Edited version of private advice

Authorisation Number: 1051563327372

Date of advice: 25 September 2019

Ruling

Subject: Eligibility of Sub Trust A as a withholding MIT for the purposes of Subdivision 12-H in Schedule 1 to the TAA 1953

Question

Will Sub Trust A qualify as a managed investment trust ('MIT') under Division 275 of the Income Tax Assessment Act 1997 (ITAA 1997) and a withholding MIT for the purposes of Subdivision 12-H in Schedule 1 to the Taxation Administration Act (TAA 1953)?

Answer

Yes.

Relevant facts and circumstances

The fund

The fund is established by an Australian independent real estate manager that provides Australian investment opportunities to Australian and international wholesale and institutional investors. The manager holds an Australian Financial Services Licence. It has a disciplined investment strategy, criteria, governance framework and risk parameters.

The fund will comprise two distinct sub-trusts - a passive arm and a trading arm.

The fund will be a 10 year fund with the possibility of extension where approved by investors. Its objective is to invest in or create a portfolio of quality income producing real estate assets. There will be a 3 year investment period from final close. The Fund will be targeting a certain overall internal rate of return ('IRR') or gross equity multiple ('GEM').

The fund will be an unlisted wholesale fund domiciled in Australia and not offered to the public.

Fund investors

Investment in the fund will be sought from the manager's existing investor base and select new investors. The new investors will be privately, specifically and directly approached by the manager as Investment Manager to scope for their interest in participating in the fund.

The expected unitholder composition of Head Trust comprises resident companies (related to the manager), resident complying superannuation funds, resident trusts, non-resident companies, non-resident trusts and non-resident limited partnerships.

The location of non-resident investors is expected to be various foreign countries. At the time of application, there were no discussions with other potential investors which are not resident in an Exchange of Information (EoI) country. Further, it is anticipated that, other than Australian investors, only non-resident investors resident in EoI countries will invest, directly or indirectly, into Head Trust.

The investors in Head Trust will hold 'units' in the trust which represent a proportionate share, measured by reference to a fixed standard, of the income and property of the trust.

Feeder Fund

Non-resident investors have the option to indirectly invest in the fund through a 'Feeder Fund'. The Feeder Fund will take the form of either a company or a foreign corporate limited partnership incorporated or formed in a foreign jurisdiction that is an EoI country.

Where it is a limited partnership, it will be formed in a foreign jurisdiction, under which, by operation of the applicable law (and not by contract or deed), liability of at least one of the partners is limited.

The voting power of the Feeder Fund will not be controlled by Australian resident shareholders.

The purpose of the Feeder Fund is to eliminate the compliance burden for non-resident investors. As such, it will be an administrative business that undertakes administrative functions including, record keeping, and collecting and distributing funds from/to non-resident investors and returns from Head Trust. It will also manage tax compliance, legal compliance, notifications of distribution notices, pay and receive funds etc. The functions will be outsourced to a local third party service provider in the jurisdiction in which it was formed. The service provider will appoint directors, and perform all functions required to be undertaken by the Feeder Fund.

The high level decisions of the Feeder Fund will be made by the directors of the company (most of whom will not be Australian residents), and such decisions will not be exercised in Australia. To the extent that any directors of the Feeder Fund attend meetings from Australia (e.g. by phone or video conference), a majority of the directors of the Feeder Fund will not be attending from Australia. The directors of the Feeder Fund will not merely rubber stamp or mechanically follow decisions of the directors who will attend meetings from Australia, nor those of the Investment Manager or any other person or body in Australia, but will make decisions in the best interests of the Feeder Fund.

If the Feeder Fund takes the form of a corporate limited partnership, the general partner would generally take part in the management of the business of the partnership, however the general partner will not be an Australian resident and will not undertake any decision making in Australia.

Given that the shareholders of the Feeder Fund will be non-residents, it is unlikely that the shareholders' meetings will be held in Australia. The meetings of directors will mainly occur outside of Australia and the associated documents will be recorded and kept outside of Australia.

Declarations of dividends and payments of dividends will occur outside of Australia. The registered office, the company's books and register of shareholders will be kept outside of Australia.

Fund structure

The fund will comprise a head unit trust (Head Trust), which will hold approximately 99% of the units in Sub Trust A and Sub Trust B unit trusts. The remaining interests (approximately 1%) will be held by a special purpose vehicle ('SPV'), which will be a company for the purposes of this ruling. SPV will hold the units at the Sub Trust A and Sub Trust B level as performance fees will be paid to the manager at the head trust level.

The manager will be the Investment Manager for Head Trust, Sub Trust A and Sub Trust B. It will also be the trustee of Head Trust.

The trustees for Sub Trust A, Sub Trust B and all other sub-trusts will be either a special purpose trustee company or a third party trustee. Sub Trust B will have a different trustee to that of Sub Trust A and each of its sister trusts. There will be 2 directors for each trustee, with only one common director between the trustee for Sub Trust B and the trustee/s for Sub Trust A and each of its sister trusts.

The Investment Memorandum for the Fund will clearly state and differentiate the different strategies of Sub Trust A and Sub Trust B.

There will be no arrangements of any kind between Sub Trust A and Sub Trust B, including no loans, leasing or licensing arrangements between the two entities. Sub Trust A will not rely on, nor influence or impact the financial position of Sub Trust and vice versa.

The funds invested are not intended to be recycled and reinvested, in particular with regard to capital invested in Sub Trust A.

Sub Trust A and its sister trusts

Sub Trust A will hold investments of a 'passive' kind and on a long term basis. It will only conduct the business of investing in commercial, industrial and retail assets for the purpose, or primarily for the purpose, of deriving rent.

Multiple trusts may be established in order to hold the investments through wholly (or partly) owned sub-trusts (i.e. Sub Trust A and its 'sister trusts'). There may be sub-trusts that Sub Trust A owns jointly with third parties not related to the fund.

Specifically, Sub Trust A and its sister trusts will seek to acquire properties with the purpose of continuing to lease them, or improve the rental stream through value creation strategies, including leasing vacant or expiring tenancies, lease repositioning, capital expenditure including refurbishment, asset expansion and/or rehabilitation to maximise rental income over the holding period.

Key to this strategy is the obtaining of favourable prices for the assets, and proactively managing leasing strategies once the assets are acquired.

Prior to the acquisition of any asset, a 'Final Investment Proposal' ('FIP') will be issued by the Investment Manager to the Investment Committee for consideration. The FIP will include:

·        Details of the asset to be acquired;

·        The purpose of the acquisition;

·        What value-add strategies (if any) are to be implemented; and

·        The asset's alignment with the investment strategy of Sub Trust A, including intended holding period, projected rental yields etc.

Accompanying the FIP will be a detailed forecast financial model prepared for each asset proposed to be acquired.

Depending on the time of acquisition of the asset within the Fund's lifecycle, the average expected holding period of the assets will be at least six years, which may expand where an extension of the Fund's life occurs beyond the initial 10 year fund life.

Tax advice and sign-off will also be required to confirm whether an asset is eligible/suitable for Sub Trust A. Where it is unclear, a ruling with the ATO will be sought.

Sub Trust B

Sub Trust B will carry on a trading business.

Prior to the acquisition of any asset, a FIP will be issued by the Investment Manager to the Investment Committee for consideration. The FIP will outline details of the asset to be acquired, the purpose for doing so, the value-add strategies (if any) to be implemented and the asset's alignment with the investment strategy of Sub Trust B.

The assets Sub Trust B will invest in will range from commercial, retail and industrial assets in respect of which the anticipated capital gain component will exceed expected rental income to buying, renting and ultimately selling distressed completed residential housing.

Investment Management Services

The manager will enter into separate Investment Management Agreements with Head Trust, Sub Trust A and Sub Trust B. The activities the Investment Manager will be performing as part of their investment management services will be on an entity-by-entity basis. That is, the activities will reflect, distinguish and clearly delineate between the separate investment strategies (as will be outlined in the Investment Memorandum). The Investment Manager will perform their duty in respect of Sub Trust A (and its sister trusts) separately and independently from its duties to Sub Trust B, and within the parameters set by the Investment Management Agreement with each trust.

Base investment management fees for funds under management or services provided will be paid by Sub Trust A and Sub Trust B respectively.

Subject to the overall performance of the fund, a performance fee will be paid by Head Trust to the manager.

Governance

The fund's compliance with the parameters that will be contained within the Information Memorandum is ensured by way of two committees - the Investment Committee and the Investor Consultation Committee. At least two fully independent members are appointed to the Investment Committee with the other two members of the Investment Committee being members of the manager's Board.

The Investment Committee is responsible for the approval of all significant investment and governance decisions and is independent from the manager's Board. Consistent with industry practice, all acquisition, disposal and other material decisions will require unanimous approval from the Investment Committee.

The Investor Consultation Committee is comprised of investor representatives and is responsible for communicating and consulting with the Investment Committee on any matter referred to them by the Investment Committee. No related party transaction or investment outside the Investment Strategy and criteria may be entered into without first being referred to the Investor Consultation Committee for discussion. In the event that an investment opportunity is outside the Investment Strategy and criteria, specific approval needs to be sought and obtained from the Investment Committee and, ultimately Investors through the Investor Consultation Committee.

The Investment Committee and Investor Consultation Committee (where required) for Sub Trust A (and its sister trusts) and Sub Trust B, will meet and act only in the interests of the respective trusts.

There will be separate agendas, meetings, resolutions and records maintained in respect of each trust.

Neither Sub Trust A nor Sub Trust B will have the ability to appoint members to the Investment Committee. Further, Sub Trust A, the trustee for Sub Trust A, the Investment Manager in its capacity as Investment Manager of Sub Trust A, the Investment Committee and Investor Consultation Committee in their capacities as committees for Sub Trust A, will not have the ability to veto any decisions in respect of Sub Trust B (and vice versa).

Assumption

·        All trusts established as part of the fund will be unit trusts.

·        While there is no certainty as to the investor composition at the date of this ruling, the anticipated investor profile of Head Trust is currently as follows:

-                 The four resident superannuation funds are complying superannuation funds or a pooled superannuation trust that has at least one member that is a complying superannuation fund, a fund that has at least 50 members.

-                 The non-resident trust 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 has at least 50 members, and the contributing members do not have day-to-day control over the entity's operation.

-                 At least 95% of the membership interests in the limited partnership are owned by entities mentioned in subsection 275-20(4)(a)-(ia), or by entities that are wholly-owned by those entities; and the remaining membership interests (if any) in the limited partnership are owned by a general partner of the limited partnership that habitually exercises the management power of the limited partnership.

·        The trustees for all unit trusts in the Head Trust chain of trusts are Australian resident entities for income tax purposes.

·        The Investment Manager is an Australian resident entity and conducts all its investment management activities in relation to the fund in Australia.

·        While the Investment Manager operates or manages Sub Trust A, it will be a financial services licensee (within the meaning of section 761A of the Corporations Act 2001) that holds an Australian financial services licence, which licence covers it providing financial services (within the meaning of section 766A of that Act) to wholesale clients (within the meaning of section 761G of that Act).

·        Sub Trust A and each of its sub-trusts will be a managed investment scheme ('MIS') under section 9 of the Corporations Act 2001.

·        Sub Trust A is an unregistered wholesale trust and is not required to be registered in accordance with section 601ED of the Corporations Act 2001 because of subsection 601ED(2) of that Act.

·        Head Trust and SPV had not become members of Sub Trust A because a financial service was provided to, or acquired by, the members as a retail client (within the meaning of sections 761G and 761GA of the Corporations Act 2001).

·        Sub Trust A will carry on a business that consists wholly of eligible investment business.

·        Sub Trust A and Sub Trust B will only invest in real estate situated in Australia and will only derive Australian sourced income.

·        Head Trust is not eligible to elect into the Attribution MIT ('AMIT') regime.

Reasons for decision

Division 275 MITs

The definition of a MIT was transferred from Schedule 1 to the TAA 1953 to Division 275 of the ITAA 1997 under the Income Tax (Attribution Managed Investment Trusts - Offsets) Act 2016.In the process, changes were made to the definition to broaden the eligibility criteria to be a MIT.

Subdivision 275-A now sets out the requirements for a trust to be a MIT in relation to an income year.[1] For present purposes, only the general requirements for ordinary cases will be considered. These are reproduced, in part, below:

275-10(1) A trust is a managed investment trust in relation to an income year if any of the following requirements are met:

(a) the trust is covered under subsection (3) of this section in relation to the income year (ordinary case);...

275-10(3) A trust is covered under this subsection 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...

(b) the trust is not a trust covered by subsection (4) (trading trust etc.) in relation to the income year; and

(c) 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

(d) at the time the payment is made:

(i) the trust is covered by section 275-15 (trusts with wholesale membership); or...

(e) the trust satisfies, in relation to the income year:

...(iii)if, at the time the payment is made, the trust is not so registered and is covered by section 275-15 - the widely-held requirements in subsection 275-20(1); and

(f) the trust satisfies the closely-held restrictions in subsection 275-30(1) in relation to the income year; and

(g) if the trust is covered by section 275-15 at the time the payment is made - it satisfies the licensing requirements in section 275-35 in relation to the income year.

Each of these requirements is further considered below.

(a) Relevant connection with Australia

There is an assumption that the trustee of Sub Trust A will be an Australian resident at all relevant times. Therefore, subparagraph 275-10(3)(a)(i) will be satisfied.

(b) Not a trading trust

The second requirement, in paragraph 275-10(3)(b), is that the trust must not be covered by subsection (4) (about trading trust etc.). Subsection 275-10(4), as it applies to unit trusts, is reproduced below:

Trading unit trust or other trust carrying on trading business etc. cannot be managed investment trust

275-10(4) 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 of Part III of the Income Tax Assessment Act 1936 in relation to the income year; or

(b) in any other case...

The expression 'trading trust' is defined in section 102N of Division 6C, as reproduced below:

Section 102N Trading trusts

102N(1) For the purposes of this Division, 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:

(a) carried on a trading business; or

(b) 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.

The expression 'trading business' is used in both paragraphs (a) and (b) of the definition in subsection 102N(1), and is defined in section 102M as meaning 'a business that does not consist wholly of eligible investment business'. The expression 'eligible investment business' is also defined in section 102M, which is reproduced, in part, below:

eligible investment business means one or more of:

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

(b) [not relevant in the present case]

For the purposes of this ruling, it is assumed that Sub Trust A will carry on a business that consists wholly of eligible investment business, and that the condition in paragraph 102N(1)(a)is therefore satisfied.

Notwithstanding the above assumption, Sub Trust A may still be a 'trading trust' under paragraph 102N(1)(b) if it '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'.

Central to the test in paragraph (b) is the concept of control. The word 'control' as used in paragraph 102N(1)(b) is not defined in the income tax Acts and therefore carries its ordinary meaning. The Macquarie Dictionary defines 'control' as follows:

1. to exercise restraint or direction over; dominate; command.

2. to hold in check; curb...

Whether or not Sub Trust A controls, or is in a position to be able to control, directly or indirectly, the affairs or operations of, in this instance, Sub Trust B, in the sense of exercising direction over, dominating, commanding or curbing, is a question of fact that must be decided on the facts and circumstances of the individual case.

In this respect:

·        While it is recognised that legal ownership is one form of control to which paragraph 102N(1)(b) might apply, the provision has a broader application.. It is noted that while legal ownership was relevant to the determination of the control test in Michael Hays Family Trust v Commissioner of Taxation [2019] FCA 426, other factors reflecting the existence of control in that case were also taken into consideration in Logan J's judgment:

'111 On the evidence in the present case, under the MJH Rural Trust Deed, and as sole unitholder in respect of that trust, the trustee of the MJH Trading Trust could:

(a) remove the trustee from office (cl 28.1.4);

(b) appoint a new trustee on retirement or removal of the old trustee (cl 28.4);

(c) call a meeting of unitholders (cl 30);

(d) pass any ordinary or special resolution at the unitholders' meeting (cl 31); and

(e) sanction or prevent the trustee from revoking, adding to, releasing, deleting or varying the deed (cl 32.1).

Further, Mr Hayes was the sole director of both the trustee of the MJH Fixed Trust and the trustee of the MJH Rural Trust. In practice, each of these trustees was thus under common control. Yet further, as sole beneficiary of the MJH Rural Trust, the trustee of the MJH Trading Trust could require the trustee of the MJH Rural Trust to terminate the trust and transfer to it all the trust property, after payment of any liabilities. Taken in conjunction, these features mean that the trustee of the MJH Trading Trust could, throughout the Relevant Years, control the affairs or operations of the MJH Rural Trust.

112 For these reasons, the MJH Trading Trust was, by s 102N(1)(b), a trading trust.'

·        Paragraph 102N(1)(b) operates within Division 6C, which seeks to prevent the erosion of the corporate tax base by ensuring that public unit trusts that carry on trading business, or control or is able to control an associated entity who carries on trading business, is taxed effectively as a company. As a safeguarding provision within Division 6C, and absent any indications to the contrary found in the legislative context, paragraph 102N(1)(b) must be interpreted broadly.[2] As stated in the EM to the 1985 Bill that introduced paragraph 102N(1)(b), the provision seeks to address arrangements including those where activities that would constitute a trading business (and would therefore categorise the trust as a trading trust) is carried on by an associated entity:

Paragraph (b) of section 102N is a safeguarding provision against arrangements to circumvent the operation of Division 6C by having activities that would constitute a trading business of a public unit trust carried on by an associated entity. By taking income from the associate in the form of eligible investment income, the trustee could otherwise ensure that the relevant trust did not qualify as a trading business and so avoid the operation of Division 6C.

By paragraph (b), a unit trust will be a trading trust in a year of income if, at any time during the year, the trustee of the unit trust was in a position to control the affairs or operations of another person (i.e., the associated entity) in respect of the carrying on by that person of a trading business.

·        The text of paragraph 275-10(3)(b) and subsection 275-10(4) incorporate the Division 6C notion of 'trading trust' without any express or implied modification to the section 102N test. Statements in the EM to the 2010 Bill (reproduced below) further explain the operation of the test in the context of the MIT withholding rules:

The trust must not be a 'trading trust'

5.48 The third general requirement that must be satisfied in determining whether a trust can qualify as a MIT is that the trust must not be:

-                 In the case of a unit trust, a 'trading trust', as defined under Division 6C of Part III of the ITAA 1936. This exclusion is based on the trading trust definition in Division 6C to ensure consistency with the treatment of unit trusts under that Division...

5.50 For a unit trust, the trading trust test; and for other trusts, the test for what is a trading business - both in Division 6C - are appropriate tests to adopt for the purposes of this measure. This is because the MIT withholding tax rules are targeted at passive investments (as are typically undertaken by genuine collective investment vehicles). This can be contrasted with investments that are more akin to the carrying on of an active business operation. Where a trust carries out an active business operation it is more closely aligned with a commercial business than a collective investment vehicle. Such widely held trusts are generally taxed like companies and are not intended to qualify for MIT concessions.

5.51 A requirement that the trust must not be a trading trust ensures that the definition of a MIT is appropriately targeted to attract and retain foreign investment into trusts that are carrying on an eligible investment business, while ensuring they do not put Australian active businesses at a competitive disadvantage. This ensures a level playing field in terms of tax when active business investments are involved and also reduces the erosion of the corporate tax base.

5.52 While the purpose of the MIT withholding tax rules is to encourage foreign investment, the 'trading trust' test appropriately balances the Government's encouragement of foreign investment into the Australian funds management sector and the protection of the integrity of the tax system.

Control must be over the 'affairs' or 'operations' of the other entity. The meaning of the terms is discussed in ATO ID 2011/11 Income Tax: Trading trust: meaning of 'control' and 'affairs or operations' of another person, as extracted below:

The terms 'affairs' and 'operations' are not defined in the Tax Act... In the context of a company, Winn J in R v. Board of Trade, ex parte St Martin Preserving Co Ltd [1964] 2 All ER 561 at 568, said:

... the phrase "affairs of the company" comprises all its business affairs, interests or transactions, all its investment or other property interests, all its profits and losses, and its goodwill.

The term 'operations', on the other hand, is explained in the singular in the Australian Oxford Dictionary (1999), Oxford University Press, Melbourne as (i) an action, or process or method of working or operating; (ii) an active process, a discharge of a function; and (iii) a piece of work, especially one in series. Thus, the word 'operations' has a narrower meaning than 'affairs' and would sit more comfortably as a reference to the day-to-day business of the company rather than its business structure. However, the concept of 'affairs' may include 'operations'.

Despite the above, having regard to the facts and assumptions in the present case, including those listed below, the structure proposed would not result in Sub Trust A having control, or being able to control, the affairs or operations of Sub Trust B for the purposes of paragraph 102N(1)(b). This takes into consideration the following assertions in the ruling application:

·        Sub Trust A does not hold any equity interest in Sub Trust B and will have no voting rights or rights to distributions;

·        Sub Trust A (and each of its sister trusts) and Sub Trust B will have different trustees, each with two directors and only one common director between them;

·        The Investment Manager will sign separate Investment Management Agreements with each of Sub Trust A and Sub Trust B, and the agreements will reflect the manager's performance of its duties in respect of the trusts on a separate and independent basis;

·        The Investment Manager will perform its duty in respect of Sub Trust A separately and independently from its duties to Sub Trust B, and within the parameters set by the Investment Management Agreement with each trust.

·        The Investment Committee and Investor Consultation Committee (where required) for Sub Trust A and Sub Trust B, will meet and act only in the interests of the respective trusts. There will be separate agendas, meetings, resolutions and records maintained;

·        There will be no loans or arrangements between Sub Trust A and Sub Trust B;

·        Sub Trust A will not rely on, nor influence or impact the financial position of Sub Trust B and vice versa.

·        Neither Sub Trust A and Sub Trust B will have the ability to appoint members to the Investment Committee; and

·        Sub Trust A, the trustee for Sub Trust A, the Investment Manager in its capacity as Investment Manager of Sub Trust A, the Investment Committee and Investor Consultation Committee in their capacities as committees for Sub Trust A, will not have the ability to veto any decisions in respect of Sub Trust B (and vice versa).

(c) The trust is a MIS

In the present case, there is an assumption that Sub Trust A is a MIS, as defined in section 9 of the Corporations Act 2001. Therefore, the requirement in paragraph 275-10(3)(c) is satisfied.

(d) Registered trust or has wholesale membership

Subparagraph 275-10(3)(d)(i) refers to section 275-15, which relevantly states:

275-15 Trusts with wholesale membership

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 601D 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 ...

[Paragraphs (b) and (c) are not relevant in the present case].

In the present case, there is an assumption that Sub Trust A is an unregistered wholesale trust and is not required to be registered in accordance with section 601ED of the Corporations Act 2001 because of subsection 601ED(2) of that Act. Therefore, Sub Trust A is a trust that is covered by section 275-15 and it follows that the requirement in subparagraph 275-10(3)(d)(i) will be satisfied.

(e) Widely held

The paragraph 275-10(3)(e) requirement will be satisfied if one of the three subparagraphs are satisfied. In this case, subparagraph (iii) is relevant and requires the trust to satisfy the widely-held requirements in subsection 275-20(1). Subsection 275-20(1) provides:

Section 275-20 Widely-held requirements - ordinary case

275-20(1)The trust satisfies the requirements in this subsection in relation to the income year if, at the time the payment mentioned in paragraph 275-10(3)(a) is made, the trust has at least 25 *members.

The term 'members' is defined in subsection 995-1(1) by reference to, relevantly, subsection 960-130(1), which in the context of a trust that is not a public trading trust, means a beneficiary, unitholder or object of the trust.

For the purposes of determining the number of members of a trust, subsection 275-20(3) provides special rules for certain types of members, as reproduced below:

275-20(3) For the purposes of subsection (1)...determine the number of *members of the trust as follows:

(a) first, by applying the rules in subsection (5), identify:

(i) the members of the trust that are not entities covered by subsection (4); and

(ii) the members of the trust that are entities covered by subsection (4);

(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).

Above paragraph 275-20(3)(a) refers to the rules in subsection (5), which in turn makes reference to other subsections, which are relevantly reproduced below:

275-20(5) The rules are as follows:

(a) if an entity that is not a trust holds interests in the trust indirectly, through a *chain of trusts:

(i) treat the entity as a member of the trust; and

(ii) do not treat a trust in a chain of trusts as a member of the trust;

(b) do not treat an object of the trust as a member of the trust;

(c) if the trust is mentioned in subparagraph 275-10(3)(d)(i) (trusts with wholesale membership) - do not treat an individual as a member of the trust (other than an individual who became a member of the trust because a financial product or a financial service was provided to, or acquired by, the individual as a wholesale client (within the meaning of section 761G of the Corporations Act 2001).);

(d) the rules in subsection (7).

275-20(6) For the purposes of paragraph (5)(a), treat an entity covered by subsection (4) as an entity that is not a trust.

275-20(7) The rules are as follows:

(a) treat the following entities as together being one entity:

(i) an individual;

(ii) each of his or her *relatives;

(iii) each entity acting in the capacity of nominee of an individual mentioned in subparagraph (i) and (ii);

(b) treat the following entities as together being one entity (the notional entity):

(i) an entity that is not an individual;

(ii) each entity acting in the capacity of nominee of the entity mentioned in subparagraph (i).

275-20(8) For the purposes of subsection (5), if the entity mentioned in subparagraph (7)(b)(i) is an entity covered by subsection (4), treat the notional entity as an entity covered by subsection (4).

The entities covered by subsection 275-20(4) include these:

275-20(4) This subsection covers the following kinds of entity:

...(c)a *complying superannuation fund,... or a *foreign superannuation fund, being a fund that has at least 50 *members;

(d) a *pooled superannuation trust that has at least one member that is a complying superannuation fund that has at least 50 members;

...(f)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;

...(j)a *limited partnership, if, throughout the income year:

(i) at least 95% of the *membership interests in the limited partnership are owned by entities mentioned in the preceding paragraphs of this subsection, or by entities that are wholly-owned by entities so mentioned; and

(ii) the remaining membership interests (if any) in the limited partnership are owned by a *general partner of the limited partnership that habitually exercises the management power of the limited partnership;

(k) an entity, all the membership interests in which are owned by any of the following:

(i) entities mentioned in the preceding paragraphs of this subsection;

(ii) entities that are wholly-owned by entities mentioned in the preceding paragraphs of this subsection;

(iii) entities that are covered under this subsection because of a previous operation of this paragraph;

(l) an entity of a kind similar to an entity mentioned in the preceding paragraphs of this subsection as specified in the regulations.

In relation Sub Trust A, the members that would be covered by subsection 275-20(4) are the resident superannuation funds (paragraph 275-20(4)(c)).

In accordance with the method outlined in subsection 275-20(3), the number of members of Sub Trust A is anticipated to be as follows:

As the total number of members in Sub Trust A, calculated in accordance with subsection 275-20(3), is more than 25, the widely-held requirements in subsection 275-20(1) will be satisfied and in turn, the requirement in subparagraph 275-10(3)(e)(iii) will also be satisfied.

(f) Closely held

Paragraph 275-10(3)(f) requires the trust not to be closely-held as set out in section 275-30. Section 275-30 states:

275-30(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 275-10(3)(d)(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.

275-30(2)For the purposes of paragraphs (1)(a) and (b):

(a) if an entity covered by subsection 275-20(4) 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 275-20(4) - 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.

275-30(3)For the purposes of paragraph (2)(b), treat an entity covered by subsection 275-20(4) as an entity that is not a trust.

275-30(4)For the purposes of paragraphs (1)(a) and (b), apply the rules in subsection 275-20(7).

As the resident complying superannuation funds are entities covered by subsection 275-20(4), they will be treated as not having a MIT participation interest in Sub Trust A. As a result, Sub Trust A is not closely-held according to the tests in section 275-30 and will therefore, satisfy the requirement in paragraph 275-10(3)(f).

(g) Licensed

Trusts that are covered by section 275-15 at the time the payment is made must satisfy the licensing requirements in section 275-35 in relation to the income year. Section 275-35 is reproduced, in part, below:

Section 275-35 Licensing requirements for unregistered MIS

275-35(1)The trust satisfies the requirements in this section in relation to the income year if, at the time the payment mentioned in paragraph 275-10(3)(a) is made (the time of the first fund payment for the income year):

(a) the trust is operated or managed by:

(i) a financial services licensee (within the meaning of section 761A of the Corporations Act 2001) holding an Australian financial services licence whose licence covers it providing financial services (within the meaning of section 766A of that Act) to wholesale clients (within the meaning of section 761G of that Act); or ...

Sub Trust A will be managed by the Investor Manager, which holds the requisite licence specified in subsection 275-35(1). Therefore, Sub Trust A will satisfy the licensing requirements in subsection 275-35(1) and the requirement in paragraph 275-10(3)(g).

Withholding MIT under Subdivision 12-H in Schedule 1 to the TAA 1953

The requirements to be a withholding MIT are set out in section 12-383 of Subdivision 12-H, which relevantly states:

Section 12-383 Meaning of withholding MIT

12-383(1)A trust is a withholding MIT in relation to an income year if:

(a) it is a *managed investment trust in relation to that income year because of paragraph 275-10(1)(a) or subsection 275-10(2) of the Income Tax Assessment Act 1997; and

(b) 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.

Dealing with the paragraph 12-383(1)(b) requirement first, a substantial proportion of the investment management activities carried out in relation to Sub Trust A in respect of all of the assets listed in subparagraph 12-383(1)(b)(i)-(iii) of the TAA 1953 must be carried out in Australia throughout the income year. On the basis that the Investment Manager is an Australian resident and conducts all its investment management activities in relation to the fund in Australia in respect of the fund's Australian assets, the paragraph 12-383(1)(b) requirement is satisfied in respect of Sub Trust A.

As to the paragraph 12-383(1)(a) requirement, Sub Trust A will satisfy the requirements in subsection 275-10(3) to be a MIT and therefore, it will be a MIT pursuant to paragraph 275-10(1)(a).

As the requirements in subsection 12-383(1) are met, Sub Trust A will be a withholding MIT for the purposes of Subdivision 12-H in Schedule 1 to the TAA 1953.

[1] Section 275-5

[2] This is consistent with ATO ID 2011/11 where it states: 'The word 'control' or 'controlled' is not defined for the purposes of Division 6C of the ITAA 1936 and accordingly must be construed by reference to its natural meaning refined by the context within which the provision is intended to operate...Given that paragraph 102N(1)(b) of the ITAA 1936 is a safeguarding provision, the concept of 'control' and its variants which determine the provision's application should be given the wide meaning which accords with its intention and not be constrained by conventional notions of corporate control.'

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