Edited version of your written advice

Authorisation Number: 1051198637796

Date of advice: 6 March 2017

Ruling

Subject: Administration - tax obligations

Question 1

Will a sub-fund of Country A Open-Ended Investment Company (OEIC) be regarded as the relevant taxpayer for Australian taxation purposes?

Answer

No.

Relevant facts and circumstances

1. Fund A is an Open-Ended Investment Company (OEIC) which is Country A (ABC) collective investment scheme registered as a corporation in Country A under the Open-Ended Investment Companies (Amendment) Regulations 2011 (the OEIC Regulations (ABC)) and is authorised by the Financial Conduct Authority (FCA) (the Regulations (ABC)). The contributions of the participants in the OEIC are pooled to purchase investments in a range of different assets.

2. Fund A is an umbrella company with several sub-funds. Each sub-fund is approved by the FCA before its establishment.

3. Fund A has sub-funds with Australian investments.

4. Company M is the Authorised Corporate Director (ACD) for Fund A and is responsible for managing and administering the day-to-day affairs of the OEIC in compliance with the Regulations (ABC). The ACD is an ABC incorporated private company limited by shares. The Board of the ACD are all ABC tax resident individuals.

5. The investment manager for Fund A is Company N which is an ABC private company limited by shares.

6. The Depositary, is a public limited company incorporated in the ABC and is responsible for the safekeeping of Fund A's property. It also has a duty to take reasonable care to ensure that Fund A is managed in accordance with the Regulations (ABC) with regard to certain matters, e.g. unit pricing. Although the assets are entrusted to the Depository for safekeeping, the umbrella company is the beneficial owner of the assets. The Depository is appointed by the umbrella company to act in the interests of the investors.

7. A sub-fund is defined under Fund A's Instrument of Incorporation as being part of the scheme property of Fund A which is pooled separately and to which specific assets and liabilities of Fund A may be allocated and which is invested in accordance with the investment objective and policy applicable to each sub-fund. Each sub-fund can be wound up without impacting on the remaining sub-funds.

8. Operationally, each sub-fund is distinct and separate, i.e. separate accounts are maintained and each sub-fund is valued separately. Each sub-fund is beneficially entitled to the income derived from its investments.

Establishment of a sub-fund

9. To establish a sub-fund, an application form together with the Instrument of Incorporation and Prospectus constituting the umbrella company and its sub-funds are submitted to the FCA for approval. The Instrument of Incorporation of the umbrella company lists each sub-fund of the umbrella company and the Prospectus of the umbrella company provides details on the operation of the umbrella company and its sub-funds.

10. The laws governing the authorisation of the umbrella company and its sub-funds are the Open-Ended Investment Companies Regulations (ABC) and the Financial Services and Markets Act 2000. The FCA may raise additional queries upon review of the application. When the FCA considers the application suitable, an authorisation certificate is issued and the umbrella company and its sub-funds are added to the FCA's register. The umbrella company and its sub-funds must then comply with the relevant laws. Should a sub-fund breach the FCA rules, financial penalties and customer sanctions are imposed.

11. The umbrella company and its sub-funds are registered with the ABC registrar of companies, Companies House. Fund A is registered as an Investment company with variable capital.

Laws applicable to Fund A

12. In the ABC, companies are incorporated under the Companies Act 2006 . Section 1043 of the Companies Act 2006 'applies to bodies corporate incorporated in and having a principal place of business in the Country A, other than:

(a)…

…

(d) open-ended investment companies.'

13. Regulation 2(1) of the 2001 Regulations defines the following terms:

“the Act” means the Financial Services and Markets Act 2000;

“open-ended investment company” means an body incorporated by virtue of regulation 3(1) or a body treated as if it had been so incorporated by virtue of regulation 85(3)(a); [Regulation 85(3)(a) treats a body incorporated by virtue of regulation 3(1) of the 1996 Regulations as if it had been incorporated by virtue of regulation 3(1) of these Regulations.]

“umbrella company” means an open-ended investment company whose instrument of incorporation provides for such pooling as is mentioned in section 235(3)(a) of the Act (collective investment schemes) in relation to separate parts of the scheme property and whose shareholders are entitled to exchange rights in one part for rights in another;

14. Regulation 3(1) of the 2001 Regulations states:

If the Authority makes an authorisation order then, immediately upon the coming into effect of the order, the body to which the authorisation order relates is to be incorporated as an open-ended investment company (notwithstanding that, at the point of its incorporation by virtue of this paragraph, the body will not have any shareholders or property).

15. Section 235(3)(a) of the Financial Services and Markets Act 2000 states the collective investment scheme must have the following characteristics:

'the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;'.

16. Section 235(4) of the Financial Services and Markets Act 2000 states:

If arrangements provide for such pooling as is mentioned in subsection (3)(a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another.

17. The Financial Services and Markets Act 2000 and the 2001 Regulations require an OEIC to be registered. Item 4 of Schedule 2 of the 2001 Regulations states:

The instrument of incorporation must also contain provisions as to the following matters:

(a) the name of the company

(b) the category, as specified in FSA rules, to which the company belongs

(c) the maximum and minimum sizes of the company's capital

(d) in the case of an umbrella company, the investment objectives applicable to each part of the scheme property that is pooled separately

(e) the classes of shares that the company may issue indicating, in the case of an umbrella company, which class or classes of shares may be issued in respect of each part of the scheme property that is pooled separately

(f) the rights attaching to shares of each class (including any provision for the expression in two denominations of such rights)

(g) if the company is to be able to issue bearer shares, a statement to that effect together with details of any limitations on the classes of the company's shares which are to include bearer shares

(h) in the case of a company which is a participating issuer, a statement to that effect together with an indication of any class of shares in the company which is a class of participating securities

(i) if the company is to dispense with the requirements of regulation 46, the details of any substituted procedures for evidencing title to the company's shares, and

(j) the form, custody and use of the company's common seal (if any).

18. The Open-Ended Investment Companies (Amendment) Regulations 2011 (the 2011 Regulations, amended the 2001 Regulations to make provision as to the assets of sub-funds of an OEIC, and applies to the affairs of Fund A. In particular:

• Regulation 11A(1) provides that, where an OEIC is an 'umbrella company' (as defined in Regulation 2(1)), the assets of a sub-fund shall belong exclusively to that sub-fund.

• Regulation 11A(2) provides that any liability incurred on behalf of or attributable to a sub-fund shall be discharged solely out of the assets of that sub-fund.

• Regulation 11A(4) provides that assets received or liabilities incurred by an umbrella company on behalf of its sub-funds or in order to enable the operation of those sub-funds, and which are not attributable to any particular sub-fund, may be allocated between the sub-funds in a manner which the umbrella company considers is fair to shareholders.

• Regulation 11A(5) provides that a sub-fund of an umbrella company is not a legal person separate from that umbrella company, but the property of a sub-fund is subject to orders of the court as if the sub-fund were a separate legal person.

• Regulation 11A(6) provides that an umbrella company may sue and be sued in respect of a sub-fund and may exercise the same rights of set-off in relation to that sub-fund as apply in respect of companies.

• Regulation 33C provides that a sub-fund may be wound up as if it were an OEIC without impacting on the remaining sub-funds, and shall be treated as if it were a separate legal person for the purposes of winding up.

19. For ABC tax purposes, Fund A is defined as an OEIC and not treated as a company (section 615(4) of the Corporation Tax Act 2010 (the ABC Tax Act)). Fund A meets the definition of an “umbrella company” as per subsection 615(1) of the ABC Tax Act which states:

Umbrella companies

(1) In this section “umbrella company” means an open-ended investment company—

(a) whose instrument of incorporation provides arrangements for separate pooling of the contributions of the shareholders and the profits or income out of which payments are made to them, and

(b) whose shareholders are entitled to exchange rights in one pool for rights in another.

(2) References in this section to a part of an umbrella company are to a separate pool.

(3) For the purposes of this Chapter—

(a) each of the parts of an umbrella company is to be regarded as an open-ended investment company, and

(b) the umbrella company as a whole is not to be regarded as an open-ended investment company.

(4) The umbrella company as a whole is not to be regarded as a company for any other purpose of the Tax Acts unless an enactment expressly provides otherwise.

20. Part 13 of the ABC Tax Act deals with other special types of companies etc. Chapter 2 of Part 13 is concerned with authorised investment funds, which include OEICs.

Relevant legislative provisions

Foreign Corporations (Application of Laws) Act 1989 section 7

Income Tax Assessment Act 1997 section 4-1

Income Tax Assessment Act 1997 section 9-1

Income Tax Assessment Act 1997 section 960-100

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

Reasons for decision

All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Who must pay income tax

Income tax is payable by a company in Australia (sections 4-1 and 9-1).

A 'company' is defined in subsection 995-1(1) to mean:

(a) a body corporate; or

(b) any other unincorporated association or body of persons;

but does not include a partnership or a ^*non-entity joint venture

A body corporate

A 'body corporate' is not defined in the ITAA 1997 or the Income Tax Assessment Act 1936 and therefore takes its ordinary meaning.

The Oxford English Dictionary 1989, 2nd edition, Clarendon Press, Oxford defines 'body corporate' to mean:

an artificial 'person' created by legal authority for certain ends; a corporation; commonly a corporation aggregate, but also applied to a corporation sole.

The Butterworths Concise Australian Legal Dictionary 2nd edition defines a body corporate as 'an artificial legal entity having separate legal personality'.

Ford, Austin and Ramsay's Principles of Corporations Law (15^th ed, LexisNexis Butterworths Australia, 2013) describes a body corporate or corporation as a vehicle to which the legal system, by the process of incorporation, has given the capacity to have legal rights and duties as a fictional legal person.

The High Court case of Chaff and Hay Acquisition Committee v. JA Hemphill and Sons Pty Ltd (1946) 74 CLR 375 (Chaff and Hay) observed that the characteristics of a corporation are perpetual succession, a name, a common seal, authority to hold property in its corporate name, to sue and be sued in that name and to make by-laws (at 388).

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number elaborates on the requirement for a 'body corporate' at paragraph 31 of the ruling:

A body corporate may be created:

• by common law, for example a chartered corporation;

• by statute, for example a Corporations Act company; or

• by registration pursuant to a statute, for example building societies, credit unions, trade unions and incorporated associations.

It is the law of the place of incorporation which determines whether a corporation exists: Lazard Bros. and Co v. Midland Bank Ltd [1933] AC 289 per Lord Wright at 297. However it is the law of the country in which a given transaction takes place determines whether the company or artificial person is recognised for income tax purposes ((Liverpool and London Life and Fire Insurance Co v. Massachusetts (1871) 77 US 566 cited with approval in Chaff and Hay).

As Fund A is created under the ABC law and has a legal personality as a corporation registered under the ABC law, it is able to be recognised as a legal entity in Australia in accordance with the common law principle in Chaff and Hay and by virtue of the operation of the Foreign Corporations (Application of Laws) Act 1989 (Cth).

In Chaff and Hay, it was found by the High Court that a committee constituted in South Australia under the Chaff and Hay (Acquisition) Act 1944 (SA) was a legal entity despite not being incorporated under South Australian law. Chief Justice Latham found that as the committee was a legal entity in South Australia as distinct from the legal personalities of the natural persons who constitute it, then it is by comity recognised as a legal entity elsewhere. His Honour went on to state (at 384-5) that the same principle applied to the recognition of bodies created by foreign law which have the rights and liabilities distinct from those of the natural persons who constitute them. Justice Starke further stated (at 388) that 'recognition is given in the case of companies or artificial persons which have come into existence in countries whose law of incorporation is based on principles different from those of Country A and Australia'.

This principle is also recognised by the Foreign Corporations (Application of Laws) Act 1989 (Cth). This Act applies in determining a question arising under Australian law where it is necessary to determine the question by reference to a system of law other than Australian law. Section 7 of that Act provides that any question relating to whether a body or person has been validly incorporated in a place outside Australia is to be determined by reference to the law applicable in the place of incorporation.

Section 7 of the Foreign Corporations (Application of Laws) Act 1989 (Cth) relevantly states:

(1) The section applies in relation to the determination of a question arising under Australian law (including a question arising in a proceeding in an Australian court) where it is necessary to determine the question by reference to a system of law other than Australian law.

(2) Any question relating to whether a body or person has been validly incorporated in a place outside Australia is to be determined by reference to the law applied by the people in that place.

(3) Any question relating to:

(a) the status of a foreign corporation (including its identity as a legal entity and its legal capacity and powers)

....

is to be determined by reference to the law applied by the people in the place in which the foreign corporation was incorporated.

It is clear that Fund A was incorporated and registered in accordance with the relevant ABC laws, namely, the Financial Services and Markets Act 2000 and the Open-Ended Investment Companies Regulations (ABC) (OEIC Regulations (ABC)). The instrument of incorporation (Instrument) of an open-ended investment company is issued to Fund A as the relevant company (umbrella OEIC) rather than each sub-fund.

As Fund A is a legal entity created by legal authority in the ABC to achieve certain purposes, Fund A satisfies the elements of a body corporate for the purposes of the Australian taxation laws. It is immaterial for this purpose that under the ABC Tax Act, Fund A is not regarded as a company for the purposes of the ABC Tax Acts unless expressly provided for (subsection 615(4) of the ABC Tax Act).

As stated earlier, the High Court decision in Chaff and Hay is an example of a body being recognised as having a separate legal existence without itself being a corporation in the strict sense. In that case, the issue before the High Court was whether a committee constituted in South Australia under the Chaff and Hay (Acquisition) Act 1944 to ensure sufficient supplies of chaff and hay was a legal entity despite not being incorporated under South Australian law, and therefore whether it was able to be sued in the Supreme Court of a relevant state or territory (a separate jurisdiction). The trial judge held that the committee was not a corporation under South Australian law and therefore should not be recognised as a corporation in a relevant state or territory.

The majority of the High Court (Latham CJ with Starke and Williams JJ concurring) held that the committee had many of the characteristics and attributes of a corporation, namely:

● the committee was not a temporary body. Under the formation Act, it continued in existence until dissolved by some means

● the committee could own property, acquire rights and incur liabilities. Those rights and liabilities were that of the committee and not of its members

● the committee was able to sue and be sued in its collective name with respect to any matters arising out of the formation Act, and

● the individual members are protected against liability for all matters and things done out of the formation Act.

After observing that it is not essential that express words of incorporation should be used in order to create a body as a corporation (per Latham CJ at 384), the High Court went on to hold that a body which can have rights and be subject to duties and can own property distinct from the natural persons who constitute it should be regarded as having a legal personality, irrespective of whether it is called a corporation.

The High Court therefore concluded that as the committee is a legal entity in a relevant state or territory, it is by comity recognised a legal entity elsewhere, in accordance with the principles established in relation to foreign corporations (per Latham CJ at 385-6, Starke J at 389 and Williams J at 396-7).

Therefore, whilst a sub-fund of an umbrella OEIC is not registered as a corporation under ABC laws, it is nevertheless necessary to look at the characteristics of the sub-fund to determine whether it has the attributes of a body corporate for the purposes of the Australian tax laws.

Character of a sub-fund

The following characteristics have been attributable to a body corporate, namely:

● a separate legal existence

● ability to continue in existence indefinitely regardless of changes to its membership, and

● the power to act, hold property, enter into legal contracts, sue and be sued in its own name.

With regard to Fund A and its sub-fund(s), the following features concerning their existence and character are relevant:

● The Depositary is responsible for the safekeeping of Fund A's property and has a duty to take reasonable care to ensure that Fund A is managed in accordance with the OEIC Regulations (ABC) with regard to certain matters. Although the assets are entrusted to the Depository for safekeeping, the umbrella company is the beneficial owner of the assets. The Depository is appointed by the umbrella OEIC to act in the interests of the investors.

● The category of the company registration in the Instrument is stated to be an umbrella company for the purposes of the OEIC Regulations (ABC) with the shareholders having the ability to exchange rights in one sub-fund for rights in another in accordance with the Instrument and the OEIC Regulations (ABC).

● Fund A is defined in the interpretation section of the Instrument as a body corporate including a company within the meaning of the FCA rules.

● Company is defined in the Instrument as Fund A.

● A Sub-fund is defined in the Instrument as a sub-fund of the Company being part of the scheme property of the Company which is pooled separately ….. and to which specific assets and liabilities of the Company may be allocated and which is invested in accordance with the investment objective and policy applicable to each sub-fund.

● The Instrument states that any reference in this Instrument to shares being issued 'in respect of' or 'relating to' a sub-fund shall be construed as a reference to shares issued by the Company which give the holder rights to participate in that part of the scheme property comprising the sub-fund in question and the entitlement, subject to clause x, to exchange those rights for rights to participate in that part of scheme property comprising any other sub-fund of the Company.

With regard to the establishment of the sub-funds, the Instrument confirms the above characteristics and provides that for each sub-fund of the Company shall keep books in which all transactions relating to the relevant sub-fund shall be kept separately and recorded. Assets, liabilities, expenses, costs or charges are attributable to the sub-funds are applied to the respective sub-funds and if not attributable to one sub-fund only, are allocated in accordance with the FCA Rules, and in a manner which is fair to the shareholders of the Company generally.

A sub-fund may be terminated subject to and in accordance with the Regulations (ABC), by the Directors in their absolute discretion under certain circumstances. On the termination of any such sub-fund or sub-funds a new Part of the Schedule to the Instrument is to be substituted with the details of the current sub-funds.

The sub-funds of the Company and their respective investment objectives are set out in the Schedule to the Instrument. The Directors may by resolution from time to time create such additional sub-fund or sub-funds. On creation of any such sub-fund or sub-funds (as well as those of the other extant sub-funds) will be substituted for the previous one and shall form part of the Instrument to the exclusion of the previous one.

The Instrument allows shareholders to switch all or some of their shares of one class issued in respect of any sub-fund for shares of another class issued in respect of the same sub-fund or for shares issued in respect of a different sub-fund.

● The Instrument states that the ACD shall be construed as the shareholder of all shares in the Company which are in issue and in respect of which no other person's name is entered on the register.

● The Instrument outlines the share classes and sub-funds and relevantly provides that each of the sub-funds would be a securities company if it were itself an open-ended investment company in respect of which an authorisation order made by the FCA is in force. Income equalisation applies to each of the sub-funds.

The 2011 Regulations (ABC) makes provision for the assets of sub-funds of an umbrella OEIC. In particular:

● Regulation 11A(1) provides that, where an OEIC is an 'umbrella company' (as defined in Regulation 2(1)), the assets of a sub-fund shall belong exclusively to that sub-fund.

● Regulation 11A(2) provides that any liability incurred on behalf of or attributable to a sub-fund shall be discharged solely out of the assets of that sub-fund.

● Regulation 11A(4) provides that assets received or liabilities incurred by an umbrella company on behalf of its sub-funds or in order to enable the operation of those sub-funds, and which are not attributable to any particular sub-fund, may be allocated between the sub-funds in a manner which the umbrella company considers is fair to shareholders.

● Regulation 11A(5) provides that a sub-fund of an umbrella company is not a legal person separate from that umbrella company, but the property of a sub-fund is subject to orders of the court as if the sub-fund were a separate legal person.

● Regulation 11A(6) provides that an umbrella company may sue and be sued in respect of a sub-fund and may exercise the same rights of set-off in relation to that sub-fund as apply in respect of companies.

● Regulation 33C provides that a sub-fund may be wound up as if it were an OEIC without impacting on the remaining sub-funds, and shall be treated as if it were a separate legal person for the purposes of winding up.

Based on the above factors pertaining to the operation of the sub-funds, it is clear that operationally they have a separate existence from Fund A. Further, the sub-funds possess the following attributes referrable to a body corporate:

● the ability to hold property and incur liability separately from Fund A and other sub-funds (Regulations 11A(1) and (2)). This suggests that the sub-funds are able to enter into legal contracts in their own name in order to procure assets and incur liabilities

● the property of the sub-funds can be subject to court orders as if the sub-funds were a separate legal person (Regulation 11A(6)).

However, the sub-funds lack the following essential elements of a body corporate, namely:

● a separate legal existence

● the power to act, sue and be sued in their own name.

The legal obligations pertaining to the property vested in the sub-funds continue to rest with Fund A. Regulation 11A(5) of the 2011 Regulations (ABC) provides that a sub-fund of an umbrella company is not a legal person separate from that umbrella company despite being able to have an order of a court applying to the property of the sub-fund as if it were a separate legal person. Further, Regulation 11A(6) provides that it is the umbrella company that may sue and be sued in respect of a sub-fund.

These factors point against the conclusion that a sub-fund has the essential attributes of a body corporate for the purposes of the Australian income tax law.

Conclusion

As a sub-fund of an OEIC does not have a separate legal existence from Fund A under the OEIC Regulations (ABC), it is unable to be treated as separate legal entity (body corporate) for the purposes of the Australian income tax law.