Edited version of your private ruling

Authorisation Number: 1051596272862

Ruling

Subject: Withholding tax and management investment trusts

Question 1

Following the proposed restructure, will Trust A be a managed investment trust (MIT) as defined in section 275-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

If the answer to Question 1 is "yes", will Trust A be a withholding MIT as defined in section 12-383 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953)?

Answer

Yes

Question 3

If the answer to Question 2 is "yes", will the concessional 15% MIT withholding tax rate apply to fund payments made to the Beneficiary A and Beneficiary B by Trust A?

Answer

Yes - to the extent that they satisfy subsection 12-437(3) of Schedule 1 of the TAA 1953.

This ruling applies for the following periods:

Year ending 31 December 2019.

Year ending 31 December 2020.

The scheme commences:

In the year ending 31 December 2019.

Relevant facts and circumstances

1.     Trust A is an Australian unit trust.

2.     The Trustee of Trust A expects to make the first fund payment for the 2020 income year before 31 December 2019. There will be a fund payment for the 2021 income tax year which is expected to be on or before 31 December 2020.

3.     The Trustee of Trust A is an Australian tax resident.

4.     Trust A is not registered or required to be registered under section 601EB of the Corporations Act 2001 (Cth) ("CA 2001") pursuant to 601ED of the CA 2001.

5.     All members of Trust A are wholesale clients and no Product Disclosure Statement under Division 2 of Part 7.9 would be required if Trust A was registered under section 601EB of the CA 2001.

6.     Trust A is a "managed investment scheme" ("MIS") as per section 9 of the CA 2001.

7.     Trust A satisfies the MIT widely-held requirements (paragraph 275-10(3)(e) of the ITAA 1997) and the closely-held restrictions (paragraph 275-10(3)(f) of the ITAA 1997).

8.     All the members of Trust A are residents of an information exchange country ("EOI country").

9.     Trust A's activities are limited to holding units in the Property Trusts ("PTs").

10.  The PTs are all Australian unit trusts:

a.     Unit Trust A

b.     Unit Trust B

c.      Unit Trust C

d.     Unit Trust D

e.     Unit Trust E

f.       Unit Trust F

g.     Unit Trust G

11.  The PTs hold student accommodation properties.

12.  The PTs derive rent from investment in the student accommodation properties under lease arrangements with "Leasing Trusts" ("LTs"). These arrangements are 'cross staple arrangements' under the MIT withholding rules.

13.  The PTs only earn income from the property once the construction of the premises is complete.

14.  The completed properties held by the PTs are "commercial residential premises" as defined in the GST Act.

15.  The primary purpose for holding the student accommodation property is to derive this rent.

16.  Some PTs hold Australian bank deposits and derive interest income from these deposits.

17.  The PTs lease the student accommodation properties in their entirety to the LT.

18.  The PTs receive rent payments from the LTs which comprise an amount of "base rent" and "top up rent". The base rent is a fixed amount that escalates each year and is subject to annual rent reviews. The top up rent represents a turnover rent and is equal to a percentage of residential income.

19.  All the land held by the PTs has not been zoned to allow the use for a primary production business.

20.  LTs derive income from the business of providing student accommodation to students and, in some cases, leasing retail space to third party tenants.

21.  The LTs enter into residential tenancy agreements with third party tenants (the students) and receive regular payments from the students for the provision of rooms in the student accommodation properties.

22.  The units in the LTs are 100% held by Unit Trust H.

23.  100% of the units of Unit Trust H are held by Beneficiary B.

24.  The Trustee of Trust A will hold an Australian Financial Services Licence ("AFSL") that covers it providing financial services (section 766A of the CA 2001) to wholesale clients (section 761G of the CA 2001) when the first fund payment for the 2020 income year and 2021 income years takes place.

25.  Company A (also known as the "Manager") is the appointed investment manager for Trust A.

26.  Company A is an Australian incorporated company.

27.  Company A is an Australian tax resident.

28.  Company A conducts all of its activities in Australia.

29.  The day-to-day control of Trust A lies with the Trustee of Trust A and the Manager - Company A.

30.  All of the investors in Trust A will be wholesale clients for the purposes of the CA 2001.

31.  Company A is the sole investment manager for Trust A.

32.  The investment management activities undertaken by Company A for Trust A are all conducted within Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 275-10

Income Tax Assessment Act 1997 section 275-15

Income Tax Assessment Act 1997 section 275-20

Income Tax Assessment Act 1997 section 275-30

Income Tax Assessment Act 1936 section 102MB

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

Taxation Administration Act 1953 Schedule 1 section 12-383

Taxation Administration Act 1953 Schedule 1 section 12-390

Taxation Administration Act 1953 Schedule 1 section 12-435

Taxation Administration Act 1953 Schedule 1 section 12-436

Taxation Administration Act 1953 Schedule 1 section 12-437

Reasons for decision

Question 1

1.     Section 275-10 of the ITAA 1997 provides a definition of a Managed Investment Trust in relation to an income year. Relevantly, where the Trustee makes a payment in an income year (see Relevant facts and circumstance paragraph 2) 275-10(1)(a) indicates that a MIT includes a trust which is covered under subsection 275-10(3).

2.     275-10(3) states:

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

(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

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

(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

(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

(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

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

(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.

3.     Each element of 275-10(3) has been met by Trust A and is discussed below.

275-10(3)(a) of ITAA 1997

4.     275-10(3)(a) states:

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;

5.     Given the Trustee is an Australian resident (see Relevant facts and circumstances paragraphs 3) this element is met.

275-10(3)(b) of ITAA 1997

6.     275-10(3)(b) states:

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

7.     Trust A meets this element as it is not covered by 275-10(4) which 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).

8.     This is because Trust A is a unit trust (see Relevant facts and circumstances paragraph 1) and is not a trading trust for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936. It is not a trading trust because of the reasons outlined below.

9.     "Trading Trust" for Division 6C of Part III of ITAA 1936 purposes is defined in section 102N(1) which 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 the carrying on by that other person of a trading business.

10.  Trading Trust definition thus consists of two elements (a) and (b) and both elements rely on the meaning of a trading business.

11.  A "trading business" is defined in section 102M of the same Division as:

a business that does not consist wholly of eligible investment business

and "eligible investment business" is defined in section 102M of the same Division as:

one or more of:

(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);

(ii) bonds, debentures, stock or other securities;

(iii) shares in a company, including shares in a foreign hybrid company (as defined in the Income Tax Assessment Act 1997 );

(iv) units in a unit trust;

(v) futures contracts;

(vi) forward contracts;

(vii) interest rate swap contracts;

(viii) currency swap contracts;

(ix) forward exchange rate contracts;

(x) forward interest rate contracts;

(xi) life assurance policies;

(xii) a right or option in respect of such a loan, security, share, unit, contract or policy;

(xiii) any similar financial instruments; or

(c) investing or trading in financial instruments (not covered by paragraph (b)) that arise under financial arrangements, other than arrangements excepted by section 102MA.

12.  The first element of the Trading Trust definition i.e. (a) is not met as Trust A only invests in units in unit trusts (see Relevant facts and circumstances paragraphs 9 and 10), this is an eligible investment business due to (b)(iv) of the definition therefore it is not a trading business so the Trustee of Trust A does not carry on a trading business.

13.  The second element i.e. (b) requires the consideration of what the Trustee of Trust A can control, directly or indirectly.

14.  Trust A holds 100% of the units of the PTs and therefore is in a position to control the PTs. However, these PTs will also not be taken to carry on a trading business. This means the second element is also not met (i.e. controlling a trading business) and Trust A is not a trading trust.

15.  The PTs are not trading businesses because they are carrying on eligible investment businesses.

16.  This is because the PTs invest in land for the primary purpose of deriving rent (see Relevant facts and circumstances paragraph 15) i.e. (a) of the definition of eligible investment business.

17.  Additionally, PTs can derive interest income from Australian bank deposits (see Relevant facts and circumstances paragraph 16) which is also an eligible investment business as per (b)(i).

18.  This means that all the activities of the PTs meet the eligible investment business definition and therefore the PTs are not carrying on of a trading business.

19.  Given Trust A only holds units in PTs and the PTs are not carrying on trading businesses the Trustee of Trust A will not be in a position to control nor be able to control, directly or indirectly the affairs or operation of another person in respect of the carrying on trading businesses.

20.  As such both elements of the Trading Trust definition are not met and 275-10(3)(b) is satisfied as Trust A is not covered by 275-10(4).

275-10(3)(c) of ITAA 1997

21.  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)

22.  Given the facts i.e. that Trust A is an MIS, the condition in section 275-10(3)(c) will be satisfied.

275-10(3)(d) of the ITAA 1997

23.  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;

24.  Trust A satisfies this section as it is covered by section 275-15. Specifically 275-15 states:

275-15 Trusts with wholesale membership

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%.

25.  Further 601ED(2) of the CA 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.

26.  Given the facts, all of Trust A's members are wholesale clients so no Product Disclosure Statement is required. This means there is no requirement that Trust A be registered in accordance with section 601ED of the CA 2001 and therefore section 275-15(a) is satisfied.

27.  Given all of the members of Trust A are wholesale clients there are no retail clients therefore subsection 275-15(b) (less than 20 retail clients) and (c) (retail clients owning no more than 10%) are also satisfied.

275-35

28.  275-35 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).

29.  The trustee of Trust A holds a relevant AFSL licence (see Relevant facts and circumstances paragraph 24) to satisfy the condition in subparagraph 275-35(a)(i).

30.  Given each element of 275-10(3) has been met by Trust A it is a MIT as defined in section 275-10 of the ITAA 1997.

Question 2

31.  Trust A is a withholding MIT as per subsection 12-383(1) of Schedule 1 of the TAA 1953:

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 subsection 275-10(2) 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.

32.  Trust A has Company A as its sole investment manager - an Australian based entity who conducts all the investment activities for Trust A in Australia (see Relevant facts and circumstances paragraphs 25 to 28 and 31 to 32). Given all the investment management activities carried out in relation to the assets of the trust are carried out in Australia, subsection 12-383(1)(b) is met and Trust A is a withholding MIT.

Question 3

33.  Relevantly 12-390(3) of Schedule 1 of the TAA 1953 states:

The rate is:

(a) if the address or place for payment of the recipient is in an *information exchange country:

(i) 15% for *fund payments (except to the extent mentioned in subparagraph (ii) or (iii)); or

(ii) 10% for fund payments, to the extent that they are, or are attributable to, fund payments from a *clean building managed investment trust (except to the extent mentioned in subparagraph (iii)); or

(iii) 30% for fund payments, to the extent that they are attributable to *non-concessional MIT income (see section 12-435); or

(b) otherwise - 30%.

34.  The 15% applies to the fund payments made to Beneficiary A and Beneficiary B by Trust A to the extent that they are made to recipients in information exchange countries "(1)" and they are not attributable to non-concessional MIT income ("NCMI") "(2)". The following details the application of each of these criterion.

(1) Recipients in information exchange countries

35.  An information exchange country is a foreign country specified in the regulations for the purposes of section 12-385(4) of Schedule 1 of the TAA 1953.

36.  As the members of the trust are residents of EOI countries criteria (1) is met..

(2) Not attributable to NCMI to the extent it is rental income from third parties

37.  The definition of NCMI is in section 12-435:

12-435 MEANING OF NON-CONCESIONAL MIT INCOME

Non-concessional MIT income means any of the following:

(a) *MIT cross staple arrangement income;

(b) *MIT trading trust income;

(c) *MIT agricultural income;

(d) *MIT residential housing income.

38.  To the extent that the cross staple arrangement amount meets the third party rent exception in subsection 12-437(3), it will not be NCMI.

39.  To the extent that the PT income is not NCMI and the payments are made to entities in an EOI country the 15% concessional MIT withholding rate will apply.