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Ruling

Subject: Managed investment trust withholding tax

Questions and answers

In respect of an investment in an Australian unit trust by the Fund: -

Foreign superannuation fund - MIT members

Question 1

Is the Fund a foreign superannuation fund for the purposes of subparagraph 12-402(3)(b) of Schedule 1 to the Taxation Administration Act 1953 (the TAA 1953)?

Answer

No. The Fund is not a foreign superannuation fund for the purposes of subparagraph 12-402(3)(b).

Question 2

Is a beneficiary of the Fund that is a foreign superannuation fund a member of the Australian unit trust for the purposes of subsection 12-402(4) of Schedule 1 to the TAA 1953?

Answer

Yes. A beneficiary of the Fund, being a beneficiary which is a 'foreign superannuation fund' as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (the ITAA 1997), will be treated as a member of the Australian unit trust for the purposes of subsection 12-402(4).

MIT participation interest

Question 3

Does a beneficiary of the Fund that is a foreign superannuation fund have a MIT participation interest in the Australian unit trust for the purposes of section 12-404 of Schedule 1 to the TAA 1953?

Answer

Yes. A beneficiary of the Fund that is a foreign superannuation fund has a MIT participation interest in the Australian unit trust for the purposes of section 12-404.

MIT status

Question 4

Is a beneficiary of the Fund that is a foreign superannuation fund:

(a) a member of the Australian unit trust covered by subsection 12-402(3) for the purposes in subsections 12-402(1) and (2) of Schedule 1 to the TAA 1953?

(b) an entity covered by subsection 12-402(3) of Schedule 1 to the TAA 1953 for the purposes of subsection 12-402A(1) of Schedule 1 to the TAA 1953?

(c) an entity covered by subsection 12-402(3) of Schedule 1 to the TAA 1953 for the purposes of subsection 12-402B(2) of Schedule 1 to the TAA 1953, such that the beneficiary of the Fund is not to be counted in the persons having a MIT participation interest in the Australian unit trust for the purposes of paragraphs 12-402B(1)(a) and (b) of Schedule 1 to the TAA 1953?

Answer

4(a) Yes. A beneficiary of the Fund, being a beneficiary which is a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997, is a member of the Australian unit trust which is covered by subsection 12-402(3) for the purposes in subsections 12-402(1) and (2).

4(b) Yes. A beneficiary of the Fund, being a beneficiary which is a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997, is an entity covered by subsection 12-402(3) for the purposes of subsection 12-402A(1).

4(c) Yes. A beneficiary of the Fund, being a beneficiary which is a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997, is an entity covered by subsection 12-402(3) for the purposes of subsection 12-402B(2), such that the beneficiary of the Fund is not to be counted in the persons having a MIT participation interest in the Australian unit trust for the purposes of paragraphs 12-402B(1)(a) and (b).

This ruling applies for the following periods:

Year ended 31 December 2011

Year ended 31 December 2012

Year ended 31 December 2013

Year ended 31 December 2014

Year ended 31 December 2015

Year ended 31 December 2016

The scheme commences on:

The scheme has commenced.

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 foreign pension fund has placed funds with the Depositary (custodian or trustee) of the Fund for the benefit of the beneficiaries of the Fund which are all overseas pension funds.

The overseas pension funds which are Participants in the Fund each have at least 50 members; they were established in Country X; their central management and control is exercised in Country X and they are not controlled by Australian entities.

The Fund has been established to facilitate pooled investment by overseas pension funds. The assets of the Fund are held by the Depositary, for the benefit of participating pension funds as set out in the Terms and Conditions.

The Depositary must acquire and hold the assets for the purpose of management and custody for the account and risk of the Participants and will receive any income in a capacity of agent, nominee or otherwise on behalf and for the benefit of the Participants.

The Depositary is required to act solely in the interest of the participating overseas pension funds. The Manager is required to act solely in the interest of the participating overseas pension funds.

The legal title to the assets of and the liabilities assumed by the Fund are held by, and in the name of, the Depositary for the benefit and account of the participants in the Fund. Only registered tax exempt overseas pension funds may participate as beneficiaries in the Fund.

The manager of the Fund has the discretion to determine the timing of distributions of the net proceeds of the Fund. However, distributions must be made to the participants pro-rata based on their respective number of participations.

A participant is beneficially entitled to the Fund's assets and at risk with respect to the Fund's obligations, in each case, pro rata to its participations, that is, its proportionate share in the Fund's net asset value.

All profits, obligations and losses are pro rata for the account and risk of each participant although obligations and losses will not exceed the participant's commitments.

The beneficiaries of the Fund are entitled to receive the Fund income. The Manager, however, has discretion as to when it makes distributions of Net Proceeds to the Participants.

On termination of the Fund, all proceeds received by the Fund on liquidation (after meeting costs) will be distributed to the participants.

The foreign pension fund is established as an overseas structure which has separate legal personality under the Country X law. It has all the powers of a natural person. It is an entity established by incorporation and registered. It can sue and be sued in its own right as an entity. It can own property (including real estate) in its own right, it can open and operate bank accounts, enter into contracts, give guarantees, undertakings and warranties, and enter into other transactions and bind itself to do or undertake acts, in its own right. The expressly stated purpose of the foreign pension fund is the provision of pension benefits to participant fund members.

The participating overseas pension funds were established in Country X. The central management and control of the participating overseas pension funds is exercised in Country X by entities none of which is an Australian resident.

The participating overseas pension funds were established for the sole purpose of and have been maintained as genuine superannuation funds solely for the benefit of non-residents of Australia. They each have 50 members or more.

No amounts paid to or set aside for the Fund and/or the participating overseas pension funds will be able to be claimed as an allowable deduction or will qualify for a tax offset under Australian income tax law. The Fund and the participating overseas pension funds are exempt from income tax in Country X.

Relevant legislative provisions

Foreign Corporations (Application of Laws) Act 1989 subsection 7(2)

Income Tax Assessment Act 1997 section 104-71(5)

Income Tax Assessment Act 1997 section 840-805

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 128A(3)

Income Tax Assessment Act 1936 paragraph 128B(3)(jb)

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

Taxation Administration Act 1953 Schedule 1 section 12-400

Taxation Administration Act 1953 Schedule 1 section 12-402

Taxation Administration Act 1953 Schedule 1 section 12-402A

Taxation Administration Act 1953 Schedule 1 section 12-402B

Taxation Administration Act 1953 Schedule 1 section 12-404

Taxation Administration Act 1953 Schedule 1 section 12-405

Reasons for decision

Background

Subdivision 12-H of Schedule 1 to the TAA 1953 imposes an obligation on the trustee of a MIT to withhold from fund payments at a reduced rate. In order to qualify for the reduced withholding rate, the recipient of the fund payment must generally provide an address or a place of payment in an information exchange country, such as, Country X, and the trust must satisfy the requirements of a MIT as specified in section 12-400 of Schedule 1 to the TAA 1953. Paragraph 12-400(1)(f) sets out the 'widely held' requirements which vary depending on whether the trust is registered under the Corporations Act 2001 and whether the trust is a wholesale fund or a retail find. A table summarising the various widely held requirements is set out below:

Broadly, one way to satisfy the widely held requirements is for a trust to have a minimum number of members (25 or 50 depending on the characteristics of the trust). There are, however, a number of special rules to determine the minimum membership requirements where widely held investors invest in the trust. For example, if a 'foreign superannuation fund' covered by subsection 12-402(3) of Schedule 1 to the TAA 1953 acquired the requisite percentage of units in an Australian unit trust, that unit trust could satisfy the widely held requirement for MIT status under section 12-400.

Fund Payment

Managed investment trust withholding tax applies in respect of a 'fund payment'. Dividends and interest, as defined in Division 11A of Part III of the ITAA 1936, would generally not be classified as a 'fund payment': See paragraphs 12-405(1)(a) and (b) of Schedule 1 of the TAA 1953. The present private ruling will have no relevance to dividend and interest income. The following comments relate to any amounts derived by the Fund which fall within the definition of a 'fund payment'.

Question 1 - is the Fund a foreign superannuation fund?

Under subsection 995-1(1) of the ITAA 1997:

· a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

· a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

The term 'superannuation fund' in subsection 995-1(1) is defined by reference to subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act).

'Superannuation fund' means:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

A superannuation fund generates income in order to provide superannuation benefits for its members, for instance, upon their retirement.

The Fund is an investment trust into which superannuation funds can invest. The Fund does not provide superannuation benefits to its own members. It is merely a collective investment vehicle which is used exclusively by a number of superannuation funds. It generates income for the benefit of the Participants in their capacity as beneficiaries of the Fund - not in their capacity as members who are receiving superannuation benefits upon their retirement, permanent incapacity or some other similar event. The Fund, itself, does not have the character of a superannuation fund even though all its beneficiaries are superannuation funds. The Fund is a vehicle which earns income for superannuation funds, but, it is not a superannuation fund in its own right.

It is considered that the Fund is not a 'superannuation fund'.

Question 2

Is the Fund a trust?

The Terms and Conditions impose fiduciary obligations on the Depositary to hold assets for the benefit of the participants. The Terms and Conditions contain the following clauses which support the conclusion that the relationship between the participants, the Depositary and the investments of the Fund, constitute a trust relationship:

The Depositary holds the investments of the Fund in its own name for the account and risk of the participants and receives any income on these investments on behalf of and for the benefit of the participants.

Each participant is beneficially entitled to the investments of the Fund.

All profits, obligations and losses connected with the Fund are for the account and risk of each participant pro rata based on their number of participations.

Participants have a right to distributions of income from the Fund with respect to proceeds arising from the Fund's investments once the Fund receives the proceeds and the Manager has determined to make a distribution to the participants.

Relationship between the Fund and the participating overseas pension funds

In Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461; (Harmer's Case), French J., (as he then was) stated that a trust 'is notably a definition of a relationship by reference to obligations'. The following four essential elements of a trust were identified in that judgement (and see also Walsh Bay Developments Pty Ltd v. FC of T (1995) 31 ATR 15 at 23):

(i) the trustee holds a legal or equitable interest in the trust property;

(ii) the trust property must be property capable of being held on trust;

(iii) there are one or more beneficiaries other than the trustee; and

(iv) there exists a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.

All of the abovementioned elements are present in the relationship between the Manager, the Depositary and the overseas pension funds which are participants in the Fund. The Fund's assets are legally held by the Depositary for the benefit of the participating overseas pension funds. The Depositary will receive any income on the Fund's assets paid to it on behalf of and for the benefit of the participating overseas pension funds. The Depositary is required to act solely in the interest of the participating overseas pension funds. In this regard, the Depositary can be said to owe a fiduciary obligation to the participants that is analogous to the fiduciary obligation that a trustee owes to the beneficiaries in a trust.

The Manager is required to act solely in the interest of the participating overseas pension funds and owes fiduciary obligations to the Fund.

It is considered the Fund has all the features of a trust law trust estate, so that for Australian tax purposes, the relationship between the Depositary, the Fund and the overseas pension funds should constitute a trust relationship.

The relationship between the Depositary, the Fund and the participating overseas pension funds is a trust relationship for Australian tax purposes whereby the Fund's assets are held solely for the benefit of the Fund's investors, namely, the overseas pension funds.

Chain of trusts

Ordinarily, the Depositary which holds the units in the Australian trusts that the Fund has invested in would be regarded as a member of those trusts. However, because the Fund is a 'trust', it is necessary to consider whether subsection 12-402(4) can apply to look through the chain of trusts.

Subsection 12-402(4) provides:

The rules are as follows:

if an entity that is not a trust holds interests in the trust indirectly, through a chain of trusts:

(i) treat the entity as a member of the trust; and

(ii) do not treat a trust in the chain of trusts as a member of the trust...

Subsection 12-402(5) adds:

For the purposes of paragraph (4)(a), treat an entity covered by subsection (3) as an entity that is not a trust.

Paragraph 12-402(3)(b) covers among other things, 'foreign superannuation funds' that have at least 50 members. Each of the participating overseas pension funds has in excess of 50 members.

The definitions of 'superannuation fund' and 'foreign superannuation fund' have been set out in the answer to Question 1 above.

The participating overseas pension funds were established in Country X and their central management and control is exercised in Country X by entities none of which is an Australian resident. The participating overseas pension funds were established for the sole purpose of and have been maintained as genuine superannuation funds solely for the benefit of non-residents of Australia.

No amounts paid to or set aside for the Fund and/or the participating overseas pension funds will be capable of being claimed as an allowable deduction or will qualify for a tax offset under the Australian income tax law. The Fund and the participating overseas pension funds are exempt from income tax in Country X.

The participating overseas pension funds are each 'foreign superannuation funds' for the purposes of paragraph 12-402(3)(b) as defined in subsection 995-1(1) of the ITAA 1997 (which cross-refers to the meaning given in section 10 of the SIS Act).

Because the participating overseas pension funds are covered by subsection (3), the participating overseas pension funds are each treated as an entity that is not a trust for the purposes of paragraph 12-402(4)(a).

A chain of trusts is defined in subsection 104-71(5) of the ITAA 1997 as follows:

A chain of trusts consists of two or more trusts where at least one of these conditions is satisfied for each of the trusts:

(a) the trustee of the trust owns units or interests in another of the trusts; or

(b) the trustee of another of the trusts owns units or interests in the trust.

In this case the participating overseas pension funds own participations (beneficial interests) in the Fund. The trustee of the Fund (namely the Depositary), in turn, holds units in certain Australian trusts. Therefore, the interests in the Australian trusts are held by the participating overseas pension funds through a chain of trusts. Hence, the participating overseas pension funds will be taken to be the members of the Australian trust for the purposes of section 12-402 in determining whether the widely held requirements are met.

Question 3 - MIT participation interest

Section 12-404 provides:

An entity has a MIT participation interest in a trust if the entity, directly or indirectly:

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

· has the control of or the ability to control, a percentage of the rights attaching to membership interests in the trust; or

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

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

The MIT participation interest can be direct or indirect. The Depositary holds units in the Australian trusts. However, as noted above, the Depositary holds the investments of the Fund (including any investments in Australian trusts) for the account and risk of the participants and receives any income on those investments on behalf of and for the benefit of the participants. Each participant is beneficially entitled to the investments of the Fund. In addition, all profits, obligations and losses connected with the Fund are for the account and risk of each participant pro rata based on their number of participations. Participants also have a right to distributions of income from the Fund with respect to proceeds arising from the Fund's investments once the Fund receives the proceeds and the Manager has determined to make a distribution to the participants.

It is considered that paragraph 12-404(1)(c) is satisfied since the participating overseas pension funds have the right to receive a percentage of any distribution of income that the Australian trusts may make. It is therefore considered that each of the participating overseas pension funds indirectly have a MIT participation interest in the Australian trusts in which the Fund invests, in direct proportion to its participation entitlements in the Fund.

Question 4 - MIT Status

It has been concluded above that the overseas pension funds have MIT participation interests in the Australian trusts and that they are 'foreign superannuation funds' which are covered by paragraph 12-402(3)(b). It has also been concluded above that subsection 12-402(4) has the effect that the overseas pension funds will be treated as 'members' of the Australian trusts in which the Fund will invest.

Accordingly, for the purpose of subsections 12-402(1) and (2), the calculation in subsection 12-402(2) will be made on the basis that the overseas pension funds are members of the Australian trusts and are entities covered by subsection 12-402(3).

Similarly, when applying subsection 12-402A(1), the overseas pension funds will be regarded as entities covered by subsection 12-402(3) which have a MIT participation interest in the Australian trusts.

Likewise, because the overseas pension funds are entities covered by subsection 12-402(3), by virtue of the operation of subsection 12-402B(2), the overseas pension funds will not be counted as persons having a MIT participation interest in the Australian trusts for the purposes of paragraphs 12-402B(1)(a) and (b).

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