Edited version of private advice

Authorisation Number: 1051639611790

Date of advice: 18 March 2020

Ruling

Subject: Managed investment trusts

Question

Is Entity A a widely-held entity as specified in paragraph 275-20(4)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Relevant facts and circumstances

Entity A

1.    Entity A:

·         is a not for profit pension fund for persons who practice a particular profession (the Profession) established under the laws of Country X, a civil law jurisdiction;

·         forms part of the statutory pension regime in Country X.

·         has as its sole purpose the provision of old-age and disability pension benefits as well as survivors' benefits in accordance with the relevant pension legislation of Country X to its members, being individuals employed or self-employed in the Profession;

·         governs its affairs according to a constitution, being the Constitution of Entity A (Constitution);

·         manages its assets in the sole interests of its members, being the individuals making monthly contributions and being entitled to pension benefits upon reaching the relevant milestones for pension payments;

·         has its central management and control carried on outside of Australia by individuals, none of whom are Australian residents; and

·         is an indefinitely continuing fund on the basis that there is no clause in the Constitution or applicable law of Country X which requires or contemplates that it will be terminated or wound up after a specified period or a specific date.

Source and management of funds

2.    The Constitution of Entity A provides amongst other things:

The funds of Entity A consist of the contributions of members, profits earned from investments and other profits.

3.    The funds may only be used to fulfil the tasks which Entity A has to undertake according to the law of Country X and the Constitution, and to pay necessary administrative costs.

4.    Entity A must ensure that the benefits to be paid according to its Constitution can be financed in the long term.

Members

5.    Members of Entity A are all members of the Profession who are not unfit for work and who are entitled to exercise the Profession.

6.    Membership of Entity A ends when:

·         a member loses the right to practice the Profession;

·         through relinquishing the exercise of the Profession;

·         through moving to another professional activity outside the scope of the Profession as specified in the Constitution and where this leads to membership of another professional pension fund; and

·         through exemption provided for in the Constitution.

7.    Entity A has over 100,000 members.

Contributions

8.    Members of Entity A during periods in which they earn income from the Profession pay a specified contribution to Entity A.

9.    Contributions are made on a monthly basis and the amounts so contributed are invested to fund pension benefits.

Benefits

10.  Broadly, Entity A provides the following types of 'compulsory' benefits:

·         retirement pension (payable to a member who has reached the normal retirement age

·         retirement pension in the event of occupational disability

·         early retirement pension (payable to a member who has reached 60 years of age and applied for the payment of early retirement benefits, at the usual retirement pension amount reduced by a prescribed discount percentage for each month of the early retirement period)

·         deferred retirement pension (payable to a member who has applied for a deferred retirement pension prior to reaching 72 years of age)

·         child benefit (payable to the recipient of a pension in the event of occupational disability, for each child)

·         widow's or widower's pension (payable to the surviving spouse of a member who has died)

·         orphan's pension (payable to the surviving children of a member who has died), and

·         one-time indemnity payment (payable to a widowed spouse of a member who is entitled to a pension and remarries).

11.  Entity A also provides the following 'voluntary' benefits:

maintenance payments to the surviving partner of a deceased member who is not an entitled beneficiary

maintenance payments for children undergoing vocational education and children or orphans in the event of lasting unfitness for work

financial assistance for rehabilitation measures (being measures to preserve, improve or restore the ability to work for a member if their ability to work is jeopardised, reduced or cancelled due to illness or another form of infirmity or a weakening of their physical or mental strengths and their health is expected to be able to maintained, improved or restored), and

voluntary payments which can be revoked at any time or one-off payments where undue hardship arises in individual cases due to certain provisions in the Constitution.

Proposed Australian Investment

Entity A proposes investing in Australian income-producing commercial buildings together with other pension funds resident in Country X.

The property investments are contemplated to be made through an Australian unit trust that satisfies the requirements to be a managed investment trust, more specifically, a withholding MIT as defined in section 12-383 of Schedule 1 to the Taxation Administration Act 1953 (TAA) (the Pension Fund MIT).

Relevant legislative provision

Income Tax Assessment Act 1997 Paragraph 275-20(4)(c)

Reasons for decision

Section 275-20 of the ITAA 1997 sets out the widely-held requirements for managed investment trusts. Specifically, paragraph 275-20(4)(c) of the ITAA 1997 states that subsection 275-20(4) of the ITAA 1997 will cover:

a *complying superannuation fund, a *complying approved deposit fund or a *foreign superannuation fund, being a fund that has at least 50 *members

*denotes a term defined in subsection 995-1(1) of the ITAA 1997.

To determine whether Entity A is a widely-held entity specified in paragraph 275-20(4)(c) of the ITAA 1997, it is necessary to consider whether Entity A is a 'foreign superannuation fund' which has at least 50 'members'.

Foreign superannuation fund

The definition of the term 'foreign superannuation fund' in subsection 995-1(1) of the ITAA 1997 states:

(a) a *superannuation fund is a foreign superannuation fund at a time if the fund is not an *Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

*denotes a term defined in subsection 995-1(1) of the ITAA 1997.

As such, in order for Entity A to qualify as a foreign superannuation fund, it must:

a)    be a 'superannuation fund'; and

b)    not be an 'Australian superannuation fund'.

Is Entity A a 'superannuation fund'?

The term 'superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Section 10 of the SIS Act defines a 'superannuation fund' as:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

Only paragraph (a) of this definition is relevant in Entity A's case.

Is Entity A a fund?

The term 'fund' is neither defined in the SIS Act nor the income tax legislation. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Macquarie Dictionary (Macmillan Publishers Australia, The Macquarie Dictionary online, macquariedictionary.com.au, viewed 9 March 2020.) (the Macquarie) relevantly defines 'fund' as having the following meanings:

1. a stock of money or pecuniary resources.

2. a store or stock of something, now often of something immaterial: a fund of knowledge.

3. an organisation which manages money invested for a particular purpose, such as superannuation.

In the High Court decision of Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290; 40 ALJR 265 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income there from being capitalised'.

Windeyer J's views in Scott were cited with approval by Hill J in Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; [2003] FCA 1428; (2003) 54 ATR 423 who stated, at paragraph 49, that 'for present purposes, the point is the need for "money" or "other property" to constitute a fund'.

The Constitution provides that the funds of Entity A consist of the contributions of members, profits earned from investments and other profits.

Generally, members of Entity A, during periods in which they earn income from practicing the Profession, are required to contribute a specified percentage of their income into Entity A.

Contributions are paid into Entity A on a monthly basis by and on behalf of the members of Entity A and the amounts are invested to fund pension benefits. This is consistent with Scott.

In view of the above, it is concluded that Entity A is a 'fund'.

Is Entity A an 'indefinitely continuing fund'?

As with 'fund', the phrase 'indefinitely continuing' is not defined in the SIS Act and income tax legislation.

The Macquarie relevantly defines 'indefinitely' and 'continuing' as having the following meanings:

Indefinitely:

1.    not definite; without fixed or specified limit; unlimited: an indefinite number.

2.    not clearly defined or determined; not precise.

Continue: (verb (Continued, continuing))

1.     to go forwards or onwards in any course or action; keep on.

2.     to go on after suspension or interruption.

3.     to last or endure.

4.     to remain in a place; abide; stay.

5.     to remain in a particular state or capacity.

There is no clause in the Constitution or applicable law in Country X which requires or contemplates that Entity A be terminated or wound up after a specified period or a specific date.

Consequently, it is considered that Entity A is an 'indefinitely continuing fund'.

Is Entity A a 'provident, benefit, superannuation or retirement fund'?

None of the four descriptors 'provident', 'benefit', 'superannuation' or 'retirement fund' are defined in the SIS Act or income tax legislation. However, the terms have been the subject of judicial consideration.

In Scott, the High Court also examined the term 'superannuation fund'. Windeyer J enunciated at ATD 351; AITR 312; ALJR 278 that:

... I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age.

In the later case of Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519; 10 AITR 463 (Mahoney), the High Court took a similar view as in Scott. Kitto J expressed the view at ALJR 232; (1967); ATD 520; AITR 464 that:

...all that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not in a general sense, but characterised by some specific future purpose. A funeral benefit is a familiar example.

The court found that the expression 'provident, benefit or superannuation fund' takes it's meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage.

In analysing the components of the expression, Kitto J interpreted the term 'benefit' to require a purpose narrower than the purpose of conferring benefits in a completely general sense upon employees. The benefit must be characterised by some future purpose e.g. a funeral benefit. On the same note, a provident fund must not refer to the provision of funds in a general sense, but must relate to a provision against contemplated contingencies.

Both of the above cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as a sickness or accident.

In Cameron Brae Pty Limited v. FCT (2007) 161 FCR 468; [2007] FCAFC 135; 2007 ATC 4936, the Full Federal Court held that the relevant fund was a superannuation fund for the purposes of former section 82AAE of the ITAA 1936. Jessup J, at paragraph 106, stated:

In answering the question whether the fund was a "superannuation fund" as the term is ordinarily understood, it is, in my view, critical that payments could not have been made out of the fund (other than by way of administration expenses, taxation, etc) save to members of the relevant discretionary class, and save in circumstances which fell within the ordinary understanding of superannuation. A proper characterisation of the fund should, in my view, depend upon the purposes for which the assets and moneys of the fund might have been used rather than upon the quality of the rights of individual members of the fund. If the fund could have been used only to achieve what might be described as a superannuation purpose, I would describe the fund as a "superannuation fund". That a particular member of a discretionary class might not, ultimately, have received any payment, was not, in my view, disqualifying.

The aforementioned authorities establish that for a fund to qualify as a provident, benefit, superannuation or retirement fund, it must have the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies (e.g. death, disability or serious illness). If a fund provides benefits in other circumstances, it will not satisfy the requirement to be a provident, benefit, superannuation or retirement fund.

The purpose of Entity A, as set out in the Constitution, is to provide benefits and support to its members and their surviving dependents in accordance with the relevant pension legislation of Country X and the Constitution. It is necessary to examine the benefits Entity A provides to determine whether its purpose corresponds to the requirements for a provident, benefit, superannuation or retirement fund.

The Constitution provides that the funds of Entity A may only be used to fulfil the tasks which Entity A has to undertake according to the law and the Constitution, and to pay necessary administrative costs.

It is considered that the circumstances in which members of Entity A and their dependents can access benefits from Entity A are consistent with those of a provident, benefit, superannuation or retirement fund.

The 'compulsory' benefits provided by Entity A are payable only upon the retirement, death or disability of a member. Entity A may also provide 'voluntary' benefits in certain limited circumstances specified. These circumstances align with the contemplated contingencies of a provident, benefit, superannuation or retirement fund.

Therefore, as Entity A has the sole purpose of providing retirement benefits or benefits in other allowable contemplated contingencies, it is considered that Entity A is a 'provident, benefit, superannuation or retirement fund'.

As Entity A satisfies all the requirements in paragraph (a) of the definition in section 10 of the SIS Act, it is a 'superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Is Entity A an 'Australian superannuation fund'?

The term 'Australian superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 295-95 of the ITAA 1997.

Subsection 295-95(2) of the ITAA 1997 provides that:

A *superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total *market value of the fund ' s assets attributable to *superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

*denotes a term defined in subsection 995-1(1) of the ITAA 1997.

Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 (TR 2008/9) sets outs the Commissioner's interpretation of the definition of 'Australian superannuation fund' in subsection 295-95(2) of the ITAA 1997.

Paragraphs 20 and 21 of TR 2008/9 state with respect to the central management and control (CM&C) of a superannuation fund:

20. The CM&C of a superannuation fund involves a focus on the who, when and where of the strategic and high level decision making processes and activities of the fund. In the context of the operations of a superannuation fund, the strategic and high level decision making processes includes:

·         formulating the investment strategy for the fund;

·         reviewing and updating or varying the fund's investment strategy as well as monitoring and reviewing the performance of the fund's investments;

·         if the fund has reserves - the formulation of a strategy for their prudential management; and

·         determining how the assets of the fund are to be used to fund member benefits.

21. The other principal areas of operation of a superannuation fund that form part of the day-to-day or operational side of the fund's activities will not constitute CM&C. These activities do not form part of the CM&C of the fund because they are not of a strategic or high level nature. Rather, these activities are of a more formalistic or administrative nature. Examples of such activities include the acceptance of contributions that are made on a regular basis, the actual investment of the fund's assets, the fulfilment of administrative duties and the preservation, payment and portability of benefits.

As Entity A has its central management and control carried on outside of Australia by individuals, none of whom are Australian residents, Entity A fails to satisfy paragraph 295-95(2)(b) of the ITAA 1997.

Consequently, Entity A is not an 'Australian superannuation fund' as defined in subsection 295-95(2) of the ITAA 1997.

As Entity A is a 'superannuation fund' without being an 'Australian superannuation' fund, it is a 'foreign superannuation fund' for the purposes of paragraph 275-20(4)(c) of the ITAA 1997.

Does Entity A have at least 50 'members'?

Having established that Entity A is a foreign superannuation fund, it is then necessary to determine if Entity A has at least 50 'members' for the purposes of paragraph 275-20(4)(c) of the ITAA 1997.

According to subsection 2-10(2) of the ITAA 1997, most defined terms in the ITAA 1997 are identified by an asterisk appearing at the start of the term and the footnote that goes with the asterisk contains a signpost to the Dictionary definitions starting at section 995-1 of the ITAA 1997.

The term 'members' in paragraph 275-20(4)(c) of the ITAA 1997 is preceded by an asterisk. The footnote that goes with the asterisk states:

For definition, see section 995-1 of the Income Tax Assessment Act 1997.

An 'entity' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 960-100 of the ITAA 1997. Subsection 960-100(1) of the ITAA 1997 defines 'entity' to include a 'superannuation fund'.

Subsection 995-1(1) of the ITAA states that a 'member' in relation to an entity has the meaning given by section 960-130 of the ITAA 1997. Subsection 960-130(1) of the ITAA 1997 sets out who is a 'member' of various entities in the following table:

*denotes a term defined in subsection 995-1(1) of the ITAA 1997.

This definition does not encompass all of the entities listed in section 960-100 of the ITAA 1997, including a superannuation fund, and is thus plainly not intended to be exhaustive.

As Entity A is not constituted as any of the entities covered by section 960-130 of the ITAA 1997 and the section does not define 'member' in relation to a superannuation fund, it is considered that the term takes its ordinary meaning in the context of paragraph 275-20(4)(c) of the ITAA 1997. The Macquarie defines 'member', in its relevant sense, to include:

1. each of the persons composing a society, party, community, or other body.

2. each of the persons included in the membership of a legislative body, as parliament.

According to the Constitution, Entity A's members by law all practice a particular profession and who are not unfit for work and who are entitled to exercise their profession.

Australian superannuation funds generally take the form of a trust and a member in the fund has a beneficial interest in the trust estate. While Entity A was established under the laws of Country X, a civil law jurisdiction which does not recognise the concept of a trust, the definition of 'member' must be construed, in the context of paragraph 275-20(4)(c) of the ITAA 1997, by reference to the relationship with Entity A, being a foreign superannuation fund.

In Entity A's case, the individuals who are entitled to benefits either currently or upon certain requirements in the future being satisfied arguably have a beneficial interest in the assets of Entity A. Further or in the alternative, the assets of Entity A are administered for the sole benefit of members of Entity A.

In view of the above, it is considered that the individuals referred to as members in the Constitution are members of Entity A for the purposes of paragraph 275-20(4)(c) of the ITAA 1997. Consequently, Entity A has at least 50 members for the purposes of the paragraph.

Conclusion

Therefore, Entity A is a 'foreign superannuation fund' with at least '50 members' for the purposes of paragraph 275-20(4)(c) of the ITAA 1997 and is a widely-held entity as specified in the paragraph.