provisions in 1992 was to ensure that participants in a limited partnership would not enjoy the benefits of both limited liability and the flow through of losses. The investment in foreign limited partnerships by the funds management, life insurance and superannuation industries would not trigger the same concerns as the losses would be quarantined nor is it anticipated that tax deferral through timing differences would arise given the passive nature of the investment activities.

Limited partnerships are treated as flow through entities in other jurisdictions.

There is growing Australian resident investment in offshore funds that are constituted as limited partnerships. This investment is being compromised due to the effective high level of tax paid by those investors where the limited partnerships are taxed in their countries of domicile without some tax credit relief in Australia.

We would be pleased to provide you with comparatives of the tax and investment outcomes of a resident investing in an Australian limited partnership as compared to a foreign limited partnership.

2 Additional background information

The growth in funds under management in the Australian funds management and life insurance industry and the relatively limited size and depth of the Australian capital markets are increasingly focussing investor attention on investment opportunities outside of Australia. In particular, it is our experience that Australian investors, particularly wholesale investors, are increasingly seeking to obtain diversified exposure to the foreign private equity and foreign real estate markets.

In order to have an appropriate level of diversification and to secure the management expertise in relation to these overseas asset classes, it is necessary for the Australian investors to invest in specialist overseas wholesale funds. Many of these funds are structured as limited partnerships. Should it be of assistance to the Review, we would be pleased to provide you with copies of the further background information for particular funds.

Overseas funds are typically structured in multiple layers for the purpose of quarantining investments between participants, diversity of manager and as a means of participating in further investments. The flow through treatment should therefore be at all levels in the structure.

Typically, the investment in a particular overseas limited partnership would be at a level of less than 10% as a higher level of ownership typically attracts excessive portfolio risks. The investments are therefore generally classified for Australian taxation purposes as "portfolio interests".

Many such overseas funds, particularly where the funds involve real estate or European private equity investments, are taxed at relatively high rates overseas. In order that the return to the Australian investors compares favourably to an equivalent investment in Australia, it is essential that a foreign tax credit is available for the Australian investors. The Review has recognised in Chapter 16 of A Platform for Consultation that either a flow through treatment or otherwise a special regime will be needed to generate that result.

3 The re-characterisation of foreign limited partnerships as companies under current law

Domestic and foreign limited partnerships are treated as companies for Australian tax purposes. Accordingly, the "flow through" regime which generally applies to domestic and foreign general partnerships is replaced by an "entity" system for domestic and foreign limited partnerships.

The result of this re-characterisation is that a distribution from a foreign limited partnership is treated as a dividend and foreign tax credits will only accrue for tax paid by the foreign limited partnership where the interest in the foreign limited partnership is equal to or greater than 10%. As the vast majority of investments in overseas limited partnerships are at a level less than this threshold, a foreign tax credit is generally not available to the Australian investors in such foreign limited partnerships.

The result is that there is a significant taxation impediment to the placement of funds into such vehicles.

We recognise there is a revenue impact in allowing the flow through of foreign tax credits, however, the cost to the revenue (which would not be significant) is outweighed by the benefits that accrue to Australian investors from being able to access global investment opportunities.

4 Suggested solution

It is the view of Lend Lease/MLC that, at least in the funds management/life insurance/superannuation context, foreign limited partnerships should be taxed on a flow through basis and foreign tax credits should be available to Australian investors for foreign tax paid by the overseas funds in relation to their investments.

It is also the view of Lend Lease/MLC that flow through treatments should be preserved even in circumstances where there are multiple tiers of such foreign limited partnerships.

5 Further offer to meet Lend Lease/MLC executives

Given the complexities of the relevant provisions of the Australian tax law we would welcome the opportunity to meet with you to further discuss the matters raised in this letter.

We trust that the above comments are of assistance to the Review in formulating its recommendations to Government.

Yours sincerely


David Higgins
Group Chief Executive
Lend Lease Corporation