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Ruling

Subject: Managed Investment Trust

Question 1

Is the trustee of the Trust eligible to make a choice under section 275-115 of the Income Tax Assessment Act 1997 (ITAA 1997) for CGT to be the primary code of taxation for calculating Managed Investment Trust (MIT) gains or losses?

Answer

Yes

Question 2

Will the trustee of the Trust be required to withhold from a fund payment made to a non-resident unit holder at a rate of 7.5% where the non-resident is in an information exchange country?

Answer

Yes

Question 3

Will the trustee of the Trust be required to withhold from a fund payment made to a non-resident unit holder at a rate of 30% where the non-resident is not in an information exchange country?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

30 June 2012

Relevant facts and circumstances

The trustee of the Trust is an Australian resident and the central management and control of the Trust is in Australia.

A clause in the Trust Deed divides the beneficial interest in the trust property into fractions called units.

A clause in the Trust Deed then provides a formula which fixes the standard of measurement for the entitlement of the unitholders.

The Trust is not a trading trust as defined under section 102N of the Income Tax Assessment Act 1936 (ITAA 1936) and continues to not be a trading trust. The Trust will not be carrying on a trading business, and will not be controlling the affairs or operations of another person in respect of carrying on by that other person of a trading business, as they will only be taking non-controlling interests in their investment business.

A substantial portion of the investment management activities of the Trust in respect of certain assets (situated in Australia, is taxable Australian property and shares, units and interests listed on an approved Australian stock exchange) will occur in Australia for the Trust.

The Trust is a managed investment scheme as defined under section 9 of the Corporations Act 2001 (Corporations Act).

The Trust is not required to be registered in accordance with section 601ED of the Corporations Act because of subsection 601ED(2) of that Act (no product disclosure statement required).

The Trust will only accept investments in lots of $500,000 AUD or more from investors.

The Trust is widely held as defined in section 12-402 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

The Trust is not closely held as defined in section 12-402B of the TAA 1953.

The manager of the Trust holds a financial services license pursuant to section 761A of the Corporations Act whose license covers it providing financial services to wholesale clients.

The Trustee of the Trust will pay unitholders distributions of income and capital as required.

The Trust will have some unitholders who have an address outside of Australia according to the records kept by or kept on behalf of the trustee of the Trust [the trustee's records] or the place of payment to the unitholder is outside of Australia (collectively the non-resident unitholders).

Some of the non-resident unitholders will have an address or place of payment in information exchange countries, and some will be in countries which are not information exchange countries.

Assumptions

If eligible, the trustee of the Trust will make a valid election for capital treatment of the MIT gains and losses of the Trust.

For the purposes of Questions 2 and 3, the Trust continues, from income year to income year, to qualify as a MIT under section 12-400 of the TAA 1953.

For the purposes of Questions 2 and 3, the unitholder is not receiving the distribution as a result of the unitholder having a carried interest in the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 275

Income Tax Assessment Act 1997 Section 275-5

Income Tax Assessment Act 1997 Section 275-10

Income Tax Assessment Act 1997 Section 275-20

Income Tax Assessment Act 1997 Section 275-115

Income Tax Assessment Act 1997 Section 840-805

Income Tax Assessment Act 1936 Division 6C

Income Tax Assessment Act 1936 Section 102N

Taxation Administration Act 1953 Subdivision 12-H of Schedule 1

Taxation Administration Act 1953 Section 12-385 of Schedule 1

Taxation Administration Act 1953 Subsection 12-385(2) of Schedule 1

Taxation Administration Act 1953 Subsection 12-385(3) of Schedule 1

Taxation Administration Act 1953 Section 12-400 of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(1)(a) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(1)(b) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(1)(c) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(1)(d) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(1)(e) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(1)(f) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(1)(g) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(1)(h) of Schedule 1

Taxation Administration Act 1953 Subsection 12-400(2) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-400(2)(a) of Schedule 1

Taxation Administration Act 1953 Section 12-401 of Schedule 1

Taxation Administration Act 1953 Section 12-402 of Schedule 1

Taxation Administration Act 1953 Section 12-402B of Schedule 1

Taxation Administration Act 1953 Section 12-405 of Schedule 1

Corporations Act 2001 Section 9

Corporations Act 2001 Subsection 601ED(2)

Corporations Act 2001 Section 761A

Corporations Act 2001 Subsection 761G(7)

Taxation Administration Regulations 1976 Regulation 44E

Corporations Regulations 2001 regulation 7.1.18(2)

Reasons for decision

Question 1

Summary

The trustee of the Trust is able to make the election in Division 275 of the Income Tax Assessment Act 1997 (ITAA 1997) to treat their gains and losses on capital account.

Detailed reasoning

Subsection 275-115(1) of the ITAA 1997 states that the trustee of an entity that is a managed investment trust (MIT) may make a choice under this section that covers the MIT. For a trust to be able to make the choice in section 275-115 of the ITAA 1997 the trust must satisfy the definition of MIT in Subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), with some modifications.

Section 12-400 of the TAA 1953 contains the definition of MIT. The first requirement in paragraph 12-400(1)(a) states that 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, the trustee of the trust was an Australian resident or the central management and control of the trust was in Australia. Division 275 of the ITAA 1997 adds a modification to section 12-400 of the TAA 1953.

The modification in section 275-20 of the ITAA 1997 has the effect of treating a trust in the same way as a managed investment trust in relation to an income year if a fund payment has not been made where the trust would have been treated as a MIT under the extended definition in Division 275 on each of the first and last days of the income year, if the trustee had made a notional fund payment on those days (hereafter referred to as the extended concept of MIT). Therefore, even if no fund payment is made during an income year, the Trust can make the CGT election as long as on the first day and the last day of the income year, if a notional fund payment had been made, the Trust would have been treated as a MIT.

Based on the facts provided, the Trust satisfies the requirement in paragraph 12-400(1)(a) of the TAA 1953, as modified by section 275-20 of the ITAA 1997, even if no fund payment is made during an income year. The applicant has stated that the trustee of the Trust is an Australian resident company, and the central management and control of the trust is in Australia.

The trust must also not be a trust covered by subsection 12-400(2) of the TAA 1953 in relation to the income year. Paragraph 12-400(2)(a) of the TAA 1953 states that a trust is covered by that subsection in relation to an income year if the unit trust is a trading trust for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Section 275-5 of the ITAA 1997 changes the requirement in paragraph 12-400(2)(a). It states that for the purposes of Division 275 of the ITAA 1997, treat a trust in the same way as a MIT in relation to an income year, if it would be a MIT in relation to the income year if paragraph 12-400(2)(a) were disregarded. The effect of this subsection is that a trust which is a Division 6C trading trust can still make the capital account treatment election in Division 275.

A 'unit trust' is not a defined term in Division 6C of the ITAA 1936. In CPT Custodian Pty Ltd (previously t/as Sandhurst Nominees (Vic) Ltd) v. Commissioner of State Revenue [2005] HCA 53, at paragraph 15, the High Court stated that the term 'unit trust', like discretionary trust, in the absence of a statutory definition, does not have a constant, fixed normative meaning.

JD Heydon and MJ Lemming in Jacob's Law of Trusts in Australia, LexisNexis Butterworths 7th Edition 2006 states:

Unit trusts are an extension into the field of commerce of the typical family trust (where settlors transfer property to a trustee on trust for their children in equal shares). ... In the case of unit trust, the scheme property is divided into a large number of units, which may, subject to their terms, be issued redeemed and traded publicly and privately.

Where beneficiaries are made entitled to a share of a beneficial interest under a trust, such as an interest in income, and entitlement to the beneficial interest is measured by reference to a fixed standard of measurement, the trust would be a unit trust for the purpose of considering the application of Division 6C of the ITAA 1936.

The Trust displays the indicia of being a unit trust for the purposes of Division 6C of the ITAA 1936. Clause 3.1 of the Trust Deed divides the beneficial interest in the trust property into fractions called units. Clause 12.3 of the Trust Deed then provides a formula which fixes the standard of measurement for the entitlement of the unitholders to the income. Based on the facts and analysis that the trust is a unit trust but not a trading trust, the requirement in paragraph 12-400(1)(b) of the TAA 1953 is satisfied.

The third requirement is found in paragraph 12-400(1)(c) of the TAA 1953. It states that a substantial proportion of the investment management activities carried out in relation to the trust in respect of all the following assets of the trust are carried out in Australia throughout the income year:

· assets that are situated in Australia at any time in the income year;

· assets that are taxable Australian property at any time in the income year;

· 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.

Section 275-10 of the ITAA 1997 modifies the requirement in paragraph 12-400(1)(c) of the TAA 1953 such that the requirement in paragraph 12-400(1)(c) is not required to be satisfied for a trust to qualify for the capital account election in Division 275. Even so, the applicant has stated that a substantial portion of the investment management activities of the Trust in respect of certain assets (assets situated in Australia, is taxable Australian property and shares, units and interests listed on an approved Australian stock exchange) will occur in Australia for the Trust, the Trust satisfies paragraph 12-400(1)(c) of the TAA 1953.

The fourth requirement is that the trust must also be, at the time the fund payment is made, a managed investment scheme within the meaning of section 9 of the Corporations Act 2001 (Corporations Act) as required by paragraph 12-400(1)(d) of the TAA 1953. If no fund payment is made during an income year, the extended concept of MIT will apply. The requirement in paragraph 12-400(1)(d) of the TAA 1953 is satisfied the applicant has stated that the Trust is a managed investment scheme within the meaning of section 9 of the Corporations Act.

The fifth requirement, in paragraph 12-400(1)(e) of the TAA 1953, is that at the time a fund payment is made the trust is covered by section 12-401 of the TAA 1953, or if it is not covered by section 12-401, then the trust is registered under section 601EB of the Corporations Act. The extended concept of MIT will apply where no fund payment is made during an income year.

Section 12-401 of the TAA 1953 states that a trust is covered by that section at a time, if at that time, the trust is not required to be registered in accordance with section 601ED of the Corporations Act (whether or not it is actually so registered) because of subsection 601ED(2) of the Corporations Act (that is, no Product Disclosure Statement (PDS) required). The applicant has stated that the Trust is not required to be registered, therefore paragraph 12-400(1)(e) of the TAA 1953 is satisfied.

Sixthly, the trust is also required to satisfy the widely held requirement in section 12-402 of the TAA 1953 in accordance with paragraph 12-400(1)(f) of the TAA 1953 at the time the first fund payment is made. The extended concept of MIT will apply where no fund payment is made during an income year. As the applicant has stated, the trust is widely held as defined in section 12-402 of the TAA 1953, and, therefore, paragraph 12-400(1)(f) of the TAA 1953 is satisfied.

The penultimate requirement in paragraph 12-400(1)(g) of the TAA 1953 requires that the trust satisfy the closely-held restrictions in subsection 12-402B(1) in relation to the income year. Based on the facts, the Trust does not have closely held restrictions as defined in section 12-402B of the TAA 1953.

The ultimate requirement in paragraph 12-400(1)(h) of the TAA 1953 is that the trust must satisfy the licensing requirements in section 12-403 of the TAA 1953 if the trust is covered by section 12-401 at the time the payment is made. Section 12-403 requires that the trust is operated or managed by an authorised representative of a financial services licensee who holds an Australian financial services license whose license covers it providing financial services to wholesale clients. If no fund payment is made during an income year, the extended concept of MIT will apply. As concluded previously, the Trust is covered by section 12-401 of the TAA 1953 (trusts with wholesale membership). The applicant has stated that the manager of the Trust holds a financial services license pursuant to section 761A of the Corporations Act and the license covers it providing financial services to wholesale clients. Therefore, paragraph 12-400(1)(h) of the TAA 1953 is satisfied.

Therefore, the Trust is a MIT within the extended concept of MIT in Division 275 of the ITAA 1997. The Trust will also be a MIT under the definition in section 12-400 of the TAA 1953, as long as a fund payment is made during the income year. Consequently, the trustee of the Trust is able to make the MIT CGT choice in section 275-115 of the ITAA 1997.

Question 2

The reasoning is on the assumption that the Trust validly makes the election for capital gains to be the primary code of taxation under Division 275 of the ITAA 1997 and that the Trust continues to qualify as a MIT from income year to income year under section 12-400 of the TAA 1953.

Summary

The trustee of the Trust will be required to withhold from a fund payment made to a non-resident unitholder at a rate of 7.5% where the non-resident is in an information exchange country.

Detailed reasoning

Section 840-805 of the ITAA 1997 states that a foreign resident beneficiary is liable for tax on the fund payment paid by a MIT. A fund payment is defined under section 12-405 of the TAA 1953 and includes capital gains from CGT events that happen in relation to CGT assets that are taxable Australian property.

Section 12-385 of Schedule 1 of the TAA 1953 requires the trustee of the MIT to withhold an amount paid to any recipients who, according to any record in the trustee's possession or is maintained on its behalf have an address outside of Australia, or where the trustee is authorised to make payments to a place outside of Australia.

The amount that must be withheld is provided for in subsection 12-385(2) of the TAA 1953, being the fund payment multiplied by the rate applicable under subsection 12-385(3). For information exchange countries, the rate of withholding is 7.5%. An information exchange country is a foreign country or foreign territory specified in the regulations for the purposes of section 12-385. A list of information exchange countries is found in Regulation 44E of the Taxation Administration Regulations 1976.

Thus, where the Trust makes a capital gain from the disposal of taxable Australian property, that capital gain forms part of the fund payment made to unitholders. For a non-resident unitholder who has an address in an information exchange country, or where the place of payment is in an information exchange country, the trustee is required to withhold 7.5% on that fund payment.

Question 3

The reasoning is on the assumption that the Trust validly makes the election for capital gains to be the primary code of taxation under Division 275 of the ITAA 1997 and that the Trust continues to qualify as a MIT from income year to income year under section 12-400 of the TAA 1953.

Summary

The trustee of the Trust will be required to withhold from a fund payment made to a non-resident unit holder at a rate of 30% where the non-resident is not in an information exchange country.

Detailed reasoning

Section 840-805 of the ITAA 1997 states that a foreign resident beneficiary is liable for tax on the fund payment paid by a MIT. A fund payment is defined under section 12-405 of the TAA 1953 and includes capital gains from CGT events that happen in relation to CGT assets that are taxable Australian property.

Section 12-385 of Schedule 1 of the TAA 1953 requires the trustee of the MIT to withhold an amount paid to any recipients who, according to any record in the trustee's possession or is maintained on its behalf, have an address outside of Australia, or where the trustee is authorised to make payments to a place outside of Australia.

The amount that must be withheld is provided for in subsection 12-385(2) of the TAA 1953, being the fund payment multiplied by the rate applicable under subsection 12-385(3). For countries that are not information exchange countries, the rate of withholding is 30%. An information exchange country is a foreign country or foreign territory specified in the regulations for the purposes of section 12-385. A list of information exchange countries is found in regulation 44E of the Taxation Administration Regulations 1976.

Thus, where the Trust makes a capital gain from the disposal of taxable Australian property, that capital gain forms part of the fund payment made to unitholders. For a non-resident unitholder who has an address which is not in an information exchange country, or where the place of payment is not in an information exchange country, the trustee is required to withhold 30% on that fund payment.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, 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.

Other issues to consider

This ruling does not cover the effect of any relevant double tax agreements between Australia and the country of domicile of the foreign resident unitholder. A double tax agreement may change the outcome of any of these questions.