Edited version of private ruling

Authorisation Number: 1012409322258

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. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Widely-held Trust

Question 1

Is the foreign resident statutory body an entity that is covered by the requirements under paragraph 12-402(3)(e) of Schedule 1 of the Taxation Administration Act 1953?

Answer

Yes.

This ruling applies for the following periods:

1 January 2013 to 31 December 2016

The scheme commences on:

1 January 2013

Relevant facts and circumstances

The foreign statutory body has more than 50 members and is recognised under a foreign law as being used for collective investment.

The contributions of the members are pooled as consideration to acquire rights to benefits produced by the foreign statutory body.

The members do not have day to day control of the foreign statutory body.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995

Taxation Administration Act 1953 Subdivision 12-H

Taxation Administration Act 1953 Paragraph 12-402(3)(e)

Reasons for Decision

Subdivision 12-H of Schedule 1 to the TAA deals with the Pay As You Go withholding obligations for distributions of managed investment trust income to foreign residents.

Under subsection 12-400(1) of Schedule 1 to the TAA, 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 to the TAA.

As part of the 'widely held requirements' contained in section 12-402 of Schedule 1 to the TAA for certain managed investment trusts, subsection 12-402(3) of Schedule 1 to the TAA 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) of Schedule 1 to the TAA. This, in turn, is used to determine whether the trust then satisfies the widely-held requirements in subsection 12-402(1) of Schedule 1 to the TAA.

Paragraph 12-402(3)(e) of Schedule 1 to the TAA 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 the Revised Explanatory Memorandum (EM) to the Tax Laws Amendment (2010 Measures No 3) Bill 2010 (TLAB (No 3) Bill 2010), which introduced the former wording of paragraph 12-402(3)(e) of Schedule 1 to the TAA upon which the current wording is based, the provision 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.'

To qualify as a collective investment vehicle pursuant to paragraph 12-402(3)(e), four requirements must be satisfied

1) The entity is recognised under a foreign law as being used for collective investment

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

A foreign law is defined in section 995-1 of the ITAA 1997 as a law of a foreign country. As the foreign law created the statutory body, it is accordingly considered a foreign law for the purposes of section 12-402(3)(e).

The Commissioner of Taxation has indicated that an entity is used for collective investment where there is a profit making purpose in the entity.

The core activities of foreign statutory body comprise of the management of operations, acceptance and management of deposits from depositors and investment of the deposits. It invests the deposits to generate a return to its depositors. The distribution of profits was contemplated by law which permits the statutory body absolute discretion to determine (subject to approval of the Minister) a sum as distributable profit in respect of a particular period or year of the Fund. It does not make a profit from providing services.

Accordingly, it is recognised under a foreign law and there is a profit-making purpose and the criteria has been met.

2) The pooling of the contributions of at least 50 members of the entity

All deposits contributed by depositors are maintained and the depositors are not able to choose which of the investments they can participate in. The deposits are managed by the Board and an Investment Panel has also been established to advise the Board to carry out its responsibility in assessing and approving investment proposals prior to submission for the approval of the Administering Minister pursuant to the law. Therefore, their contributions are considered 'pooled' under this requirement.

It is a statutory body incorporated under the law and is not a company, trust or partnership.

Subsection 960-130(1) of the ITAA 1997 sets out who is a 'member' of various entities such as a shareholder in a company, a partner in a partnership and a beneficiary in a trust. The statutory body is not an entity that is described in this section. However, subsection 960-130(2) provides that if two or more entities jointly hold interests or rights that give rise to membership of another entity, each of them is a member of the other entity. The depositors are considered to be members of the statutory body as they hold rights to the distributable profits of the statutory body and therefore, have membership interests in the statutory body.

Further, the statutory body is not recognised as a bank as it is not established in accordance with the relevant Bank legislation under the laws of the foreign country. The relationship between the depositors and the statutory body is not considered a creditor/debtor relationship. This is on the basis that when a depositor opens a new account as a member with the statutory body the depositor agrees to the terms in the application form that the statutory body will manage the funds deposited in accordance with the law.

This requirement that there is a pooling of contributions of at least 50 members of the entity is satisfied.

3) The contributions were made as consideration to acquire rights to benefits produced by the entity

The contributions made by the depositors (i.e. members of the statutory body) were made as consideration to acquire the rights to benefits produced by the statutory body. This is on the basis that the members are entitled to distributable profits declared by the statutory body pursuant to the law. Therefore, this requirement should be satisfied.

4) The members of the entity do not have day-to-day control over the operation of the entity

The Commissioner's view is that it is intended to encapsulate entities where the members (essentially the investors) do not have day-today control over their investments but where the function is 'handed-over' and performed by a professional manager. That is the requirement that delineates between investments where control of the collective funds is vested in the group of investors and where control is vested in an entity who manages the funds on behalf of the group.

The Board is responsible for the administration of the statutory body and all matters concerning the welfare of the members. With the exception of the Managing Director and Chief Executive Officer, all other Board members are independent non-executive directors and not directly involved in operational matters of the statutory body.

The appointment of Board members has been made by various governmental departments (including the Prime Minister's and Treasury departments) on the basis that the individuals have vast experiences and expertise in diverse areas including finance, economy, accounting, public administration and law.

Several committees, consisting of the appointed Board members, management and external individuals, have also been set up based on their experiences and expertise. These committees assist the Board in ensuring the administration of the functions of the statutory body are within the parameters of the law. For example, the Investment Panel has been established to ensure that investment decisions are made after a thorough research and evaluation process. Further, pursuant to the law, all investment decisions must be approved by the Administering Minister (being a Minister from the Prime Minister's department).

Although the members of the Board and the committees may also be depositors of the statutory body, these members hold their positions as general board and committee members and not in a personal capacity in respect of their own deposits in the statutory body. Accordingly, the Board and committee members will not be regarded as having any control over the investment decisions or operations of the statutory body in their personal capacity as contributors.

They are also not representatives of the depositors. Therefore, the Board and committees should be seen to be independent of the depositors and their roles are to manage the deposits on behalf of the depositors.

The employees and committees are engaged in the broad administration of the statutory body including investment management. Accordingly, the statutory body conducts its role as a professional fund manager using the combined expertise of its employees together with appointment of specialist external managers, as appropriate.

Further, as mentioned above, the depositors themselves are not able to choose which investments that they can participate in.

Accordingly, the members of the entity (i.e. depositors of the statutory body) do not have the day to day control of the operations of the entity and this fourth requirement is satisfied

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).