Edited version of your written advice

Authorisation Number: 1012716095853

Ruling

Subject: Managed Investment Trust

Question 1

Will the amounts paid by the trustee of ABC Trust to DEF Trust which are subject to managed investment trust withholding tax pursuant to section 840-805 of the Income Tax Assessment Act 1997 (ITAA 1997) represent non-assessable non-exempt (NANE) income of DEF Trust in accordance with section 840-815 of the ITAA 1997?

Answer

No.

Question 2

Will DEF Trust obtain a credit pursuant to section 18-32 of Schedule 1 to the Taxation Administration Act 1953 (TAA) for the tax withheld by the trustee of ABC Trust?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2015

Income year ended 30 June 2016

The scheme commences on:

The income year ended 30 June 2015

Relevant facts and circumstances

1. ABC Trust has been settled as a unit trust.

2. The trustee of ABC Trust will be XYZ Co. XYZ Co is a company constituted under the Corporations Act 2001 (Corporations Act) and is a resident of Australia for tax purposes.

3. XYZ Co is a professional trustee and is a financial services licensee (as defined in section 761A of the Corporations Act). Its Australian Financial Services Licence includes providing financial services to wholesale clients.

4. ABC Trust will be established as an unregistered managed investment scheme for the purposes of the Corporations Act.

5. All of the units in the ABC Trust will be owned by DEF Trust.

6. DEF Trust will be an investment trust constituted by a trust deed.

7. DEF Trust will be listed on a foreign stock exchange.

8. DEF Trust will be constituted under foreign laws and is an entity based in a foreign country. The management and control of DEF Trust will be in that foreign country.

9. DEF Trust is not a resident of Australia for tax purposes.

10. DEF Trust will have more than 50 members after listing.

11. DEF Trust is managed by the trustee of DEF Trust.

12. ABC Trust will not have retail clients and is not required to issue a product disclosure statement under Division 2 of Part 7.9 of the Corporations Act.

13. The purpose of the ABC Trust is to invest in a portfolio of income producing assets in Australia.

14. ABC Trust will invest in assets primarily to derive rental income and does not undertake any other business activity.

15. XYZ Co will provide, and be responsible for, the day to day management of ABC Trust's business, operations and properties and the investment management activities relating to ABC Trust.

16. DEF Trust will endeavour to ensure that for each financial year there is at least one distribution of distributable income and the last distribution covers the period up to the last day of the financial year.

17. DEF Trust will provide a foreign postal address to the trustee of ABC Trust.

18. DEF Trust will not carry on business in Australia at or through a permanent establishment in Australia.

19. At all relevant times, there will not be any non-resident individual who owns 10% or more of the units in ABC Trust directly or indirectly.

20. DEF Trust will be treated as a flow through vehicle in the foreign country.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 840-815

Taxation Administration Act 1953 section 18-32 of Schedule 1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Section 840-815 of the ITAA 1997 states that an amount on which managed investment trust (MIT) withholding tax is payable is NANE income of an entity.

MIT withholding tax is defined in subsection 995-1(1) of the ITAA 1997 as meaning income tax payable under Subdivision 840-M of this Act or Subdivision 840-M of the Income Tax (Transitional Provisions) Act 1997.

Section 840-805 of the ITAA 1997 imposes the liability for managed investment trust withholding tax. Subsection 840-805(1) of the ITAA 1997 states:

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.

Accordingly, an entity will be liable to pay managed investment trust withholding tax if it satisfies the requirements under either subsections 840-805(2), (3) or (4) of the ITAA 1997.

Subsection 840-805(4) of ITAA 1997 states:

(4) This subsection applies to you if:

(a) you are a beneficiary of a trust (that is not a managed investment trust or a custodian) and are presently entitled to a share of the income or capital of the trust; and

(b) all or part of that share (also the fund payment part) is reasonably attributable to a payment that is a fund payment in relation to an income year made by a trust that is a managed investment trust in relation to that year; and

(c) you are not, in respect of that share, a beneficiary in the capacity of a trustee of another trust; and

(d) you are a foreign resident at the time (the entitlement time) when you became presently entitled.

In this case, the ultimate beneficiaries of ABC Trust are the beneficiaries of a trust (DEF Trust) that is not a MIT or a custodian. The ultimate beneficiaries must also be presently entitled to a share of the income or capital of the trust (DEF Trust).

The meaning of the term present entitlement has been considered by the High Court of Australia in a number of cases. The most recent exposition is in the unanimous judgment of the Full High Court in Harmer v Commissioner of Taxation (1991) 173 CLR 264 at 271:

The parties are agreed that the cases establish that a beneficiary is "presently entitled" to a share of the income of a trust estate if, but only if:

(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and

(b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.

In terms of unit trusts, further guidance can be found in Taxation Ruling IT 2680, which states:

Unit trust distributions

27. Unitholders in a unit trust generally have a beneficial interest in the entirety of trust property which is managed on their behalf by the trustee and manager in accordance with the terms of the trust deed (Smith v. Anderson (1880) 15 Ch D 247). The nature of their beneficial interests, including their entitlement to trust income, is also determined by the terms of the trust deed.

28. Trust deeds governing public unit trusts generally provide for the periodic distribution of income, e.g. quarterly or half-yearly. Income distributable to unitholders is calculated after charging expenses against trust income derived in the relevant period.

Unitholders generally become presently entitled to the distributable income at the end of the relevant period even though actual payment is made several days or weeks later.

29. Although a non-resident unitholder becomes liable to pay withholding tax from the time of present entitlement, the obligation on the trustee, or trust manager, to deduct withholding tax arises at the time the distribution payment is made (section 221YL), or is deemed to have been made, for example, when income is reinvested (paragraph 221YK(3)(a)).

DEF Trust will endeavour to ensure that for each financial year there is at least one distribution of distributable income and the last distribution covers the period up to the last day of the financial year. Therefore, it is considered that unitholders of DEF Trust will be presently entitled to a share of the income or capital of DEF Trust as required by paragraph 840-805(4)(a) of the ITAA 1997.

The EM to the Income Tax (Managed Investment Trust Withholding Tax) Bill 2008 states:

An entity is presently entitled to an amount reasonably attributable to a fund payment

1.188 In relation to this first requirement, it is necessary that:

• the beneficiary is presently entitled to a share of the income or capital of the trust; and

• that share is reasonably attributable to a fund payment in relation to an income year of a managed investment trust for that year.

Liability based on present entitlement

1.189 Where the investment is undertaken through a trust that is not a managed investment trust or a custodian, liability to managed investment trust withholding tax is imposed on the basis of present entitlement. This aligns with the approach currently adopted to the imposition of dividend, interest and royalty withholding tax under Division 11A of the ITAA 1936.

Based on the above discussion of the meaning of the term present entitlement, it is considered that the unit holders of DEF Trust will be presently entitled to a share of the income or capital of DEF Trust as required by paragraph 840-805(4)(a) of the ITAA 1997.

Paragraph 840-805(4)(b) of the ITAA 1997

Paragraph 840-805(4)(b) of the ITAA 1997 requires that all or part of that share (also the fund payment part) is reasonably attributable to a payment that is a fund payment in relation to an income year made by a trust that is a MIT in relation to that year.

In order for paragraph 840-805(4)(b) of the ITAA 1997 to be satisfied, ABC Trust must be a managed investment trust.

The definition of a managed investment trust (MIT) is in subsection 12-400(1) of Schedule 1 to the TAA. Relevantly subsection 12-400(1) of Schedule 1 to the TAA provides that:

A trust is a managed investment trust in relation to an income year 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 12-401 - 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.

Paragraph 12-400(1)(a) of Schedule 1 to the TAA

The first requirement for a trust to be a MIT within the meaning of subsection 12-400(1) of Schedule 1 to the TAA is that 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, the trustee of the trust was an Australian resident or the central management and control of the trust was in Australia.

The trustee of ABC Trust is XYZ Co. XYZ Co is a company constituted under the Corporations Act and is a resident of Australia for tax purposes. Thus, this requirement is satisfied.

Paragraph 12-400(1)(b) of Schedule 1 to the TAA

The second requirement for a trust to be a MIT is that it must not be a trust covered by subsection 12-400(2) of Schedule 1 to the TAA.

ABC Trust is a unit trust so paragraph 12-400(2)(a) of Schedule 1 to the TAA applies. It must be established whether ABC Trust will be a trading trust for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Section 102N of the ITAA 1936 provides that a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee carried on a trading business, or 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.

Section 102M of the ITAA 1936 defines trading business as a business that does not consist wholly of eligible investment business. Eligible investment business is also defined in section 102M of the ITAA 1936 to include:

(a) investing in land for the purpose, or primarily for the purpose, of deriving rent; or…

ABC Trust will invest in assets primarily to derive rental income and does not undertake any other business activity. Therefore as ABC Trust's business will consist wholly of eligible investment business, it will not carry on a trading business.

Therefore, ABC Trust will not be a trading trust as defined in section 102N of the ITAA 1936 and paragraph 12-400(1)(b) of Schedule 1 to the TAA is satisfied.

Paragraph 12-400(1)(c) of Schedule 1 to the TAA

This paragraph requires that a substantial proportion of the investment management activities carried out in relation to the trust are carried out in Australia throughout the income year in respect of the Australian assets, taxable Australian property or shares, units or interests traded on an Australian stock exchange that are owned by the trust.

XYZ Co will be responsible for the day to day management of ABC Trust's operations, assets and properties and the investment management activities of the assets of ABC Trust in Australia. Therefore, paragraph 12-400(1)(c) of Schedule 1 to the TAA will be satisfied.

Paragraph 12-400(1)(d) of Schedule 1 to the TAA

Paragraph 12-400(1)(d) of Schedule 1 to the TAA requires that at the time the payment is made (being the first fund payment in relation to the income year made by the trustee of the trust), the trust must be a managed investment scheme (within the meaning of section 9 of the Corporations Act).

ABC Trust is established as an unregistered managed investment scheme for the purposes of the Corporations Act, thus, paragraph 12-400(1)(d) of Schedule 1 to the TAA is satisfied.

Paragraph 12-400(1)(e) of Schedule 1 to the TAA

Paragraph 12-400(1)(e) of Schedule 1 to the TAA requires that ABC Trust be covered by section 12-401 of Schedule 1 to the TAA when the trustee of the trust makes the first fund payment in relation to the income year, or, alternatively, it is registered under section 601EB of the Corporations Act.

Section 12-401 of Schedule 1 to the TAA states:

A trust is covered by this section at a time if, at that time:

(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%.

As the trustee of DEF Trust (which is a wholesale client) will own all of the units in it, ABC Trust will not be required to be registered in accordance with subsection 601ED(2) of the Corporations Act because no product disclosure statement is required to be given under Division 2 of Part 7.9 of the Corporations Act. Further, as there are no retail clients, paragraphs 12-401(b) and (c) of Schedule 1 to the TAA are not relevant.

Hence, paragraph 12-400(1)(e) of Schedule 1 to the TAA will be satisfied as ABC Trust will be covered by section 12-401 of Schedule 1 to the TAA.

Paragraph 12-400(1)(f) of Schedule 1 to the TAA

Paragraph 12-400(1)(f) of Schedule 1 to the TAA requires that ABC Trust satisfy the widely held requirements in subsection 12-402(1) of Schedule 1 to the TAA on the basis that it is a trust that is not registered under section 601EB of the Corporations Act and is covered by section 12-401 of Schedule 1 to the TAA.

In accordance with subsection 12-402(1) of Schedule 1 to the TAA, the trust needs to have at least 25 members. However, subsection 12-402(2) of Schedule 1 to the TAA modifies how the number of members is to be determined for the purposes of subsection 12-402(1) of Schedule 1 to the TAA.

DEF Trust will be covered by paragraph 12-402(3)(e) of Schedule 1 to the TAA as it is an entity 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.

After listing on a foreign stock exchange, DEF Trust will have at least 50 unit holders. Further, the members of DEF Trust do not have day-to-day control over DEF Trust's operations as it is managed by the trustee of DEF Trust. Thus, DEF Trust is an entity that will be covered by subsection 12-402(3) of Schedule 1 to the TAA.

There are no members of ABC Trust that will not be entities covered by subsection 12-402(3) of Schedule 1 to the TAA (as DEF Trust will be the sole member of ABC Trust).

Subparagraph 12-402(2)(c)(i) of Schedule 1 to the TAA then requires the determination of DEF Trust's MIT participation interest in ABC Trust.

A MIT participation interest in a trust is defined in section 12-404 of Schedule 1 to the TAA. DEF Trust has a MIT participation interest in ABC Trust of 100% as it holds 100% of the interests in ABC Trust. Subparagraph 12-402(2)(c)(ii) of Schedule 1 to the TAA then requires the MIT participation interest to be multiplied by 50 and rounded upwards to the nearest whole number. In the case of DEF Trust, this will be 50.

Subparagraph 12-402(2)(c)(iii) of Schedule 1 to the TAA then requires the working out of the total of the results of subparagraph (ii) for all of the entities. In this case, as DEF Trust will be the only entity, the result will be 50.

Paragraph 12-402(2)(d) of Schedule 1 to the TAA then requires the totalling of the results of paragraphs (b) and (c). The total will be 50. ABC Trust is therefore taken to have 50 members.

Since 50 is greater than 25, ABC Trust will satisfy the widely held requirements in subsection 12-402(1) of Schedule 1 to the TAA. Hence, paragraph 12-400(1)(f) of Schedule 1 to the TAA will be satisfied.

Paragraph 12-400(1)(g) of Schedule 1 to the TAA

Paragraph 12-400(1)(g) of Schedule 1 to the TAA requires that the trust satisfies the closely-held restrictions in subsection 12-402B(1) in relation to the income year.

As ABC Trust will be a trust that is mentioned in subparagraph 12-400(1)(e)(i) of Schedule 1 to the TAA, paragraph 12-402B(1)(a) of Schedule 1 to the TAA applies. Paragraph 12-402B(2)(a) of Schedule 1 to the TAA then applies to treat DEF Trust (an entity covered by subsection 12-402(3) of Schedule 1 of the TAA) as not having a MIT participation interest in ABC Trust.

As DEF Trust will be the sole unit holder of ABC Trust, no MIT participation interest is taken into account for the purposes of subsection 12-402B(1) of Schedule 1 to the TAA. Therefore, 10 or fewer persons do not have a total MIT participation interest in ABC Trust of 75% of more. Thus, the situation in paragraph 12-402B(1)(a) of Schedule 1 to the TAA will not exist for ABC Trust.

Paragraph 12-402B(1)(c) of Schedule 1 to the TAA is satisfied if a foreign resident individual has a MIT participation interest in the trust of 10% or more. In the present circumstances, DEF Trust owns all the units in ABC Trust but is not a foreign resident individual. Hence, the situation in paragraph 12-402B(1)(c) of Schedule 1 to the TAA will not exist for ABC Trust.

Hence, ABC Trust satisfies paragraph 12-400(1)(g) of Schedule 1 to the TAA as it satisfies the closely-held restrictions in section 12-402B of Schedule 1 to the TAA.

Paragraph 12-400(1)(h) of Schedule 1 to the TAA

Paragraph 12-400(1)(h) of Schedule 1 to the TAA requires that 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.

XYZ Co will be the trustee of ABC Trust and it operates and manages ABC Trust. XYZ Co holds an Australian financial services licence whose licence covers it providing financial services to wholesale clients. Thus, subparagraph 12-403(1)(a)(i) of Schedule 1 to the TAA is satisfied.

Accordingly, paragraph 12-400(1)(h) of Schedule 1 to the TAA is satisfied.

Therefore, as all of the requirements of subsection 12-400(1) of Schedule 1 to the TAA have been satisfied, ABC Trust is a MIT.

Further, at least some of the share of the income or capital of DEF Trust (the fund payment part) will be reasonably attributable to a fund payment by ABC Trust in relation to an income year, because the trustee of DEF Trust will be the sole unit holder of ABC Trust.

Therefore, paragraph 840-805(4)(b) of the ITAA 1997 which requires that all or part of that share (also the fund payment part) is reasonably attributable to a payment that is a fund payment in relation to an income year made by a trust that is a MIT in relation to that year is satisfied.

Paragraphs 840-805(4)(c) and (d) of the ITAA 1997

If the beneficiaries of DEF Trust are not, in respect of that share, a beneficiary in the capacity of a trustee of another trust, and if they are a foreign resident at the time when they become presently entitled, all of the requirements of subsection 840-805(4) of the ITAA 1997 will be satisfied.

Accordingly, in accordance with subsection 840-805(4) a foreign resident beneficiary of DEF Trust, that is not a beneficiary in the capacity of a trustee of another trust, is liable to pay managed investment trust withholding tax on all or part of the share that is reasonably attributable to a fund payment by ABC Trust.

Conclusion

Section 840-815 of the ITAA 1997 states that an amount on which managed investment trust withholding tax is payable is NANE income of an entity.

In this case, managed investment trust withholding tax is applied to the beneficiaries to whom section 840-805(4) of the ITAA 1997 applies. It is those beneficiaries who receive the benefit of the NANE treatment.

As the liability for managed investment trust withholding tax lies with the ultimate beneficiaries of ABC Trust (being the beneficiaries of DEF Trust who are not the trustee of another trust), and not the trustee of DEF Trust in its own capacity, the NANE income treatment in section 840-815 of the ITAA 1997 does not apply to DEF Trust.

DEF Trust is a trust under Australian law and will therefore be subject to tax under Division 6 of Part III of the ITAA 1936.

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