Edited version of private ruling

Authorisation Number: 1011873130523

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Ruling

Subject: Investment body withholding obligations

Question 1

Is the Entity an 'Investment Body' for the purposes of Subdivision 12E of Schedule 1 to the Taxation Administration Act 1953?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The Entity is incorporated under the relevant State co-operatives Act. Liability is limited by shares issued to members.

The Entity's main activities undertaken are landlord, and the operation of an enterprise.

The Entity's rules of incorporation include, among other things, the power to raise money on loan and receive money on deposit. The nature and type of deposits made by members include:

· Share acquisition

· Savings accounts

· Current accounts

· Term deposits

· Debentures.

Other details about deposits include:

· Deposits are not normally transferable

· Each member is restricted to $X.XX paid up shares only

· Additional deposits do not result in the issue of more shares

· Terms and rates are set by the Board and vary from time to time.

· The Entity may not accept deposits from individuals (including friends, family or other associates) who are not members (shareholders).

Benefits paid to, or credited for, depositors by the Entity include, among other aspects:

· interest

· bill paying service.

The Entity is not a 'financial institution' within the meaning set out under section 202A of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part VA

Income Tax Assessment Act 1936 Section 202A

Income Tax Assessment Act 1936 Section 202D

Income Tax Assessment Act 1936 Subsection 202D(1)

Income Tax Assessment Act 1936 Subsection 202D(2)

Tax Administration Act 1953 Subdivision 12E of Schedule 1

Tax Administration Act 1953 Section 12-140 of Schedule 1

Tax Administration Act 1953 Subsection 12-140(1) of Schedule 1

Tax Administration Act 1953 Section 12-155 of Schedule 1

Taxation Administration Regulations 1976 Division 3

Taxation Administration Regulations 1976 Regulation 34.

Further issues for you to consider

We have limited our ruling to the questions raised in your application. There may be related issues that you should consider including:

Reporting obligations of an investment body

If it is determined that the Union The Entity is an investment body, you need to refer to Annual investment income reporting essentials for information on the reporting obligations and options for an investment body, which is available on the ATO website (www.ato.gov.au). Other information available on the website includes:

· What is an investment body and what should be reported

· Investment body responsibilities

· About investment income reporting for investment bodies

· Quarterly TFN/ABN reporting

· Reporting exemptions from quoting a TFN/ABN

· Lodging the annual investment income report (AIIR)

· Reporting withholding from investment income payments.

Exceptions to withholding

Subdivision 12E of the Tax Administration Act 1953 sets out various exceptions where, upon certain criteria being satisfied, an investment body may not be required to withhold an amount from a payment in respect of an investment. Broadly these exceptions include:

The investor notifies the investment body that they are exempt from the TFN notification requirement

· Where the investor has previously notified the investment body of their exemption status, however the investor entity's circumstances change and the investment body is unaware that an exemption no longer applies for the investor (the investor fails to notify a change in circumstances)

· The investment consists of shares in a public company and the relevant payment is a fully franked distribution, franked at 100%

· The payment in respect of an investment is less than the threshold amounts determined under the Taxation Administration Regulations 1976 (TAR).

Division 3 of the TAR relates to payments in respect of Part VA investments where the ABN or TFN has not been quoted. Regulation 35 sets out certain circumstances where an amount is not required to be withheld from a payment in respect of and investment. Broadly these circumstances include:

· Where a payment in respect of an investment is made to an investor who has not turned 16 as at 1 January prior to the period the payment relates; or

· Where a payment in respect of an investment is made by a financial institution; and

· In addition to either of the above circumstances, the amount of that payment in respect of the investment is less than the threshold applicable to those circumstances for the financial year. However these thresholds may be pro-rated where the period is less than a full financial year.

Reasons for decision

Issue 1

Question 1

Detailed reasoning

General discussion of the law

Withholding obligations of an investment body

Subdivision 12E of Schedule 1 to the Tax Administration Act 1953 (TAA) deals with Pay As You Go (PAYG) withholding from payments where the recipient of that payment has not quoted a Tax File Number (TFN) or Australian Business Number (ABN). This is also referred to as TFN withholding.

Generally, TFN withholding applies to an amount paid, or applied, by an 'investment body' in respect of the investment of an 'investor' and that investor has not quoted a TFN. In these circumstances, the investment body is required to withhold an amount from that payment.

Subsection 12-140(1) of Schedule 1 to the TAA provides that an investment body must withhold an amount from a payment it makes to another entity in respect of a Part VA investment if:

(a) all or some of the payment is ordinary income or statutory income of the other entity; and

(b) if the investment is non-transferable - the other entity did not quote its tax file number in connection with the investment before the time when the payment became payable; and

(c) if the investment is transferable - the other entity did not quote its tax file number in connection with the investment before the time when the other entity had to be registered with the investment body as the investor to be entitled to the payment.

Where a TFN has not been quoted, Regulation 34 of the Taxation Administration Regulations 1976 (TAR) states that investment bodies are required to deduct an amount, which at this time is equal to 46.5% of the amount of the payment.

However, an investor may qualify for an exemption from providing a TFN, in that circumstance the investor must notify the investment body of that exemption. Where an investor has not provided details of an exemption from quoting a TFN, the investment body is required to withhold an amount from any payment in respect of that investment.

In addition, section 12-155 of Schedule 1 to the TAA allows a business to quote an ABN as an alternative to a TFN in respect of an investment. However this is only allowed if that investment is made in the course or furtherance of an enterprise carried on by it and the ABN was quoted to the investment body within the required time. Where those criteria are not satisfied, the investment body is required to withhold an amount from any payment in respect of that investment.

Investment body

The TAA refers to a Part VA investment. A Part VA investment is identified as an investment of a kind mentioned in section 202D of the Income Tax Assessment Act 1936 (ITAA36). Broadly, this refers to:

· an interest-bearing account with a financial institution

· an interest-bearing deposit with a financial institution

· a loan to a government body or body corporate (other than one made in the ordinary course of a business of providing finance)

· a deposit of money with a solicitor for the purpose of being invested or lent

· units in a unit trust

· shares in a public company

· an investment-related betting chance.

Subsection 202D(1) of the ITAA 1936 provides that those kinds of investment listed in the table are an investment to which Part VA applies. In particular, item 3 of the table includes the:

Loan of money to a government body or to a body corporate (other than a deposit to the credit of an account referred to in item 1, a deposit to which item 2 applies or a loan made in the ordinary course of the business of providing business or consumer finance by a person who carries on that business).

Section 202A of the ITAA 1936 provides that the term investment body means a person who is an investment body within the meaning of section 202D. Where subsection 202D(2) of the ITAA 1936 provides the definition for the term investor and investment body, which states that:

In relation to an investment of a kind mentioned in column 1 of an item in the table in subsection (1):

(a) the investor is the person specified in column 2 of the item; and

(b) the investment body is the person specified in column 3 of the item.

In examining column 3 of the table under subsection 202D(1) of the ITAA 1936, an investment body includes:

· a financial institution

· a government body or body corporate

· a solicitor

· the manager of a unit trust

· a company

· a betting investment body.

Income Tax Ruling IT 2634 Income tax: application of tax file number arrangements to loans made to government bodies and bodies corporate sets out the Commissioner's view on the application of Section 202D of the ITAA 1936 and explains the meaning of terms including 'the business of providing business or consumer finance', 'body corporate' and 'loan', which are not defined under the ITAA 1936.

Paragraph 3 of IT 2634 discusses that the investor is the person in whose name the money is lent (i.e. the lender of the funds) and the investment body is the body to whom the loan is made, in particular a government body or body corporate.

Paragraph 22 of IT 2634 discusses the term body corporate and, as this term is not defined, that the term takes its ordinary meaning. According to the Macquarie Dictionary, in its legal context body corporate means:

a person, association or group of persons legally incorporated in a corporation.

Paragraph 23 of IT 2634 explains that this meaning applies for the purpose of Item 3 of the table under subsection 202D(1) of the ITAA 1936. The term body corporate, as used in Item 3, includes an artificial person or legal entity created and recognised as having a personality and existence distinct from those of the individual persons who form it from time to time and that is incorporated under a State or Commonwealth Act or by governmental or parliamentary authority.

Loan to a body corporate

Paragraphs 20-21 of IT 2634 discusses that there is no statutory definition of the term 'loan' in the tax file number provisions under Part VA of the ITAA 1936, therefore the term loan takes its ordinary meaning. The Macquarie Dictionary states that the ordinary meaning of the term loan includes:

1) the act of lending; a grant of the use of something temporarily…

2) something lent or furnished on condition of being returned, especially a sum of money lent at interest.

In addition, a loan of money in the context of that expression in Item 3 of the table under subsection 202D(1) of the ITAA 1936, would generally include the creation of debt by:

· the lender's payment of, or agreement to, lend money to the body corporate, or

· a credit or other financial accommodation to an account with the lender upon which the body corporate is entitled to draw immediately.

Application of the law to your circumstances

IT 2634 discusses that a body corporate includes a legal entity incorporated under a State Act. As the Entity is legally incorporated under an Act of the State, it is considered to be a body corporate for the purposes of section 202D of the ITAA 1936.

As discussed in IT 2634, the term loan takes on its ordinary meaning, which includes something lent or furnished on condition of being returned, especially a sum of money lent at interest. The Entity's deposit holders deposit money into accounts, where the terms of making those deposits include that those funds will be returned and that the Entity pays or credits those accounts with interest. Therefore it is considered that those deposits constitute a loan to the Entity for the purposes of section 202D of the ITAA 1936.

The Entity's deposit holders have loaned money to the Entity and the Entity has been determined to be a body corporate. Therefore, it is considered that those payments constitute a loan of money to a body corporate and represent an investment of the kind described at item 3 of the table under subsection 202D(1) of the ITAA 1936.

As it has been determined that the Entity is a body corporate in relation to an investment of the kind described at item 3 of the table under subsection 202D(1) of the ITAA 1936, it is considered that the Entity represents a person (entity) described in column 3 of the table. Therefore the Entity meets the definition of an investment body under subsection 202D(2).

In addition, as the Entity's deposit holders loan money in relation to an investment of a kind described under item 3 of the table under subsection 202D(1) of the ITAA 1936, it is considered that the Entity's deposit holders represent a person (entity) described in column 2 of the table. Therefore the Entity's deposit holders meet the definition of an investor under subsection 202D(2).

As the Entity is an investment body under section 202D of the ITAA 1936, the Entity is an investment body for the purposes of Subdivision 12E of Schedule 1 to the TAA.

Therefore, where the Entity's deposit holders have not provided the Entity with their respective ABN or TFN, or notified the Entity of an exemption from providing a TFN, the Entity is required to withhold an amount from any payment made to those deposit holders in respect of their investment under section 12-140 of Schedule 1 to the TAA.