New Zealand: Inland Revenue issues rulings on availability of foreign tax credits for tax paid by Australian limited partnerships

Chris Harker

New Zealand's Inland Revenue has recently finalised a series of public rulings (BR Pub 14/01 to 14/05) regarding the ability of a New Zealand resident partner of an Australian limited partnership (ALP) to claim foreign tax credits for tax paid by the limited partnership. The rulings apply from the 2013/2014 income year.

The rulings concern ALPs that are treated as companies for Australian tax purposes, but are fiscally transparent for New Zealand tax purposes. The rulings will, however, be of general interest to persons that are considering New Zealand inbound or outbound investment involving a hybrid entity (that is, an entity that has transparent tax treatment in one jurisdiction, but that is taxed as an entity in its own right in another).

In summary, the rulings provide that New Zealand partners in an ALP:

• are allowed a foreign tax credit for Australian tax paid on Australian source income earned by the ALP, to the extent that income is treated as derived (for New Zealand tax purposes) by the New Zealand partners;
• are not allowed a foreign tax credit for Australian dividend withholding tax deducted from distributions made by the ALP to its partners (such distributions not being income for New Zealand tax purposes);
• are allowed a foreign tax credit for Australian tax paid on a distribution made to the ALP by a unit trust, to the extent that distribution is treated (for New Zealand tax purposes) as a dividend derived by the New Zealand partners. A unit trust is treated as a company for New Zealand tax purposes, meaning that distributions made by a unit trust will generally be dividends for New Zealand tax purposes;
• are not allowed a foreign tax credit for the amount of any franking credit attached to any dividend derived by the ALP. (This follows from the fact that a franking credit will represent Australian tax paid on the earnings of the entity from which the ALP derives the dividend, and not on an amount derived by the New Zealand partner);
• in the case of an ALP that is the head company of a consolidated group for Australian tax purposes, are allowed a foreign tax credit only for Australian income tax paid by the ALP on income that it earns directly (and not for Australian tax paid, in its capacity as head company of the consolidated group, on income of the other companies in the group).

The rulings, taken together, illustrate the general principle that New Zealand partners are entitled to foreign tax credits to the extent that the ALP pays Australian income tax on amounts which (for New Zealand tax purposes) are treated as income of the New Zealand partners. By contrast, the general rule is that New Zealand partners are not allowed a foreign tax credit for Australian tax paid on amounts that are not income of the partners for New Zealand tax purposes (such as distributions by the ALP, or income earned by other companies in the same consolidated group as the ALP).

The rulings are expressed to apply only to specific situations and avoid dealing with a number of difficult issues which could arise in practice (for example, the ruling regarding an ALP that is the head company of an Australian consolidated group expressly does not consider situations where one or more of the group entities is in a loss position). That said, the rulings remain a useful guide to the relevant principles when applying New Zealand's foreign tax credit rules to a hybrid entity. The rulings also highlight the point that care is required when structuring any cross-border investment involving a hybrid entity, and in particular that the New Zealand tax consequences of such an investment must be carefully considered together with applicable foreign tax laws.

Chris Harker (chris.harker@russellmcveagh.com), Wellington
Russell McVeagh
Tel: +64 4 819 7345
Website: www.russellmcveagh.com

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