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Ruling

Subject: Managed Investment Trusts

Question 1

Does a U.S. Limited Partnership (USLP) satisfy the requirements under paragraph 12-402(3)(e) of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

Question 2

Does a U.S. real estate investment trust (US REIT) satisfy the requirements under paragraph 12-402(3)(e) of Schedule 1 to the TAA?

Answer

Yes.

This ruling applies for the following periods:

year ending 30 June 2013

year ending 30 June 2014

year ending 30 June 2015

year ending 30 June 2016

year ending 30 June 2017

year ending 30 June 2018

year ending 30 June 2019

year ending 30 June 2020

year ending 30 June 2021

year ending 30 June 2022

The scheme commences on:

1 July 2012

Relevant facts and circumstances

US REIT.

US REIT was incorporated in the United States of America (the US) and is structured to qualify as a real estate investment trust (REIT) for US corporate income tax purposes.

US REIT was formed under the Corporations and Associations Article of the Annotated Code of the relevant state (the State Code). It has elected to be and continues to qualify as a REIT under the US Internal Revenue Code of 1986 (the US IRC).

US REIT is governed by the provisions of the State Code, the US IRC and its Articles of Incorporation.

US REIT conducts its operations as an 'umbrella partnership REIT' (UPREIT) through an operating partnership, US Limited Partnership (USLP). (The UPREIT arrangement between US REIT and USLP is discussed further below.)

US REIT meets the organisational requirements for REIT status provided under section 856(a) of the US IRC as follows:

· being organised as a corporation, trust, or association;

· being managed by one or more trustees or directors (section 856(a)(1));

· having transferable shares or certificates of beneficial interest (section 856(a)(2));

· being taxable as a domestic corporation (but for the operation of sections 856 to 859 of the US IRC) (subsection 856(a)(3));

· not being a financial institution or insurance company (section 856(a)(4));

· being owned by 100 or more persons (section 856(a)(5)) - US REIT has approximately 30,000 shareholders of record as at 31 December 2011;

· not being closely held (section 856(a)(6)); and

· electing to be taxed as a REIT or have in effect such an election made for a previous taxable year (section 856(a)(7)).

Sections 8-202 and 8-301 of the State Code provides for the election of trustees at least every three years at an annual meeting of shareholders.

Section 856(a)(1) of the US IRC requires a REIT to be managed by its trustees or directors. The US REIT Board of Directors is elected annually at its annual meeting.

The directors of US REIT are required, as a condition of their status as directors, to maintain ownership of US REIT common shares. However, US REIT does not conduct business itself, other than acting as the sole General Partner of USLP, and issuing public equity from time to time, the proceeds of which are contributed to USLP in exchange for additional units.

USLP

USLP is a limited partnership.

USLP was formed as a limited partnership under an Act (DRULP Act), an Act made by the legislature of a certain state in the US.

USLP is governed by the terms of the DRULP Act and the USLP Agreement, which is established pursuant to the DRULP Act.

The capital contributions of the partners to USLP are made in exchange for units in the partnership. The units in USLP provide the partners with a share in the partnership's interest, based on the class of unit as prescribed in the USLP Agreement.

USLP has one General Partner, US REIT, which currently holds the majority of the units of USLP. The remaining units of USLP are held by external unrelated partners.

The employees of USLP manage and control all the facets of the day to day operations of USLP. These employees are not partners of USLP and they have not made any contributions to USLP.

The UPREIT arrangement

As noted above, US REIT conducts its operations as an UPREIT, through an operating partnership, USLP.

To ensure US REIT maintains its status as a REIT, the UPREIT arrangement with USLP involves the following conditions:

· US REIT is the sole General Partner of USLP;

· USLP and its direct or indirect subsidiaries hold substantially all of the assets indirectly owned by US REIT and its ownership interests in US REIT's joint ventures;

· the USLP Agreement specifies that, without the consent of outside Limited Partners, US REIT shall not directly or indirectly own any significant assets other than the abovementioned general and limited partnership interests;

· the USLP Agreement specifies that no person (other than US REIT and direct and indirect wholly owned subsidiaries of US REIT) may own more than a minor value of USLP interests;

· USLP conducts the operations of the business and is structured as a partnership with no publicly traded equity;

· Except for net proceeds from public equity issuances by US REIT, USLP generates the capital required by US REIT's business through its operations, the issuance of debt, or through the issuance of units as acquisition currency.

The executive officers of US REIT are appointed by US REIT's board of directors, but are employed by USLP.

US REIT has formally delegated the day to day control of the operations of USLP to the Board of Directors of US REIT. The Board of Directors has oversight over the operation of USLP in accordance with the State Code, but it has delegated its day to day responsibilities to the employees of USLP by exercising the powers it has under the USLP Agreement.

Relevant legislative provisions

Taxation Administration Act 1953

Schedule 1, subsection 12-400(1)

Schedule 1, paragraph 12-400(1)(f)

Schedule 1, subsection 12-402(1)

Schedule 1, subsection 12-402(3)

Schedule 1, paragraph 12-402(3)(e)

Schedule 1, section 12-402B

Income Tax Assessment Act 1997

Subsection 995-1(1)

DRULP Act (United States of America)

Section 17-101(9)

Section 17-106(a)

Internal Revenue Code 1986 (United States of America)

Section 856(a)(1)

Section 856(a)(2)

Section 856(a)(3)

Section 856(a)(4)

Section 856(a)(5)

Section 856(a)(6)

Section 856(a)(7)

State Code (United States of America)

Section 8-101

Section 8-103(b)

Section 8-202

Section 8-301

Reasons for decision

All legislative references are to Schedule 1 to the TAA unless otherwise indicated.

Question 1

Summary

USLP satisfies the requirements under paragraph 12-402(3)(e).

Detailed reasoning

Subdivision 12-H deals with the Pay As You Go withholding obligations for distributions of managed investment trust income.

Under subsection 12-400(1), there are various conditions that need to be considered in order to determine whether a particular trust is a managed investment trust in relation to an income year. Paragraph 12-400(1)(f) includes the requirement that the trust must satisfy the widely-held requirements in section 12-402 of Schedule 1.

As part of the 'widely held requirements' contained in section 12-402 for certain managed investment trusts, subsection 12-402(3) lists certain widely-held entities, whose participation interest in the trust are multiplied by 50 to provide a 'notional number' of members of the trust under subsection 12-402(2). This, in turn, is used to determine whether the trust then satisfies the widely-held requirements in subsection 12-402(1).

Paragraph 12-402(3)(e) specifies an entity:

'(i) that is recognised under a *foreign law as being used for collective investment by pooling the contributions of its members as consideration to acquire rights to benefits produced by the entity; and

(ii) that has at least 50 members; and

(iii) the contributing members of which do not have day-to-day control over the entity's operation'.

According to paragraph 5.79 of the Revised Explanatory Memorandum (EM) to the Tax Laws Amendment (2010 Measures No 3) Bill 2010 (TLAB (No 3) Bill 2010), paragraph 12-402(3)(e) 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'.

The TLAB (No 3) Bill 2010 introduced the former wording of paragraph 12-402(3)(e), upon which the current paragraph is based. Therefore, USLP must satisfy the following requirements:

a) it must be recognised under a foreign law as being used for collective investment;

b) there must be a pooling of contributions of USLP's members as consideration to acquire rights to benefits produced by USLP;

c) USLP must have at least 50 members; and

d) the contributing members of USLP must not have day to day control over the operation of USLP.

Recognised under a foreign law as being used for collective investment

The first requirement is that USLP must be recognised under a foreign law as an entity which is used for collective investment. There are three elements to this first requirement, namely:

a) recognised;

b) foreign law; and

c) being used for collective investment.

The term 'recognised' is not a defined term for the purposes paragraph 12-403(2)(e). The EM to the TLAB (No 3) Bill 2010 also provides little guidance on the meaning. The term should therefore take its ordinary meaning.

The Macquarie Dictionary relevantly defines 'recognised' as:

'… 4. to acknowledge formally as existing or as entitled to consideration: one government recognises another.
5. to acknowledge or accept formally as being something stated: to recognise a government as a belligerent.
6. to acknowledge or treat as valid: to recognise a claim…'

In the context of the words in paragraph 12-403(2)(e), the Commissioner's view is that an entity that is formally established and/or is formally governed under a foreign law is an entity that is 'recognised' under that foreign law.

USLP is established under, and governed by the provisions of, the DRULP Act. There are also several restrictions placed on USLP under the USLP Agreement, which is established pursuant to the DRULP Act. Therefore, for the purposes of applying paragraph 12-402(3)(e), USLP is an entity that is 'recognised' under the DRULP Act.

A 'foreign law' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as a law of a foreign country. Accordingly, the DRULP Act, which is law of a foreign country (namely, the US or a State of the US), is a foreign law for the purposes of paragraph 12-402(3)(e) of Schedule 1 to the TAA. USLP is therefore an entity that is recognised under a foreign law, namely the DRULP Act and the USLP Agreement established pursuant to the DRULP Act.

The term 'collective investment' is an undefined term and must therefore take its ordinary meaning. The Macquarie Dictionary defines the word 'collective' to include 'relating to a group of individuals taken together'. The term 'investment' is defined in the Macquarie Dictionary to include 'the investing of money or capital in order to secure profitable returns, especially interest or income'.

Indeed, in the context of applying paragraph 12-402(3)(e) to determine whether an entity is recognised by a foreign law as 'being used for collective investment', the Commissioner's approach has been to consider whether the relevant foreign laws require the entity to have a profit-making purpose of at least two or more people.

USLP is a limited partnership, formed under the DRULP Act. Section 17-101(9) of the DRULP Act requires that the limited partnership is formed by two or more persons.

Under section 17-106(a) of the DRULP Act, a limited partnership of the relevant state may carry on any lawful business, purpose or activity, whether or not for profit. The DRULP Act itself does not, therefore, require that a limited partnership of that state be involved in 'investment'.

However, USLP is an 'operating partnership' within an UPREIT arrangement involving US REIT. As part of this arrangement, USLP must operate a business so as to ensure that US REIT maintains its status as a REIT.

The UPREIT arrangement also involves USLP, as the operating partnership:

· holding substantially all of the assets indirectly owned by US REIT and its ownership interests in US REIT's joint ventures;

· conducting the operation of the business and being structured as a partnership with no publicly traded equity; and

· except for net proceeds from public equity issuances by US REIT, generating the capital required by US REIT's business through its operations, the issuance of debt, or through the issuance of units as acquisition currency.

Furthermore, US REIT is the sole General Partner of USLP and cannot directly or indirectly own any other significant assets other than the partnership units in USLP. In addition, no person other than US REIT may own more than a minor value of USLP interests.

Although the DRULP Act allows USLP to engage in non-investment activities in which a REIT cannot engage, the USLP Agreement made pursuant to the DRULP Act prohibits the USLP from engaging in any activities that is inconsistent with US REIT's status as a REIT.

Accordingly, in the context of its role as an operating partnership within the UPREIT arrangement with US REIT, USLP is recognised under a foreign law as being used for collective investment for the purposes of paragraph 12-402(3)(e).

Pooling of contributions as consideration to acquire rights to benefits produced by the entity

The capital contributions of the partners to USLP are made in exchange for units in the partnership. A 'unit' in USLP provides the partner with a share in the partnership's interest, based on the class of unit as prescribed in the USLP Agreement.

Accordingly, the requirement in paragraph 12-402(3)(e) that there is a pooling of contributions as consideration to acquire rights to benefits produced by USLP is satisfied.

The entity must have at least 50 members

US REIT owns the majority of the limited partner interests in USLP, while the remaining limited partner interests are held by a large number of unrelated third parties. USLP therefore has at least 50 members.

The contributing members of the entity do not have day to day control over the operation of the entity

The USLP Agreement provides that all management powers over the business and affairs of USLP are and shall be exclusively vested in the US REIT (as the General Partner) and that no limited partner shall have any right to participate in or exercise control or management power over the business and affairs of the partnership.

However, US REIT has formally delegated the day to day control of the operations of USLP to the Board of Directors of US REIT. The Board of Directors has oversight over the operation of USLP in accordance with the state corporate law, but it has delegated its day to day responsibilities to the employees of USLP by exercising the powers it has under the USLP Agreement.

The employees of USLP manage and control all the facets of the day to day operations of USLP. These employees are not partners of USLP and they have not made any contributions to USLP.

As none of the employees of USLP have made any contributions to USLP and do not have any interest in the Partnership, the contributing members of USLP do not have day to day control over the operation of the entity for the purposes of paragraph 12-402(3)(e).

Conclusion

USLP satisfies all the requirements of paragraph 12-402(3)(e). Indeed, as noted at paragraph 5.79 of the EM to TLAB (No 3) Bill 2010, paragraph 12-402(3)(e) is intended to 'capture foreign collective investment vehicles, such as US real estate investment trusts'. Although USLP itself is not a US REIT, it effectively operates as one within the UPREIT structure with US REIT, conducting its business as the operating partnership to ensure that US REIT maintains its status as a REIT.

Accordingly, it is consistent with the policy intention of the provision that USLP, in its capacity as a operating partnership within an UPREIT structure with US REIT, satisfies the requirements of paragraph 12-402(3)(e).

Question 2

Summary

US REIT satisfies the requirements under paragraph 12-402(3)(e).

Detailed reasoning

As USLP satisfies the requirements under paragraph 12-402(3)(e), it is necessary to consider whether US REIT also satisfies the requirements of the paragraph to determine whether US REIT is disregarded when applying the 'closely-held restrictions' under section 12-402B.

Recognised under a foreign law as being used for collective investment

US REIT is a real estate investment trust formed as a corporation. It is formed under the State Code. It also qualifies as a REIT under the US IRC. US REIT is governed by the provisions of the State Code, US IRC and its Articles of Incorporation. As the US REIT was formed under the State Code, the State Code is a relevant 'foreign law' for the purposes of paragraph12-402(3)(e).

Section 8-103(b) of the State Code provides that:

'To the extent any provision of this title is contrary to or inconsistent with sections 856 through 858 of the Internal Revenue Code [of the US] or the regulations adopted under those sections, the latter shall prevail as to any real estate investment trust qualifying under those sections and regulations.'

Therefore, sections 856 to 858 of the US IRC must be considered alongside the State Code when considering whether a foreign law recognises US REIT as being used for collective investment for the purposes of subsection 12-402(3)(e).

Section 8-101 of the State Code defines a REIT as:

'an unincorporated business trust or association formed under this title which property is acquired, held, managed, administered, controlled, invested, or disposed of for the benefit and profit of any person who may become a shareholder'.

This definition contemplates a profit-making purpose of the entity for the benefit of more than one person (the shareholders), which indicates a recognition by the State Code that the entity is being used for collective investment.

Pooling contributions of its members as consideration to acquire rights to benefits produced by the entity

A 'share' is defined in section 8-101 of the State Code as a transferable unit of beneficial interest in a REIT. The State Code definitions of a REIT and share in a REIT (discussed above) and the requirements under the US IRC that a REIT's shares must be owned by 100 or more persons is consistent with the notion of pooling of contributions.

The Articles of Incorporation of US REIT provides that shares in US REIT will be issued thereby for consideration (Article VI, section 6(a) of the Articles of Incorporation of the US REIT). Therefore, US REIT satisfies this condition.

The entity has at least 50 members

The US IRC requires that a REIT must be owned by 100 or more persons and US REIT exceeds this requirement. Accordingly, US REIT has at least 50 members.

The contributing members of the entity do not have the day to day control over the entity's operations

Sections 8-202 and 8-301 of the State Code provides for the election of trustees at least every three years at an annual meeting of shareholders. Further, section 856(a)(1) of the US IRC requires a REIT to be managed by its trustees or directors. The US REIT Board of Directors is elected annually at its annual meeting. While the directors of US REIT are required, as a condition of their status as directors, to maintain ownership of US REIT common shares, such amounts are wholly immaterial to the total number of US REIT shares outstanding.

In an overall context, whilst directors of US REIT are shareholders of US REIT, they do not have day to day control of US REIT by virtue of this ownership. The day to day control of US REIT by the directors arises from their appointment as directors who, having been so appointed, are obliged to hold an immaterial percentage of US REIT shares. Therefore, the members (i.e. shareholders) of US REIT do not have day to day control over the operation of US REIT.

Conclusion

US REIT satisfies all the requirements of paragraph 12-402(3)(e). Indeed, as noted at paragraph 5.79 of the EM to TLAB (No 3) Bill 2010, paragraph 12-402(3)(e) is intended to 'capture foreign collective investment vehicles, such as US real estate investment trusts'. Accordingly, it is consistent with the policy intent of the provision that US REIT, as US REIT, satisfies the requirements of paragraph 12-402(3)(e).

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