Edited version of your written advice

Authorisation Number: 1012889537555

Date of advice: 21 October 2015

Ruling

Subject: Managed Investment Trust

Question 1

Will Trust be a managed investment trust (MIT) as defined in subsection 12-400(1) in Schedule 1 to the Taxation Administration Act 1953 provided that:

• Trust only conducts an 'eligible investment business' as defined in section 102M of the Income Tax Assessment Act 1936, or

• any entity that Trust controls, directly or indirectly, only conducts an 'eligible investment business'?

Answer

Yes

Question 2

Will the interest payable by Trust to the Lender under the Loan Facility be deductible under section 8-1 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 apply, or will the Commissioner seek to apply Part IVA?

Answer

No

Relevant facts and circumstances

Investment in an Australian unit trust (Trust) by a foreign investor (Investor).

Investor is the Lender to Trust pursuant to the Loan Facility.

Relevant legislative provisions

Taxation Administration Act 1953 (Cth) Schedule 1, Subsection 12-400(1)

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

Taxation Administration Act 1953 (Cth) Schedule 1, Section 12-401

Taxation Administration Act 1953 (Cth) Schedule 1, Section 12-402

Taxation Administration Act 1953 (Cth) Schedule 1, Section 12-402B

Taxation Administration Act 1953 (Cth) Schedule 1, Section 12-403

Taxation Administration Act 1953 (Cth) Schedule 1, Section 12-404

Taxation Administration Act 1953 (Cth) Schedule 1, Section 12-405

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1936 Part IVA

Profit Shifting

Subdivisions 815-B to 815-D of the Income Tax Assessment Act 1997 ('the profit shifting provisions') set out in Australia's domestic law rules in respect of transfer pricing. The transfer pricing provisions ensure that these rules better align with the internationally consistent transfer pricing approaches and standards set out in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as at 22 July 2010.

This Ruling does not consider the application of the transfer pricing provisions to the arrangement. 

Reasons for decision

Question 1

Summary

Trust will be a MIT as defined in subsection 12-400(1) of Schedule 1 to the Taxation Administration Act 1953.

Detailed reasoning

Overview of section 12-400 - Meaning of a managed investment trust (MIT)

A MIT is defined in Schedule 1 of the Taxation Administration Act 1953 for the purposes of a withholding tax regime that applies to certain distributions of Australian sourced income from an Australian trust that is a MIT to foreign investors. Paragraphs 12-400(1)(a)-(h) set out the requirements for a trust to constitute a MIT for the purposes of the regime, all of which must be present.

Paragraph 12-400(1)(a) Requirement 1

For paragraph 12-400(1)(a) in Schedule 1 to the Taxation Administration Act 1953, the trustee of Trust must be an Australian resident, or the central management and control of the trust must be in Australia at the time the first fund payment is made or at an earlier time.

The trustee of Trust is a company incorporated in Australia.

Further, Trust has paid or will pay fund payments in each relevant year of income.

Paragraph 12-400(1)(b) Requirement 2

On the basis that Trust will only hold units in a second entity that is an 'eligible investment business', Trust is not or will not be carrying on a trading business itself.

Trust is not a trading trust for the purposes of Division 6C of the Income Tax Assessment Act 1936 as it conducts an 'eligible investment business'.

Paragraph 12-400(1)(c) Requirement 3

The Commissioner accepts that the investment management activities of the assets of Trust are carried out in Australia by the trustee and other persons engaged by the trustee.

Paragraph 12-400(1)(d) Requirement 4

Trust will constitute a managed investment scheme in accordance with section 9 of the Corporations Act 2001.

Paragraph 12-400(1)(e) Requirement 5

As Trust is a wholesale unregistered trust, the requirements of section 601ED of the Corporations Act 2001 are satisfied. Further, Trust does not have more than 20 retail clients as members that hold more than a 10% interest in Trust; paragraphs 12-401(1)(b) and (c).

Paragraph 12-400(1)(f) Requirement 6

Trust is subject to paragraph 12-400(1)(f)(iii) as Trust is unregistered and is covered by section 12-401. This in turn requires that the widely-held test in subsection 12-402(1) is satisfied.

On the basis that Trust is deemed to have at least 25 members, the widely-held test in subsection 12-402(1) is satisfied, and therefore paragraph 12-400(1)(f) is satisfied.

Paragraph 12-400(1)(g) Requirement 7

Trust is a wholesale, unregistered MIS for the purposes of the Corporations Act 2001, therefore the closely-held requirements will not be breached unless:

• 10 or fewer persons have a MIT participation interest in the Trust of 75% or more, or

• a foreign resident individual has a MIT participation interest in the Trust of 10% or more.

In applying these restrictions, the statutory provisions provide that MIT participation interests held by 'qualifying investors' are ignored. As Investor will constitute a 'qualifying investor' and is ignored, the MIT participation interest held by another entity is less than 75% and does not breach the 'closely held requirement'. Further, no foreign individual has or will have a MIT participation interest of more than 10%.

Paragraph 12-400(1)(h) Requirement 8

As Trust is covered by section 12-401, Trustee of Trust must satisfy the licensing requirements in section 12-403, which happens when the Trust is operated or managed by an entity that holds a licence that enables the entity to provide financial services to wholesale clients; subparagraph 12-403(1)(a)(i). Trustee holds an Australian Financial Services License which authorises Trustee to provide financial services to wholesale clients.

As all eight conjunctive requirements in subsection 12-400(1) are or will be satisfied, Trust will constitute a MIT for the ruling period.

Question 2

Summary

Will the interest payable by the Trust to the foreign investor be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Broadly, section 8-1 allows a taxpayer to deduct from its assessable income any loss, or outgoing to the extent that it is:

• incurred in gaining or producing assessable income; or

• necessarily incurred in carrying on a business for the purposes of gaining or producing their assessable income.

However, a taxpayer cannot deduct a loss or outgoing under section 8-1 to the extent that it is, among other things, a loss or outgoing of capital, or of a capital nature.

In determining whether an outgoing is deductible under the first limb of section 8-1, a sufficient nexus must exist between the loss or outgoing and the gaining or producing of assessable income. Whilst numerous cases have dealt with the nexus between an outgoing and the gaining or producing of assessable income, it is ultimately a matter of fact to be determined on a case by case basis.

In respect of interest, the Commissioner accepts that interest paid on a loan used to acquire income producing assets such as units in Trust will be deductible under section 8-1 where it is expected that assessable income will be derived from the investment; see Taxation Ruling TR 95/33. Therefore, on the basis that Trust is borrowing in order to finance the acquisition of income producing assets, any interest paid on loans subject to the Loan Facility will prima facie be deductible to Trust under section 8-1.

However, a deduction is not available under section 8-1 in respect of returns on equity interests. The Commissioner accepts that loans made under the Loan Facility do not constitute equity interests pursuant to Division 974 of the ITAA 1997.

Loans made under the Loan Facility are not subject to Division 230 of the ITAA 1997 which is concerned with the Taxation of Financial Arrangements.

Therefore, the payments of interest will be deductible to Trust under section 8-1.

However, the amount of interest deductible pursuant to section 8-1 is subject to the Profit Shifting Disclaimer.

Question 3

Summary

Part IVA of the Income Tax Assessment Act 1936 will not apply to the arrangement.

Detailed reasoning

Part IVA of the ITAA 1936 contains the general anti-avoidance rules regarding schemes to reduce income tax. The rules apply where the Commissioner makes a determination, based on an objective assessment of the relevant facts and circumstances that a taxpayer entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit.

Based on the matters set out in the Relevant facts and circumstances, the Commissioner considers that the dominant purpose of entering into the scheme was not to obtain a tax benefit.