Edited version of your written advice

Authorisation Number: 1012965074695

Date of advice: 17 February 2016

Ruling

Subject: Marketplace lending fund

Question 1

Will the Responsible Entity be required to identify the Fund as a trust estate, such that Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) will need to be applied by the Responsible Entity as trustee of the Fund?

Answer

Yes

Question 2

Will the Responsible Entity be required to identify each Investor's Account as a trust estate, such that Division 6 of the ITAA 1936 will need to be applied by the Responsible Entity as trustee of each Investor's Account?

Answer

No

Question 3

Will the Responsible Entity be required to lodge a tax return in its capacity as trustee of the Fund on an annual basis?

Answer

Yes

Question 4

Will the Responsible Entity be required to lodge a tax return in its capacity as trustee of an Investor's Account on an annual basis?

Answer

No

Question 5

Will the Responsible Entity be regarded as an entity for the purposes of Division 184 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), in its capacity as trustee of the Fund?

Answer

Yes

Question 6

Will the Responsible Entity be regarded as an entity for the purposes of Division 184 of the GST Act, in its capacity as trustee of an Investor's Account?

Answer

No

Question 7

Will the activities of the Fund, carried on by the Responsible Entity in its capacity as trustee of the Fund, constitute an enterprise for the purposes of section 9-20 of the GST Act?

Answer

Yes

Question 8

Is the Responsible Entity, in its capacity as trustee of the Fund, entitled to register for GST under Division 23 of the GST Act?

Answer

Yes

This ruling applies for the following periods:

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

The scheme commences on:

During the year ending 30 June 2016

Relevant facts and circumstances

The Fund is a registered, non-unitised managed investment scheme and a marketplace lending platform comprising a number of discrete investments in loans made in accordance with the terms set out in the Constitution of the Fund to persons (Borrowers) approved by the trustee and responsible entity of the Fund (referred to as the Responsible Entity in this ruling).

Some of the clauses of the Constitution which are both relevant to the operation of the Fund and the determination of the questions addressed in this ruling are as follows -

(i) The Responsible Entity has agreed to act as the trustee of the Fund and will hold the Fund's assets on trust for the Investors.

(ii) Investment in the Fund by an Investor involves the following three stage process -

• an application to become an Investor being accepted by the Responsible Entity

• from options provided by the Responsible Entity and using the on-line platform made available by the Fund, the Investor selecting available loans, and

• based on the selections made by the Investor, the Responsible Entity allocating a proportionate interest in loans to an Investor's portfolio (that is, those Fund assets referable to an investor).

The allocation mentioned above doesn't create a beneficial interest in any Fund assets, but instead creates a notional reference point in order to determine Investor entitlements to income and capital from the Fund.

(iii) Each Investor constitutes a separate class of interest in the Fund from each other Investor for the purposes of the Corporations Act 2001.

(iv) An investment in the Fund confers on an Investor an undivided beneficial interest in the Fund and does not confer an interest, right or entitlement in any particular Fund assets referable to the Investor's portfolio.

(v) Accordingly, Investors must not: interfere with powers, rights etc. of the Responsible Entity under the Constitution; exercise rights, powers or privileges in respect of the Fund assets or lodge caveats or other notices affecting or encumbering Fund assets; require any Fund assets to be transferred to that Investor; or give any directions to the Responsible Entity that would limit any exercise of any discretion expressly conferred on the Responsible Entity.

(vi) An Investor's Account is maintained by the Responsible Entity in respect of each Investor, the balance of which at a particular time represents the value of the Investor's portfolio at that time. Essentially, credits and debits are used to record cash movements that are referable to the notional allocations of loans to the Investor's Account. In particular -

• a credit will occur to the Investor's Account for all money paid and retained in the Fund by the Investor; all money that has been received in respect of the Investor; money applied to make loans that are to be (notionally) referable to the Investor; and the Investor's income entitlements, and

• a debit will occur to the Investor's Account for all money paid out of the Fund to the Investor; all money paid in to settle transactions in respect of the Investor; the payment of fees associated with the Investor's portfolio; any amounts received by the Fund from disposing of loans referable to the Investor's portfolio; and losses of capital referable to the Investor's portfolio.

(vii) The Responsible Entity's powers include powers with respect to all of the Fund assets. No authorisations are required by the Responsible Entity when exercising any of these powers. The Responsible Entity is allowed absolute discretion in deciding how to exercise such powers.

(viii) For income tax purposes, the Constitution requires the Responsible Entity to determine Income, being an amount calculated in the same manner as net income is calculated under section 95 of the ITAA 1936.

(ix) An Investor's income entitlement is that proportion of Income that is attributable to an Investor's portfolio or the Investor's Account. The Responsible Entity is required to calculate and determine the income entitlement of each Investor at the end of each year. Accordingly, the Investor's entitlement to income of the Fund is determined to be the proportion of the total income of the Fund that is referable to an Investor's Account.

(x) Investors are taken to be presently entitled and absolutely entitled to their income entitlement.

From a financial services regulatory perspective, each Investor's Account is not treated as a sub-scheme and does not require registration as a separate managed investment scheme.

Relevant legislative provisions

Corporations Act 2001

Corporations Act 2001 subsection 601FC(2)

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 161

Income Tax Assessment Act 1936 subsection 161(1)

Income Tax Assessment Act 1997 section 960-100

Income Tax Assessment Act 1997 subsection 960-100(2)

Income Tax Assessment Act 1997 subsection 960-100(4)

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-20(1)(a)

A New Tax System (Goods and Services Tax) Act 1999 Division 23

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 Division 184

A New Tax System (Goods and Services Tax) Act 1999 section 184-1

A New Tax System (Goods and Services Tax) Act 1999 paragraph 184-1(1)(g)

A New Tax System (Goods and Services Tax) Act 1999 subsection 184-1(2)

Reasons for decision

Question 1

Summary

The Responsible Entity will need to identify the Fund as a trust estate such that Division 6 of the ITAA 1936 will need to be applied by the Responsible Entity as trustee of the Fund.

Detailed reasoning

One of the more widely referred to definitions of a trust is that of Underhill (Law of Trusts and Trustees, 12th edition, p 3) as follows:

A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust) of whom he may himself be one, and any of whom may enforce the obligation.

The essential elements of a trust (as per the 4th edition of Jacobs' Law of Trusts in Australia) therefore involve: (a) an intention to create a trust; (b) a trustee holding a legal or equitable interest in trust property; (c) trust property that is property capable of being held on trust; (d) one or more beneficiaries other than the trustee; and (e) a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.

For income tax purposes a trust is identified as an 'entity' in section 960-100 of the Income Tax Assessment Act 1997 (ITAA 1997). However, because a right or obligation cannot be conferred or imposed on an entity that is not a legal person, the trustee of a trust is taken to be the relevant entity consisting of the trustee (subsection 960-100(2) of the ITAA 1997). Where a trust is identified for income tax purposes, any reference to an 'entity' is taken to be a reference to the trustee in its capacity as trustee of the trust (subsection 960-100(4) of the ITAA 1997).

The Fund will be a trust for income tax purposes. That is, there is an express relationship via the Constitution whereby trust property is to be held by the Responsible Entity (as trustee) for the benefit of the Investors, and the trustee has fiduciary and statutory obligations to the Investors.

This is consistent with the managed investment scheme provisions under the Corporations Act 2001. That is, from a Corporations Law perspective, the Fund is a single registered managed investment scheme. There is a single trustee of this scheme, whereby all of the scheme property is held for the collective benefit of all beneficiaries (Investors) of the scheme. This reflects the statutory trust relationship identified and outlined in subsection 601FC(2) of the Corporations Act 2001. It is inherent in the nature of a managed investment scheme that the Investors are pooling their investments with other Investors and that Investors do not have 'day-to-day' control over the Fund assets.

A similar analysis applies under the general law trust concepts. Accordingly, from a general trust law and managed investment scheme perspective, there is a single trust relationship, being the Fund as a whole.

The identification of a trust does not of itself attract the trust taxation provisions of Division 6 of the ITAA 1936. As outlined in the High Court decision in Commissioner of Taxation v Bamford [2010] HCA 10, Division 6 of the ITAA 1936 does not require the identification of a trust as an entity (paragraphs 19 to 21), but instead requires the identification of the trust estate of which there is a beneficiary (paragraph 38). It also requires the identification of a trustee in respect of the trust estate (paragraph 27) and income of the trust estate (paragraph 26).

Consistent with this last point, the Full Federal Court decision in Leighton v Commissioner of Taxation [2011] FCAFC 96 outlined that one must identify the income that is derived by the trust estate from the corpus of that trust estate.

9. … Thus, to be liable as a "trustee", Mr Leighton must stand in some relation to a proprietary right by virtue of which net income of the trust estate arises.

10. The requirement that the relationship be with the net income of the trust estate and not, for example, with what is correctly to be characterised as the corpus of the trust estate is no less important than that the taxpayer be a "trustee". In the example just given, only the net income produced by that corpus could constitute the net income of the trust estate.

On examining the elements of Division 6 of the ITAA 1936, all of the Fund assets are held collectively as the corpus of a single trust estate for the benefit of all Investors (as beneficiaries). Income is generated by the trust estate on such assets for the benefit of all Investors collectively and is only distributed to Investors (as an entitlement) at the end of the financial year. Once income is determined at the Fund level, it is then applied to each Investor and each Investor's Account.

Therefore the Fund, as a single trust, derives 'income' from the Fund assets and no Investor receives an entitlement to such income until the end of the financial year. At that point in time, an income entitlement for an Investor is then applied to their Investor's Account based on Fund assets referable to that account. The income entitlement is that of the Investor and thus the allocation of income to the Investor's Account would simply be the application of such income (or alternatively the application of capital of the Investor).

Question 2

Summary

The Responsible Entity will not need to identify each Investor's Account as a trust estate, and Division 6 of the ITAA 1936 will not need to be applied by the Responsible Entity as trustee of each Investor's Account.

Detailed reasoning

Having contemplated and applied the essential elements of a trust against the Investor's Accounts maintained by the Responsible Entity in accordance with the Constitution, it is considered that the Investor's Accounts will not constitute trusts for income tax purposes for the following reasons:

• there is no intention of the various parties to create a separate trust relationship as between the Responsible Entity (as trustee) and each Investor of the Fund

• the Responsible Entity (as trustee) will hold the legal interest in the Fund assets collectively for the benefit of all Investors

• no Investor will have an equitable interest in any single Fund asset and will have no rights or powers with respect to such assets

• an Investor will have an undivided interest in the whole Fund, and

• the Responsible Entity (as trustee) will retain all powers (absolutely) with respect to dealing with the Fund assets.

On the issue of identifying a relevant trust estate, the Full High Court judgment of the majority in Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 at 452 noted as follows:

The appellant's contention is that the income payable to the respondent's wife was not, as the majority in the Federal Court held, "the net income of a trust estate" within the meaning of sec. 95 of the Act. The argument is based very largely on the proposition, founded on the judgment of Kitto J. in Stewart Dawson Holdings Pty. Ltd. v. F.C. of T. (1965) 39 A.L.J.R. 300, at p. 301, that income derived by a trustee from his own property or by means of his personal exertion, "income with respect to which a trust arises at the moment of derivation", does not answer the statutory description. Kitto J. was making the point that when a person establishes a trust of his future income simpliciter, the income when it is derived is the subject matter or corpus of the trust, not the fruit of it. To use the terminology of sec. 95, it is because the income is the "trust estate" that it cannot be "the net income of" that trust estate. His Honour's remarks do not touch the case where an immediate trust is established of a proprietary right which yields or earns future income. Then the income is accurately described as income of a trust estate. For reasons which we have already given, this is the situation which obtains here.

Therefore, even if an Investor's Account could be determined to be a trust, the income generated by the Fund could not be said to be income derived by the Investor's Accounts. The allocation of the amounts after derivation by Investors by virtue of their present entitlement is an allocation of their capital and not an amount of income derived by the trust estate in the Investor's Account to which Division 6 of the ITAA 1936 may be applied.

Question 3

Summary

The Responsibility Entity will be required to lodge a tax return as trustee of the Fund on an annual basis as required under section 161 and related provisions of the ITAA 1936.

Detailed reasoning

Subsection 161(1) of the ITAA 1936 provides:

Every person must, if required by the Commissioner by notice published in the Gazette, give to the Commissioner a return for a year of income within the period specified in the notice.

In accordance with section 161 and related provisions of the ITAA 1936 the Commissioner requires every person described in Tables A, B, C, D, E, F, G, H, I, J, K or L of the current lodgment legislative instrument issue by the Commissioner to give the Australian Taxation Office a return of income for the year. The current legislative instrument regarding lodgment of returns (TPAL 2015/2) lists the lodgment obligations of different entities. Table L relevantly states:

Where the trustee of a trust estate has derived income (including capital gains) and the trustee is not covered by Tables M, N, O or Q, a trust return is required to be lodged by the trustee resident in Australia. If there is no trustee resident in Australia, the return is to be lodged by the trust's public officer or, where no public officer is appointed, by the trust's agent in Australia.

The Responsible Entity is the trustee of the Fund pursuant to the Constitution, will derive income, and is not covered by Tables M, N, O or Q of the current legislative instrument. As trustee, the Responsible Entity will therefore be responsible for the lodgement of an income tax return in accordance with section 161 and related provisions of the ITAA 1936 in respect of the Fund on an annual basis.

Question 4

Summary

There will not be a requirement to lodge a tax return in respect of an Investor's Account.

Detailed reasoning

As an Investor's Account will not constitute a trust for income tax purposes and/or will not attract the operation of the trust taxation provisions contained in Division 6 of the ITAA 1936 (for the reasons outlined in response to question 2 of this ruling), a separate income tax return will not be required to be lodged in accordance with section 161 and related provisions of the ITAA 1936 in respect of any Investor's Account maintained by the Responsible Entity for an Investor.

Question 5

Summary

In its capacity as trustee of the Fund, the Responsible Entity will be regarded as an 'entity' for the purposes of Division 184 of the GST Act.

Detailed reasoning

An 'entity' for the purposes of the GST Act is defined by section 184-1 of that Act and includes (at paragraph (1)(g)) a 'trust'. Subsection 184-1(2) of the GST Act clarifies that the trustee of a trust, acting in that capacity, is taken to be standing as the trust. This is explained further at paragraphs 71 to 73 of Miscellaneous Taxation Ruling MT 2006/1 as follows:

71. Trusts and superannuation funds are given statutory status as entities in themselves under subsection 184-1(1) of the GST Act. Some superannuation funds are trusts. At law, a trust is not a legal person. It is a collection of rights, duties and powers arising from the relationship to property held by the trustee for the benefit of the beneficiaries. The trust itself cannot be a party to legal proceedings nor have other obligations placed upon it. The trustee is the appropriate party. This is recognised in subsection 184-1(2) which provides that the trustee in that capacity is taken to be the trust entity. Consequently a trust entity is identified both by the trust relationship itself (the trust) and by reference to one of the necessary legal persons to that relationship (the trustee).

72. The Act does not create two separate entities - the trust and trustee - but rather the relevant entity is the trust, with the trustee standing as that entity if legal personality is required. A consequence of this is that there will only ever be one ABN registration for the trust and only one ABN issued irrespective of the number of trustees for the trust.

73. As stated, rights and obligations cannot be placed directly upon a trust. Therefore, the trustee is the legal person who may create rights and have obligations in relation to the trust property. The trustee is the legal person who is taken to be the trust entity and holds the ABN for the trust or superannuation fund …

In accordance with the Constitution, the Responsible Entity holds Fund assets on trust for the benefit of the Investors. As explained in paragraph 83 of MT 2006/1, the Responsible Entity, in its capacity as trustee of the managed investment scheme, is the entity for GST purposes:

83. Similarly, for managed investment schemes registered under the Corporations Act 2001, it is accepted that the public company (already entitled to an ABN) is entitled to hold another ABN as the responsible entity and trustee provided that the activities the public company does in that capacity amount to an enterprise.

Question 6

Summary

The Responsible Entity will not be regarded as an 'entity' for the purposes of Division 184 of the GST Act in its capacity as the trustee of an Investor's Account.

Detailed reasoning

For the reasons set out in response to question 2 of this ruling, the Investor's Accounts maintained by the Responsible Entity in accordance with the Constitution do not constitute trusts in their own right. As such, an Investor's Account will not constitute an entity pursuant to paragraph 184-1(1)(g) (or any other provision) of the GST Act, nor will the Responsible Entity constitute an entity in its capacity as trustee of an Investor's Account pursuant to the operation of subsection 184-1(2) of the GST Act.

Question 7

Summary

The activities of the Fund, carried on by the Responsible Entity in its capacity as trustee of the Fund, will constitute an enterprise under section 9-20 of the GST Act.

Detailed reasoning

The term 'enterprise' is defined by paragraph 9-20(1)(a) of the GST Act to include an activity, or series of activities, done in the form of a business.

MT 2006/1 explains (at paragraph 170B) that the words 'in the form of' have the effect of extending the meaning of 'enterprise' beyond entities carrying on a business. As per paragraph 177 of MT 2006/1, to determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. Some of the main indicators of a business, as discussed in Taxation Ruling TR 97/11, are listed in paragraph 178 of MT 2006/1 as follows:

• a significant commercial activity;

• a purpose and intention of the taxpayer to engage in commercial activity;

• an intention to make a profit from the activity;

• the activity is or will be profitable;

• the recurrent or regular nature of the activity;

• the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

• activity is systematic, organised and carried on in a businesslike manner and records are kept;

• the activities are of a reasonable size and scale;

• a business plan exists;

• commercial sales of product; and

• the entity has relevant knowledge or skill.

The series of activities to be done by the Responsible Entity as trustee of the Fund in the course of making loans on commercial terms to Borrowers (for the benefit of Investors) demonstrates the main indicia of a business (as listed above). The Responsible Entity, in its capacity as trustee for the Fund will therefore be carrying on an enterprise pursuant to section 9-20 of the GST Act.

Question 8

Summary

The Responsible Entity, in its capacity as trustee of the Fund, is entitled to register for GST under Division 23 of the GST Act.

Detailed reasoning

Any entity that is carrying on an enterprise is entitled to be registered for GST under section 23-10 of the GST Act.

As the Responsible Entity, in its capacity as trustee for the Fund is carrying on an enterprise (as confirmed in response to question 7 of this ruling), it is entitled to be registered for GST under section 23-10 of the GST Act.

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