Edited version of private advice

Authorisation Number: 1051596303760

NOTICE

This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.

This notice must not be taken to imply anything about:

·        the binding nature of the private advice issued to the applicant

·        the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 18 October 2019

Ruling

Subject: Withholding Tax and Management Investment Trusts

Question 1

Following the proposed restructure, will Trust A (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 the 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 it represents rental income.

This ruling applies for the following period(s)

Year Ending 31 December 2019.

Year Ending 31 December 2020.

The scheme commences:

In the income year ending 31 December 2019.

Relevant facts and circumstances

1.     Trust A ("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 after the restructure and 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's activities are:

a.     Holding units in "Property Trusts" ("PTs")

b.     Investing or trading units in Property Trusts

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

8.     The PTs are all Australian unit trusts:

a.     Australian Unit Trust A

b.     Australian Unit Trust B

c.      Australian Unit Trust C

d.     Australian Unit Trust D

e.     Australian Unit Trust E

f.       Australian Unit Trust F

g.     Australian Unit Trust G

h.     Australian Unit Trust H

i.       Australian Unit Trust J

9.     The PTs hold student accommodation properties.

a.     There is a dormant property trust - Australian Unit Trust G.

b.     Recently established property trust for the purposes of pursuing acquisitions of new sites - Australian Unit Trust A.

10.  The PTs derive rent from investment in the student accommodation properties under lease arrangements with "Leasing Trusts" ("LTs").

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

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

13.  The PTs do not generally receive payments such as reimbursement for operating expenses. The LTs incur all operating expenses.

14.  The LTs must pay all outgoings (e.g. rates, taxes and levies) and usage charges (e.g. electricity, gas, water, sewerage, garbage and waste removal) to the relevant authorities on behalf of the PTs.

15.  The LTs must reimburse the PTs for building related insurance premiums including industrial special risk and public and product liability insurance.

16.  All reimbursements received by PTs are incidental and relevant to the renting of its property and ancillary to the ownership and use of its property.

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

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

19.  The PTs hold chattels to be supplied with the student accommodation including, for example:

a.     bedding

b.     electrical appliances and equipment

c.      furniture

20.  The PTs lease the student accommodation properties in their entirety to the LTs, along with the included chattels, in consideration for payments of arm's length rent.

21.  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.

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

23.  LTs derive income from the business of providing student accommodation to students (which includes income from services provided as well as rental income under the rental tenancy agreements with students) and, in some cases, leasing retail space to third party tenants.

24.  Retail lease agreements do not provide for the provision of other services.

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

26.  The residential tenancy agreements provide that the students will pay a weekly amount for which the student will receive the following:

a.     Fully furnished room and apartment including goods and chattels in the shared living, dining and kitchen area

b.     Utility services including water and energy

c.      Air-conditioning/heating

d.     Broadband internet

e.     Contents insurance

27.  There is no separate payment received by the LTs from the students for the above services except where there is an excess.

28.  LTs also provide laundry services and linen which (if the tenant chooses to utilise this service) the tenant will pay for separately.

29.  The LTs price the rent associated with these services to cover the estimated costs that will be incurred throughout the lease period. There is minimal profit associated with providing these services.

30.  These services are provided to encourage tenants to lease the apartment or rooms.

31.  The units in the LTs are 100% held by the Unit Trust A.

32.  100% of the units of the Unit Trust A are held by Beneficiary B.

33.  The Trustee 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.

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

35.  Company A is an Australian incorporated company.

36.  Company A is an Australian tax resident.

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

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

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

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

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

42.  Company A undertakes the following activities:

a.     Feasibility and due diligence services in relation to the acquisition of new sites that will be suitable for development and construction of the student accommodation properties.

b.     Overseeing the development and construction of the student accommodation properties.

c.      Managing the projects and ensuring that regulatory requirements and deadlines are satisfied.

d.     Arranging finance to assist with the funding requirements associated with the development and construction of the student accommodation properties.

e.     Negotiating with Universities and other educational institutions in relation to the reserved room capacity for each student accommodation property.

f.       Reporting and communicating with investors on a regular basis.

g.     Providing trustee services - Company A (which owns 100% of the shares in the trustee companies) is responsible for all activities of the trustees, including keeping proper books of accounts for each Property Trust and the Trust A as well as the group as a whole.

43.  Prior to the restructure 100% of the units in the Trust A are held by the Unit Trust B and 100% of these units are held by Beneficiary B.

44.  Beneficiary B is incorporated in X and its address is in X.

45.  Beneficiary B is a tax resident of X.

46.  Beneficiary B does not carry on business at or through an Australian permanent establishment.

47.  XYZ holds 98.4654% interest in Beneficiary B.

48.  Company C holds 100% interest in XYZ.

49.  Trust Fund A holds 96.9191% interest in Company C.

50.  The restructure is as follows:

a.     Trust Fund A has formed a limited partnership, the Beneficiary A (the "Beneficiary A") in the Country Y. It's address is in the Country Y;

b.     Beneficiary A will establish a new Australian unit trust, Unit Trust C, and appoint an Australian trustee;

c.      Trust Fund A will subscribe for 99.8% of the limited partnership interests in Beneficiary A by payment of cash (as the sole limited partner). Company D will be the general partner and manager of Beneficiary A and hold the remaining membership interests (0.2%) in the Beneficiary A.

d.     Beneficiary A will subscribe for 100% of the units in Unit Trust C to fund the investment in the Trust A by payment of cash;

e.     Unit Trust C will subscribe for at least 46.1% of the units in the Trust A to fund the acquisition of units in the PT;

                                          i.     This means that Unit Trust B will hold at most 53.9% of the units in Trust A.

f.       Trust A will subscribe for units in the PTs to fund the repayment of interest-free unitholder loans (which were initially issued to partially fund the acquisition of properties and sourced from funds ultimately contributed by the Trust Fund A); partially or fully repay bank debt and/or fund the future working capital requirements by payment of cash;

                                          i.     This means that Trust A will retain 100% of the units in the PTs at all times.

g.     The PTs will repay the interest-free unitholders loans, partially or fully repay bank debt and/or fund the future working capital requirements by payment of cash;

h.     Trust A will repay its existing interest-free unitholder loans to Unit Trust B by payment of cash to Unit Trust B;

i.       Unit Trust B will repay its existing interest-free unitholder loans to Beneficiary B by payment of cash;

j.       Beneficiary B will undertake a return of capital to Company E by payment of cash (the capital distribution will not involve a cancellation or redemption of shares in Beneficiary B);

k.      Company E will undertake a return of capital to Company F by payment of cash (the capital distribution will not involve a cancellation or redemption of stock in Company E); and

l.       Company F will undertake a return of capital to Trust Fund A by payment of cash (the capital distribution will not involve a cancellation or redemption of stock in Company F).

m.    The Trustee of Trust A will obtain 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)

51.  Beneficiary A will not carry on a business at or through an Australian permanent establishment.

52.  All of the entities with participation interests in Trust Fund A have at least 50 beneficiaries/members and are indefinitely continuing plans/funds, in the sense of there being no set date or period for them to be terminated or wound-up.

53.  The retirement plans associated with these entities are defined benefit plans or hybrid defined benefit/defined contribution plans.

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 Division 6C 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 paragraph 6), this is an eligible investment business due (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 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 17) i.e. (a) of the definition of eligible investment business.

The PTs hold land and chattels (see Relevant facts and circumstances paragraph 19) however, subsection 102MB(1) of the ITAA 1936 clarifies the meaning of "investing in land" as broader than the land itself:

For the purposes of this Division, investments in moveable property, being property that is:

(a) incidental to and relevant to the renting of land; and

(b) customarily supplied or provided in connection with the renting of land; and

(c) ancillary to the ownership and use of land;

are taken to be investments in land.

17.  Given the chattels held by the PTs are customarily supplied in student accommodation these will be taken to be investments in land as per subsection 102MB(1) of the ITAA 1936..

18.  PTs also receive minor reimbursements such as for building related insurance premiums. However, subsections 102MB(2) and 102MB(3) of ITAA 1936 clarifies that these incidental amounts would form part of the gross revenue that is considered rent:

102MB(2)

For the purposes of this Division, an entity ' s investments in land are taken to be for the purpose, or primarily for the purpose, of deriving rent during a year of income if:

(a) each of those investments is for purposes (other than the purpose of trading) that include a purpose of deriving rent; and

(b) at least 75% of the gross revenue from those investments for the year of income consists of rent (except excluded rent); and

(c) none of the remaining gross revenue from those investments for the year of income is:

(i) excluded rent; or

(ii) from the carrying on of a business that is not incidental and relevant to the renting of the land.

102MB(3)

In working out the gross revenue referred to in paragraph (2)(b), payments for the provision of services that:

(a) are incidental to and relevant to the renting of land; and

(b) are ancillary to the ownership and use of the land;

are taken to be rent derived from the land.

Example:

Payments as reimbursement for expenses incurred by the lessor in providing security services for a shopping centre would be covered by this subsection.

19.  As these reimbursements are incidental and relevant to the renting of the student accommodation and ancillary to the ownership and use of the accommodation, these reimbursements will be taken as rent derived from land for these purposes.

20.  This means that the business regarding the property investment only derives gross revenue as referred to in paragraph (2)(b) i.e. 100% and therefore achieves the minimum 75% requirement to be considered to be investing in land.

21.  Additionally, PTs can derive interest income from Australian bank deposits (see Relevant facts and circumstances point 18) which is also an eligible investment business as per (b)(i).

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

23.  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.

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

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

25.  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)

26.  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

27.  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;

28.  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%.

29.  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.

30.  Given the facts, all of the 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.

31.  Given all of the members of the 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.

275-10(3)(e)

32.  275-10(3)(e)

(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);

33.  As established the trust is not registered under 601EB and so (i) and (ii) do not apply to Trust A. Trust A instead meets (iii) and therefore satisfies 275-10(3)(e). This is because Trust A is covered by 275-15 (discussed above) and also meets the widely held requirements in subsection 275-20(1) discussed in further detail below.

275-20(1)

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.

34.  The number of members in the Trust A is determined by applying the rules contained in section 275- 20(3), which are subject to the rules in subsection 275-20(4) through to subsection 275-20(8). In determining the number of members in the Trust A, section 275-20(3) provides that:

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).

35.  Subsection (5) indicates that where an entity indirectly holds interest in the trust through a chain of trusts the entity is treated as a member of the trust.

36.  Given the facts, this means that

a.     Beneficiary B will be considered a member of the trust for 275-20(3) purposes as it holds 100% of the units in Unit Trust B which holds at most 53.9% of the units in Trust A (275-20(5)(a)) and

b.     Beneficiary A will be considered a member of the trust for 275-20(3) purposes as it holds 100% of the units in Unit Trust C which holds at least 46.1 % of the units in Trust A (275-20(5)(a)).

37.  Beneficiary B is not covered by 275-20(4) while Beneficiary A is covered by 275-20(4) - see reasoning under heading Beneficiary A is covered by 275-20(4) below. This means that as per 275-20(3) there is one (a)(i) member - Beneficiary B and for the (a)(ii) member - Beneficiary A a calculation as per (c) is required. This calculation involves multiplying the participation interest by 50 i.e. given the holding is at least 46.1% this means 46.1% x 50 = 23.05. This is then rounded up therefore the result is 24.

38.  Finally (d) indicates the total results are obtained by adding these together so the result is 24+1 = 25 thereby satisfying 275-20(1) i.e. the trust has at least 25 members.

Beneficiary A is covered by 275-20(4)

39.  Relevantly, Beneficiary A is covered by 275-20(4)(j):

a limited partnership, if, throughout the income year:

(i) at least 95% of the membership interests in the limited partnership are owned by entities mentioned in the preceding paragraphs of this subsection, or by entities that are wholly-owned by entities so mentioned; and

(ii) the remaining membership interests (if any) in the limited partnership are owned by a general partner of the limited partnership that habitually exercises the management power of the limited partnership;

40.  As described in the relevant facts and circumstances point 50, Trust Fund A will hold greater than 95% of the membership interests in Beneficiary A while the general partner and manager is Company D with the remaining membership interests.

41.  All the entities that have a participation interest in Trust Fund A i.e. the WCPFs are entities that meet the criteria in 275-20(4)(g) i.e. "mentioned in the preceding paragraphs" making Beneficiary A covered by 275-20(4).

42.  Specifically, 275-20(4)(g) states:

an entity, the principal purpose of which is to fund pensions (including disability and similar benefits) for the citizens or other contributors of a foreign country, if:

(i) the entity is a fund established by an exempt foreign government agency; or

(ii) the entity is established under a foreign law for an exempt foreign government agency; or

(iii) the entity is a *wholly-owned subsidiary of an entity mentioned in subparagraph (i) or (ii);

43.  Further section 995-1 defines "Exempt foreign government agency" as:

(a) the government of a foreign country, or of part of a foreign country; or

(b) an authority of the government of a foreign country, if the authority is of a similar nature to an authority that is an *exempt Australian government agency; or

(c) an authority of the government of part of a foreign country, if the authority is of a similar nature to an authority that is an *exempt Australian government agency.

44.  As outlined in the facts each of the entities with a participation interest in Trust Fund A's principal purpose is to fund pensions (including disability and similar benefits) for XY citizens or other XY contributors and has been established by an "exempt foreign government agency". Therefore they meet 275-20(4)(g) and so Beneficiary A is covered by 275-20(4).

275-10(3)(f)

45.  275-10(3)(f) states:

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

46.  Further 275-30(1) & (2) state:

275-30(1)

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.

275-30(2)

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.

47.  As discussed above, the Beneficiary A is an entity covered by section 275-20(4). Accordingly, the Beneficiary A will be treated as not having MIT participation interests in the Trust A for the purposes of section 275-30(1)(a) due to the operation of 275-30(2).

48.  The only entity with a MIT participation interest in the Trust A will be Beneficiary B. Beneficiary B will hold total MIT participation interests in the Trust A of no greater than 53.9% and is an Australian resident company.

49.  Accordingly it satisfies 275-30(1) as it does not have 10 or fewer persons holding a total MIT participation interest in the Trust A of 75% or more and a foreign resident individual does not have a MIT participation interest in the Trust A of 10%.

275-10(3)(g)

50.  275-10(3)(g) 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).

51.  The trustee of Trust A holds an AFSL licence (see Relevant facts and circumstances paragraph 33) i.e. 275-10(3)(g)(a)(i) satisfying this condition.

52.  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

53.  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.

54.  This is because, as already detailed above, Trust A is a MIT because of 275-10(1)(a) thus satisfying 12-383(1)(a) as it also meets 12-383(1)(b) of Schedule 1 of the TAA 1953 as discussed below.

55.  Paragraph 12-383(1)(b) of Schedule 1 of the TAA 1953 requires consideration of the "investment management activities" of the trust. This is not defined in the ITAA 1997 or the TAA 1953 and therefore takes on its ordinary meaning.

56.  However, it should be noted there is guidance in the Revised Explanatory Memorandum ('EM') to the Tax Laws Amendment (2010 Measures No. 3) Bill 2010 (Cth) extracts are provided below:

5.13

...

The relevant investment management activities are generally undertaken by the manager of the fund. Such decisions relate to the type of, and timing of the purchase of, investment assets.

...

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.

...

5.63

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).

5.65

The investment management requirement only applies in respect of assets of the trust that have a relevant connection with Australia. Assets that have a relevant connection with Australia are assets of the trust that are situated in Australia, taxable Australian property or shares, units or interests traded on an Australian stock exchange. [Schedule 5, item 4, subparagraphs 12-400(1)(c)(i) to (iii)]

...

Example 5.7 Investment in Australian assets by global fund

Global real estate fund GREF, which satisfies the conditions to be a specified widely-held listed entity, holds a global real estate investment portfolio, including investments in Australian real estate through a managed investment scheme (AMIT).

The global investment manager of GREF has a wholly-owned Australian investment manager. All investment management activities in relation to the Australian real estate portfolio are either performed by the wholly-owned Australian investment manager or sub-contracted to Australian third party service providers.

AMIT will satisfy the investment management requirement notwithstanding that the global investment manager provides substantial or significant investment management services in relation to AMIT's non-Australian global real estate portfolio. The exact nature and quantum of the offshore activities and the nature, size or value of offshore assets are not relevant to whether AMIT passes the investment management activity test in relation to its Australian assets.

AMIT will qualify as a MIT (provided it satisfies the other requirements to be a MIT).

Example 5.8 Offshore manager for Australian assets

PT unit trust is an Australian trust holding commercial property in Australia. The 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. Officers of SFM Co are flown to Australia on two occasions over the course of the income year. While in Australia these officers make certain investment management decisions as to the purchase of property and carry out final due diligence work associated with that purchase by PT unit trust. SFM Co has no physical presence in Australia and has carried out preparatory activities in relation to the investment management in Singapore. As the substantial proportion of the investment management activities in relation to the Australian assets of PT unit trust are undertaken from an office in Singapore, PT unit trust would not satisfy the investment management requirement and could not qualify as a MIT.

57.  The 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 37 and 40 to 42). Given all the investment management activities carried out in relation to the assets of the trust are carried out in Australia 12-383(1)(b) is met and Trust A is a withholding MIT.

Question 3

58.  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%.

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

(1) Recipients in information exchange countries

60.  An information exchange country is a foreign country specified in the regulations for the purposes of section 12-390(7) of Schedule 1 of the TAA 1953. Relevantly, the Taxation Administration Regulations 2017 (Cth) specifies in Item 36 and Item 41 of the table in regulation 34(2) that the Country Y and X are information exchange countries with effect from 1 July 2008 and 1 July 2010 respectively.

61.  As the recipients of the fund payments are Beneficiary A and Beneficiary B and their place of address is Country Y and X respectively, the recipients are in information exchange countries Thereby meeting, criteria (1).

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

62.  The Trust A will not have NCMI income as defined in section 12-435 of Schedule 1 of the TAA 1953 below as, to the extent it is rental income, it will not have any of these types of income:

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.

63.  Each of these types of income is discussed separately below.

(a) *MIT cross staple arrangement income

64.  The following explains in detail that although there is a MIT cross staple arrangement, Trust A does not have MIT cross staple arrangement income to the extent that it meets the third party rent exception.

65.  Section 12-437 of Schedule 1 of the TAA 1953 defines MIT cross staple arrangement income and provides specific exclusions.

66.  Subsection 12-437(1) states:

This section applies if:

(a) an amount is included in the assessable income for an income year of a *managed investment trust in relation to the income year (worked out for the purposes of determining the trust ' s *net income, or in the case of an *AMIT, the trust ' s total assessable income, for the income year); and

(b) the amount mentioned in paragraph (a) is, or is attributable to, an amount derived, received or made from another entity (the second entity ); and

(c) the amount mentioned in paragraph (a) is not an amount mentioned in paragraph 12-405(1)(a), (b), (c), (d) or (e).

67.  Trust A will have income from the PTs from the rent received from the leasing arrangement with the LTs.

68.  Subsection 12-437(2) states:

The amount is MIT cross staple arrangement income of the *managed investment trust if:

(a) either:

(i) the *managed investment trust is an *asset entity in relation to the income year and is a *stapled entity in relation to a *cross staple arrangement; or

(ii) the second entity is an asset entity in relation to the income year and is a stapled entity in relation to a cross staple arrangement; and

(b) either:

(i) if subparagraph (a)(i) applies - the second entity is an *operating entity in relation to the income year and is a stapled entity in relation to the cross staple arrangement; or

(ii) if subparagraph (a)(ii) applies - another entity (the third entity ) is an operating entity in relation to the income year and is a stapled entity in relation to the cross staple arrangement; and

(c) either:

(i) if subparagraph (a)(i) applies - the amount is derived, received or made by the managed investment trust from the second entity; or

(ii) if subparagraph (a)(ii) applies - the amount is attributable to an amount derived, received or made by the second entity from the third entity.

69.  Broadly, for this scenario given the PTs receives rent from the LTs, there is an asset entity subject to a cross staple arrangement. This is detailed below.

70.  The Trust A is an asset entity which is defined in 12-436 of Schedule 1 of the TAA 1953. Specifically, 12-436(1) states:

An asset entity in relation to an income year is a trust or partnership that is not covered by subsection 275-10(4) of the Income Tax Assessment Act 1997 in relation to the income year.

71.  As discussed above Trust A is not covered by 275-10(4) and is therefore an asset entity.

72.  It is part of a cross staple arrangement which is defined in 12-436(4) of Schedule 1 of the TAA 1953 as:

A cross staple arrangement is an *arrangement that is entered into by 2 or more entities (the arrangement entities ) if:

(a) at least one of the arrangement entities is an *asset entity; and

(b) at least one of the arrangement entities is an *operating entity; and

(c) the following conditions are satisfied:

(i) one or more other entities (the external entities ) each hold a *total participation interest in each arrangement entity;

(ii) the sum of the total participation interests held by the external entities in each arrangement entity is 80% or more.

73.  The LTs will be considered operating entities as each LT derives income from the business of providing student accommodation to students which includes income from services provided as well as rental income under the rental tenancy agreements with students.

74.  Trust Fund A holds an indirect interest in the LTs and the PTs both greater than 80%.

75.  Specifically, the LTs are 100% held by Unit Trust A which is 100% held by Beneficiary B which is 98.4654% held by XYZ which is 100% held by Company C and 96.919% held by Trust Fund A i.e. approximately 95% interest which is greater than 80% holding.

76.  The PTs are held by Trust A which is held 46.1% by Unit Trust C and 53.9% held by Unit Trust B. These are held by Beneficiary A and Beneficiary B respectively. The Beneficiary A has Trust Fund A as the limited partner with greater than 95% interest i.e. greater than 43.7% indirect interest through this holding. Additionally, as detailed above Trust Fund A has an approximate 95% indirect interest in Beneficiary B and thereby a 51% interest through this holding. Therefore in total it holds greater than 80% interest in the PTs.

77.  Therefore as detailed above there is an asset entity and a cross staple arrangement.

78.  The relevant exclusion such that limits Trust A's MIT cross staple arrangement income is in subsection 12-437(3) of the TAA 1953:

The amount is not MIT cross staple arrangement income of the *managed investment trust under subsection (2) to the extent that it is attributable to an amount that satisfies the following requirements:

(a) the amount is derived, received or made by a *stapled entity in relation to the *cross staple arrangement from an entity that is not a stapled entity in relation to the cross staple arrangement;

(b) the amount mentioned in paragraph (a) is *rent from land investment.

79.  Rent from land investment is defined in 995-1(1) of the ITAA 1997 as:

rent from land investment means rent that is derived or received from investments in Division 6C land.

80.  Division 6C land is defined in 995-1(1) of the ITAA 1997 as:

Division 6C land has the meaning given by section 12-448 in Schedule 1 to the Taxation Administration Act 1953.

81.  Relevantly 12-448(5) of Schedule 1 of the TAA 1953 states:

Division 6C land is land (within the meaning of Division 6C of Part III of the Income Tax Assessment Act 1936 ), and includes a thing if an investment in the thing would be an investment in land under subsection 102MB(1) of that Act.

82.  102MB(1) of Division 6C of the ITAA 1936 states:

For the purposes of this Division, investments in moveable property, being property that is:

(a) incidental to and relevant to the renting of land; and

(b) customarily supplied or provided in connection with the renting of land; and

(c) ancillary to the ownership and use of land;

are taken to be investments in land.

83.  Further Law Companion Ruling LCR 2019/D2 Non-concessional MIT income states at paragraph 53:

The term 'Division 6C land' refers to land within the meaning of Division 6C of Part III of the ITAA 1936. This includes an investment in land contemplated under subsection 102MB(1), that is, investments in a narrow class of moveable property. Accordingly, 'rent from land investment' under the Act extends beyond the common law notion of land, to that contemplated under Division 6C.

84.  As it is broader than rent the following is also relevant:

102MB(2)

For the purposes of this Division, an entity ' s investments in land are taken to be for the purpose, or primarily for the purpose, of deriving rent during a year of income if:

(a) each of those investments is for purposes (other than the purpose of trading) that include a purpose of deriving rent; and

(b) at least 75% of the gross revenue from those investments for the year of income consists of rent (except excluded rent); and

(c) none of the remaining gross revenue from those investments for the year of income is:

(i) excluded rent; or

(ii) from the carrying on of a business that is not incidental and relevant to the renting of the land.

102MB(3)

In working out the gross revenue referred to in paragraph (2)(b), payments for the provision of services that:

(a) are incidental to and relevant to the renting of land; and

(b) are ancillary to the ownership and use of the land;

are taken to be rent derived from the land.

Example:

Payments as reimbursement for expenses incurred by the lessor in providing security services for a shopping centre would be covered by this subsection.

85.  This means rent from land investment also consists of amounts that are incidental to and relevant to the renting of land and are ancillary to the ownership and use of the land such as reimbursement for expenses incurred to provide security services.

86.  PTs own land and the student accommodation buildings, fixtures and chattels which are incidental to and customarily provided in leasing the student accommodation buildings which are an "investment in land".

87.  The PTs lease the student accommodation properties in their entirety to the LTs for consideration.

88.  The LTs then enter into residential tenancy agreements with third party tenants (the students) and receive payments from students for the provision of rooms in the student accommodation properties and certain services (see Relevant facts and circumstances paragraph 26 to 30 above).

89.  Further Law Companion Ruling LCR 2019/D2 Non-concessional MIT income states:

54. It is a necessary requirement that the arrangement between the operating entity and the third party (from which the cross staple payment is sourced) can properly be characterised as a lease (or sub-lease) in order for there to be rent. In turn, only that component of the payment properly characterised as rent from land investment will qualify for the carve-out.

Payment under a lease

55. At common law⁴¹, a lease is an interest in land, which is for a fixed or ascertainable term and confers on the grantee the right of exclusive possession over the land.⁴² By contrast, a licence is a personal, contractual right of the grantee against the grantor, effectively amounting to permission to do something that it would otherwise not be permissible.

56. This distinction carries practical legal consequences, as a tenant's possession can be protected by equitable remedies against third parties such as ejectment, trespass and nuisance, whereas a licensee is limited to action personally against the licensor under contract law.⁴³

57. Whether a grant of a right to use land will be characterised as a lease depends on whether, in substance (discerned objectively), the grant confers on the recipient a right of exclusive possession.⁴⁴ The terminology adopted by the parties in an instrument is a relevant consideration, but is not determinative.

...

81. The payment under a lease will only qualify as rent to the extent it genuinely reflects a payment for the periodic use of the relevant land subject to a lease. Where a bundle of rights and benefits are conferred on a lessee of land in return for a single periodic payment, only that part of the payment that is properly referable to the third party's lease of land will be attributable to rent from land investment and avoid ultimate characterisation as NCMI.

...

86. If the payments under the arrangements are partly rent and partly for something else (for example, a licence), a reasonable basis of apportionment of income must be applied to identify the MIT cross staple arrangement income component.

90.  As highlighted in example 1.6 in Revised Explanatory Memorandum to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2019 (Explanatory Memorandum), it is appropriate to use a proportionate basis to attribute an amount between rental income and other services income:

Example 1.6: Amount attributable to cross staple arrangement

Asset Trust owns commercial property (a specialist homewares shopping centre). It leases that commercial property to Op Co in consideration for an annual rental payment of $80,000. This arrangement is a cross staple arrangement entered into by Asset Trust (an asset entity) and Op Co (an operating entity) with a cross staple payment of $80,000.

Op Co enters into sub lease agreements with third party tenants for exclusive possession of retail spaces. Separately, it enters into licence arrangements with respect to common areas for the use of temporary advertising or promotional displays.

Op Co derives:

$90,000 in third party rental income from its sub leases (net of attributable expenses other than the cross-staple rent); and

$10,000 from its licence arrangements (net of attributable expenses other than the cross-staple rent).

To determine the amount of income that is attributable to third party rental income, Op Co must reduce the third party rental income by part of the $80,000 cross staple payment on a proportionate basis.

Therefore, because 90 per cent of Op Co's income is from third party rent, 90 per cent of the cross staple payment is attributable to that amount. Consequently, in relation to the cross staple payment of $80:

$72,000 (that is, $80,000 x 90 per cent) is attributable to third party rent and will not be MIT cross staple arrangement income; and

$8,000 will be MIT cross staple arrangement income.

91.  In this case the LTs receive both rental income and income for the provision of other services from the tenants. To the extent that the payments from the LT to the PT are attributable to the rental income received by the LT, it will not be NCMI. In other words, to the extent that the amount is attributable to payments for the other services, including utility services, broadband internet, laundry services and contents insurance, it will be NCMI (and a 30% rate of withholding could apply).

92.  This means that to the extent that the income derived by the PT is rental income it will not be NCMI and therefore the 15% MIT withholding rate will apply to this income.

(b) *MIT trading trust income;

93.  MIT trading trust income is defined in section 12-446 of Schedule 1 of the TAA 1953 which provides that MIT trading trust income is an amount included in the assessable income of the MIT that is derived from another entity that is a trading trust for the purposes of Division 6C of Part III of the ITAA 1936.

94.  As already established Trust A only holds units in the PTs which are not trading trusts therefore no amount of income of the Trust A will be MIT trading trust income.

(c) *MIT agricultural income;

95.  MIT agricultural income is defined in section 12-448 of Schedule 1 of the TAA 1953 which provides that the income is attributable to an asset that is used or could reasonably be used for carrying on a primary production business. Given the facts (see Relevant facts and circumstances paragraph 22) the PTs do not hold such assets therefore the Trust A will not derive such income.

(d) *MIT residential housing income.

96.  Section 12-450 of Schedule 1 of the TAA 1953 defines MIT residential housing income to be that income attributable to a residential dwelling asset. Residential dwelling asset is defined in section 12-452 of Schedule 1 of the TAA 1953 to exclude commercial residential premises. Commercial residential premises is defined in 995-1(1) of the ITAA 1997 as having the same meaning as in the GST Act.

97.  Further ECC Southbank Pty Ltd v. Federal Commissioner of Taxation [2012] FCA 795; 2012 ATC 20-336; [2012] Q ConvR 54-780; (2012) 205 FCR 505; [2013] ALMD 1486; [2013] ALMD 1487; [2013] ALMD 1488; [2013] ALMD 1489; (2012) 87 ATR 902 found that these particular student accommodation and serviced apartments were either a hostel or very similar to a hostel and that they met the definitions of "commercial residential premises" in the GST Act.

98.  The PT premises only earn income on completion and when complete they are commercial residential premises. This means that the income of the Trust A is not MIT residential housing income.

99.  As indicated above there is only NCMI to the extent that the income the PT is not rental income and the payments are made to entities in an information exchange country and therefore the 15% concessional rate will apply.