Edited version of your written advice

Authorisation Number: 1051176608075

Date of advice: 22 December 2016

Ruling

Subject: Withholding Managed Investment Trust

Question 1

Will the Trust A meet the requirements to be a withholding managed investment trust (MIT) in accordance with section 12-383 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA 1953)?

Answer

Yes

Relevant facts and circumstances

1. Foreign Co A owns properties through its Australian subsidiaries in Australia. Under the implementation agreement, Foreign Co A will sell these properties to Trust B a sub-trust of Trust A.

2. Trust A is, and Trust B on settlement will be, an Australian resident trust. Their activities will be limited to investing directly or indirectly in land and buildings in accordance with the investment mandate for the purposes of deriving rental income.

3. Majority of the units in Trust A will be owned by Foreign Trust X. Foreign Co B is the other unit holder. Foreign Trust X will issue new units which will be subscribed by Foreign Co C which is a wholly owned subsidiary of Foreign Co A. Foreign Trust X will use the funds from the subscription to purchase units in Trust A. Trust A will raise external loan through banks and provide the loans funds and the subscription proceeds received from Foreign Trust X to Trust B for the purchase of sale properties.

4. Trust A is an unregistered managed investment scheme (MIS) within the meaning of section 9 of the Corporations Act 2001 (Cth). Trust A is not required to be registered in accordance with section 601ED of the Corporations Act 2001 (Cth). Trust A has no retail members.

5. The Trustee of Trust A is a financial services licensee or an authorized representative of such a financial services licensee having the Relevant Licence

6. Foreign Trust X will have at least 50 members. 10 or fewer persons (other than an entity covered by subsection 275-20(4) of the Income Tax Assessment Act 1997 (ITAA 1997)) will neither hold, nor have a right to acquire or control, units in, Foreign Trust X (whether directly or indirectly) equal to 75% or more of the total units, nor the right to receive (directly or indirectly) 75% or more of any distribution of income that the trust may make.

7. No foreign resident individual or their relatives/nominees, whether directly or indirectly, will own or have a right to own or control units in, or distributions from, Foreign Trust X of 10% or more.

8. The members of Foreign Trust X will not have day-to-day control over the entity's operations.

9. Trust A will be initially managed by Company M which has the responsibility to undertake a due diligence review and make a recommendation to the trustee of the Trust A to accept the implementation agreement and oversee its implementation including the sale of the properties.

10. On sale of properties to Trust B, Company M will be replaced by Company N manager of Trust A. Company N responsibilities will include:

● managing trust properties

● developing Trust A's investment plan

● preparing market analysis relevant to investment mandate

● Identifying and assessing new investment opportunities in Australia

● assessing and implementing proposed investments and disposals

● accounting, cash management, preparation and lodgement of tax returns

● recommendation to the trustee of Trust A regarding distributions to unit holders, and

● reporting to the unit holders

11. All of the above activities will be undertaken by Company M and Company N in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 102N(1)

Income Tax Assessment Act 1936 paragraph 102N(1)(a)

Income Tax Assessment Act 1936 paragraph 102N(1)(b)

Income Tax Assessment Act 1936 section 102M

Taxation Administration Act 1953 section 12-383 of Schedule 1

Taxation Administration Act 1953 paragraph 12-383(a) of Schedule 1

Taxation Administration Act 1953 paragraph 12-383(b) of Schedule 1

Income Tax Assessment Act 1997 subsection 104-71(5)

Income Tax Assessment Act 1997 paragraph 275-10(1)(a)

Income Tax Assessment Act 1997 subsection 275-10(3)

Income Tax Assessment Act 1997 paragraph 275-10(3)(a)

Income Tax Assessment Act 1997 paragraph 275-10(3)(b)

Income Tax Assessment Act 1997 paragraph 275-10(3)(c)

Income Tax Assessment Act 1997 paragraph 275-10(3)(d)

Income Tax Assessment Act 1997 subparagraph 275-10(3)(d)(i)

Income Tax Assessment Act 1997 paragraph 275-10(3)(e)

Income Tax Assessment Act 1997 subparagraph 275-10(3)(e)(iii)

Income Tax Assessment Act 1997 paragraph 275-10(3)(f)

Income Tax Assessment Act 1997 paragraph 275-10(3)(g)

Income Tax Assessment Act 1997 paragraph 275-10(4)(a)

Income Tax Assessment Act 1997 section 275-15

Income Tax Assessment Act 1997 paragraph 275-15(a)

Income Tax Assessment Act 1997 subsection 275-20(1)

Income Tax Assessment Act 1997 subsection 275-20(3)

Income Tax Assessment Act 1997 paragraph 275-20(3)(c)

Income Tax Assessment Act 1997 subsection 275-20(4)

Income Tax Assessment Act 1997 paragraph 275-20(4)(f)

Income Tax Assessment Act 1997 subsection 275-20(5)

Income Tax Assessment Act 1997 paragraph 275-20(5)(a)

Income Tax Assessment Act 1997 subsection 275-20(6)

Income Tax Assessment Act 1997 subsection 275-20(7)

Income Tax Assessment Act 1997 subsection 275-30(1)

Income Tax Assessment Act 1997 paragraph 275-30(1)(a)

Income Tax Assessment Act 1997 subsection 275-30(2)

Income Tax Assessment Act 1997 paragraph 275-30(2)(a)

Income Tax Assessment Act 1997 subsection 275-30(3)

Income Tax Assessment Act 1997 paragraph 275-30(2)(b)

Income Tax Assessment Act 1997 subsection 275-35(1)

Income Tax Assessment Act 1997 subparagraph 275-35(1)(a)(i)

Income Tax Assessment Act 1997 section 275-40

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-25

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

Corporations Act 2001 section 9

Corporations Act 2001 section 601EB

Corporations Act 2001 section 601ED

Corporations Act 2001 subsection 601ED(2)

Corporations Act 2001 section 761A

Corporations Act 2001 paragraph 761A(1)(s)

Corporations Act 2001 section 761G

Corporations Act 2001 subsection 761G(4)

Corporations Act 2001 section 766A

Corporations Act 2001 section 1012B

Corporations Act 2001 paragraph 1012B(3)(b)

All legislative references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Reasons for decision

Section 12-383 of Schedule 1 to the TAA 1953 states:

A trust is a withholding MIT in relation to an income year if:

(a) it is a *managed investment trust in relation to that income year because of paragraph 275-10(1)(a) or (2)(b) of the Income Tax Assessment Act 1997; and

(b) a substantial proportion of the investment management activities carried out in relation to the trust in respect of all of the following assets of the trust are carried out in Australia throughout the income year:

(i) assets that are situated in Australia at any time in the income year;

(ii) assets that are *taxable Australian property at any time in the income year;

(iii) 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.

MIT under paragraph 275-10(1)(a)

A trust is a managed investment trust (MIT) in relation to an income year if the trust is covered under subsection 275-10(3) in relation to the income year.

A trust is covered under subsection 275-10(3) of the ITAA 1997 in relation to an income year if it meets certain requirements.

Australian resident

Paragraph 275-10(3)(a) states:

(a) 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:

(i)  the trustee of the trust was an Australian resident; or

(ii)  the central management and control of the trust was in Australia

Subsection 995-1(1) states that an 'Australian resident' means a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Paragraph (b) of the definition of 'resident or resident of Australia' in subsection 6(1) of the ITAA 1936 states:

a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

The trustee of Trust A is a company incorporated in Australia.

Accordingly, as the trustee of the Trust A is an Australian resident in each relevant income year, paragraph 275-10(3)(a) is satisfied.

Not a trading trust

Paragraph 275-10(3)(b) states:

the trust is not a trust covered by subsection (4) (trading trust etc.) in relation to the income year;

Subsection 275-10(4) states:

A trust is covered by this subsection in relation to an income year if:

(a) in the case of a unit trust - the trust is a trading trust for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 in relation to the income year; or

(b) in any other case -- the trust at any time in the income year:

…

(i) carried on a trading business (within the meaning of that Division); or

(ii) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business (within the meaning of that Division).

Trust A is a unit trust, therefore, paragraph 275-10(4)(a) is the only relevant provision.

Subsection 102N(1) (in Division 6C of Part III of the ITAA 1936) states:

For the purposes of this Division, a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee:

(a) carried on a trading business; or

(b) controlled or was able to control, directly or indirectly, the affairs or operations of another person in respect of that person carrying on a trading business.

The term 'trading business' is defined in section 102M of the ITAA 1936 as:

a business that does not wholly consist of eligible investment business.

Section 102M of the ITAA 1936 defines 'eligible investment business' to include:

(a) investing in land for the purpose, or primarily for the purpose, of deriving rent; or

(b) investing or trading in any or all of the following:

(i) secured or unsecured loans (including deposits with a bank or other financial institution);

…

(iv) units in a unit trust;…

The trustee of the Trust A will hold the units in Trust B, or invest directly in land and buildings in Australia, for the purpose of deriving rent. Trust A, by satisfying paragraph (a) and subparagraph (b)(iv) is an 'eligible investment business' which is not carrying on a trading business (paragraph 102N(1)(a)).

The trustee of Trust A by holding all of the units in Trust B will control, directly or indirectly, the affairs or operations of the trustee of Trust B. Therefore, It is necessary to examine the business carried on by the trustee of Trust B to reach a conclusion that paragraph 102N(1)(b) of the ITAA 1936 does not apply to Trust A circumstances.

Does the trustee of Trust B carry on a trading business?

Trust B will purchase and hold the sale properties for the purpose or primarily for the purpose, of deriving rent. The investment objective of Trust A is to invest, directly or indirectly, in a diversified portfolio of income producing real estate assets which is predominantly used for industrial purposes, whether wholly or partially, in Australia. The activities of Trust A and Trust B will be limited to investing directly or indirectly in land and buildings in accordance with the investment mandate for the purposes of deriving rental income. Any acquisition of a property in the future will also be for the purpose, or primarily for the purpose, of deriving rent. Moreover, neither Trust A nor Trust B will control or be in a position to control a 'trading business.'

The assets of the trustee of the Trust B satisfy paragraph (a) of the definition of 'eligible investment business'. Therefore, the trustee of the Trust B is not carrying on a 'trading business'.

The trustee of the Trust A does not control, directly or indirectly, the affairs or operations of the trustee of the Trust B in respect of the latter carrying on a trading business (paragraph 102N(1)(b) of the ITAA 1936).

Accordingly, Trust A will not be a trust that is covered by subsection 275-10(4) in each relevant income year, paragraph 275-10(3)(b) is satisfied.

Managed investment scheme

Paragraph 275-10(3)(c) states:

at the time the payment is made, the trust is a managed investment scheme (within the meaning of section 9 of the Corporations Act 2001)

Trust A is an unregistered managed investment scheme within the meaning of section 9 of the Corporations Act 2001, by virtue of having at least two unit holders, that is, Foreign Trust X and Foreign Co B at the time the trustee of Trust A makes the first fund payment in relation to each relevant income year.

Accordingly, paragraph 275-10(3)(c) is satisfied.

Wholesale membership

Paragraph 275-10(3)(d) states:

at the time the payment is made:

(i)  the trust is covered by section 275-15 (trusts with wholesale membership); or

(ii)  if the trust is not covered by section 275-15 - the trust is registered under section 601EB of the Corporations Act 2001

Subparagraph 275-10(3)(d)(i) applies to Trust A.

Section 275-15 states:

A trust is covered by this section at a time if, at that time:

(a) the trust is not required to be registered in accordance with section 601ED of the Corporations Act 2001 (whether or not it is actually so registered) because of subsection 601ED(2) of that Act (no product disclosure statement required) or because it is operated or managed by an entity covered by subsection 275-35(2) (Crown entities); and

(b) the total number of entities that had become a *member of the trust because a financial product or a financial service was provided to, or acquired by, the entity as a retail client (within the meaning of sections 761G and 761GA of the Corporations Act 2001) is no more than 20; and

(c) the entities mentioned in paragraph (b) have a total *MIT participation interest in the trust of no more than 10%

Subsection 601ED(2) of the Corporations Act 2001 states:

A managed investment scheme does not have to be registered if all the issues of interests in the scheme that have been made would not have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made.

Trust A does not have any retail members. Trust A is not required to be registered in accordance with section 601ED of the Corporations Act 2001 (whether or not it is actually so registered) because of subsection 601ED(2) of that Act. In the absence of any retail members, all the issues of interests in the scheme that have been made, or will be made, do not require the giving of a Product Disclosure Statement under Division 2 of Part 7.9 of the Corporations Act 2001 if the scheme had been registered when the issues were, or subsequently are, made. This is because of section 1012B of the Corporations Act 2001.

Section 1012B sets out situations in which the issue of a financial product gives rise to an obligation on a 'regulated person' (defined in section 1011B to include an issuer of the financial product) to give another person a Product Disclosure Statement for the product.

Section 1012B does not apply because if the units in Trust A are a 'financial product', paragraph 1012B(3)(b) requires that it is issued to the person as a retail client. The trustee of Trust A will only issue units in Trust A to wholesale clients as defined in section 761G of the Corporations Act 2001. Subsection 761G(4) defines a 'wholesale client' as not being a retail client. Therefore, paragraph 1012B(3)(b) is not satisfied.

A further reason to consider is that no provision in Division 2 of Part 7.9 of the Corporations Act 2001 applies because units in Trust A are not a 'financial product' - a term defined, by reference to section 9 and section 761A in Division 3 of Chapter 7 of the Corporations Act 2001, in which paragraph 765A(1)(s) specifically excludes an interest in a managed investment scheme (whether or not operated in this jurisdiction) in relation to which none of paragraphs 601ED(1)(a), (b) and (c) are satisfied and that is not a registered scheme. If none of paragraphs 601ED(1)(a), (b) and (c) are satisfied, and as Trust A is not a registered scheme, paragraph 765A(1)(s) will apply to units in the Trust A.

Therefore, on either basis, paragraph 275-15(a) is satisfied.

Paragraphs 275-15(b) and (c) are not relevant, because none of the members (unit holders) of Trust A is a retail client within the meaning of sections 761G and 761GA of the Corporations Act 2001.

Accordingly, paragraph 275-10(3)(d) is satisfied.

Widely-held requirements

Paragraph 275-10(3)(e) states:

the trust satisfies, in relation to the income year:

(i) if, at the time the payment is made, the trust is registered under section 601EB of the Corporations Act 2001 and is covered by section 275-15 - either or both of the widely-held requirements in subsections 275-20(1) and 275-25(1); or

(ii) if, at the time the payment is made, the trust is so registered and is not covered by section 275-15 - either or both of the widely-held requirements in subsections 275-20(2) and 275-25(1); or

(iii) if, at the time the payment is made, the trust is not so registered and is covered by section 275-15 - the widely-held requirements in subsection 275-20(1)

As discussed above, Trust A is not registered under section 601EB of the Corporations Act 2001 and is covered by section 275-15. Therefore, subparagraph 275-10(3)(e)(iii) is relevant.

Subsection 275-20(1) states:

The trust satisfies the requirements in this subsection in relation to the income year if, at the time the payment mentioned in paragraph 275-10(3)(a) is made, the trust has at least 25 *members.

Subsection 275-20(3) states:

For the purposes of subsection (1) and paragraph (2)(b), determine the number of *members of the trust as follows:

(a) first, by applying the rules in subsection (5), identify:

(i) the members of the trust that are not entities covered by subsection (4); and

(ii) the members of the trust that are entities covered by subsection (4);

(b) next, work out the number of members mentioned in subparagraph (a)(i);

(c) next:

(i) work out the *MIT participation interest in the trust of each entity mentioned in subparagraph (a)(ii); and

(ii) for each of those entities, multiply the total of its MIT participation interest in the trust by 50 and round the result upwards to the nearest whole number; and

(iii) work out the total of the results of subparagraph (ii) for all of those entities;

(d) next, work out the total of the results of paragraphs (b) and (c).

Subsection 275-20(5) states that:

The rules are as follows:

(a) if an entity that is not a trust holds interests in the trust indirectly, through a *chain of trusts:

(i) treat the entity as a member of the trust; and

(ii) do not treat a trust in the chain of trusts as a member of the trust;

(b) do not treat an object of the trust as a member of the trust;

(c) if the trust is mentioned in subparagraph 275-10(3)(d)(i) (trusts with wholesale membership) - do not treat an individual as a member of the trust (other than an individual who became a member of the trust because a financial product or a financial service was provided to, or acquired by, the individual as a wholesale client (within the meaning of section 761G of the Corporations Act 2001));

(d) the rules in subsection (7).

Subsection 275-10(6) states:

For the purposes of paragraph (5)(a), treat an entity covered by subsection (4) as an entity that is not a trust.

Therefore, the first step is identifying whether there is an entity covered by subsection 275-20(4).

An entity covered by subsection 275-20(4) includes, under paragraph 275-20(4)(f):

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;

As stated above in the Relevant Facts and Circumstances, Foreign Trust X is a trust used for collective investment by pooling the contributions of its members as consideration to acquire rights to benefits produced by the entity. Foreign Trust X has at least 50 members, and the contributing members do not have day-to-day control over the entity's operation. Therefore, the conditions under paragraph 275-20(4)(f) are satisfied by Foreign Trust X.

Subsection 275-20(6) provides that paragraph 275-20(5)(a) must be applied on the basis that Foreign Trust X (being an entity covered by subsection 275-20(4)) is an entity that is not a trust. However, Foreign Trust X does not hold interests in Trust A indirectly, through a 'chain of trusts' as defined in subsection 104-71(5). This means that there is no need for paragraph 275-20(5)(a) to deem Foreign Trust X as a member of Trust A, because it is already a member of Trust A.

For completeness, the rules in subsection 275-20(7) are not relevant to the present case.

Section 275-40 states:

(1)  An entity has a MIT participation interest in a trust if the entity, directly or indirectly:

(a) holds, or has the right to acquire, interests representing a percentage of the value of the interests in the trust; or

(b) has the control of, or the ability to control, a percentage of the rights attaching to *membership interests in the trust; or

(c) has the right to receive a percentage of any distribution of income that the trust may make.

(2)  The MIT participation interest of the entity in the trust is the greatest of the percentages mentioned in paragraphs (1)(a), (b) and (c).

Foreign Trust X will directly hold majority of the units in Trust A. It will own 100% of the shares in Foreign Co B, which will directly hold remaining units in the Trust A. Foreign Trust X has, directly and indirectly, a 'MIT participation interest' in the Trust A of 100%. Pursuant to paragraph 275-20(3)(c), this percentage is multiplied by 50 and rounded upwards to the nearest whole number. This yields a result of 50.

Thus, the Trust A will satisfy, in relation to each relevant income year, the widely-held requirements in subsection 275-20(1) by having at least 25 members.

Accordingly, paragraph 275-10(3)(e) is satisfied.

Closely-held restrictions

Paragraph 275-10(3)(f) states:

the trust satisfies the closely-held restrictions in subsection 275-30(1) in relation to the income year…

Subsection 275-30(1) states:

The trust satisfies the requirements in this subsection in relation to the income year unless, at any time in the income year, any of the following situations exist:

(a) for a trust mentioned in subparagraph 275-10(3)(d)(i) (trusts with wholesale membership) - 10 or fewer persons have a total *MIT participation interest in the trust of 75% or more;

(b) if paragraph (a) does not apply - 20 or fewer persons have a total MIT participation interest in the trust of 75% or more;

(c) a foreign resident individual has a MIT participation interest in the trust of 10% or more

Paragraph 275-30(1)(a) is relevant because Trust A is a trust with a wholesale membership under subparagraph 275-10(3)(d)(i).

Subsection 275-30(2) states:

For the purposes of paragraphs (1)(a) and (b):

(a) if an entity covered by subsection 275-20(4) has a *MIT participation interest in the trust - treat that entity as not having a MIT participation interest in the trust; and

(b) if an entity that is not a trust has a MIT participation interest in the trust because it holds interests in the trust indirectly, through a *chain of trusts:

(i) if the entity is covered by subsection 275-20(4) - do not treat it as having a MIT participation interest in the trust; and

(ii) do not treat a trust in the chain of trusts as having a MIT participation interest in the trust.

Subsection 275-30(3) states:

For the purposes of paragraph (2)(b), treat an entity covered by subsection 275-20(4) as an entity that is not a trust.

As discussed above, Foreign Trust X has a 'MIT participation interest' in Trust A of 100%.

The effect of paragraph 275-30(2)(a) is that Foreign Trust X (being an entity covered by subsection 275-20(4)) is treated as not having a MIT participation interest in Trust A.

Furthermore, the effect of subsection 275-30(3) is that paragraph 275-30(2)(b) must be applied on the basis that Foreign Trust X (being an entity covered by subsection 275-20(4)) is an entity that is not a trust. However, Foreign Trust X does not hold interests in Trust A indirectly, through a 'chain of trusts' as defined in subsection 104-71(5). Therefore, paragraph 275-30(2)(b) does not apply to treat Foreign Trust X as not having a MIT participation interest in Trust A.

Foreign Trust X's 100% interest in Trust A will be excluded by paragraph 275-30(2)(a) in calculating whether 10 or fewer persons have a total MIT participation interest in Trust A of 75% or more.

Therefore, Trust A satisfies the closely-held restrictions requirements in subsection 275-30(1).

Accordingly, paragraph 275-10(3)(f) is satisfied.

Licencing requirements for unregistered MIS

Paragraph 275-10(3)(g) states:

if the trust is covered by section 275-15 at the time the payment is made - it satisfies the licensing requirements in section 275-35 in relation to the income year.

As discussed above, Trust A is covered by section 275-15.

Subsection 275-35(1) states:

The trust satisfies the requirements in this section in relation to the income year if, at the time the payment mentioned in paragraph 275-10(3)(a) is made (the time of the first fund payment for the income year):

(a) the trust is operated or managed by:

(i) a financial services licensee (within the meaning of section 761A of the Corporations Act 2001) holding an Australian financial services licence whose licence covers it providing financial services (within the meaning of section 766A of that Act) to wholesale clients (within the meaning of section 761G of that Act); or

(ii) an authorised representative (within the meaning of section 761A of that Act) of such a financial services licensee; or

(b) the trust is operated or managed by an entity covered by subsection (2); or

(c) the trust is operated or managed by an entity that:

(i) is a *wholly-owned subsidiary of an entity covered by subsection (2); and

(ii) is an entity covered by subsection (3).

Subparagraph 275-35(1)(a)(i) is relevant.

At the time of the first fund payment for each relevant income year, Trust A will be operated by a financial services licensee, the trustee of Trust A. The licence covers it providing financial services (within the meaning of section 766A of the Corporations Act 2001) to wholesale clients (within the meaning of section 761G of the Corporations Act 2001).

Accordingly, Trust A satisfies paragraph 275-10(3)(g).

MIT - conclusion

Trust A is a trust covered under subsection 275-10(3) in relation to the income year. Therefore, it is a MIT under paragraph 275-10(1)(a).

Accordingly, paragraph 12-383(a) of Schedule 1 to the TAA 1953 is satisfied

Withholding MIT

Trust A, to qualify as a withholding MIT, must satisfy paragraph 12-383(b) of Schedule 1 to the TAA 1953. It states:

a substantial proportion of the investment management activities carried out in relation to the trust in respect of all of the following assets of the trust are carried out in Australia throughout the income year:

(i) assets that are situated in Australia at any time in the income year;

(ii) assets that are taxable Australian property at any time in the income year; and

(iii) 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

The only assets that the trustee of Trust A will hold (other than a certain amount of cash) are the units in Trust B. The units owned by the trustee of Trust A in Trust B are 'taxable Australian property' in section 855-15, being an 'indirect Australian real property interest' as defined under section 855-25.

Therefore, only subparagraph 12-383(b)(ii) of Schedule 1 to the TAA 1953 is relevant.

Investment management activities

The phrase "investment management activities" is undefined, but paragraphs 5.60 to 5.64 of the Revised Explanatory Memorandum (EM) of the Bill that was enacted as the Tax Laws Amendment (2010 Measures No. 3) Act 2010 states:

What are investment management activities?

5.60 At a practical level, the activities involved in operating and managing a fund are quite varied and diverse, and depend on the nature of the underlying investments of the fund. Activities include - but are not limited to - the provision of custodian services, the management and servicing of the underlying assets of the fund (for example, commercial property) and the provision of professional services in relation to various acquisitions, due diligences and disposals of underlying assets.

5.61 These activities can be compared to the investment management activities of a fund - the activities of the fund manager in relation to the investments of the fund. The manager of a MIS is generally appointed to invest and manage the assets of the MIS (the 'portfolio'). The manager must keep the portfolio under review, keep proper books of account in relation to the portfolio and is generally subject to investment instructions (as per the agreement between the manager and operator of the fund) which may set out limitations to the manager's investment discretion.

5.62 Where the manager delegates any of its investment management obligations to another entity, the investment management activities include the activities undertaken in relation to the trust by that other entity. It is these activities that are central to the policy objectives of the MIT withholding tax rules - the policy being that a substantial proportion of the investment management functions in relation to the assets of the fund that have a relevant connection with Australia should be carried out in Australia.

5.63 The physical location of investment management activities does not only refer to the place where the final decision to invest (or not) is taken. The fund management activities of the entity must be examined holistically - including market analysis, identification of potential investments and carrying out of due diligence, culminating in the particular investment decision.

5.64 The other activities - such as asset management - that flow from attracting foreign capital to Australia are merely incidental to the fund management activities. It is possible that, particularly in the case of Australian assets under management, the asset management activities will occur in Australia in any case regardless of the nature of the investor/purchaser and whether or not such investments are structured through a trust that qualifies as a MIT.

Example 5.4: Meaning of investment management activities

PT unit trust is an Australian trust (established on 1 July 2012) that is operated by a trustee (responsible entity) and is a registered MIS. The only assets that PT unit trust holds are commercial property in Australia. It is not a trading trust and has more than 50 members (and so is widely held). Asset management, custodial services, accounting and legal services are provided in Australia, but the fund is managed by SFM Co - a fund manager based in Singapore. SFM Co does preparatory work around market analysis, identifying potential investments and carrying out due diligence on potential investments. This work is undertaken from its office in Singapore.

As SFM Co has no presence in Australia, it is not carrying out the investment management activities in Australia. PT unit trust would not be a MIT for the withholding tax rules but would be treated in the same way as a MIT for the purposes of MIT capital account treatment (Division 275 of the ITAA 1997).

As paragraph 5.62 of the EM states, where the manager of a MIS delegates any of its investment management obligations to another entity, the investment management activities include the activities undertaken in relation to the trust by that other entity.

Therefore, the activities of Company M and Company N in relation to Trust A are relevant.

The investment activities that have been or will be undertaken by Company M in Australia are stated in paragraph 9 under the Relevant Facts and Circumstances.

After the execution and completion of the implementation agreement, the investment management activities that will be undertaken by the Company N in Australia are stated in paragraph 10 under the Relevant Facts and Circumstances.

Both Company M and Company N will employ suitably qualified and experienced investment professionals to perform the investment management services in Australia and will be compensated at market rates by the trustee of Trust A.

A holistic examination of the activities that will be carried out by the Company M, Company N and the trustee of Trust A in Australia throughout each relevant income year leads to the conclusion that a substantial proportion of the investment management activities carried out in relation to Trust A in respect of its assets that are taxable Australian property will be carried out in Australia throughout each relevant income year.

Accordingly, Trust A satisfies paragraph 12-383(b) of Schedule 1 to the TAA 1953.

Conclusion

Trust A will be a withholding MIT as defined in section 12-383 of Schedule 1 to the TAA 1953.