Edited version of private ruling

Authorisation Number: 1011656634902

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Ruling

Subject: Widely-held Trust

Question 1

Is the Investment Limited Partnership (ILP), being a member of the Trust, an entity that is covered by paragraph 12-402(3)(e) of Schedule 1 to the Tax Administration Act 1953 (TAA 1953)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

During the year ended 30 June 2011

Relevant facts and circumstances

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

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

The members do not have day to day control of the ILP.

The ILP is a unit holder of a managed investment trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995

Taxation Administration Act 1953 Subdivision 12-H

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, 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

Subdivision 12-H of Schedule 1 to the TAA 1953 deals with 'Pay As You Go' withholding obligations for distributions of managed investment trust income.

As part of the 'widely-held requirements' for certain management investment trusts, subsection 12-402(3) of Schedule 1 to the TAA 1953 specifies certain widely-held entities whose participation interests in the trust are multiplied by 50 to provide a 'notional number' of members of the trust. This, in turn, is used to determine whether the trust satisfies the widely-held requirements in subsection 12-402(1) of Schedule 1 to the TAA 1953.

Paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 includes:

an entity that is recognised under a foreign law as being used for collective investment by means of pooling the contributions of at least 50 members of the entity as consideration to acquire rights to benefits produced by the entity, if the members of the entity do not have day-to-day control over the operation of the entity.

According to the Revised Explanatory Memorandum (EM) to the Tax Laws Amendment (2010 Measures No 3) Bill 2010 (TLAB (No 3) Bill 2010) paragraph at 5.79, paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 targets:

… a foreign collective investment vehicle, which is an entity with at least 50 members that is recognised under a foreign law as being used for collective investment where the member contributions are pooled together in exchange for rights to the benefits produced by the entity and where members do not have day-to-day control over the operation of the entity.

Therefore, the ILP must be recognised under a foreign law as being used for collective investment and the entity itself must also satisfy the remaining three requirements of paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953. That is, the ILP must involve:

§ the pooling of contributions of at least 50 members of the entity;

§ consideration to acquire rights to benefits produced by the entity; and

§ the members not having day to day control over the operation of the entity.

'recognised under a foreign law as being used for collective investment'

The ILP is authorised as an investment limited partnership by law of the foreign country. To achieve its status as a ILP under the law of the foreign country, the entity must:

§ be formed by two or more persons;

§ have as its principal business the investment of its funds in property;

§ appoint a Custodian that is authorised in whom the assets of the investment limited partnership is entrusted for safe-keeping and is charged with verifying that the business of the partnership is conducted in accordance with the Partnership Agreements; and

§ meet any requirements set out by the foreign country's Financial Services Regulatory Authority.

Furthermore, pursuant to Regulatory Notices issued by the foreign country's Financial Services Regulatory Authority, investment limited partnerships are recognised as collective investment schemes.

A 'foreign law' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 as a law of a foreign country. The law of the foreign country is accordingly a 'foreign law' for the purposes of paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953.

Therefore, as an authorised investment limited partnership that is recognised as a collective investment scheme under the foreign country's law, the ILP is recognised under a foreign law as being used for collective investment.

'pooling of contributions of at least 50 members of the entity'

The contributions made by all of the Limited Partners of the ILP are paid into a common fund which is maintained by the Custodian. The Limited Partners then do not, under the partnership agreement, have the right to choose which of the investments made by the ILP they can participate in. The contributions are, therefore, 'pooled'.

As there are more than 50 Limited Partners of the ILP, this requirement that there is a pooling of contributions of at least 50 members of the entity in paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 is satisfied.

'as consideration to acquire rights to benefits produced by the entity'

This requirement is satisfied as each Limited Partner provides a capital contribution to the ILP and receives their share of the ILP's investment proceeds based on the amount of their contribution.

'members of the entity do not have day-to-day control over the operation of the entity'

This requirement has its origins in the previous formulation of paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 which referred to the definition of 'managed investment scheme' in section 9 of the Corporations Act 2001. Context and legislative history demonstrate that this requirement, in conjunction with the aforementioned requirements, is intended to encapsulate entities where the members (essentially the investors) do not have day-to-day control over their investment but where that function is 'handed-over' and performed by a professional manager. That is, the requirement delineates between investments where control of the collective funds is vested in the group of investors and where control is vested in an entity who manages the funds on behalf of the group.

The organisation and management of the ILP in this arrangement meets the latter description. The Limited Partners, the investors, do not have day-to-day control over their investments, the investment decisions of the ILP or the daily management of the ILP. It is only the General Partner, as assisted by the Management Company and the Administrator, which has control.

Conclusion

As each of the requirements are satisfied, the ILP is an entity covered by paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953.