Edited version of your private ruling

Authorisation Number: 1012102552590

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Withholding Tax

Question 1

Will the trustee of the Trust be required to withhold under Subdivision 12-E of schedule 1 to the Taxation Administration Act 1953 any amount from a payment (which represents Australian taxable income which is not from the disposal of taxable Australian property) to a non-resident unit holder, irrespective of whether the non-resident is in an information exchange country or not?

Answer

Yes, in some very limited circumstances, TFN withholding may apply to the payment made from the trustee of the Trust to a non-resident unit holder.

This ruling applies for the following period:

1 July 2011 to 30 June 2012.

The scheme commenced on:

The income year ended 30 June 2012.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust was created as a Unit Trust.

The Trustee is an Australian resident.

The central management and control of the Trust is in Australia.

The Trust will be a trust with wholesale membership with at least 25 members. There will not be 10 persons or fewer persons with a total Managed Investment Trust (MIT) participation interest of 75% or more.

The Trust will seek to obtain investment both domestically and offshore.

Companies that are to be targeted are likely to be listed on the stock exchanges.

The Trust Deed

The Trust Deed divides the beneficial interest in the trust property into fractions called units.

The Trust Deed then provides a formula which fixes the standard of measurement for the entitlement of the unit holders.

The Trust Deed governs the transfer of units in the unit trust. Under this clause, units are transferable in some circumstances.

The minimum investment is $X00,000 AUD.

Other Relevant Facts

The Trustee has made a valid election for capital treatment of the MIT gains and losses of the Trust.

No election has been made by the Trustee to apply the amendments made by schedule 2 to the Tax Laws Amendment (2011 Measures No. 5) Act 2011 (Division 6E election).

The duties of the Trustee include paying unit holders distribution of income and/or capital.

Assumptions

The Trust continues, from income year to income year, to qualify as a MIT under section 12-400 of schedule 1 to the TAA 1953.

The unit holder is not receiving the distribution as a result of the unit holder having a carried interest in the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 4-15

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 115-210

Income Tax Assessment Act 1997 section 115-215

Income Tax Assessment Act 1997 subsection 115-215(3)

Income Tax Assessment Act 1997 subsection 115-215(6)

Income Tax Assessment Act 1997 section 855-40

Income Tax Assessment Act 1997 subsection 855-40(2)

Income Tax Assessment Act 1997 subsection 855-40(3)

Income Tax Assessment Act 1936 Division 6 of Part III

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 98A

Income Tax Assessment Act 1936 subsection 98A(1)

Income Tax Assessment Act 1936 subsection 98A(3)

Income Tax Assessment Act 1936 Part VA

Income Tax Assessment Act 1936 section 202D

Income Tax Assessment Act 1936 subsection 202D(1)

Income Tax Assessment Act 1936 subsection 202D(2)

Income Tax Assessment Act 1936 section 202EE

Taxation Administration Act 1953 section 12-140 to schedule 1

Taxation Administration Act 1953 paragraph 12-140(1)(a) to schedule 1

Taxation Administration Act 1953 paragraph 12-140(1)(b) to schedule 1

Taxation Administration Act 1953 paragraph 12-140(1)(c) to schedule 1

Taxation Administration Act 1953 section 12-145 to schedule 1

Taxation Administration Regulations 1976 regulation 35(1)

Reasons for decision

When are you required to withhold?

Subsection 12-140(1) of schedule 1 to the Taxation Administration Act 1953 (TAA 1953) creates a TFN withholding obligation on an investment body in relation to certain payments it makes to another entity in respect of an investment. Where the investment consists of units in a unit trust, section 12-145 of schedule 1 to the TAA 1953 also creates a TFN withholding obligation on the trustee where a non-resident beneficiary becomes presently entitled for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) to a share of the income of the trust at a time before any of that share is paid to the beneficiary.

An investment for which TFN withholding may apply is called a 'Part VA investment' and is defined in section 202D of the ITAA 1936. Units in a unit trust are one of the types of Part VA investment mentioned in column 1 of the table in subsection 202D(1). In this case, the Trust is a unit trust which satisfies Item 5 Column 1 of the table in subsection 202D(1).

The investment body is defined in subsection 202D(2) of the ITAA 1936 as the person specified in column 3 of the table in subsection 202D(1). For a unit trust this is specified as the manager of the unit trust. The term 'manager', in the context of Part VA of the ITAA 1936, is not a defined term. The trustee of the Trust, whose duties include the paying of trust distributions to the unit holders, is taken to be the manager for the purpose of subsection 202D(1). In any case, subsection 12-140(2) of schedule 1 to the TAA 1953 states that if a Part VA investment consists of units in a unit trust, an entity (including the investment body) must withhold an amount from a payment it makes to another entity in respect of the investment if the conditions in subsection 12-140(1) is met. Therefore, the trustee of the Trust will be required to withhold from a payment if it meets the criteria in subsection 12-140(1) of schedule 1 to the TAA 1953.

A TFN withholding obligation arises under subsection 12-140(1) of schedule 1 to the TAA 1953 if all or some of the payment made is ordinary or statutory income of the recipient A TFN withholding obligation arises under section 12-145 of schedule 1 to the TAA 1953 in relation to a unit holder's share of the trust's income if a TFN withholding obligation would arise under section 12-140 in relation to that share if it was paid to the unit holder by the trustee at the time that the unit holder became so entitled.

Where trust distributions are the non-resident beneficiary's ordinary income

In some limited circumstances, where Australian sourced trust distributions to the non-resident beneficiary are amounts of ordinary income in their hands, there will be an amount of ordinary income for TFN withholding to apply to and paragraph 12-140(1)(a) of schedule 1 to the TAA 1953 will be satisfied.

Non-resident Beneficiary's statutory income under Division 6 of Part III of the ITAA 1936

Because the MIT has not made a Division 6E election, Division 6 of Part III of the ITAA 1936 and the old Subdivision 115-C of the Income Tax Assessment Act 1997 (ITAA 1997) as existed before royal assent to Tax Laws Amendment (2011 Measures No.5) Act 2011 (TLAA 2011 No. 5 Act) applies.

Paragraph 12-140(1)(a) of schedule 1 to the TAA 1953 requires that the distribution is ordinary or statutory income of the non-resident unit holder. Statutory income is defined in subsection 6-10(2) of the ITAA 1997 as amounts that are not ordinary income but which are included in an entity's assessable income by provisions about assessable income. One way that there may be statutory income of the non-resident unit holder is if there is statutory income under Division 6 of Part III of the ITAA 1936.

As the trust is a resident trust, the trustee of the Trust is required to include all capital gains and capital losses from all sources, including those from CGT assets that are not taxable Australian property (non-TAP), in the calculation of its net capital gain. The net capital gain is included in the calculation of the net income of the trust under subsection 95(1) of the ITAA 1936.

Where MIT withholding on amounts occurs under Subdivision 12-H of schedule 1 to the TAA 1953, then section 840-815 of the ITAA 1997 would apply to deem those amounts to be non-assessable non-exempt income of the non-resident beneficiary. However, to the extent that there is a net capital gain included in the income of the Trust, and some of that net capital gain is attributable to capital gains from CGT events happening to non-TAP CGT assets of the trust that is attributable to sources in Australia, both the non-resident beneficiary (under subsection 98A(1) or 98A(3) of the ITAA 1936) and the trustee (under subsection 98(3) of the ITAA 1936) are assessed on the non-resident beneficiary's share of the net income of the trust that is attributable to sources in Australia The amount assessed to the beneficiary is statutory income in their hands.

The source of a capital gain is determined by common law rules. There are no relevant statutory rules to determine the source of a capital gain. In reaching this conclusion, ATO Interpretative Decisions ATO ID 2010/54 which deals with source, was taken into account. Specifically, ATO ID 2010/54 states that the taxable Australian property (TAP) tests in section 855-15 of the ITAA 1997 are not relevant for the purpose of determining source.

Non-resident Beneficiary's capital gain from a trust

Where a trust has made a capital gain during an income year and the beneficiary's assessable income for the income year includes an amount under subsections 98A(1) or 98A(3) of the ITAA 1936 that is attributable in whole or in part to that capital gain, the beneficiary of the trust is taken to make an extra capital gain in accordance with subsection 115-215(3) of the ITAA 1997. Subsection 855-40(2) of the ITAA 1997 only disregards the extra capital gains under section 115-215 of the ITAA 1997 and not the non-resident beneficiary's share of net income attributable to Australian sources under subsections 98A(1) and 98A(3) of the ITAA 1936. Subsection 115-215(6) of the ITAA 1997 provides the beneficiary with a deduction for their share of the net income of the trust attributable to the trust's net capital gain. Whilst subsection 115-215(6) has been repealed, item 51 in schedule 2 to the TLAA 2011 No. 5 Act has the effect that the law prior to that Act is preserved for MIT's that do not make the Division 6E election for the 2010-11 and 2011-12 income years. The applicant has advised that they will not be making the Division 6E election and thus, Subdivision 115-C of the ITAA 1997 as existed before royal assent to the TLAA 2011 No. 5 Act applies for the 2010-11 and 2011-12 income years.

While the deduction in subsection 115-215(6) of the ITAA 1997 reduces the beneficiary's assessable income as a step in determining their taxable income, it does not change the amount of the beneficiary's assessable income or take any amount out of their assessable income. Section 4-15 of the ITAA 1997 makes it clear that deductions are subtracted from assessable income to arrive at the amount of an entity's taxable income, but deductions do not change the amount of an entity's assessable income. In summary, the deduction under subsection 115-215(6) of the ITAA 1997 does not change the fact that the beneficiary has been assessed on an amount of statutory income under section 98A of the ITAA 1936.

Disregarding a capital gain made through a fixed trust under Division 855

In accordance with section 855-40 of the ITAA 1997, a foreign resident beneficiary of a fixed trust disregards any capital gain they make as a result of subsection 115-215(3) of the ITAA 1997 if that capital gain is in respect of their interest in the Trust and the CGT asset to which the CGT event happened is not TAP for the Trust. Section 855-40 of the ITAA 1997 does not disregard a non-resident beneficiary's share of the net income of a trust included in the beneficiary's assessable income under a provision of Division 6 of Part III of the ITAA 1936, such as section 98A of the ITAA 1936, even if some of the net income is attributable to a capital gain made by the trustee of the trust from a CGT asset that is not TAP.

The combined effect of subsection 855-40(2) of the ITAA 1997 and the deduction under subsection 115-215(6) of the ITAA 1997 is that a foreign resident beneficiary is not taxed on any amount pertaining to the non-TAP capital gain. However, these provisions do not change the fact that an amount of statutory income was included in the beneficiary's assessable income under section 98A of the ITAA 1936 or that some or all of the statutory income is attributable to a capital gain.

Subsection 855-40(3) of the ITAA 1997 states that where the beneficiary disregards the capital gain under subsection 855-40(2) of the ITAA 1997, the trustee of the trust is not liable to pay tax in respect of that amount pursuant to subsection 98(3) of the ITAA 1936.

Therefore, a non-resident beneficiary's individual interest in the net income of the trust from Australian sources which is included in their assessable income under subsections 98A(1) or 98A(3) of the ITAA 1936 may include some or all of a capital gain made from a non-TAP CGT asset, even though the beneficiary:

· is not ultimately taxed on that share of the net income because of the deduction under subsection 115-215(6) of the ITAA 1997; and

· disregards the related capital gain attributed to the beneficiary under subsection 115-215(3) of the ITAA 1997 because of subsection 855-40(2) of the ITAA 1997.

Conversely, if the trust is not a fixed trust, then subsection 855-40(2) of the ITAA 1997 will not apply to disregard the capital gain made after applying section 115-215 of the ITAA 1997.

In any case, whether the trust is fixed or not, the amount included in the non-resident beneficiary's assessable income under subsections 98A(1) or 98A(3) of the ITAA 1936 is statutory income of the non-resident beneficiary. This amount, where it is Australian taxable income of the Trust, also constitutes a payment in respect of a Part VA investment for the purpose of section 12-140 of schedule 1 to the TAA 1953 and therefore, the trustee of the Trust is obliged to withhold tax from the payment if the non-resident beneficiary has failed to quote their TFN to the Trust. Therefore, paragraph 12-140(1)(a) of schedule 1 to the TAA 1953 is satisfied.

Other requirements in subsection 12-140(1) of schedule 1 to the TAA 1953

Where paragraph 12-140(1)(a) of schedule 1 to the TAA 1953 is satisfied, either paragraph 12-140(1)(b) or (1)(c) must be satisfied before withholding is required. Paragraph 12-140(1)(b) states that if the investment is non-transferable - the other entity did not quote its tax file number in connection with the investment before the time when the payment became payable. Paragraph 12-140(1)(c) then states if the investment is transferable - the other entity did not quote its tax file number in connection with the investment before the time when the other entity had to be registered with the investment body as the investor to be entitled to the payment.

Here, the investment is transferable, as the Trust Deed allows the transfer of units at the discretion of the Manager, but the non-resident beneficiary has not obtained and quoted their TFN to the trustee of the Trust and hence, paragraph 12-140(1)(c) of schedule 1 to the TAA 1953 will apply.

Therefore, TFN withholding will apply where there is an amount of ordinary or statutory income of the non-resident beneficiary.

Circumstances where TFN withholding is not required

Withholding will not be required where:

· the payment or entity is subject to one of the exceptions to withholding in Subdivision 12-E of schedule 1 to the TAA 1953;

· the entity has quoted its tax file number; or

· the entity is deemed to have quoted its tax file number.

The only exception to withholding in Subdivision 12-E of schedule 1 to the TAA 1953 that may apply to a trust distribution that is entirely non-TAP capital gains is section 12-170 of schedule 1 to the TAA 1953 which provides that section 12-140 or 12-145 of schedule 1 to the TAA 1953 does not require an amount to be withheld if the payment is less than the amount worked out under the regulations.

However, regulation 35(1) of the Taxation Administration Regulations 1976 states that the exception will only apply to an investor who had not turned 16 on the 1 January before the date on which the payment was made; and about whose age the investment body is aware. Further, the amount of the payment must be less than $420 in the case of a payment in respect of the whole financial year, or $420 × P/365 where P is the number of days in the period in the financial year in respect of which the amount is payable. Therefore, it is unlikely that the exception in section 12-170 of the TAA 1953 will apply to a trust distribution from the Trust as it is likely the investors will be over 16, as this is a MIT where the minimum investment is $500,000 AUD.

TFN withholding will also not be required where the non-resident unit holder has obtained and quoted their TFN to the trustee of the Trust.

Deemed quotation of the tax file number for non-residents in some circumstances

In some circumstances, where TFN withholding would otherwise apply, a non-resident may be deemed to have quoted their TFN by operation of section 202EE of the ITAA 1936.

Subsection 202EE(1) of the ITAA 1936 relevantly provides:

For the purposes of this Part, where:

(a) a non-resident is an investor in relation to an investment to which this Part applies; and

(b) at a particular time, the investment body pays an amount to the non-resident by way of income derived from the investment;

the non-resident is taken to have quoted the non-resident's tax file number in connection with the investment at that time if:

(c) the investment body is required to withhold an amount under Subdivision 12-F or 12-H in Schedule 1 to the Taxation Administration Act 1953 from the payment; or

(d) the investment body would have been required to withhold such an amount but for the operation of paragraph 128B(3)(a), (ga) or (jb) or subparagraph 128B(3)(h)(iv) of this Act or subsection 802-15(1) of the ITAA 1997.

The use of the terms 'at a particular time' and 'at that time' in subsection 202EE(1) of the ITAA 1936 indicates that subsection 202EE(1) is concerned with a distribution at a particular time rather than deeming the tax file number to have been quoted for the life of the investment.

In comparison, subsection 202DB(1) of the ITAA 1936 provides for the quotation of a person's tax file number to an investment body for an investment. It uses the term 'in connection with the investment' without a reference to timing. This suggests that the quotation of the tax file number in subsection 202DB(1) applies for the life of the investment.

If subsection 202EE(1) of the ITAA 1936 operates so as to treat a tax file number to be quoted for the life of the investment, it would just refer simply to the investment, as is the case in subsection 202DB(1) of the ITAA 1936. It would not contain references to the terms like 'at a particular time, the investment body pays an amount to the non-resident' and 'in connection with the investment at that time'.

Therefore, subsection 202EE(1) of the ITAA 1936 treats a non-resident beneficiary of a managed investment trust to have quoted their tax file number in relation to certain investments in the trust only at the particular time of a distribution from the trustee of the trust. The subsection does not apply to future distributions from the trustee of the trust in connection with the investment. The criteria in subsection 202EE(1) therefore need to be considered at the time of each distribution to the non-resident to determine whether the non-resident is deemed to have quoted a tax file number.

In this case, each distribution made by the trustee of the Trust will need to be tested for deemed quotation under subsection 202EE(1) of the ITAA 1936. This view was articulated in ATO ID 2012/08.

However, where a payment consists partially of a distribution non-TAP capital gain and other amounts for which section 202EE of the ITAA 1936 applies to deem quotation of the non-resident's TFN, TFN withholding is not required on any of the payment.

Conclusion

Generally, for TFN withholding in subsection 12-140(1) of schedule 1 to the TAA 1953 to apply to the trust's distribution to a non-resident beneficiary of a non-TAP, Australian sourced capital gain the following conditions must all be met:

The trust has not made the Division 6E election;

There is net income of the trust for the income year;

There is a net capital gain of the trust for the income year;

The non-resident beneficiary is presently entitled to the income of the trust ; and

None of the TFN withholding exceptions apply, the entity has not actually quoted its TFN and the TFN is not deemed to have been quoted for that specific payment.

There will also be some limited circumstances where a trust distribution of amounts that are non-TAP Australian sourced capital gains will be ordinary income of a non-resident beneficiary. Where this is the case, TFN withholding will apply where none of the TFN withholding exceptions apply and the entity has not actually quoted its TFN and the TFN is not deemed to have been quoted for that specific payment.

The deemed TFN quotation will need to be tested for each payment made to the non-resident beneficiary.

Where a payment consists partially of a distribution non-TAP capital gain and other amounts for which section 202EE of the ITAA 1936 applies to deem quotation of the non-resident's TFN, TFN withholding is not required on any of the payment.

Therefore, in some cases the trustee of the Trust will be required to withhold from a payment that is entirely non-TAP capital gains of the Trust.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).