Edited version of private ruling

Authorisation Number: 1011544672063

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Ruling

Subject: Managed investment trust distribution

Question 1

In relation to the 2010-11 income year and all future income years (subject to the maximum period allowed by the Commissioner), will the trust continue to be a 'managed investment trust' (MIT) for the purpose of section 12-400 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes, in relation to the 2010-11 income year to the 2019-20 income year (inclusive), the trust will continue to be a MIT.

Question 2

Will Applicant 1 and Applicant 2 be liable to pay income tax (imposed under the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 (MITWHT Act)) on the 'fund payment part' (the Fund Payment Part) within the meaning of subsection 840-805(2) of the Income Tax Assessment Act 1997 (ITAA 1997) of any distributions which they receive in relation to the trust because of section 840-805 of the ITAA 1997 and will such tax be levied at rates not greater than 7.5% in relation to the 2010-11 income year and all future income years (subject to the maximum period allowed by the Commissioner)?

Answer

Yes, in relation to the 2010-11 income year to the 2019-20 income year (inclusive), Applicant 1 and Applicant 2 will be liable to pay income tax (imposed under the MITWHT Act) on the Fund Payment Part of any distributions which they receive in relation to the trust because of section 840-805 of the ITAA 1997 and such tax will be levied at rates not greater than 7.5%.

Question 3

In relation to the 2010-11 income year and all future income years (subject to the maximum period allowed by the Commissioner), will Applicant 1 and Applicant 2 obtain a credit pursuant to section 18-32 of Schedule 1 of the TAA for the tax withheld by the trustee (as responsible entity of the trust) and will such credit be applied in accordance with Division 3 of Part lIB of the TAA?

Answer

Yes, in relation to the 2010-11 income year to the 2019-20 income year (inclusive), Applicant 1 and Applicant 2 will obtain a credit pursuant to section 18-32 of Schedule 1 of the TAA for the tax withheld by the trustee (as responsible entity of the trust) and such credit will be applied in accordance with Division 3 of Part lIB of the TAA.

Question 4

In relation to the year 2010-11 income year and all future income years (subject to the maximum period allowed by the Commissioner), will the amounts subject to tax referred to at Question 2 represent non-assessable non-exempt income of Applicant 1 and Applicant 2 in accordance with section 840-815 of the ITAA 1997?

Answer

Yes, in relation to the 2010-11 income year to the 2019-20 income year (inclusive), the amounts subject to tax referred to at Question 2 will represent non-assessable non-exempt income of Applicant 1 and Applicant 2 in accordance with section 840-815 of the ITAA 1997.

Question 5

In relation to the 2010-11 income year and all future income years (subject to the maximum period allowed by the Commissioner), will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply, or will the Commissioner seek to apply Part IVA of the ITAA 1936, having regard to the facts and circumstances identified under the heading 'Relevant facts'?

Answer

No, in relation to the 2010-11 income year to the 2019-20 income year (inclusive), Part IVA of the ITAA 1936 will not apply, nor will the Commissioner seek to apply Part IVA of the ITAA 1936.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

The scheme has not yet commenced.

Relevant facts and circumstances

It is proposed that 100% of the units in the trust will become owned by Applicant 1 and Applicant 2. Applicant 2 will acquire less than 75% of the units in the trust. Applicant 1 will acquire the remainder. Both Applicant 1 and Applicant 2 will own their units both legally and beneficially and not on trust or as nominees on behalf of any other entity.

Applicant 1 and Applicant 2 (,collectively, the Applicants) are not residents of Australia.

The Applicants are related entities, with all of the securities in Applicant 2 being owned by Applicant 1.

The Applicants and the trust are unrelated at the present time.

The Applicants are 'real estate investment trusts' (REITs) formed in country X.

Applicant 1 has more than 50 members (shareholders).

Applicant 1 will hold its interest in the trust in its own name, i.e., that interest will not be held in the name of the trustees of Applicant 1. Likewise, Applicant 2 will hold its interest in the trust in its own name and that interest will not be held in the name of the trustees of Applicant 2.

Each of the Applicants carries on business in country X. In this regard, all management (including strategic and operational) and decision-making by the Applicants is carried on in country X. Furthermore, all or a significant majority of their management personnel (including all or a significant majority of their trustees) are located in country X, and all or a significant majority of Board meetings are and will be conducted in country X.

While there is no fixed intention at the present time, Applicant 2 may, in the future, become a listed vehicle, or the shares in Applicant 2 may be sold in whole or in part by way of trade sale. Alternatively, or in addition to the Applicant 2 listing/trade sale strategy, there may be a relisting of the trust at a future time or a dealing in the trust units.

The co-investment structure is considered desirable because it provides Applicant 1 with strategic flexibility regarding the holding and sale by Applicant 1 of direct and indirect interests in the trust.

Applicant 1 has previously seeded certain foreign funds in a similar way.

The trustee is a company constituted under the Corporations Act 2001 and is the responsible entity of the trust. The trustee is a financial services licensee (as defined in section 761A of the Corporations Act 2001) and its licence covers operating the managed investment scheme. The trust is registered under section 601EB of the Corporations Act 2001 and will continue to be registered.

The trust is a managed investment scheme that has been registered under Chapter 5C the Corporations Act 2001.

The trust is currently a MIT for the purposes of Subdivision 12-H of Schedule 1 of the TAA as it satisfied all the relevant requirements under section 12-400 of Schedule 1 of the TAA.

The trust will invest in land primarily for the purpose of deriving rent.

The trust's year of income ends on 30 June.

The trustee will manage all of the assets of the trust in Australia. A management agreement will be entered into between Applicant 1 and the trustee in terms of which the trustee shall provide, and be responsible for, the day to day management of the trust's businesses, operations and properties and the investment management activities pertaining to the trust. The management agreement will ensure that Applicant 1 is consulted on the more significant aspects of the trust's operations which require Applicant 1 approval. It is likely that an affiliate of the trustee will be appointed as the responsible entity of the trust and will replace the trustee under the management agreement and be bound by the terms of that agreement.

Assumptions

At all relevant times, there will not be any individual who owns 10% or more of the shares in Applicant 1.

At all relevant times, the parties to the draft management agreement will carry out their activities in the manner envisioned in the draft management agreement (or any replacement agreement which is on substantially the same terms as the draft management agreement).

At all relevant times, substantially all of the tasks which are to be performed by the trustee in terms of the draft management agreement will be performed in Australia whether or not the tasks are in fact performed by another entity.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 section 12-400

Taxation Administration Act 1953 Schedule 1 section 12-401

Taxation Administration Act 1953 Schedule 1 section 12-402

Taxation Administration Act 1953 Schedule 1 subparagraph 12-402(3)(e)

Taxation Administration Act 1953 Schedule 1 section 12-402B

Taxation Administration Act 1953 Schedule 1 section 12-403

Taxation Administration Act 1953 Schedule 1 section 12-404

Taxation Administration Act 1953 Schedule 1 section 18-32

Taxation Administration Act 1953 section 8AAXD

Taxation Administration Act 1953 section 8AAZLA

Taxation Administration Act 1953 section 8AAZLB,

Taxation Administration Regulations 1976 subregulation 44E(2)

Income Tax Assessment Act 1936 section 102M

Income Tax Assessment Act 1936 section 102N

Income Tax Assessment Act 1936 Part IVA

Corporations Act 2001 section 9

Corporations Act 2001 section 601EB

Income Tax Assessment Act 1997 section 840-805

Income Tax Assessment Act 1997 section 840-815

Income Tax Assessment Act 1997 subsection 960-130(1)

Income Tax (Managed Investment Trust Withholding Tax) Act 2008 Section 4

Question 1

Summary

The trust will continue to be a MIT.

Detailed reasoning

Subdivision 12-H of Schedule 1 of the TAA deals with pay as you go (PAYG) withholding obligations for 'fund payments' for the purposes of subsection 12-405(1) of Schedule 1 of the TAA (Fund Payments).

Under subsection 12-400(1) of Schedule 1 of the TAA, there are various requirements that need to be satisfied in determining whether a particular trust is a MIT.

Subsection 12-400(1) of Schedule 1 of the TAA defines a trust to be a 'managed investment trust' if:

(a) at the time the trustee of the trust makes the first *fund payment in relation to the income year, or at an earlier time in the income year:

(i) the trustee of the trust was an Australian resident; or

(ii) the central management and control of the trust was in Australia; and

(b) the trust is not a trust covered by subsection (2) (trading trust etc.) in relation to the income year; and

(c) a substantial proportion of the investment management activities carried out in relation to the trust in respect of all of the following assets of the trust are carried out in Australia throughout the income year:

(i) assets that are situated in Australia at any time in the income year;

(ii) assets that are *taxable Australian property at any time in the income year;

(iii) assets that are *shares, units or interests listed for quotation in the official list of an *approved stock exchange in Australia at any time in the income year; and

(d) at the time the payment is made, the trust is a managed investment scheme (within the meaning of section 9 of the Corporations Act 2001); and

(e) at the time the payment is made:

(i) the trust is covered by section 12-401 (trusts with wholesale membership); or

(ii) if the trust is not covered by section 12-401 - the trust is registered under section 601EB of the Corporations Act 2001; and

(f) the trust satisfies, in relation to the income year:

(i) if, at the time the payment is made, the trust is registered under section 601EB of the Corporations Act 2001 and is covered by section 12-401 - either or both of the widely-held requirements in subsections 12-402(1) and 12-402A(1); or

(ii) if, at the time the payment is made, the trust is so registered and is not covered by section 12-401 - either or both of the widely-held requirements in subsections 12-402(1A) and 12-402A(1); or

(iii) if; at the time the payment is made, the trust is not so registered and is covered by section 12-40I - the widely-held requirements in subsection 12-402(1); and

(g) the trust satisfies the closely-held restrictions in subsection 12-402B(1) in relation to the income year; and

(h) if the trust is covered by section 12-401 at the time the payment is made - it satisfies the licensing requirements in section 12-403 in relation to the income year.

The residency requirement (subparagraph 12-400(1)(a) of Schedule 1 of the TAA)

This requirement is clearly satisfied by the trust because the following requirements will be satisfied at all times in the future because:

· the trustee (an Australian resident company having regard to its incorporation in Australia) will continue be the trustee of the trust; and

· the trust will continue to be managed and controlled in Australia.

No trading requirement (subparagraph 12-400(1)(b) of Schedule 1 of the TAA)

A trust covered by subsection 12-400(2) of Schedule 1 of the TAA cannot qualify as a MIT. Subsection 12-400(2) of Schedule 1 of the TAA provides:

(2) A trust is covered by this subsection in relation to an income year if:

(a) in the case of a unit trust - the trust is a trading trust for the purposes of Division 6C in Part Ill of the Income Tax Assessment Act 1936 in relation to the income year; or

(b) in any other case - the trust at any time in the income year:

(i) carried on a trading business (within the meaning of that Division); or

(ii) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business (within the meaning of that Division).

The trust will not be covered by subsection 12-400(2) of Schedule 1 of the TAA because the trust will not be a trading trust (as defined in section 102N of the ITAA 1936). Specifically, the trust will not carry on a 'trading business' nor will it control, or have the ability to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business. A 'trading business' is defined in section 102M of the ITAA 1936 as a business that does not consist wholly of eligible business activities (also as defined in section 102M of the ITAA 1936).

At present and as is contemplated for future years, the trust will continue to invest in land primarily for the purpose of deriving rent which is an eligible investment business under section 102M of the ITAA 1936.

Investment management activities carried out in Australia

A substantial proportion of investment management activities must be carried out in Australia: see subparagraph 12-400(1)(c) of Schedule 1 of the TAA.

The Revised Explanatory Memorandum to the Tax Laws Amendment (2010 Measures No. 3) Act 2010 (the Amending Act) contains the following comments which provide some insight as to what was meant by a 'substantial proportion':

5.57 Since the introduction of the MIT withholding tax rules there is evidence that trusts qualifying as MITs are not necessarily managed by the Australian funds management industry. This can occur where the operator (often the trustee) of the trust outsources the investment management control to a fund manager operating outside Australia.

...

5.62 Where the manager delegates any of its investment management obligations to another entity, the investment management activities include the activities undertaken in relation to the trust by that other entity. It is these activities that are central to the policy objectives of the MIT withholding tax rules - the policy being that a substantial proportion of the investment management functions in relation to the assets of the fund that have a relevant connection with Australia should be carried out in Australia.

Example 5.4 of the Revised Explanatory Memorandum concludes that an offshore fund manager conducts a 'substantial proportion' of the investment management activities if it 'does preparatory work around market analysis, identifying potential investments and carrying out due diligence on potential investments.'

The trustee (an Australian resident company) will continue to manage all of the assets of the trust in Australia. The trustee will not delegate any of its functions as operator and manager to any party outside of Australia.

The trust will continue to be operated and managed by the trustee. The trustee will continue to be remunerated on an arm's length basis out of the trust's assets for the services which it will continue to provide (as it currently does).

A management agreement will be entered into between Applicant 1 and the trustee. In terms of the management agreement, the trustee shall provide, and be responsible for, the day to day management of the trust's businesses, operations and properties and the investment management activities pertaining to the trust. This includes the real estate investment and business management services.

The management agreement provides a very broad mandate for the trustee to conduct the significant majority of the investment and business management activities of the trust, which includes and is not limited to:

· providing research and economic and statistical data in connection with the trust's real estate investments and recommending changes to the trust's real estate investment policies when appropriate

· sourcing of real estate investments in accordance with the trust's real estate investment focus

· making recommendations concerning specific investments

· evaluating and negotiating contracts with respect to the foregoing, in each case, on behalf of the trust, as applicable, and in the furtherance of the trust's real estate objectives

· reporting regularly and providing such information, and making appropriate persons available for the purpose of reviewing with representatives of Applicant 1

· investigating, evaluating and negotiating the prosecution and negotiation of any claims of the trust in connection with its real estate investments

· advising and assisting with the trust's risk management and oversight function, including ensuring that all of the assets of the trust, and all of the operational and business risks pertaining to the trust, are adequately insured, and

· administering bookkeeping and accounting functions as are required for the management and operation of the trust.

The management agreement is intended to ensure that Applicant 1 is consulted on the more significant aspects of the trust's operations which require Applicant 1 approval. The management agreement is not intended to usurp the trustee's role as operator and manager of the trust. Instead, the management agreement is intended to ensure that Applicant 1 has appropriate oversight over the operation of the trust. This ensures that Applicant 1 is consulted and approves decisions already made by the trustee, as opposed to Applicant 1 actually making any decisions on behalf of the trustee.

In the present circumstances, it is considered that a substantial proportion of investment management activities take place in Australia.

Managed investment scheme

The trust must be a 'managed investment scheme': see subparagraph 12-400(1)(d) of Schedule 1 of the TAA.

The trust will be a managed investment scheme under section 9 of the Corporations Act 2001 after the completion of the acquisition. This will continue to be the case at the time of all future Fund Payments being made.

Wholesale membership

The trust must either be a trust with 'wholesale membership' (subparagraph 12-400(1)(e)(i) of Schedule 1 of the TAA) or it must be registered under section 601EB of the Corporations Act 2001.

Section 12-401 of Schedule 1 of the TAA provides:

A trust is covered by this section at a time if, at that time:

(a) the trust is not required to be registered in accordance with section 601ED of the Corporations Act 2001 (whether or not it is actually so registered) because of subsection 601ED(2) of that Act (no product disclosure statement required) or because it is operated or managed by an entity covered by subsection 12-403(2) (Crown entities); and

(b) the total number of entities that had become a *member of the trust because a financial product or a financial service was provided to, or acquired by, the entity as a retail client (within the meaning of sections 761G and 761GA of the Corporations Act 2001) is no more than 20; and

(c) the entities mentioned in paragraph (b) have a total *MIT participation interest in the trust of no more than 10%.

After the acquisition by the Applicants, the trust will not be required to be registered even though it will still be registered. Subsection 601ED(2) of the Corporations Act 2001 does not require registration where a product disclosure statement is not required to be given under Division 2 of Part 7.9 of the Corporations Act 2001 in relation to issues in the trust (i.e. the trust has no retail clients). Here, as only Applicant 1 and Applicant 2 hold units in the trust (both of which are wholesale clients), the trust is not required to be registered. Because Applicant 1 and Applicant 2 are the only members, paragraphs 12-401(b) and 12-401(c) of Schedule 1 of the TAA are also satisfied.

Hence, the trust will be covered by section 12-401 of Schedule 1 of the TAA.

Section 601EB registration

If the trust was not a trust with 'wholesale membership' it must be registered under section 601EB of the Corporations Act 2001 (subparagraph 12-400(1)(e)(ii) of Schedule 1 of the TAA).

The trust is registered under section 601EB of the Corporations Act 2001.

Hence, even if the trust is not covered by section 12-401 of Schedule 1 of the TAA, it would satisfy the alternative requirement in subparagraph 12-400(1)(e)(ii) of Schedule 1 of the TAA because it is in fact registered under section 601EB of the Corporations Act 2001.

Widely held

A trust must satisfy the widely held requirements in subparagraph 12-400(1)(f) of Schedule 1 of the TAA. The widely held requirements are set out in subsections 12-402(1) and 12-402(1A) of Schedule 1 of the TAA.

To apply those provisions it is necessary to ascertain the number of members of the trust. The number of members is determined under subsection 12-402(2) of Schedule 1 of the TAA which provides:

(a) first, by applying the rules in subsection (4), identify:

(i) the members of the trust that are not entities covered by subsection (3); and

(ii) the members of the trust that are entities covered by subsection (3);

(b) next, work out the number of members mentioned in subparagraph (a)(i);

(c) next:

(i) work out the *MIT participation interest in the trust of each entity mentioned in subparagraph (a)(ii); and

(ii) for each of those entities, multiply the total of its MIT participation interest in the trust by 50 and round the result upwards to the nearest whole number; and

(iii) work out the total of the results of subparagraph (ii) for all of those entities;

(d) next, work out the total of the results of paragraphs (b) and (c).

In determining the number of members, it is necessary to decide whether Applicant 1 is covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA. If Applicant 1 is covered by subparagraph 12-402(3)(e), its 'MIT participation interest' will be multiplied by 50 (see subparagraphs 12-402(2)(a)(ii) and 12-402(2)(c) of Schedule 1 of the TAA.

For the reasons discussed below, it is considered that Applicant 1 is covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA.

As explained below, Applicant 1 has a 'MIT participation interest' (as defined in section 12-404 of Schedule 1 of the TAA) of 100% in the trust. 100% multiplied by 50 equals 50. Hence, Applicant 1 will be counted as 50 members.

As explained below, because Applicant 2 is wholly owned by Applicant 1 and has only one member, it fails the requirement that it must have at least 50 members. Applicant 2 is therefore not an entity covered by paragraph 12-402(3)(e) of Schedule 1 of the TAA. As Applicant 2 is not covered by subparagraph 12-402(3)(e), it only counts as one member (see subparagraphs 12-402(2)(a)(i) and 12-402(2)(b) of Schedule 1 of the TAA).

Applying the above methodology results in the trust being deemed to have 51 members.

The trust will satisfy the widely held requirement contained in both section 12-402(1) and 12-402(1A) of Schedule 1 of the TAA because it will be considered to have 51 members (i.e. more than 25 members as required by section 12-402(1) and more than 50 members as required by 12-402(1A)). Accordingly, even if the trust is not covered by 12-401, the trust will still satisfy the widely held requirement by being able to satisfy 12-402(IA).

Entity covered by subsection 12-402(3) of Schedule 1 of the TAA

Subparagraph 12-402(3)(e) of Schedule 1 of the TAA includes:

an entity that is recognised under a foreign law as being used for collective investment by means of pooling the contributions of at least 50 members of the entity as consideration to acquire rights to benefits produced by the entity, if the members of the entity do not have day-to-day control over the operation of the entity.

According to paragraph 5.79 of the Revised Explanatory Memorandum to the Amending Act, subparagraph 12-402(3)(e) of Schedule 1 of the TAA targets:

…a foreign collective investment vehicle, which is an entity with at least 50 members that is recognised under a foreign law as being used for collective investment where the member contributions are pooled together in exchange for rights to the benefits produced by the entity and where members do not have day-to-day control over the operation of the entity...

Therefore, Applicant 1 and Applicant 2 must be recognised under a foreign law as being used for collective investment and the entity itself must also satisfy the remaining three requirements of subparagraph 12-402(3)(e) of Schedule 1 of the TAA. That is, Applicant 1 and Applicant 2 must involve:

· the pooling of contributions of at least 50 members of the entity;

· as consideration to acquire rights to benefits produced by the entity; and

· the members not having day to day control over the operation of the entity.

'recognised under a foreign law as being used for collective investment'

The first requirement involves the entity being recognised under a foreign law as an entity which is used for collective investment.

Both Applicant 1 and Applicant 2 were formed in country X. The law of formation of the entity in country X is expressed to be subject to certain provisions of country X's tax laws and must be read together with those tax laws where applicable. Those specific provisions of country X's tax laws apply to Applicant 1 but not to Applicant 2.

Therefore, country X's tax laws must be considered alongside the law of formation when considering whether the foreign law recognises Applicant 1 as being used for collective investment for the purposes of subparagraph 12-402(3)(e) of Schedule 1 of the TAA. As Applicant 2 does not qualify under country X's tax laws, only the law of formation is the relevant foreign law in relation to Applicant 2.

The definition of a REIT under country X's law of formation contemplates a profit-making purpose of the entity for the benefit of more than one person (the shareholders), which indicates a recognition by the law of formation that the entity is being used for collective investment.

Therefore, both Applicant 1 and Applicant 2 are recognised under a foreign law as being used for collective investment.

'pooling of contributions of at least 50 members of the entity'

Subparagraph 12-402(3)(e) of Schedule 1 of the TAA requires that the entity pool the contributions of at least 50 members.

While the law of formation does not contain a requirement as to the number of shareholders necessary for a REIT, country X's tax laws require the shares to be owned by more than 50 persons.

The foreign law is consistent with the notion of pooling of contributions of at least 50 members as required under subparagraph 12-402(3)(e) of Schedule 1 of the TAA.

Therefore, as Applicant 1 qualifies as a REIT under country X's tax laws, there is a pooling of the contributions of at least 50 members of the entity.

However, as Applicant 2 is wholly owned by Applicant 1 and therefore has only one member, it fails the requirement that it have at least 50 members. Applicant 2 is therefore not an entity covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA.

'as consideration to acquire rights to benefits produced by the entity'

Subparagraph 12-402(3)(e) of Schedule 1 of the TAA requires there be consideration from the 50 or more members of the entity to acquire rights to benefits produced by the entity.

The Declaration of Trust of Applicant 1 states that the shares in Applicant 1 will be validly issued by Applicant 1 upon receipt of full consideration for which they have been issued. Therefore, Applicant 1 satisfies the condition under subparagraph 12-402(3)(e) of Schedule 1 of the TAA that contributions are made as consideration to acquire rights to benefits produced by Applicant 1.

'members of the entity do not have day-to-day control over the operation of the entity'

The final requirement in subparagraph 12-402(3)(e) of Schedule 1 of the TAA is that the members of the entity do not have day-to-day control over the operation of the entity. The law of formation provides for the election of trustees. Further, country X's tax laws require a REIT to be managed by its trustees or directors.

Therefore, the members of Applicant 1 do not have day-to-day control over the operation of the entity. Applicant 1 therefore satisfies this final requirement of paragraph 12-402(3)(e) of Schedule 1 of the TAA.

Conclusion

As each of the elements are satisfied in relation to Applicant 1, Applicant 1 is an entity covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA.

However, Applicant 2, being wholly owned by Applicant 1 and therefore having only one member, is not an entity covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA.

MIT participation interest

For the purposes of subparagraph 12-402(2)(c) of Schedule 1 of the TAA, it is necessary to determine Applicant 1's 'MIT participation interest' in MlF.

A 'MIT participation interest' is defined in section 12-404 of Schedule 1 of the TAA which provides:

(1) An entity has a MlT participation interest in a trust if the entity, directly or indirectly:

(a) holds, or has the right to *acquire interests representing a percentage of the value of the interests in the trust; or

(b) has the control of, or the ability to control, a percentage of the rights attaching to *membership interests in the trust; or

(c) has the right to receive a percentage of any distribution of income that the trust may make.

(2) The MIT participation interest of the entity in the trust is the greatest of the percentages mentioned in paragraphs (1)(a), (b) and (c).

Applicant 1 will have a 100% MIT participation interest in the trust because of its direct and indirect interests in the trust (through its ownership of 100% of the shares in Applicant 2).

Not closely held

A trust must satisfy the 'closely held' requirements in section 12-402B of Schedule 1 of the TAA (see subparagraph 12-400(1)(g) of Schedule 1 of the TAA).

Section 12-402B of Schedule 1 of the TAA provides:

(1) The trust satisfies the requirements in this subsection in relation to the income year unless, at any time in the income year, any of the following situations exist:

(a) for a trust mentioned in subparagraph 12-400(1)(e)(i) (trusts with wholesale membership) - 10 or fewer persons have a total *MIT participation interest in the trust of 75% or more;

(b) if paragraph (a) does not apply - 20 or fewer persons have a total MIT participation interest in the trust of 75% or more;

(c) a foreign resident individual has a MIT participation interest in the trust of 10% or more.

(2) For the purposes of paragraphs (1)(a) and (b):

(a) if an entity covered by subsection 12-402(3) has a *MIT participation interest in the trust - treat that entity as not having a MIT participation interest in the trust; and

(b) if an entity that is not a trust has a MIT participation interest in the trust because it holds interests in the trust indirectly, through a *chain of trusts;

(i) if the entity is covered by subsection 12-402(3) - do not treat it as having a MIT participation interest in the trust; and

(ii) do not treat a trust in the chain of trusts as having a MIT participation interest in the trust.

(3) For the purposes of paragraph (2)(b), treat an entity covered by subsection 12-402(3) as an entity that is not a trust.

(4) For the purposes of paragraphs (1)(a) and (b), apply the rules in subsection 12-402(6).

If subparagraph 12-400(1)(e)(i) of Schedule 1 of the TAA applies (i.e. trusts with wholesale membership in terms of section 12-401 of Schedule 1 of the TAA), it will be necessary to satisfy subparagraph 12-402B(1)(a) of Schedule 1 of the TAA. 10 or fewer persons must not have a total MIT participation interest of 75% or more.

Applicant 1 is an entity covered by section 12-402(3) of Schedule 1 of the TAA and its MIT participation interest is disregarded for the purposes of the closely-held restrictions: see subparagraph 12-402B(2)(a) of Schedule 1 of the TAA. Applicant 2 will be considered to have a MIT participation interest of less than 75%. Accordingly, only one person (Applicant 2) will be considered to have a MIT participation interest but this will be less than 75%. This condition will be satisfied.

Alternatively, if subparagraph 12-400(1)(e)(ii) of Schedule 1 of the TAA applies (i.e. trusts which do not have wholesale membership in terms of section 12-401 of Schedule 1 of the TAA), it will be necessary to satisfy subparagraph 12-402B(1)(b) of Schedule 1 of the TAA. 20 or fewer persons must not have a total MIT participation interest of 75% or more.

Again, Applicant 1 is an entity covered by subsection 12-402(3) of Schedule 1 of the TAA and its MIT participation interest is disregarded for the purposes of the closely-held restrictions: see subparagraph 12-402B(2)(a) of Schedule 1 of the TAA. Applicant 2 will be considered to have a MIT participation interest of less than 75%. Accordingly, only one person (Applicant 2) will be considered to have a MIT participation interest but this will be less than 75%. This condition will be satisfied.

Subparagraph 12-402B(1)(c) of Schedule 1 of the TAA imposes the requirement that a foreign resident individual must not have a MIT participation interest of 10% or more. Applicant 1 and Applicant 2 own all the units in the trust. However, they are not individuals. Moreover, there are no individual investors in Applicant 1 which own 10% or more of the shares in Applicant 1. Hence, this requirement is satisfied.

Licensing requirement

Subparagraph 12-400(1)(h) of Schedule 1 of the TAA provides that, if the trust is covered by section 12-401 of Schedule 1 of the TAA, the trust must satisfy the licensing requirements in section 12-403 of Schedule 1 of the TAA.

Subparagraph 12-403(1)(a)(i) of Schedule 1 of the TAA requires the trustee to hold an Australian financial services licence whose licence covers it providing financial services to wholesale clients. The trustee holds the requisite licence.

Question 2

Summary

Applicant 1 and Applicant 2 will be liable to pay income tax on the Fund Payment Part of any distributions which they receive in relation to the trust and such tax will be levied at rates not greater than 7.5%.

Detailed reasoning

Subsections 840-805(1) and 840-805(2) of the ITAA 1997 provide:

(1) You are liable to pay income tax at the rate declared by the Parliament on the amount identified in subsection (2), (3) or (4) as the fund payment part if that subsection applies to you.

Note 1: The tax, which is called managed investment trust withholding tax, is imposed by the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 and the rate of the tax is set out in that Act.

...

(2) This subsection applies to you if:

(a) you are paid an amount from a trust that is a *managed investment trust in relation to an income year, or an amount is applied or dealt with as you direct by such a trust; and

(b) all or part of that amount (the fund payment part) is represented by a payment that is a *fund payment in relation to that year; and

(c) you are, in respect of the fund payment part, a beneficiary (but not a beneficiary in the capacity of a trustee of another trust); and

(d) you are a foreign resident when you are paid the amount or when the amount is applied or dealt with as you direct.

MIT

The trust must be a MIT (see subparagraph 840-805(2)(a) of the ITAA 1997).

Section 995-1 of the ITAA 1997 defines a MIT for the purposes of the ITAA 1997 in accordance with the definition in section 12-400 of Schedule 1 of the TAA.

It has been concluded in relation to Question 1, above, that the trust is a MIT for the purposes of section 12-400 of Schedule 1 of the TAA. Accordingly, the trust will also be a MIT for the present purposes.

Fund Payment

The MIT withholding tax is imposed on the fund payment part of the distribution. Question 2 only deals with the fund payment part. Question 2 does not deal with any other part of the distribution.

Beneficiary not trustee of another trust

The Applicants will be unitholders in the trust and accordingly they will be beneficiaries of the trust.

Subparagraph 840-805(2)(c) of the ITAA 1997 has the effect that MIT withholding tax is not imposed on a beneficiary which is a trustee of another trust. It is therefore necessary to decide whether Applicant 1 and Applicant 2 are beneficiaries who are trustees of another trust.

Both Applicant 1 and Applicant 2 are REITs which are established as a statutory vehicle (a juridical person) under the law of formation in country X. It is therefore necessary to consider the nature of a REIT established under the law of formation and compare this to the nature of a 'trust' for the purposes of section 840-805 of the ITAA 1997.

Ford and Lee in the Principles of the Law of Trusts defines a trust for the purposes of Australian law at paragraph 1.010 as follows:

A trust may be defined as an obligation enforceable in equity which rests on a person (the trustee) as owner of some specified property (the trust property) to deal with that property for the benefit of a certain person (the beneficiary) or persons, or for the advancement of certain purposes…[and that]…the features distinguishing a trustee from other persons in a fiduciary relationship is that title to the property has been vested in the trustee so that it can be held for the benefit of the beneficiary.

The law of formation prescribes features which make a country X REIT different to a trust relationship as is envisaged in section 840-805 of the ITAA 1997. Notably, the law of formation outlines a number of features of a REIT which add weight to the finding that a REIT is not receiving the fund payment in its capacity as a trustee of another trust. These features include -

· perpetual existence;

· limited liability;

· a separate legal identity;

· the capacity to sue and be sued;

· no separation of legal and beneficial ownership in the property owned by the REIT;

· an ability to merge with or into other legal entities;

· property is capable of being legally and beneficially owned by the REIT in its own capacity; and

· shareholders (beneficiaries) of the REIT do not have a beneficial interest in the property owned by a REIT but only have an interest in the shares in the REIT.

It follows from these features under the law of formation that a REIT established under the law of formation is not akin to a trust under Australian law.

In the present case, the interest in the trust will be held by Applicant 1 or Applicant 2. The interest in the trust will not be held by the trustees of Applicant 1 or the trustees of Applicant 2.

In these circumstances, Applicant 1 and Applicant 2 will own the legal and beneficial title to the trust and therefore will not receive the fund payment in their capacity as trustees of another trust for the purposes of section 840-805 of the ITAA 1997.

Foreign resident

Neither of the Applicants will be an Australian resident for the purposes of subsection 6(1) of the ITAA 1936. As the Applicants are not Australian residents, they will be foreign residents: see subsection 995-1(1) of the ITAA 1997. Accordingly subparagraph 840-805(2)(d) of the ITAA 1997 will be satisfied.

MITWHT Act

Section 4 of the MITWHT Act imposes MIT withholding tax of 7.5% on fund payments if the entity is a resident of an information exchange country.

Whether Applicant 1 and Applicant 2 are 'residents of an information exchange country' (and therefore eligible to obtain the reduced rate of withholding) is determined under subsection 4(3) of the MITWHT Act.

Applicant 1 is a resident of country X for country X tax purposes. Country X is listed as an information exchange country in the table to subregulation 44E(2) of the Taxation Administration Regulations 1976. Applicant 1 therefore qualifies as a resident of an information exchange country under subparagraph 4(3)(a) of the MITWHT Act.

In the present case, it is not necessary to decide whether Applicant 2 is a resident of an information exchange country under subparagraph 4(3)(a) of the MITWHT Act.

Even if it could be said that Applicant 2 is not a resident of country X for the purposes of country X tax laws subparagraph 4(3)(b)(ii) of the MITWHT Act will treat Applicant 2 as a resident of country X if it was formed in country X and carries on business in country X.

In the present case, all management (including strategic and operational) and decision-making of Applicant 2, is carried on in country X. Furthermore, a significant majority of its management personnel (including a significant majority of its trustees) are located in country X, and all or a significant majority of board meetings are and will be conducted in country X. Applicant 2 was formed in country X. Accordingly, it will be a resident of an information exchange country.

As the Applicants are residents of an information exchange country, the MIT withholding tax rate will be 7.5% in relation to the income year commencing 1 July 2010 and following income years.

Question 3

Summary

Applicant 1 and Applicant 2 will obtain a credit for the tax withheld by the trustee and such credit will be applied in accordance with Division 3 of Part lIB of the TAA.

Detailed reasoning

Section 18-32 of Schedule 1 of the TAA provides:

(1) An entity is entitled to a credit if:

(a) the entity's *ordinary income or *statutory income includes an amount that is represented by or reasonably attributable to a *fund payment; and

(b) the entity has borne all or part of an *amount withheld from the payment under Subdivision 12-H.

(2) The amount of the credit is that amount or part.

As the fund payments paid by the trust will be ordinary income or statutory income of the Applicants, they will be entitled to a credit for any amount withheld by the trust under the provisions of subdivision 12-H of Schedule 1 of the TAA.

Where the Commissioner does not allocate the amounts due under the MITWHT Act to a Running Balance Account (an RBA), the Commissioner will apply the above section 18-32 of Schedule 1 of the TAA credit against the primary tax debt under section 8AAZLB of the TAA. It is expected that the amount withheld by the trustee will match the amount which is payable by the Applicants with the overall result that no amount would be payable. Alternatively, if (in the unlikely event) the Commissioner allocates the amounts due under the MITWHT Act to an RBA established for the Applicants, the Commissioner will apply the above section 18-32 of Schedule 1 of the TAA credit to the RBA under section 8AAZLA of the TAA again with the effect that ordinarily no amount would be outstanding.

In the unlikely event that the credit exceeded the amount owed by each of the Applicants, the excess of the credit under section 18-32 of Schedule 1 of the TAA will be refundable to that Applicant.

Question 4

Summary

The Fund Payment Part will represent non-assessable non-exempt income of Applicant 1 and Applicant 2 in accordance with section 840-815 of the ITAA 1997.

Detailed reasoning

Section 840-815 of the ITAA 1997 provides:

An amount on which *managed investment trust withholding tax is payable is not assessable income and is not *exempt income of an entity.

In the present case, the Fund Payment Part will represent non-assessable non-exempt income of the Applicants by virtue of section 840-815 of the ITAA 1997. This amount will not be included in the Applicants' assessable income by virtue of sections 6-15 and 6-23 of the ITAA 1997.

Question 5

Summary

Part IVA of the ITAA 1936 will not apply.

Detailed reasoning

For Part IVA of the ITAA 1936 to apply, the following elements, among others, must be present:

· there must be a scheme

· there must be a tax benefit obtained in connection with the scheme

· it must be concluded that the sole or dominant purpose of entering into the scheme was to obtain the tax benefit.

The scheme

The scheme consists of the acquisition of all of the trust units by Applicant 2 and Applicant 1 under the Trust Scheme.

Tax benefit

As a result of the arrangement, Fund Payments made by the trust will be subject to a final withholding tax of 7.5% and not at the higher 30% company rate of income tax.

Dominant purpose

Part IVA only applies to a scheme in connection with which a taxpayer obtains a tax benefit if, after having regard to eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling a taxpayer to obtain the tax benefit.

The provisions refer to 'the purpose' of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. The person need not be the taxpayer.

It is possible for Part IVA to apply notwithstanding that the dominant objective purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain.

The consideration of purpose or dominant purpose requires an objective conclusion to be drawn. The conclusion is not about a person's subjective purpose or motive. A conclusion about a relevant person's purpose is the conclusion of a reasonable person based on all the facts and circumstances that are relevant to considering the eight factors. However, not all of the factors will be equally relevant in every case. Provided the eight factors are each taken into account, it is possible to arrive at the conclusion as to purpose by making a global assessment of purpose.

Consideration of the eight factors involves comparison of the scheme with alternative scenarios (counterfactuals). In other words, the conclusion about the dominant purpose of a person entering into or carrying out the scheme, or any part of it, necessarily requires consideration of what may otherwise have occurred.

These eight factors are as follows:

1. the manner in which the scheme was entered into or carried out

2. the form and substance of the scheme

3. the time at which the scheme was entered into and the length of the period during which the scheme was carried out

4. the result in relation to the operation of this Act that, but for this Part, would be achieved by this scheme

5. any change in the financial position of the relevant taxpayer that has resulted, or will result, or may reasonably be expected to result, from the scheme

6. any change in the financial position of any person who has any connection with the relevant taxpayer, being a change that has resulted or may reasonably be expected to result from the scheme

7. any other consequence for the relevant taxpayer, or for any person referred to in the sixth factor, of the scheme having been entered into or carried out

8. the nature of any connection between the relevant taxpayer and any person referred to in the sixth factor above.

Manner in which the scheme was entered into or carried out

This factor examines the manner in which the scheme was entered into or carried out and looks to determine whether there is any contrivance or artificiality present in the scheme by comparing the manner in which the scheme was entered into or carried out with the manner in which an alternative transaction would have been implemented - eg by the presence of a step or steps in a relevant transaction or arrangement that would not be expected to be present in a more straightforward or ordinary method of achieving the outcome of the transaction or arrangement.

In the present case, the scheme involves two related entities (Applicant 1 and Applicant 2) acquiring all of the units in the trust pursuant to the Trust Scheme.

As Applicant 1 wholly owns Applicant 2 and provides all the capital for Applicant 2, the transaction could have been carried out by only one entity wholly acquiring the trust.

However, the form of the present transaction is explicable when regard is had to the longer term commercial objectives including the desire for flexibility in relation to potential exit strategies in relation to the investment.

The form and substance of the scheme

This factor directs attention to whether there is a discrepancy between the form of the scheme and its substance, meaning its commercial and economic substance. A discrepancy between the business and practical effect of the scheme on the one hand and its legal form on the other, may indicate the scheme is being implemented in a particular form as a means to obtain a tax benefit.

Both Applicant 1 and Applicant 2 will legally and beneficially own their respective units in the trust. There is no other legal arrangement in relation to the units in the trust, such as, any nominee, agency or trust relationship involving the units. In both form and substance, the arrangement involves Applicant 2 owning less than 75% of the trust and Applicant 1 owning the balance.

Time and the length of the period

The third factor draws attention to particular aspects related to the timing of the manner in which the scheme is entered into or carried out.

There is no particular timing imperative associated with the scheme or time sensitive aspect to when the transactions are carried out which have a bearing on the tax outcomes.

Tax result

The fourth factor focuses on the tax benefit and any other tax consequences resulting from the scheme.

A result of the scheme is that Fund Payments distributed by the trust will be subject to a 7.5% rate of PAYG withholding which is creditable against Applicant 1's and Applicant 2's liability to MIT withholding tax which would also be levied at a rate of 7.5% rather than the company income tax rate of 30%.

This tax result would have been identical had Applicant 2 acquired 100% of the units under the Trust Scheme and the trust then issued Applicant 1 with units post completion so that Applicant 2 then held less than 75% of the units.

The alternative counterfactual (ii) (see below) which involves Applicant 2 acquiring all of the units in the trust, might have given rise to a 30% tax rate in the hands of Applicant 2 because Applicant 2 would not satisfy the closely-held restrictions.

Alternative counterfactual (ii) was not seriously contemplated because:

· the structure which is being adopted delivered the required level of commercial flexibility; and

· committing to alternative counterfactual (ii) raised the prospect of future regulatory change and potentially costly future restructuring.

Change in the financial position

The absence of any practical change in the overall financial, legal or economic position of a taxpayer that is affected by the scheme is likely to add weight to the conclusion that the dominant purpose was to obtain a tax benefit.

In the present case, there is a real and substantial change in the financial position of Applicant 1 and Applicant 2 as a result of this structure. Applicant 1 and Applicant 2 have acquired an interest in the trust in their respective proportions and each will pay for its own interest.

Conversely, if a taxpayer changes its business operations or business structure as a result of the scheme, this may sometimes raise an inference that the scheme was entered into in order to obtain a tax benefit.

In the present case, the Applicants did not change their business operations or restructure their business in order to enter into this scheme. Indeed, Applicant 1 has used a similar business structure to the present structure when making other investments in the past.

Change in the financial position of another person

There are no other persons who are relevant to the consideration of this factor.

Any other consequences

On the facts provided in the ruling application, there are no other consequences for the relevant taxpayer or for any other person.

The connection with any person referred to in the sixth factor above

Applicant 2 is 100% owned by Applicant 1.

Counterfactuals identified

The identification of a tax benefit requires consideration of the income tax consequences which would have arisen in the counterfactuals if Part IVA did not exist. This counterfactual forms the background for the objective ascertainment of the dominant purpose.

The potential counterfactuals are:

i. a 100% acquisition by Applicant 2 (as a result of Applicant 1 exercising its nomination rights under the Agreement) and on or immediately after completion of the Trust Scheme, Applicant 1 subscribing for additional units in the trust, such that Applicant 2 legally and beneficially owns less than 75% of all units in the trust and Applicant 1 legally and beneficially owns the remainder. After completion of this subscription by Applicant 1, future subscriptions for equity (or potentially capital contributions) would occur in these respective percentages by Applicant 2 and Applicant 1; and

ii. an initial acquisition by Applicant 2 of 100% of the units in the trust and subsequent issue of units to Applicant 1 once an exit strategy became clearer.

Of these counterfactuals, the only alternative which achieves the previously stated objectives of flexibility is set out in paragraph (i) above. It is noted that this alternative would produce the identical tax outcome as the structure envisaged in the Application. This alternative involves an additional step in order to achieve the desired ownership structure (being the subscription for new equity in the trust by Applicant 1 on or after completion of the Trust Scheme).

The second counterfactual creates a risk of regulatory change and potentially costly future restructuring.

Conclusion

The present proposed arrangement involves a genuine beneficial acquisition for commercial purposes by each of the Applicants in certain proportions. Each Applicant legally and beneficially owns their respective share of the units in the trust. They will each pay to acquire their respective interests. Applicant 1 has carried out similar acquisitions using special purpose vehicles in a similar fashion to the present proposed arrangement. The present proposed arrangement has commercial advantages, such as, flexibility in relation to exit strategies.

It is considered that, based on the relevant eight factors, it cannot be concluded that the sole or dominant purpose of the scheme was to obtain a tax benefit.

Accordingly, Part IVA will not apply to the present proposed arrangement.

Future years

It is noted that private rulings are subject to changes in the law or the facts. If the law changes in the future or if there is a change in the facts in a material particular, this ruling cannot be relied upon to that extent. Also, if there is a change in a material particular in respect of the assumed facts, this ruling cannot be relied upon. Of course, an immaterial change will not affect the binding nature of this private ruling.

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