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Ruling

Subject: Managed investment trust withholding tax

Question 1

Will the Trust continue to be a 'managed investment trust' (an MIT) within the meaning of subsection 12-400(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the TAA 1953) provided its ownership structure remains consistent with the description provided in this ruling?

Answer

Yes. The Trust will continue to be an MIT within the meaning of subsection 12-400(1) of Schedule 1 to the TAA 1953 provided there is no material change in the facts of this ruling.

Question 2

Taxpayer 1 and Taxpayer 2 be liable to pay income tax (imposed under the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 (Cth) (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 Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) and will such tax be levied at rates not greater than 7.5% (or such other rates as the Parliament stipulates from time to time under the MITWHT Act)?

Answer

Yes. Taxpayer 1 and Taxpayer 2 will be liable to pay income tax (imposed under the MITWHT Act) on the 'fund payment part', within the meaning of subsection 840-805(2) of the ITAA 1997, (the Fund Payment Part), of any distributions which they receive in relation to the Trust by virtue of section 840-805 of the ITAA 1997.

Such tax will be levied at rates not greater than 7.5% for the year ended 20XX and 15% for future years (or such other rates as the Parliament stipulates from time to time under the MITWHT Act).

Question 3

Will Taxpayer 1 and Taxpayer 2 obtain a credit pursuant to section 18-32 of Schedule 1 to the TAA 1953, for the tax withheld by the Manager (as trustee of the Trust) and will any such credit be applied in accordance with Division 3 of Part IIB of the TAA 1953?

Answer

Yes. Taxpayer 1 and Taxpayer 2 will obtain a credit pursuant to section 18-32 of Schedule 1 to the TAA 1953 for the tax withheld by the Manager and any such credit will be applied in accordance with Division 3 of Part IIB of the TAA 1953.

Question 4

Will the amounts subject to tax referred to at Question 2 represent non-assessable non-exempt income of Taxpayer 1 and Taxpayer 2 in accordance with section 840-815 of the ITAA 1997?

Answer

Yes. The amounts subject to tax referred to at Question 2 will represent non-assessable non-exempt income of Taxpayer 1 and Taxpayer 2 in accordance with section 840-815 of the ITAA 1997.

This ruling applies for the following periods:

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

Year ended 31 December 2017

Year ended 31 December 2018

Year ended 31 December 2019

Year ended 31 December 2020

This ruling also applies to fund payments which relate to the above years of income.

The scheme commences on:

The scheme has not yet 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.

Background

The Applicants hold between them all of the units in the Trust. Taxpayer 2 holds less than Y% and Taxpayer 1 holds the balance.

Taxpayer 1 holds its interest in the Trust in its own name, i.e., that interest is not held in the name of the trustees of Taxpayer 1. Likewise, Taxpayer 2 holds its interest in the Trust in its own name and that interest is not held in the name of the trustees of Taxpayer 2.

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

The Transaction

The Former Manager will cease to be the responsible entity and manager of the Trust, and the Manager will become the new trustee and manager of the Trust pursuant to the terms of the Proposed Management Agreement.

The Applicants

The Applicants are not residents of Australia.

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

The Applicants are formed under the Foreign Formation Code country X.

Each of the Applicants carries on business in the country X.

Taxpayer 1 has more than Z members (shareholders).

The Manager

The Manager is a company constituted under the Corporations Act.

The Manager will replace the Former Manager as the trustee and manager of the Trust and the Manager will become a Financial Services Licensee.

The employees of the Manager will be located in Australia.

The Manager will appoint an Australian resident as a 'responsible manager'. Any non-resident 'responsible manager' will spend only a fraction of the time in performing that function compared to the time spent by the Australian resident 'responsible manager'.

In terms of the Proposed Management Agreement, the Manager 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.

Under the Proposed Management Agreement, the Manager will carry out the following activities of the Trust (amongst others):

· 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;

· making recommendations concerning specific investments;

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

· evaluating and negotiating contracts with respect to the foregoing;

· reporting regularly and making appropriate persons available for the purpose of reviewing with representatives of Taxpayer 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 Proposed Management Agreement will ensure that Taxpayer 1 is consulted on the more significant aspects of the Trust's operations which require Taxpayer 1 approval. This ensures that Taxpayer 1 is consulted and approves decisions already made by the Manager, as opposed to Taxpayer 1 actually making any decisions on behalf of the Manager.

A sister company of the Manager will provide corporate management services to the Manager, such as, legal and compliance, financial and accounting services, human resources, corporate communications, Internet technology, and general corporate management. The pricing of these services is to be determined by applying arms length pricing principles.

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 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

Corporations Act 2001 section 9

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

Reasons for decision

Question 1

Summary

The Trust will continue to be a MIT.

Detailed reasoning

Subdivision 12-H of Schedule 1 of the TAA 1953 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 1953 (Fund Payments).

Under subsection 12-400(1) of Schedule 1 of the TAA 1953, there are various requirements that need to be satisfied in determining whether a particular trust is a MIT.

Subsection 12-400(1) 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

This requirement is clearly satisfied by the Trust.

At all relevant times, the Manager will be the trustee of the Trust. The Manager is an Australian resident company because it was incorporated in Australia.

The Trust will continue to be managed and controlled in Australia.

No trading requirement

A trust covered by subsection 12-400(2) cannot qualify as a MIT. Subsection 12-400(2) 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 section 12-400(2) 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.

Substantial proportion of investment management activities in Australia requirement

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 1953.

The Revised Explanatory Memorandum to the Tax Laws Amendment (2010 Measures No. 3) Act 2010 (the Revised Explanatory Memorandum) contains the following comments:

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.

...

5.61...the activities of the fund manager in relation to the investments of the fund. The manager of a MIS is generally appointed to invest and manage the assets of the MIS (the 'portfolio'). The manager must keep the portfolio under review, keep proper books of account in relation to the portfolio and is generally subject to investment instructions (as per the agreement between the manager and operator of the fund) which may set out limitations to the managers investment discretion.

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 Manager will not delegate any of its functions as operator and manager to any party outside of Australia with the exception of the corporate management services which will be provided by the sister company of the Manager.

The Trust will be operated and managed by the Manager. The Manager will be remunerated on an arm's length basis out of the Trust's assets for the services which it will provide.

In terms of the Proposed Management Agreement, the Manager 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 Proposed Management Agreement provides a very broad mandate for the Manager 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;

· making recommendations concerning specific investments;

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

· evaluating and negotiating contracts with respect to the foregoing;

· reporting regularly and making appropriate persons available for the purpose of reviewing with representatives of Taxpayer 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.

In the Proposed Management Agreement it is intended that Taxpayer 1 will be consulted on the more significant aspects of the Trust's operations. For example, Taxpayer 1 must grant approval in respect of a number of the listed matters.

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

Managed investment scheme requirement

The Trust must be a 'managed investment scheme' within the meaning of section 9 of the Corporations Act: see subparagraph 12-400(1)(d) of Schedule 1 of the TAA 1953.

Section 9 of the Corporations Act defines a 'managed investment scheme' as:

(a) a scheme that has the following features:

(i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);

(ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);

(iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or…

Taxpayer 2 and Taxpayer 1 have contributed funds by subscribing for units which confer beneficial interests in the assets and income of the Trust, their contributed funds were pooled together to provide benefits for Taxpayer 2 and Taxpayer 1 (as unit holders in the Trust) and Taxpayer 2 and Taxpayer 1 do not have the day to day control over the operation of the scheme.

Hence, the Trust will be a managed investment scheme under section 9 of the Corporations Act.

Wholesale membership requirement

In order to satisfy subparagraph 12-400(1)(e) of Schedule 1 of the TAA 1953, the Trust must be a trust covered by section 12-401 of Schedule 1 of the TAA 1953 (a trust with 'wholesale membership').

A trust is covered by section 12-401 if:

(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%.

Subsection 601ED(2) of the Corporations Act 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 in relation to issues in the Trust (i.e. The Trust has no retail clients). Here, as only Taxpayer 1 and Taxpayer 2 hold units in the Trust (both of which are wholesale clients), the Trust is not required to be registered. Because Taxpayer 1 and Taxpayer 2 are the only members and are not retail clients, paragraphs 12-401(b) and (c) are also satisfied.

Hence, the Trust will be covered by section 12-401 of Schedule 1 of the TAA 1953.

Widely held requirement

A trust must satisfy the widely held requirements in subparagraph 12-400(1)(f) of Schedule 1 of the TAA 1953. The widely held requirements are set out in subsections 12-402(1) and 12-402(1A) of Schedule 1 of the TAA 1953.

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 1953 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 Taxpayer 1 is covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953. If Taxpayer 1 is covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953, its 'MIT participation interest' will be multiplied by 50: See subparagraphs 12-402(2)(a)(ii) and (c) of Schedule 1 of the TAA 1953.

For the reasons discussed below, it is considered that Taxpayer 1 is covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953.

As explained below, Taxpayer 1 has a 'MIT participation interest' (as defined in section 12-404 of Schedule 1 of the TAA 1953) of 100% in the Trust. 100% multiplied by Z equals Z. Hence, Taxpayer 1 will be counted as Z members.

As explained below, because Taxpayer 2 is wholly owned by Taxpayer 1 and has only one member, it fails the requirement that it must have at least Z members. Taxpayer 2 is therefore not an entity covered by paragraph 12-402(3)(e) of Schedule 1 of the TAA 1953. As Taxpayer 2 is not covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953, it only counts as one member: See subparagraphs 12-402(2)(a)(i) and (b) of Schedule 1 of the TAA 1953.

Applying the above methodology results in the Trust being deemed to have B members.

The Trust will satisfy the widely held requirement contained in section 12-402(1) because it will be considered to have B members (i.e. more than 25 members as required by section 12-402(1) of Schedule 1 of the TAA 1953).

Entity covered by subsection 12-402(3)

Formerly, subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953 included:

(e) 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;

Paragraph 5.79 of the Revised Explanatory Memorandum supplies the following explanation as to subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953:

5.79 The list has also been amended to better define those foreign entities that are recognised under a foreign law as having a similar status to a managed investment scheme. The amendment better targets this type of entity to 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 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. This definition will more appropriately capture foreign collective investment vehicles, such as country X real estate investment trusts (country X REITs) and foreign mutual funds.

Taxpayer 1 and Taxpayer 2 must be recognised under a foreign law as being used for collective investment and the entities, themselves, must also satisfy the remaining three requirements of subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953. That is, the scheme 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.

(i) 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 Taxpayer 1 and Taxpayer 2 were formed in country X under the Foreign Formation Code. The law under which the Applicants were formed (the Foreign Formation Code) is expressed to be subject to certain provisions of the Foreign Tax Code of country X and must be read together with those tax laws where applicable. Those specific provisions of the Foreign Tax Code apply to Taxpayer 1 but not to Taxpayer 2.

Therefore, the Foreign Tax Code must be considered alongside the Foreign Formation Code when considering whether the foreign law recognises Taxpayer 1 as being used for collective investment for the purposes of subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953. As Taxpayer 2 does not qualify under the Foreign Tax Code, only the Foreign Formation Code is the relevant foreign law in relation to Taxpayer 2.

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

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

(ii) Pooling of contributions of at least 50 members of the entity

Subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953 requires that the entity pool the contributions of at least 50 members.

While the Foreign Formation Code does not contain a requirement as to the number of shareholders necessary for a REIT, the Foreign Tax Code requires these shares to be owned by more than 50 persons.

The Foreign Formation Code 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 1953.

Therefore, as Taxpayer 1 qualifies as a REIT under the Foreign Tax Code, there is a pooling of the contributions of at least 50 members of the entity.

However, as Taxpayer 2 is wholly owned by Taxpayer 1 and therefore has only C members it fails the requirement that it have at least 50 members. Taxpayer 2 is therefore not an entity covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953.

(iii) As consideration to acquire rights to benefits produced by the entity

Subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953 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 Taxpayer 1 states that the shares in Taxpayer 1 will be validly issued by Taxpayer 1 upon receipt of full consideration for which they have been issued (unless they were issued by way of share dividend or share split). Therefore, Taxpayer 1 satisfies the condition under subparagraph 12-402(3)(e) that contributions are made as consideration to acquire rights to benefits produced by Taxpayer 1.

(iv) 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 1953 is that the members of the entity do not have day-to-day control over the operation of the entity. The Foreign Formation Code provides for the election of trustees. Further, the Foreign Tax Code requires a REIT to be managed by its trustees or directors.

Therefore, the members of Taxpayer 1 do not have day-to-day control over the operation of the entity.

Taxpayer 1 therefore satisfies this final requirement of paragraph 12-402(3)(e).

Subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953 was amended retrospectively and the provision now reads:

(e) 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;

Subparagraph 12-402(3)(e) has been reworded to make it clearer that an entity will be included if it is 'recognised under a foreign law as being used for collective investment by pooling the contribution of its members, provided the entity has at least 50 members [and certain other conditions are met]...' :See Part 24, Table 8.41 of the Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No. 9) Bill 2011.

This amendment strengthens the view, set out above in relation to the earlier wording of the provision, that Taxpayer 1 will satisfy subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953.

Conclusion

As each of the elements are satisfied in relation to Taxpayer 1, Taxpayer 1 is an entity covered by subparagraph 12-402(3)(e) of Schedule 1 of the TAA 1953.

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

MIT participation interest

For the purposes of subparagraph 12-402(2)(c) of Schedule 1 of the TAA 1953, it is necessary to determine Taxpayer 1's 'MIT participation interest' in the Trust.

A 'MIT participation interest' is defined in section 12-404 of Schedule 1 of the TAA 1953 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).

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

Not closely held requirement

A trust must satisfy the 'closely held' requirements in section 12-402B of Schedule 1 of the TAA 1953: see subparagraph 12-400(1)(g) of Schedule 1 of the TAA 1953.

Section 12-402B 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).

Subparagraph 12-400(1)(e)(i) of Schedule 1 of the TAA 1953 will apply because this is a trust with wholesale membership in terms of section 12-401 of Schedule 1 of the TAA 1953. Hence, it will be necessary to satisfy subparagraph 12-402B(1)(a) of Schedule 1 of the TAA 1953. 10 or fewer persons must not have a total MIT participation interest of 75% or more.

Taxpayer 1 is an entity covered by section 12-402(3) of Schedule 1 of the TAA 1953 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 1953. Taxpayer 2 will be considered to have a MIT participation interest of less than 75%. Accordingly, only a number of members (Taxpayer 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) imposes the requirement that a foreign resident individual must not have a MIT participation interest of 10% or more. Taxpayer 1 and Taxpayer 2 own all the units in the Trust. However, they are not individuals. Moreover, there are no individual investors in Taxpayer 1 which own 10% or more of the shares in Taxpayer 1. Hence, this requirement is satisfied.

Licensing requirement

Subparagraph 12-400(1)(h) of Schedule 1 of the TAA 1953 provides that, if the trust is covered by section 12-401, the trust must satisfy the licensing requirements in section 12-403 of Schedule 1 of the TAA 1953.

Subparagraph 12-403(1)(a)(i) requires the trust to be managed by an entity which holds an Australian financial services licence whose licence covers it providing financial services to wholesale clients. The Manager will obtain the requisite license such that subparagraph 12-403(1)(a)(i) will be continuously satisfied.

Overall conclusion

Therefore, as the Trust satisfies all the conditions in section 12-400 of Schedule 1 to the TAA 1953, it will continue to be a 'managed investment trust' within the meaning of that term under section 12-400.

Question 2

Summary

Taxpayer 1 and Taxpayer 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 that 7.5% in relation to the year ended 31 December 2012 and 15% in relation to future years.

Detailed reasoning

Subsections 840-805(1) and (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.

…

(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 1953.

It has been concluded in relation to Question 1, above, that the Trust is a MIT for the purposes of section 12-400. 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 unit holders 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 Taxpayer 1 and Taxpayer 2 are beneficiaries who are trustees of another trust.

Both Taxpayer 1 and Taxpayer 2 are REITs which are established as a statutory vehicle (a juridical person) under the Foreign Formation Code. It is therefore necessary to consider the nature of a REIT established under the Foreign Formation Code and compare this to the nature of a 'trust' for the purposes of section 840-805.

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 Foreign Formation Code 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 Foreign Formation Code 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 formed under the Foreign Formation Code 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 Foreign Formation Code that a REIT established under the Code is not akin to a trust under Australian law.

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

In these circumstances, Taxpayer 1 and Taxpayer 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) 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 for the relevant year ended (being an income year which starts before 1 July 2012) and 15% for income years starting on or after 1 July 2012.

Whether Taxpayer 1 and Taxpayer 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.

Taxpayer 1 is a resident of country X for country X federal tax purposes. Country X is listed as an information exchange country in the table to subregulation 44E(2) of the Taxation Administration Regulations 1976. Taxpayer 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 Taxpayer 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 Taxpayer 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 Taxpayer 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 Taxpayer 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. Taxpayer 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 relevant year and 15% for later years.

Question 3

Summary

Taxpayer 1 and Taxpayer 2 will obtain a credit for the tax withheld by the Manager and such credit will be applied in accordance with Division 3 of Part IIB of the TAA 1953.

Detailed reasoning

Section 18-32 of Schedule 1 of the TAA 1953 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 1953.

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 credit against the primary tax debt under section 8AAZLB of the TAA 1953. It is expected that the amount withheld by the Manager 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 credit to the RBA under section 8AAZLA of the TAA 1953 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 1953 will be refundable to that Applicant.

Question 4

Summary

The Fund Payment Part will represent non-assessable non-exempt income of Taxpayer 1 and Taxpayer 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. This amount will not be included in the Applicants' assessable income by virtue of sections 6-15 and 6-23 of the ITAA 1997.

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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