For Australian tax purposes, an LLC is a “foreign hybrid company” and treated as a partnership for Australian tax purposes if it satisfies the requirements of section 830-15 ITAA 1997 (see our prior blog on “LLCs – US and Australian Classification and Tax Considerations”).
A sale of an LLC interest, or a conversion of that interest to stock in a US corporation by an Australian resident member, would trigger capital gains tax (CGT) event A1 on the difference between the market value of the member’s interests in the LLC and the cost base of that interest.
If the member has held the LLC interest for more than 12 months, then they could apply the CGT general 50% discount to a sale or a conversion.
The CGT roll-over relief would not be available under Subdivision 122-B ITAA 1997 for a sale of the interest.
Where the gain is subject to tax in the US (as with a sale – see “LLC Series: Selling or Converting an LLC Interest – the US Tax Implications: Partnerships, “Effectively Connected Income” and the US Non-Recognition Rules”) for Australian tax law purposes, it would be treated as being subject to foreign tax at that time, allowing for the application of the foreign income tax offset (FITO) in Australia (subject to the considerations in Burton v. Commissioner of Taxation  FCAFC 141 that Australian taxpayers, to whom the 50% CGT discount applies are only entitled to a FITO in respect of half of the US tax paid in respect of gain, with Article 22(3) of the Australia-US tax treaty not operating to alter this result). Watch more about Burton v. Commission here.
The conversion of an LLC interest to stock in a US corporation by an Australian resident member would trigger CGT event A1 on the difference between the market value of the member’s interests in the LLC and the cost base of that interest.
The CGT roll-over under Subdivision 122-B ITAA may be applied for a conversion if it involved a “rollover” from a partnership to a company, where the partners’ interests in all the assets of a business carried on by the partnership are disposed of to a company (in which they own all of the shares), for stock in that company with equivalent market value to the interests disposed of. For this to occur, the conversion of the LLC would need to be undertaken (for US tax purposes) as an “asset over” transfer to a corporation controlled by all of the members of the LLC.
The cost base and holding period rules (for application of the CGT 50% general discount) would be preserved with a Subdivision 122-B rollover.
If the gain is not taxed in the US (as with a conversion for which the US non-recognition rules applied) it would be taxable in Australia, with no applicable FITO.
If you are considering selling or restructuring your LLC interest, please contact:
Head, US-Australia Tax Desk