Edited version of your written advice

Authorisation Number: 1012877573518

Date of advice: 16 September 2015

Ruling

Subject: Managed investment trust

Question

Is the trust an entity of a kind specified in paragraph 12-402(3)(e) of Schedule 1 to the Taxation Administration Act 1953?

Answer

Yes.

Relevant facts and circumstances

The trust

The trust, a foreign entity, requested a private binding ruling in order to confirm that it is an entity of a kind specified in paragraph 12-402(3)(e) of Schedule 1 to the Taxation Administration Act 1953 (TAA). Being an entity of the kind specified assists an Australian unit trust to be settled by the trust, to satisfy the 'widely-held' requirements in subsection 12-402(1) of Schedule 1 to the TAA, for the purposes of the managed investment trust (MIT) withholding tax regime in Subdivision 12-H of Schedule 1 to the TAA.

The trust is listed on a foreign stock exchange and its shares are publicly traded.

The trust was formed and incorporated as a profit company in the form of a public company. Being classified as a profit company (as opposed to the classification as a non-profit company under the relevant law) contemplates a profit-making purpose for the trust.

The trust controls a property income earning asset base.

The relevant overseas exchange is licensed to establish and supervise listing requirements for listed entities. The exchange satisfies this statutory duty by establishing listing requirements and enforcing compliance of them.

The trust qualifies as a diversified Real Estate Investment Trust (REIT) under a regulatory framework that encompasses criminal and civil jurisdiction, where legislation has been contravened.

For the trust to qualify as a REIT under the applicable listing requirements, it must satisfy the following:

• a gross assets requirement

• be a 'property entity', i.e. a company which is primarily engaged, directly or indirectly, in property activities including the holding of properties and development of properties for letting and retention as investments; or the purchase of land for development of properties for retention as investments

• earn the majority of its revenue from rental revenue

• pay a proportion of its taxable earnings available for distribution to its investors each year

• have tax deductible distributions under the income tax regime applying to REITs

• keep its debt below a set level of its gross asset value

• qualify for a listing on the foreign exchange, and

• have a committee to apply and report on a risk management policy.

The trust satisfies all of the above requirements and the definition of "REIT" under the applicable legislation and the listing requirements of its stock exchange.

The trust's net income from its property investments that is distributed to its shareholders is not taxed at the level of the trust but at the level of the shareholders at their marginal income tax rates.

The trust's shareholders have the protection of legislation and relevant government agencies. They can vote on specific issues in a general meeting and vote for the company to be a REIT, but they do not have day-to-day control over the operations of the company.

The trust's internal management and property administration and its directors are responsible for its ongoing compliance with the listing requirements, legislation and the trust's memorandum of incorporation.

The trust currently has thousands of shareholders.

The trust beneficially owns some of the shares and units in a property group which is listed on the Australian Securities Exchange (ASX).

The trust is considering investments into Australian real property assets through joint venture Australian unit trusts, which are proposed to qualify as MITs.

Relevant legislative provisions

Taxation Administration Act 1953, section 3AA(2)

Taxation Administration Act 1953, subsection 12-400(1) of Schedule 1

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

Taxation Administration Act 1953, section 12-401 of Schedule 1

Taxation Administration Act 1953, subsection 12-402(1) of Schedule 1

Taxation Administration Act 1953, subsection 12-402(3) of Schedule 1

Taxation Administration Act 1953, paragraph 12-402(3)(e) of Schedule 1

Taxation Administration Act 1953, subparagraph 12-402(3)(e)(i) of Schedule 1

Taxation Administration Act 1953, subparagraph 12-402(3)(e)(ii) of Schedule 1

Taxation Administration Act 1953, subparagraph 12-402(3)(e)(iii) of Schedule 1

Taxation Administration Act 1953, section 12 404 of Schedule 1

Income Tax Assessment Act 1997, section 960-130

Income Tax Assessment Act 1997, subsection 995-1(1)

Income Tax Assessment Act 1997, paragraph 995-1(1)(c)

Reasons for decision

Summary

The trust satisfies the requirements of paragraph 12-402(3)(e) of Schedule 1 to the TAA, as it is recognised under a foreign law as being used for collective investment and meets the remaining three requirements, as follows:

• having at least 50 members;

• the pooling of contributions of members as consideration to acquire rights to benefits produced by the entity, and

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

Detailed reasoning

Subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953 (TAA) imposes withholding obligations on the trustee of a trust that is a managed investment trust (MIT) in relation to an income year that makes a "fund payment" in relation to that income year.

Under subsection 12-400(1) of Schedule 1 to the TAA 1953, there are various conditions that need to be satisfied in order for a trust to qualify as a MIT in relation to an income year.

Specifically, paragraph 12-400(1)(f) of Schedule 1 to the TAA requires that the Australian unit trust which the trust intends to settle satisfies the widely-held requirements in subsection 12-402(1) of Schedule 1 to the TAA on the basis that it is a trust that is not registered under section 601EB of the Corporations Act 2001 and is covered by section 12-401 of Schedule 1 to the TAA.

Subsection 12-402(3) of Schedule 1 to the TAA specifies certain entities whose "MIT participation interest" (defined in section 12-404 of Schedule 1 to the TAA) in the trust is multiplied by 50 and rounded upwards to the nearest whole number to provide a notional number of members of the trust. This number is added to the number of members of the trust that are not entities covered by subsection 12-402(3) of Schedule 1 to the TAA, and the total number is used to determine whether the trust satisfies the requirement to have at least 25 members under subsection 12-402(1) of Schedule 1 to the TAA.

Relevantly, paragraph 12-402(3)(e) specifies the following kind of entity:

(e) 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;

The Revised Explanatory Memorandum (EM) to the Tax Laws Amendment (2010 Measures No 3) Bill 2010 (TLAB (No 3) Bill 2010) at paragraph 5.79, explains the scope of paragraph 12-402(3)(e), as follows:

... 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 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. This definition will more appropriately capture foreign collective investment vehicles, such as US real estate investment trusts (US REITs) and foreign mutual funds.

Application to the facts

In order for the trust to satisfy the requirements of paragraph 12-402(3)(e) of Schedule 1 to the TAA, it must be recognised under a foreign law as being used for collective investment and meet the remaining three requirements, as follows:

• having at least 50 members

• the pooling of contributions of members as consideration to acquire rights to benefits produced by the entity, and

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

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

A 'foreign law' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as a law of a foreign country.

The trust was formed and incorporated as a profit company in the form of a public company under foreign legislation. In addition, the trust is a REIT by virtue of satisfying the regulatory framework of its foreign jurisdiction. The foreign legislation and regulatory framework constitute a 'foreign law' for the purposes of paragraph 12-402(3)(e) of Schedule 1 to the TAA.

Accordingly, the trust is recognised under a foreign law as being used for collective investment.

'pooling the contributions of members'

Section 3AA(2) of the TAA provides that an expression has the same meaning in Schedule 1 to the TAA as in the ITAA 1997. There are three references to "members" in paragraph 12-402(3)(e) of Schedule 1 to the TAA, in none of which the term "members" is asterisked. We infer from this that paragraph 12-402(3)(e) of Schedule 1 to the TAA does not rely upon the meaning of "member" in the ITAA 1997 (specifically paragraph (c) of the definition of "member" in subsection 995-1(1) of the ITAA 1997 refers to the meaning given by section 960-130 of the ITAA 1997). Rather, the general law meaning of a member of an entity will be relied on.

This ruling will proceed on the basis that the shareholders of the trust are the members of the trust, which is authorised to issue shares which are fully paid up. So, when the trust's shareholders subscribe for their shares, they are required to make contributions to the company.

The requirement that the entity (the trust) pool the contributions of its members is satisfied.

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

Under its memorandum of incorporation, the shareholders of the trust are entitled to participate in any distribution made by it and to receive proportionally the net assets of the trust upon its liquidation. The requirement that the members pool their contributions as consideration to acquire rights to benefits produced by the entity (the trust) is satisfied.

having 'at least 50 members of the entity'

As the trust currently has thousands of shareholders, the requirement that the entity have at least 50 members in subparagraph 12-402(3)(e)(ii) of Schedule 1 to the TAA is satisfied.

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

This requirement has its origins in the previous formulation of paragraph 12-402(3)(e) of Schedule 1 to the TAA 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 satisfied by entities where the members (essentially the investors) do not have day-to-day control over their investment but that function is 'handed-over' and performed by a professional manager. That is, the requirement distinguishes between investments where control of the collective funds is vested in the group of investors and where control is vested in an entity that manages the funds on behalf of the group.

The trust's shareholders have the protection of the applicable foreign legislation and a regulatory framework which allows them to vote on specific issues in a general meeting and choose directors who will direct the affairs of the company in such a way that the trust will continue to be a REIT. But the shareholders do not have day-to-day control over the operations of the company.

The trust's directors, internal management and property administration are responsible for investment and operational decisions, and for ongoing compliance with the trust's memorandum of incorporation, the applicable foreign legislation and regulatory framework. Therefore, subparagraph 12-402(3)(e)(iii) of Schedule 1 to the TAA is satisfied.

Conclusion

The trust is an entity of a kind specified in paragraph 12-402(3)(e) of Schedule 1 to the TAA.