Edited version of your written advice

Authorisation Number: 1013117357300

Date of advice: 31 October 2016

Ruling

Subject: IMR Concession

Question 1

Is Entity A an 'IMR widely held entity' under subsection 842-230(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on:

1 July 2011

Relevant facts and circumstances

1. Entity A is a foreign pooled investment trust created by an act of a foreign legislature with a mandate to accumulate assets through investment earnings to reduce the foreign State's unfunded pension liability, and to assist participating retirement schemes in meeting their future, pension obligations.

2. Entity A was created and organised by a foreign State and is maintained at all times as a domestic trust in a foreign State. Entity A and its participating funds (the constituent funds) are foreign residents for taxation purposes.

3. Entity A is managed by a Board (The Board). The Board employs professional staff, headed by an Executive Director, to administer Entity A's day-to-day operations. The central management and control of Entity A and its constituent funds is carried on outside Australia by entities that are not Australian residents for taxation purposes.

4. The Board's Operating Trust Agreement (the operating trust agreement) outlines that Entity A is established, operated and maintained exclusively for the management, investment and reinvestment of moneys or property of its constituent funds.

5. Entity A is exempt from income tax in a foreign State. Participation in Entity A is expressly limited to funds which are exempt from income tax in the foreign State.

6. Through paragraph 842-207(1)(b) of the Income Tax (Transitional Provisions) Act 1997, Entity A has elected to apply the IMR concession available under section 842-215 of the ITAA 1997 from 1 July 2011.

7. There are a total of xx constituent funds in Entity A. The constituent funds hold all of the direct and indirect participation interests in Entity A. No constituent fund has an interest in another constituent fund.

8. Entity A's constituent funds are indefinitely continuing funds.

9. The interests that these constituent funds have in Entity A are as set out in the submission by Entity A. The percentages in this submission represent each constituent funds right to both the income and corpus of Entity A.

10. All constituent funds other than the Entity B (Entity B) and Entity C (Entity C) have individually a right to less than 20% of the corpus or income of Entity A.

11. Entity B has a right to 40% of the corpus and income of Entity A. Entity B has more than 50 members. The benefits guide of Entity B forms part of the scheme to which this Ruling applies.

12. Entity C has a right to 40% of the corpus and income of Entity A. Entity C has more than 50 members. The benefits guide of Entity C forms part of the scheme to which this Ruling applies

13. All of the constituent funds are established by law in the foreign State. The operating rules of each of the constituent funds, including rules about membership and benefits, are regulated by laws in the foreign State.

14. The operating trust agreement prohibits that part of Entity A's corpus or income which equitably belongs to any particular constituent fund from being used for or diverted to any purposes other than for the exclusive benefit of the relevant members or their beneficiaries. The exclusive benefit requirement is set out in the operating trust agreement and the governing legislation.

15. The operating trust agreement prohibits assignment by a constituent fund of any part of its equity or interest in the group trust. Constituent funds are permitted by statute only to elect to transfer moneys to Entity A, allocate their deposits among the available investment accounts or withdraw them.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 275-20

Income Tax Assessment Act 1997 section 842-215

Income Tax Assessment Act 1997 section 842-230

Income Tax Assessment Act 1997 section 842-235

Income Tax (Transitional Provisions) Act 1997 paragraph 842-207(1)(b)

Reasons for decision

Subsection 842-230(1) of the ITAA 1997 provides the definition of an IMR widely held entity:

An IMR widely held entity is any of the following:

(aa) a *widely held entity;

(a) an entity that is covered by paragraph 275-20(4)(a), (b), (c), (d), (e), (g), (h) or (i);

(b) (Repealed by No 53 of 2016)

(c) an entity of a kind specified in regulations made for the purposes of this paragraph.

Definition of widely held entity

Paragraph 842-230(1)(aa) of the ITAA 1997 is relevant to Entity A. It provides that an entity that is considered a 'widely held entity' is also an 'IMR widely held entity'.

Subsection 995-1(1) of the ITAA 1997 provides that the term 'widely held entity' has the meaning given by subsection 842-230(2) of the ITAA 1997.

Subsection 842-230(2) of the ITAA 1997 provides:

An entity is a widely held entity if:

(a)  either:

(i)  no other entity has a *total participation interest in the entity of 20% or more (see section 842-235); or

(ii)  there are not 5 or fewer other entities the sum of whose total participation interests in the entity is 50% or more (see section 842-235); or

….

Definition of total participation interest

Subsection 995-1(1) of the ITAA 1997 provides that the term 'total participation interest' has the meaning given by section 960-180 of the ITAA 1997.

However, it is noted that for the purposes of subsection 842-230(2) of the ITAA 1997, an entity's 'total participation interest' in another entity is ultimately determined by the operation of section 842-235 of the ITAA 1997.

Section 960-180 of the ITAA 1997 provides that

An entity's total participation interest at a particular time in another entity is the sum of:

(a) the entity's *direct participation interest in the other entity at that time; and

(b) the entity's *indirect participation interest in the other entity at that time.

Definition of direct participation interest and indirect participation interest

Direct Participation Interest

Subsection 995-1(1) of the ITAA 1997 provides that the term 'direct participation interest' has the meaning given by section 960-190 of the ITAA 1997.

Section 960-190 of the ITAA 1997 provides that the test for direct participation interest depends on the type of entity being tested. For the purposes of Entity A and its constituent funds, the relevant test is for trusts. Subsection 960-190(1) of the ITAA 1997 provides that the test for trusts is:

the direct control interest (within the meaning of section 351 of the Income Tax Assessment Act 1936) that the first entity holds in the other entity

Subsection 351(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that:

(1)  An entity that is a beneficiary in a trust holds a direct control interest in the trust at a particular time equal to:

(a) the percentage of the income of the trust represented by the share of the income to which the beneficiary is entitled, or that the beneficiary is entitled to acquire; or

(b) the percentage of the corpus of the trust represented by the share of the corpus to which the beneficiary is entitled, or that the beneficiary is entitled to acquire;

or, if those percentages differ, the greater of those percentages.

Under the test set out in subsection 351(1) of the ITAA 1936, all constituent funds have a direct participation interest in Entity A. All constituent funds other than Entity B and Entity C have a right to less than 20% of the percentage of income of the trust, and a right to less 20% of the corpus of the trust. Individually these funds therefore have a direct participation interest of less than 20% in Entity A.

Entity B has a right to 40% of the income of the trust and 40% of the corpus of the trust. It therefore has a direct participation interest of 40% in Entity A.

Entity C has a right to 40% of the income of the trust and 40% of the corpus of the trust. It therefore has a direct participation interest of 40% in Entity A.

Indirect Participation Interests

Subsection 995-1(1) of the ITAA 1997 provides that the term 'indirect participation interest' has the meaning given by section 960-185 of the ITAA 1997

Section 960-185 of the ITAA 1997 sets out the following steps for calculating the indirect participation interest:

(1) Work out the indirect participation interest that an entity (the holding entity) holds at a particular time in another entity (the test entity) by multiplying:

(a) the holding entity's *direct participation interest (if any) in another entity (the intermediate entity) at that time;

by:

(b) the sum of:

(i) the intermediate entity's direct participation interest (if any) in the test entity at that time; and

(ii) the intermediate entity's indirect participation interest (if any) in the test entity at that time (as worked out under one or more other applications of this section).

The constituent funds do not hold any interest in any other constituent funds and the constituent funds are the only entities with an interest in Entity A. The indirect participation interest of each of the constituent funds in Entity A is therefore zero.

Calculating the total participation interest

As mentioned above, section 842-235 of the ITAA 1997 sets out the rules for determining 'total participation interest' for the purposes of the widely held entity test in subsection 842-230(2) of the ITAA 1997.

Relevant to Entity A's circumstances, subsection 842-235(6) of the ITAA 1997 provides that certain entities will be treated as having a total participation interest of nil in Entity A (the test entity):

If an entity that has a *direct participation interest or *indirect participation interest in the test entity is an entity covered by:

(a) paragraph 842-230(1)(a), (b) or (c); or

(b) paragraph 275-20(4)(f) (foreign collective investment vehicles with a wide membership);

treat the entity's *total participation interest in the test entity as nil.

Entities covered by paragraph 842-230(1)(a) of the ITAA 1997 are entities covered by paragraphs 275-20(4)(a), (b), (c), (d), (e), (g), (h) or (i) of the ITAA 1997.

Relevant to Entity A's circumstances is paragraph 275-20(4)(c), which covers the following entities;

a *complying superannuation fund, a *complying approved deposit fund or a *foreign superannuation fund, being a fund that has at least 50 *members;

Therefore if any of the constituent funds are foreign superannuation funds with at least 50 members, they would be entities covered by paragraph 275-20(4)(c) of the ITAA 1997. This would mean that under subsection 842-235(6) of the ITAA 1997, their total participation interest in Entity A will be deemed to be nil.

If all entities with a total participating interest in Entity A over 20% have their total participation interest in Entity A reduced to nil by operation of subsection 842-235(6) of the ITAA 1997 then there will be no entity with a total participation interest in Entity A over 20%. This will mean that Entity A satisfies the condition set out in subparagraph 842-230(2)(a)(i) of the ITAA 1997.

As noted above, Entity B and Entity C are the only constituent funds who have a total participation interest in Entity A of more than 20%. Therefore it is only necessary to consider whether these two entities are foreign superannuation funds.

Definition of Foreign Superannuation Fund

A foreign superannuation fund is defined by subsection 995-1(1) of the ITAA 1997 as:

(a) a *superannuation fund is a foreign superannuation fund at a time if the fund is not an *Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

In order for a constituent fund to be considered a foreign superannuation fund, it needs to meet the criteria of:

(a) being a 'superannuation fund', and

(b) not be an 'Australian superannuation fund'.

Do Entity B and Entity C meet the definition of a superannuation fund under the SIS Act?

The term 'superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as:

superannuation fund has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993

Section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) defines a 'superannuation fund' as:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme

Entity B and Entity C, are indefinitely continuing funds. They therefore meet the requirement set out in subparagraph (a)(i) of the definition of 'superannuation fund' in subsection 10(1) of the SIS Act.

The Benefits Guides of Entity B and Entity C show they have the characteristics of a superannuation fund. They therefore meet the requirements set out in subparagraph (a)(ii) of the definition of 'superannuation fund' in subsection 10(1) of the SIS Act.

Entity B and Entity C meet the conditions set out in paragraph (a) of the definition of 'superannuation fund' in subsection 10(1) of the SIS Act. Each fund is therefore a 'superannuation fund'.

Do Entity B and Entity C meet the definition of an 'Australian superannuation fund'?

The term 'Australian superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 295-95 of the ITAA 1997.

Section 295-95 of the ITAA 1997 sets out the conditions under which a superannuation fund is considered to be an 'Australian superannuation fund'. One of these conditions is that 'the central management and control of the fund is ordinarily in Australia'. This is not the case for any of Entity A's constituent funds. All constituent funds therefore satisfy condition (b) of the definition of a foreign superannuation fund as defined by subsection 995-1(1) of the ITAA 1997.

As Entity B and Entity C are both a 'superannuation fund' without being an 'Australian superannuation fund' they both meet the definition of a 'foreign superannuation fund' under subsection 995-1(1) of the ITAA 1997.

Are Entity B and Entity C entities covered by paragraph 275-20(4)(c) of the ITAA 1997?

In order for Entity B and Entity C to be entities covered by paragraph 275-20(4)(c) of the ITAA 1997 they must be a 'foreign superannuation fund' with at least 50 members.

Members is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning set out in section 960-130 of the ITAA 1997.

Section 960-130 provides a table that sets out what constitutes a member for various entities. As both Entity B and Entity C, are trusts, Item 3 of the table is relevant. Item 3 sets out that for a trust; any beneficiary, unitholder or object of the trust is considered a member.

Entity B and Entity C both have over 50 beneficiaries. As per section 960-130 of the ITAA 1997 these beneficiaries constitute members for the purposes of paragraph 275-20(4)(c) of the ITAA97.

Entity B and Entity C are therefore entities covered by paragraph 275-20(4)(c) of the ITAA 1997. As such, they are both entities covered by paragraph 842-230(1)(a) of the ITAA 1997.

The operation of subsection 842-235(6) of the ITAA 1997 therefore treats the total participating interest that both Entity B and Entity C have in Entity A to be nil.

Conclusion

Entity B and Entity C are the only entities with a direct participating interest in Entity A over 20%. No entity has an indirect participating interest in Entity A. As Entity B and Entity C have a nil total participating interest by operation of subsection 842-235(6) of the ITAA 1997, no entity has a total participating interest in Entity A of 20% or more.

Entity A therefore meets the test set out in subparagraph 842-230(2)(a)(i) of the ITAA 1997 of having no entity with a total participation interest of 20% or more.

As Entity A meets the test set out in subparagraph 842-230(2)(a)(i) of the ITAA 1997, Entity A meets the definition of a 'widely held entity' in paragraph 842-230(1)(aa) and is therefore an 'IMR widely held entity' under subsection 842-230(1) of the ITAA 1997.

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).