Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess loss allocation: When do the restrictions apply?
ITA07/S116A (3) and S127C (3)
The excess loss allocation restrictions apply when:
- an individual makes a trading or property business loss as a partner in a firm;
- which arises, wholly or partly, as a consequence or in connection with tax avoidance arrangements to which the individual is a party, a main purpose of which is to secure that losses are allocated or arise to the individual, rather than a non-individual, see BIM82770; and
- with a view to the individual obtaining relief for the loss.
The fact that the non-individual is not a partner in the firm or is unknown or does not exist at the time does not prevent the restriction applying.
Where there is no non-individual member and no plans for there to be in future, there may still be a relevant tax avoidance arrangement if the business giving rise to the loss is sold or transferred by the partnership to a non-individual who is not in partnership if that transfer is part of the arrangement.
A relevant tax avoidance arrangement can be any agreement, understanding or any form of arrangement for the loss to be allocated to one or more individuals rather than a non-individual.
The allocation of the losses does not have to be the main purpose of the arrangements, only one of the main purposes.
For the purposes of the loss rules an overseas individual remains an individual.
EXP LLP expands its overseas operations. For regulatory reasons, its operations it sets up a local partnership the EXP partnership. A, B and C are members of both EXP LLP and the EXP partnership.
*In the first year, EXP partnership makes a loss which is allocated to A, B and C, local members D, E and F receiving neither a profit nor loss. *
The excess loss provisions do not apply as an overseas individual is still an individual.