Edited version of your written advice

Authorisation Number: 1051445703443

Date of advice: 2 November 2018

Ruling

Subject: Marketplace lending fund

Question

Will the Fund be a managed investment trust (MIT) for the purposes of Division 275 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Fund satisfy the conditions in section 276-10 of the ITAA 1997 in order to qualify as an attribution managed investment trust (AMIT)?

Answer

Yes

Question 3

Will the Fund qualify to treat each class of membership interests in it as a separate AMIT in accordance with section 276-20 of the ITAA 1997?

Answer

Yes

Question 4

If the Fund makes a choice in accordance with paragraph 276-20(1)(d) of the ITAA 1997, is it fair and reasonable to determine the trust components of each class of Loan Units treated as a separate AMIT by reference to the Loan Note(s) referable to that class?

Answer

Yes

Question 5

Will interest income derived by the Fund in respect of the Loan Notes be on a cash basis rather than on an accruals basis?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Relevant facts and circumstances

The Fund is a settled unit trust and a registered managed investment scheme under the Corporations Act 2001 open to both retail and wholesale investment by residents of Australia for taxation purposes.

It operates what is commonly referred to as a marketplace lending fund.

The Responsible Entity of the Fund is an Australian resident company.

The Responsible Entity has entered into a Loan Note Agreement with a lending company (Lending Co) to advance money (via a custodian) to Lending Co for the issue of Loan Notes.

Lending Co enters into loans with borrowers in accordance with the terms of the Loan Note Agreement and the Fund’s Constitution.

Through an online marketplace lending platform, holders of units in the Fund (Members) may obtain an economic exposure to loans. This exposure is obtained via subscription for Loan Units in the Fund.

Members subscribe to the Fund by applying for:

● one Foundation Unit in the Fund, carrying no right to any distributions of income or capital from the Fund; and

● Cash Units in the Fund, carrying rights to capital but no rights to any distributions of income from the Fund.

Members make selections by which they indicate that they are prepared to have an economic exposure to one or more potential loans. Lending Co will have identified the borrowers, undertaken credit assessments and negotiated terms of the proposed loans (other than the interest rate).

If a loan has secured selection from one or more Members (and all legal documentation and conditions precedent to the loan have been completed/satisfied), the Responsible Entity will cause the custodian of the Fund to advance money (on behalf of the Responsible Entity) equal to the amount of the selections under the Loan Note Agreement to Lending Co. The Fund does not borrow any of the money it advances to Lending Co.

Lending Co will issue to the custodian a separate Loan Note in relation to each Member that secured selection, the face value of which will be the amount of the Member’s selection. Collectively, those Loan Notes constitute a separate class referable to a loan.

Lending Co will then enter into the loan.

These loans will be backed by a secured first mortgage against Australian real estate (i.e. property that qualifies as acceptable in the PDS).

The borrowers can consist of individuals, trusts, self-managed superannuation funds or companies borrowing for a wide range of personal or business purposes.

The maximum term of a loan will not exceed 3 years.

The Responsible Entity will also convert a number of Cash Units held by Members who have secured selections in relation to the loan into Loan Units of a separate class in the Fund.

The conversion ratio is explained in the Constitution.

Each class of Loan Units will be ‘referable’ to a particular Loan Note issued by Lending Co corresponding to that Member’s selection and each class of Loan Notes will be ‘referable’ to a number of classes of Loan Units issued in respect of each class of Loan Notes (and therefore each loan).

The term ‘referable’ (as used in the Constitution and the Loan Note Agreement) is a notional concept as Members do not obtain a beneficial interest in any particular Loan Notes or any of the loans.

Members will have an undivided interest in the whole of the Fund.

The payment obligations of a class of Loan Notes are derived from the terms of the loan.

Pursuant to the terms of the Loan Note Agreement, cash received by Lending Co from a loan (on repayment of principal and payment of interest by the borrower) will be used by Lending Co to fund repayments of principal and payments of interest on referable Loan Notes to the custodian (less a margin).

The rate of interest payable by Lending Co on Loan Notes issued to the custodian is equal to the interest rate specified on the relevant Member’s selection, less the margin.

Lending Co’s obligations to pay these amounts to the custodian are limited to the extent that the amounts payable by the borrower in accordance with the loan have actually been received by Lending Co.

The termination date of a Loan Note will be the same as the date on which the loan which is referable to the Loan Note matures, is terminated or cancelled (whichever is earlier).

The terms of the Loan Units are matched, in an economic sense, to the terms of the referable Loan Notes.

In the event of a default on the loan, Lending Co may negotiate with the borrower to agree to a new payment schedule, amend the terms of the loan, or accept a replacement loan with a replacement borrower. Where Lending Co agrees to accept a replacement loan, the Loan Notes referable to the original loan will be cancelled and replaced with new Loan Notes which are referable to the replacement loan.

Members holding Loan Units on the distribution date are presently entitled to receive distributions referable to the Loan Notes.

Loan Units will confer upon a Member distributable entitlements comprised of:

● an income entitlement equal to the share of the net income of the Fund that is referable to Loan Units of the relevant class held by the Member (a distributable income amount); and

● a capital entitlement equal to the share of all other amounts received by the Responsible Entity (other than net income) that is referable to Loan Units of the relevant class held by the Member (a distributable capital amount).

The distribution of a Member’s distributable entitlement will be via subscription to Cash Units. The Responsible Entity’s obligation to distribute the entitlement will be set off against the Member’s obligation to pay the subscription price for the issue of a number of additional Cash Units in the Fund equivalent to the value of that distribution.

Members are only entitled to these distributions, and thus Cash Units, to the extent that an amount has in fact been received by the Responsible Entity (via the custodian) under the Loan Note.

There is no discretion provided to the Responsible Entity in respect of this distribution and subscription mechanism.

The portion of the payment of a Member’s distributable entitlement that is referable to the Member’s distributable capital amount is treated as a pro rata return of capital or reduction in the amount subscribed by the Member in the Loan Units of the relevant class. This will mean that the Loan Units will effectively be redeemed at the time when Loan Notes are repaid (which in all cases will not exceed 3 years).

On full repayment of the Loan Notes by Lending Co to the custodian, or if no capital amounts are received by the custodian from Lending Co in respect of Loan Notes (because the borrower is in default), the Loan Units of the Members that are issued in respect of a relevant class are redeemed by the Responsible Entity for nil consideration.

A Member may withdraw Cash Units at their discretion by providing the Responsible Entity with a withdrawal request, upon receipt of which the Responsible Entity must pay or cause to be paid to the withdrawing Member the relevant withdrawal amount, being the value of the Cash Units.

A Member is generally not able to withdraw their Loan Units until maturity of the referable Loan Note(s).

The Responsible Entity has made a choice under subparagraph 276-10(1)(e)(i) of the ITAA 1997 to have the AMIT rules under Division 276 of the ITAA 1997 apply as of 1 July 2017.

The Responsible Entity has made a choice under paragraph 276-20(1)(d) of the ITAA 1997 to treat each class of membership interests in the Fund as being a separate AMIT as of 1 July 2017.

Assumptions

1. Interest on the Loan Notes will (at the very least) be paid on an annual basis and will therefore not constitute an ‘eligible return’ under subsection 159GP(3) of the Income Tax Assessment Act 1936 (ITAA 1936).

2. The Fund will not satisfy the $100 million asset test contained in subsection 230-455(2) of the ITAA 1997, such that Division 230 of the ITAA 1997 will not apply in relation to any gains or losses of the Fund from a financial arrangement.

3. The Fund will not make an election under subsection 230-455(7) of the ITAA 1997 to have Division 230 of the ITAA 1997 apply.

4. The widely held and closely held tests contained in paragraphs 275-10(3)(e) and 275-10(3)(f) of the ITAA 1997 respectively will be satisfied for the period after 30 June 2018 (after the start-up period).

5. The Responsible Entity does not generally target investors that are a financial institution or otherwise carrying on a business of money lending.

6. The only assets of the Fund are Loan Notes and cash deposits (in the form of bank accounts).

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6C of Part III

Income Tax Assessment Act 1936 subsection 159GP(3)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 subsection 230-455(2)

Income Tax Assessment Act 1997 subsection 230-455(7)

Income Tax Assessment Act 1997 Division 275

Income Tax Assessment Act 1997 section 275-10

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

Income Tax Assessment Act 1997 paragraph 275-10(2)(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 subparagraph 275-10(3)(d)(ii)

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

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

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 subsection 275-10(4)

Income Tax Assessment Act 1997 subsection 275-10(6)

Income Tax Assessment Act 1997 section 275-15

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

Income Tax Assessment Act 1997 subsection 275-20(2)

Income Tax Assessment Act 1997 subsection 275-25(1)

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

Income Tax Assessment Act 1997 section 275-35

Income Tax Assessment Act 1997 section 275-45

Income Tax Assessment Act 1997 section 275-50

Income Tax Assessment Act 1997 section 275-55

Income Tax Assessment Act 1997 Division 276

Income Tax Assessment Act 1997 Subdivision 276-A

Income Tax Assessment Act 1997 section 276-10

Income Tax Assessment Act 1997 paragraph 276-10(1)(a)

Income Tax Assessment Act 1997 paragraph 276-10(1)(b)

Income Tax Assessment Act 1997 paragraph 276-10(1)(e)

Income Tax Assessment Act 1997 subparagraph 276-10(1)(e)(i)

Income Tax Assessment Act 1997 subparagraph 276-10(1)(e)(ii)

Income Tax Assessment Act 1997 section 276-15

Income Tax Assessment Act 1997 paragraph 276-15(1)(a)

Income Tax Assessment Act 1997 section 276-20

Income Tax Assessment Act 1997 subsection 276-20(1)

Income Tax Assessment Act 1997 paragraph 276-20(1)(a)

Income Tax Assessment Act 1997 paragraph 276-20(1)(b)

Income Tax Assessment Act 1997 paragraph 276-20(1)(c)

Income Tax Assessment Act 1997 paragraph 276-20(1)(d)

Income Tax Assessment Act 1997 subsection 276-20(2)

Income Tax Assessment Act 1997 subsection 276-20(3)

Income Tax Assessment Act 1997 subsection 276-20(4)

Income Tax Assessment Act 1997 subsection 276-20(5)

Income Tax Assessment Act 1997 section 276-260

Income Tax Assessment Act 1997 section 276-265

Income Tax Assessment Act 1997 section 276-270

Income Tax Assessment Act 1997 Subdivision 276-F

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

Taxation Administration Act 1953 section 12A-110 of Schedule 1

Corporations Act 2001

Corporations Act 2001 section 9

Corporations Act 2001 section 601EB

Reasons for decision

Question 1

Summary

The Fund will be a MIT for the purposes of Division 275¹ pursuant to paragraph 275-10(2)(a).

Detailed reasoning

The meaning of a MIT in relation to an income year is provided by section 275-10 as follows –

(1) A trust is a managed investment trust in relation to an income year if any of the following requirements are met:

(a) the trust is covered under subsection (3) of this section in relation to the income year (ordinary case);

(b) the trust is covered under section 275-45 in relation to the income year (only members of trust are managed investment trusts etc.).

(2) A trust is also a managed investment trust in relation to an income year if any of the following requirements are met:

(a) the trust is covered under section 275-50 in relation to the income year (no fund payment made in relation to the income year);

(b) the trust is covered under section 275-55 in relation to the income year (temporary circumstances outside the control of the trustee).

A trust (such as the Fund) that does not satisfy subsection 275-10(3) solely because the trustee does not make a fund payment in relation to the year may nevertheless qualify as a MIT if it is covered by section 275-50 in relation to that income year (paragraph 275-10(2)(a)).

A trust is covered by section 275-50 if the trustee does not make a fund payment during an income year, and the trust would be a managed investment trust (by virtue of its satisfaction of all the other conditions of subsection 275-10(3)) if the trustee had made a fund payment during the income year. Essentially, this provision requires that all the other conditions of subsection 275-10(3) would be satisfied at both the start and end of the relevant income year.

For the purposes of establishing whether the Fund (a unit trust) is a MIT in relation to an income year in accordance with paragraph 275-10(1)(a), by virtue of being covered under subsection 275-10(3) in relation to the income year, it is assessed against each of the conditions set out in that subsection as follows –

(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; and

The Responsible Entity, as trustee of the Fund, is an Australian resident. However, as the Fund will only be distributing interest income during the income year, it will not be making any ‘fund payments’ as defined in section 12A-110 of Schedule 1 to the Taxation Administration Act 1953. Notwithstanding the Responsible Entity will satisfy this paragraph in accordance with the requirements of section 275-50.

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

As the Fund’s only assets are Loan Notes and cash deposits (per assumption 6 of this ruling), it is not a unit trust covered by subsection 275-10(4), i.e. a trading trust for the purposes of Division 6C of Part III of the ITAA 1936, thereby satisfying the condition in paragraph 275-10(3)(b).

(c) 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); and

As the Fund is registered as a managed investment scheme, it is a managed investment scheme within the meaning of section 9 of the Corporations Act 2001, thereby satisfying the condition in paragraph 275-10(3)(c) in the event that the Fund were to make a fund payment in relation to the income year and in the alternative in accordance with the requirements of section 275-50.

(d)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; and

The Fund is a registered managed investment scheme under section 601EB of the Corporations Act 2001, thereby satisfying the condition in subparagraph 275-10(3)(d)(ii) in the event that the Fund were to make a fund payment in relation to the income year and in the alternative in accordance with the requirements of section 275-50.

(e) 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); and

As the Fund is a registered managed investment scheme and not covered by section 275-15, it will be required to satisfy subparagraph 275-10(3)(e)(ii).

Subsection 275-10(6) will operate to deem this requirement to be satisfied by the Fund during the start-up period (the income years ending 30 June 2017 and 2018).

Pursuant to assumption 4 of this ruling, the Fund will have at least 50 members during the income years ending 30 June 2019 and subsequent in accordance with the widely-held requirements in subsection 275-20(2), thereby satisfying the condition in subparagraph 275-10(3)(e)(ii) for those years in the event that the Fund were to make a fund payment in relation to the income year and in the alternative in accordance with the requirements of section 275-50.

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

Subsection 275-10(6) will operate to deem this requirement to be satisfied by the Fund during the start-up period (the income years ending 30 June 2017 and 2018).

Pursuant to assumption 4 of this ruling, the Fund will satisfy the closely held restrictions in subsection 275-30(1) during the income years ending 30 June 2019 and subsequent, thereby satisfying the condition in paragraph 275-10(3)(f) for those years.

(g) 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.

This condition does not need to be satisfied as the Fund will not be covered by section 275-15.

On the basis of all of the above, the Fund will be covered under section 275-50 and will therefore be a MIT pursuant to paragraph 275-10(2)(a).

Question 2

Summary

The Fund will satisfy the conditions of section 276-10 in order to qualify as an AMIT.

Detailed reasoning

The conditions that a trust would need to satisfy in order to qualify as an AMIT are contained in section 276-10. In the case of the Fund, the relevant conditions are identified and addressed as follows:

Condition: that the Fund be a MIT in relation to the income year (paragraph 276-10(1)(a))

For the reasons set out in response to question 1 of this ruling, the Fund will be a MIT for the relevant income year pursuant to section 275-10, thereby satisfying the condition in paragraph 276-10(1)(a).

Condition: that the rights to income and capital arising from each of the membership interests in the Fund are clearly defined at all times when the Fund is in existence in the income year (paragraph 276-10(1)(b))

The question as to whether the rights to income and capital arising from the membership interests in a trust are clearly defined is one of fact that will generally be determined having regard to the constituent documents of the trust. Having said that, section 276-15 sets out certain legislative safe harbours which apply to provide certainty for common arrangements where the rights to income and capital arising from the membership interests in a managed investment trust would be expected to be clearly defined.

Under the safe harbour at paragraph 276-15(1)(a), the rights to income and capital arising from the membership interests in a trust will be taken to be clearly defined at a particular time if the trust is a managed investment scheme that is registered under section 601EB of the Corporations Act 2001.

As the Fund is a registered managed investment scheme under section 601EB of the Corporations Act 2001, the rights to income and capital arising from the membership interests of each Member in the Fund will be taken to be clearly defined pursuant to the operation of paragraph 276-15(1)(a), thereby satisfying the condition in paragraph 276-10(1)(b).

Condition: that either the Responsible Entity (as trustee of the Fund) has made an irrevocable choice to apply the AMIT rules under Division 276 for that income year (subparagraph 276-10(1)(e)(i)), or the Fund was an AMIT for an earlier income year (subparagraph 276-10(1)(e)(ii)).

The Responsible Entity has made a choice under subparagraph 276-10(1)(e)(i) to have the AMIT rules under Division 276 apply to it as of 1 July 2017, thereby satisfying the condition in paragraph 276-10(1)(e).

On the basis of all of the above, the Fund will qualify as an AMIT under section 276-10 for the income year in respect of which the choice under subparagraph 276-10(1)(e)(i) is made and, pursuant to the operation of subparagraph 276-10(1)(e)(ii), for each subsequent income year in which it satisfies the other requirements relevant to those income years.

Question 3

Summary

The Fund will qualify to treat each class of membership interests in it as a separate AMIT for the purposes of Division 276 (other than Subdivision 276-A) in accordance with section 276-20.

Detailed reasoning

The conditions that an AMIT would need to satisfy in order to treat each class of membership interests in it as being a separate AMIT for an income year for the purposes of Division 276, as per subsection 276-20(2), are contained in subsection 276-20(1). Each of those conditions are identified and addressed in the context of the Fund as follows -

Condition: that the membership interests in the Fund for the income year are divided into classes (paragraph 276-20(1)(a))

The question as to whether an AMIT has more than one class of membership interests is one of fact. Law Companion Guideline LCG 2015/5², at paragraph 13, states the following with respect to the meaning of a class of membership interests:

Subsection 995-1(1) specifies that a ‘class’ of membership interests in a trust exists if the interests have the same, or substantially the same, rights. One class of interest will be distinct from another class if the terms relating to the class of interest provide interest holders of the first class with rights to the income and/or capital of the AMIT that are not substantially the same as those obtained by the holders of interests in the second class.

The following classes of membership interests will be issued by the Responsible Entity in satisfaction of paragraph 276-20(1)(a).

Loan Units

Under the terms of the Constitution, the Fund will issue a separate class of Loan Units (membership interests) to each Member referable to each underlying Loan Note issued by Lending Co to the custodian in accordance with a Member’s selection on a loan. The rights to income and capital of the Fund attaching to each Loan Unit in a class will be the same. Each Member holding a class of Loan Units, based on the value of their selection, will potentially have rights distinct from those of each other Member holding other Loan Units.

While this means that it is possible that each Loan Unit class will have just one member, paragraph 2.31 of the Explanatory Memorandum to the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 states that “it is possible for a class to have just one member.”

Where the Loan Notes in a class are substantially identical (for example, they are identical other than the issue price), the rights to income and capital of the Fund on the Loan Units referable to those Loan Notes will be substantially the same and would together comprise a class for the purposes of section 276-20.

Cash Units and Foundation Units

As the rights attached to the Cash Units and a single Foundation Unit held by each Member of the Fund will be the same for all Members, these two forms of membership interests will, for the purposes of paragraph 276-20(1)(a), constitute two separate classes of units in the Fund.

Condition: that the rights arising from each of the membership interests in a particular class are the same as the rights arising from every other of the membership interests in that class

(paragraph 276-20(1)(b))

As outlined above, the Constitution provides for the same rights arising for Members in respect of

● each Loan Unit issued within a class of Loan Units (or where classes of Loan Units are referable to substantially identical Loan Notes in a class, each of those Loan Units for those classes);

● each Cash Unit issued in the Fund; and

● each Foundation Unit issued in the Fund,

thereby satisfying the condition in paragraph 276-20(1)(b).

Condition: each of the membership interests in a particular class are distinct from each of the membership interests in another class (paragraph 276-20(1)(c))

Each class of Loan Units issued by the Fund to a Member will be referable to an underlying Loan Note held by the custodian and will have different rights determined by the relevant Member’s selection. Those rights will be separate and distinct to the rights arising in respect of a different class of Loan Units (referable to a different Loan Note) or from the rights arising in respect of those different classes of Loan Units that are not referable to substantially identical Loan Notes.

Each class of Loan Units will also be distinct from the class of Foundation Units and Cash Units issued by Fund.

The class of Foundation Units issued by the Fund will be distinct from the class of Cash Units, thereby satisfying the condition in paragraph 276-20(1)(c).

Condition: that the Responsible Entity (as trustee of the Fund) has made an irrevocable choice to treat each class of membership interests in the Fund as being a separate AMIT for the income year (paragraph 276-20(1)(d))

The Responsible Entity has made a choice under paragraph 276-20(1)(d) to have the AMIT rules apply separately to each class of membership interests in the Fund as of 1 July 2017, thereby satisfying the condition in subparagraph 276-20(1)(d).

The choice applies to the income year for which the choice is made and every subsequent income year, and is irrevocable (subsections 276-20(4) and (5)).

On the basis of all of the above, the Fund will satisfy each of the conditions under

subsection 276-20(1) and be able to treat each class of membership interests as a separate AMIT for the purposes of Division 276 (other than Subdivision 276-A) for the income year in respect of which the choice under paragraph 276-20(1)(d) is made, and for each subsequent income year provided it continues to satisfy the relevant requirements in those later income years.

Question 4

Summary

If the Fund makes a choice in accordance with paragraph 276-20(1)(d), it is fair and reasonable to determine the trust components of each class of Loan Units treated as a separate AMIT by reference to the Loan Note(s) referable to that class.

Detailed reasoning

As provided for in subsection 276-20(2), for the purposes of applying Division 276 (other than Subdivision 276-A) each separate class of membership interests in an AMIT which satisfies each of the conditions set out in subsection 276-20(1) (including the making of the relevant choice under paragraph 276-20(1)(d)) is to be treated as being a separate AMIT for that income year.

For the purposes of Division 276 (and pursuant to subsection 276-20(3)), an AMIT which satisfies each of the conditions set out in subsection 276-20(1) will accordingly allocate assessable income, exempt income, non-assessable non-exempt income, tax losses, net capital losses and other similar amounts in respect of the AMIT between each of the separate classes of membership interests on a fair and reasonable basis.

To work out how much of an amount of a particular character is attributed to each member of an AMIT for an income year, an AMIT must (in accordance with the rules specified in

sections 276-265 and 276-270 and subject to Subdivision 276-F) first work out the trust component for the income year:

● of a character relating to assessable income;

● of a character relating to exempt income;

● of a character relating to non-assessable non-exempt income; and

● of a character relating to a tax offset (section 276-260).

As the entitlements to income and capital for each class or classes of Loan Units issued in the Fund is/are determined by reference to a specific asset of the Fund, being a referable Loan Note or a class of substantially identical Loan Notes (as applicable), the Fund will be constituted by classes with separately identifiable and referable assets.

LCG 2015/5 provides guidance in respect of AMITs constituting classes with separately identified assets as follows –

35. If a trustee chooses to treat each class of membership interests as a separate AMIT, each class is treated as having separate trust property to the extent that the property can be separately identified for each class.

36. Where there are separately identifiable assets, the assessable income, allowable deductions and other tax attributes for each class need to be determined by reference to the assets supporting that class. To do otherwise would be inconsistent with the rule in subsection 276-20(3) …

For each class or classes (as applicable) of Loan Units treated as a separate AMIT under subsection 276-20(2), the trustee should work out the trust components for that deemed separate AMIT for the income year by reference to the Loan Note or class of substantially identical Loan Notes referable to that class or classes.

Question 5

Summary

Interest income derived by the Fund in respect of the Loan Notes will be on a cash basis.

Detailed reasoning

Taxation Ruling TR 98/1³ is to be used as a guide for entities who, for tax purposes, must make use of the receipts (cash) method and/or earnings (accruals) method of tax accounting to determine their ordinary income under section 6-5.

The general principle set out in TR 98/1, as per paragraph 17, is that when accounting for income in respect of a year of income a taxpayer must adopt the method that, in the circumstances relevant to the taxpayer and the income, is the most appropriate such that it gives a substantially correct reflex of income.

The general principle to be applied to investment income in the form of interest is set out in paragraph 47 of TR 98/1. That is, subject to the overall principle that the appropriate method is that giving a substantially correct reflex of income, and subject to any exceptions to this general rule, “interest is only derived, or arises, when it is received or credited”.

Accordingly, the Fund will be taken to derive interest income on a cash basis (rather than an accruals basis) unless that method is considered not to give a substantially correct reflex of the Fund’s income and/or an exception to this general rule applies.

Paragraph 47 of TR 98/1 provides the following non-exhaustive list of exceptions to the general rule, none of which apply to the Fund -

● interest from a business of money lending carried on by the taxpayer;

● interest derived by a financial institution (Taxation Ruling TR 93/27); unless from a 'non-accrual loan' (Taxation Ruling TR 94/32);

● interest derived on a customer's overdue account where the provision of credit to customers is a regular feature of the business activities of the taxpayer and the interest is charged on an accruals basis. The interest owing by customers at the end of the year is assessable income derived in that year, even though it has not yet been received;

● interest derived by taxpayers, whose other income is calculated on an accruals basis, who invest in fixed or variable interest securities cum interest (Taxation Ruling TR 93/28); and

● interest from deposits made in the ordinary course of carrying on a business, where the business income is properly assessable on the earnings basis, may be derived on a due and receivable basis. An example of this would be a large trading business that actively manages its funds on deposits.

The Responsible Entity, in its capacity as a trustee of an AMIT, derives interest income via the custodian in accordance with the Loan Note Agreement pursuant to Loan Notes on issue. The Responsible Entity:

● does not hold itself out as a money lending business;

● does not enter into loans with the borrowers;

● does not itself borrow any funds;

● does not itself decide to subscribe for Loan Notes, but merely enters into Loan Notes to reflect Members’ selections and rates of interest;

● does not manage the relationship with the borrowers, including the identification of potential borrowers or assessing their credit risk; and

● does not have any input into decisions regarding borrowers in default (including whether replacement Loan Notes are issued).

The nature of the activities carried on by the Responsible Entity is such that a substantially correct reflex of the Fund’s income is given by the derivation of interest income on a cash (receipts) basis.

Based on the above, the interest income in respect of a referable Loan Note derived by each class of membership interests that is treated as a separately deemed AMIT for the purposes of

Division 276 (other than Subdivision 276-A) will be on a cash (receipts) basis.