Edited version of private advice

Authorisation Number: 1051660001115

Date of advice: 25 June 2020

Ruling

Subject: Income tax - assessable income - non assessable non-exempt - distributions on foreign investments

Question

Will dividends paid by X to Y as trustee of the Y Trust, and to which the Y has made Z presently entitled, be non-assessable non-exempt income of Z under Subdivision 768-A of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

For the year ending 30 June 201I

The scheme commences on:

September 201H

Relevant facts and circumstances

Parties to the scheme

X

1)    X is a foreign resident company limited by shares and was incorporated under the laws of Singapore on 24 February 201A.

2)    X functions as an investment holding company and does not conduct business activities in Australia.

3)    X declares and pays its dividends in Singapore.

Y Trust

4)    The Y Trust is an Australian resident discretionary trust established according to the terms contained in the Y Trust Deed.

5)    The 'Schedule' of the Y Trust Deed lists the Y Trust's 'Named beneficiaries' as being:

·   A1;

·   B1; and

·   (amongst the other listed 'classes of eligible beneficiaries')

Companies:

·      Of which any of the beneficiaries otherwise mentioned in this

schedule is a shareholder or director, or

·      ln which at least one share is owned beneficially by any

of the beneficiaries otherwise mentioned in this schedule.

Y

6)    Y is the Trustee of the Y Trust (Trustee). The Trustee is an Australian resident for income tax purposes. It is a company limited by shares, whose directors and shareholders are A1 and A2.

7)    A1 is an Australian resident for income tax purposes.

8)    A2 is an Australian resident for income tax purposes and is A1's spouse.

Z

9)    Z is a beneficiary of the Y Trust. Z is an Australian resident company limited by shares, whose directors are A1 and Ms A2. Its sole shareholder is S.

10) S is an Australian resident company (incorporated in the state of Victoria), is limited by shares and its directors and shareholders are A1 and A2.

Overview of X dividend distribution

11) On 12 May 201A, X agreed to issue shares and convertible notes to investors including the Y Trust. The Y Trust was issued M of the ordinary shares in X (being 26%) and N convertible notes.

12) In June 201A, X used the proceeds from the subscriptions of these shares and convertible notes for its payment of the purchase consideration under a share purchase agreement, under which it acquired all of the issued shares in P (a foreign resident company incorporated in Singapore).

13) On 3 August 201H, X entered into a 'Share Sale Agreement' with L (a foreign resident company incorporated in Singapore) for the sale of all the issued shares in P (P Sale).

14) In connection with the P Sale, X amended the terms and conditions of the convertible notes to provide for an automatic conversion of the outstanding convertible notes to X ordinary shares upon completion of the P Sale.

15) On completion of the P Sale in or around August 201H, X issued O ordinary shares to the Y Trust - on conversion of the Y Trust's N convertible notes into X ordinary shares - and the Y Trust subsequently held P of the ordinary shares in X. The total number of X ordinary shares which were on issue at this time (that is, for the income year ending 30 June 201I) was Q.

16) X is not eligible for, and has not claimed, any foreign tax deduction related to the above described dividends that it has paid to the Y Trust.

Trustee Minutes relating to X dividend distribution

17) Relevantly, according to the 'Trustee Minutes' signed and dated 31 August 201H, it was resolved as follows:

INCOME OF THE Y TRUST

...

(a) under "Definitions" in the Y Trust Deed, "income of the trust

fund" means "subject to clause 7 [of the Y Trust Deed], the net

income of the trust as defined in section 95(1) of the lncome

Tax Assessment Act 1936 (Cth) (as amended)", and

(b) clause 7 of the Y Trust Deed, provides that the Trustee may

"... instead of relying on the definition of income of the

trust fund' set out in this deed, decide at any time prior to

30 June in a financial year to adopt, for that financial

year, another definition of income of the trust fund'. A

decision under this clause 7 must be made by signing a

minute to that effect'.

...

DETERMINATION OF INCOME UNDER THE Y TRUST DEED

Resolved

1      That... [Y] in its capacity as

Trustee of the Y Trust, in accordance with the definition of

"income of the trust fund" in the Y Trust Deed and every power

enabling it, determines that the income of the trust fund for

the financial year ending 30 June 201I ("201I Year") include

all distributions made by X to ... [Y] in its capacity as Trustee of the

Y Trust during the 201I Year ("Distributions").

...

INCOME DISTRIBUTION - DISTRIBUTIONS:

...

[3] (b) that it is proposed to pay, apply or set aside to and for the

benefit of Z, being a beneficiary of the Y Trust, all the Distributions

made at the time when those Distributions are paid or credited to ...

[Y] in its capacity as Trustee of the Y Trust.

...

Resolved

...

4      That ... [Y] in its capacity as Trustee of the Y Trust, in accordance

with clause 6 of the Y Trust Deed [which gives the Trustee absolute

discretion to distribute income of the Y Trust to anyone named in the

Y Trust Deed's Schedule as a beneficiary], pay, apply or set aside the

Distributions to and for the benefit of Z at the time when those

Distributions are paid or credited to ... [Y] in its capacity as Trustee

of the Y Trust.

5 On and from the time the Distributions referred to in Resolution 4

are paid or credited to ... [Y] in its capacity as Trustee of the Y Trust, Z

has a vested and indefeasible interest in the Distributions.

X dividend distribution

18) Interim dividends sourced from X profits for the financial year ending 31 March 201I were paid to the X shareholders (as appearing on the X 'Electronic Register of Members'). The Y Trust was a X shareholder appearing on the 'Electronic Register of Members' at the relevant dates that the X dividend distributions were made.

19) The payment of this interim dividend was authorised by a X 'Directors Resolution' dated X Directors Resolution 201H.

20) According to the Y Trust's draft 'Profit and Loss' statement for the year ended 30 June 201I, the Y Trust's 'Gross Profit' is AUD$T.

21) The details relating to payment of X dividends were as follows:

a) 3 September 201H - the first X dividend (SGD$U) was transferred by X and received by the Trustee. On the same day, this dividend amount was converted to Australian dollars (AUD$U) and transferred to the bank account of Z.

b) 5 April 201I - a further X dividend (SGD$V) and a return of capital (SGD$W) was transferred by X and received by the Trustee. As at 5 April 201I, this further X dividend was equivalent to AUD$V.

c) On 8 April 201I, this further X dividend and return of capital was exchanged for Australian dollars and transferred to the bank account of Z.

22) According to the Y Trust's draft 'Profit and Loss' statement for the year ended 30 June 201I, the Y Trust's 'Gross Profit' is AUD$T.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 95(1)

Income Tax Assessment Act 1936 section 350

Income Tax Assessment Act 1936 section 351

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 6-20

Income Tax Assessment Act 1997 section 6-23

Income Tax Assessment Act 1997 subsection 6-25(2)

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 11-55

Income Tax Assessment Act 1997 section 758-15

Income Tax Assessment Act 1997 section 768-1

Income Tax Assessment Act 1997 subsection 768-5(2)

Income Tax Assessment Act 1997 subsection 768-5(3)

Income Tax Assessment Act 1997 section 768-10

Income Tax Assessment Act 1997 section 960-100

Income Tax Assessment Act 1997 section 960-115

Income Tax Assessment Act 1997 section 960-120

Income Tax Assessment Act 1997 subsection 960-185(1)

Income Tax Assessment Act 1997 subsection 960-185(2)

Income Tax Assessment Act 1997 section 960-190

Income Tax Assessment Act 1997 section 974-70

Income Tax Assessment Act 1997 subsection 974-75(1)

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

Reasons for decision

Question One

Will dividends paid by X to Y as trustee of the Y Trust, and to which the Y has made Z presently entitled, be non-assessable non-exempt income of Z under Subdivision 768-A of the Income Tax Assessment Act 1997?

Summary

Yes, the X dividends paid to Z via the Y Trust and Trustee are considered to be foreign equity distributions that are NANE income of Z under subsection 768-5(2) of ITAA 1997.

Detailed reasoning

Subdivision 768-A of ITAA 1997

1)    According to section 768-1 of the Income Tax Assessment Act 1997 (ITAA 1997), a distribution is non-assessable non-exempt (NANE) income for an Australian corporate tax entity if:

2      an Australian corporate tax entity receives a foreign equity distribution from a foreign company, either directly or indirectly through one or more interposed trusts or partnerships; and

(b) the Australian corporate tax entity holds a participation interest of at least 10% in the foreign company.

2)    Subsection 768-5(2) of the ITAA 1997 deals with foreign equity distributions received by an Australian corporate tax entity through interposed trusts, and provides that:

An amount is not assessable income, and is not *exempt income, of an entity if:

(a) the entity is a beneficiary of a trust or a partner in a partnership, an Australian resident and a *corporate tax entity; and

(b) the amount is all or part of the *net income of the trust or partnership that would, apart from this subsection, be included in the entity's assessable income because of:

(i) Division 276; or

(ii) Division 5 or 6 of Part III of the Income Tax Assessment Act 1936;

(c) the amount can be attributed (either directly or indirectly through one or more interposed trusts or partnerships that are not *corporate tax entities) to a *foreign equity distribution; and

(d) at the time the distribution is made, the entity satisfies the participation test in section 768-15 in relation to the company that made the distribution; and

(e) the entity:

(i) does not receive the distribution in the capacity of a trustee; or

(ii) receives the distribution in the capacity of a trustee of a *public trading trust; and

(f) the distribution is not one to which section 768-7 (which is about foreign income tax deductions) applies.

3)    Further, subsection 768-5(3) of the ITAA 1997 provides that:

An amount that is *non-assessable non-exempt income under subsection [768-5](2) is taken, for the purpose of section 25-90 (about deductions relating to foreign non-assessable non-exempt income) to be derived from the same source as the *foreign equity distribution.

NANE definition

4)    In relation to NANE income, section 6-23 of the ITAA 1997 provides that:

An amount of *ordinary income or *statutory income is non-assessable non-exempt income if a provision of this Act or of another *Commonwealth law states that it is not assessable income and is not *exempt income.

Note:

Capital gains and losses on assets used to produce some types of non-assessable non-exempt income are disregarded (see section 118-12 [of ITAA 1997]).

For a summary list of provisions about non-assessable non-exempt income, see Subdivision 11-B [of ITAA 1997].

5)    According to section 11-55 of the ITAA 1997, foreign equity distributions on participation interests in section 768-5 of ITAA 1997 is a provision listed in subdivision 11-B of the ITAA 1997.

6)    Therefore, the dividend distribution made by X to Z via the Trustee and Y Trust may be NANE income provided that all the conditions in subsection 768-5(2) of the ITAA 1997 are satisfied.

Assessable income

7)    According to subsection 995-1(1) of ITAA 1997:

assessable income has the meaning given by sections 6-5, 6-10, 6-15, 17-10 and 17-30 [of ITAA 1997].

For the effect of GST-related amounts on assessable income, see Division 17 [of ITAA 1997].

Exempt income

8)    In relation to 'exempt income', section 6-20 of the ITAA 1997 provides that:

6-20(1)

An amount of *ordinary income or *statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another *Commonwealth law.

For summary lists of provisions about exempt income, see sections 11-5 and 11-15.

6-20(2)

*Ordinary income is also exempt income to the extent that this Act excludes it (expressly or by implication) from being assessable income.

6-20(3)

By contrast, an amount of *statutory income is exempt income only if it is made exempt from income tax by a provision of this Act outside this Division or another *Commonwealth law.

6-20(4)

If an amount of *ordinary income or *statutory income is *non-assessable non-exempt income, it is not exempt income.

Note:

An amount of non-assessable non-exempt income is not taken into account in working out the amount of a tax loss.

Ordinary income

9)    In relation to 'ordinary income', section 6-5 of the ITAA 1997 relevantly provides that:

6-5(1)

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Note:

Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

6-5(2)

If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

...

6-5(4)

In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

10) Therefore, dividends may be characterised as income according to ordinary concepts.

Statutory income

11) In relation to 'statutory income', section 6-10 of the ITAA 1997 states that:

6-10(1)

Your assessable income also includes some amounts that are not *ordinary income.

Note:

These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5.

6-10(2)

Amounts that are not *ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

Note 1:

Although an amount is statutory income because it has been included in assessable income under a provision of this Act, it may be made exempt income or non-assessable non-exempt income under another provision: see sections 6-20 and 6-23 [of the ITAA 1997].

Note 2:

Many provisions in the summary list in section 10-5 contain rules about ordinary income. These rules do not change its character as ordinary income.

6-10(3)

If an amount would be *statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

6-10(4)

If you are an Australian resident, your assessable income includes your * statutory income from all sources, whether in or out of Australia.

12) Dividends are listed in section 10-5 of the ITAA 1997 as being statutory income.

Dividends being ordinary and statutory income

13) A 'dividend', as a normal English word, is income according to ordinary concepts. Therefore, a 'dividend' includes a dividend under the concept of ordinary income in addition to the statutory provisions found in section 10-5 of the ITAA 1997.

14) As a result, a reference to a 'dividend' in either the ITAA 1997 or the ITAA 1936 is a reference to a dividend as ordinary income and statutory income.

15) Therefore, the X dividends paid to Z via the Y Trust and Trustee may be viewed as ordinary and statutory income. In either case, as subsection 6-25(2) of the ITAA 1997 states that the provisions of the ITAA 1997 (outside of Part 1-3 in Chapter 1 of the ITAA 1997) prevail over the rules about ordinary income, the X dividends may nevertheless be statutory income in case there is any doubt.

Entity

16) According to subsection 995-1(1) of ITAA 1997, 'entity' has the meaning given by section 960-100 of ITAA 1997.

17) Section 960-100 of ITAA 1997 relevantly provides that:

960-100(1)

Entity means any of the following:

...

(b) a body corporate;

...

(f) trust;

...

Note:

The term entity is used in a number of different but related senses. It covers all kinds of legal person. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.

...

960-100(2)

The trustee of a trust, of a *superannuation fund or of an *approved deposit fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.

Note 1:

This is because a right or obligation cannot be conferred or imposed on an entity that is not a legal person.

Note 2:

The entity that is the trustee of a trust or fund does not change merely because of a change in the person who is the trustee of the trust or fund, or persons who are the trustees of the trust or fund.

...

960-100(4)

If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity.

Example:

A provision that refers to a company does not cover a company in a capacity as trustee, unless it also refers to a trustee.

18) Therefore, both Z and the Y Trust are an 'entity' within the meaning of that term in section 960-100 of ITAA 1997.

Beneficiary of a trust

19) Clause 2 of the Y Trust Deed provides as follows:

The beneficiaries of the Y Trust are:

·                     the persons named in the Schedule as beneficiaries; and

·                     the persons who are members of any of the classes of eligible beneficiaries specified in the Schedule.

20) Z is a beneficiary of the Y Trust as:

·   A1 is listed in the Y Trust Deed's 'Schedule' as a 'Named beneficiary';

·   A1 is a director of Z; and

·   the Y Trust Deed's 'Schedule' lists as being included in the class of 'eligible beneficiaries', a company of '[o]f which any of the beneficiaries otherwise mentioned in [the Y Trust Deed's] [S]chedule is a shareholder or director'.

Australian resident

21) Subsection 995-1(1) of ITAA 1997 defines 'Australian resident' to mean:

a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936.

22) Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) relevantly states that:

In this Act, unless the contrary intention appears:

...

resident or resident of Australia means:

...

a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

23) Z is an Australian resident as it is a company incorporated in Australia (in the state of Victoria) (refer to paragraph 10 above at 'Relevant facts and circumstances').

Corporate tax entity

24) Section 960-115 of ITAA 1997 relevantly states the following in relation to the meaning of 'corporate tax entity':

An entity is a corporate tax entity at a particular time if:

(a) the entity is a company at that time...

25) Z is a corporate tax entity as it is a company.

Net income of the trust

26) According to subsection 995-1(1) of ITAA 1997, net income of a trust 'has the same meaning as in Division 6 [titled 'Trust income'] of Part III of [ITAA 1936].'

27) Subsection 95(1) in Division 6 of Part III of the ITAA 1936 provides that:

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

A trust may be required to work out its net income in a special way by Division 266 or 267 in Schedule 2F to this Act or Division 275 of the Income Tax Assessment Act 1997.

28) The Y Trust Deed defines 'income of the trust fund' to mean '...subject to clause 7 [of the Y Trust Deed], the net income of the trust as defined in section 95(1) of the Income Tax Assessment Act 1936 (Cth) (as amended).'

29) However, clause 7 of the Y Trust Deed permits an alternative definition for 'net income of a trust' to be utilised as follows:

Trustee's right to determine nature of income

7 The trustee may, instead of relying on the definition of 'income of the trust find' set out in this deed, decide at any time prior to 30 June in a financial year to adopt, for that financial year, another definition of 'income of the trust fund'. A decision under this clause 7 must be made by signing a minute to that effect.

30) According to the 'Trustee Minutes' dated 31 August 201H (above at paragraph 17 in the 'Relevant facts and circumstances'); it was resolved that for the financial year ending 30 June 201I, pursuant to clause 7 of the Y Trust Deed, that the Trustee would adopt an alternative definition for 'income of the trust fund'. The alternative definition adopted was that 'all distributions made by X to the Trustee' for the financial year ending 30 June 201I would form 'income of the trust fund' for the financial year ending 30 June 201I.

Foreign equity distribution

31) Section 768-10 of the ITAA 1997 defines a 'foreign equity distribution' as:

a *distribution or *non-share dividend made by a company that is a foreign resident in respect of an *equity interest in the company.

32) Section 960-120 of the ITAA 1997 relevantly defines a 'distribution' (made by a corporate tax entity that is a company) as:

a dividend, or something that is taken to be a dividend, under [ITAA 1997].

33) Further, subsection 960-120(2) of the ITAA 1997 provides that:

A *corporate tax entity makes a distribution in the form of a dividend on the day on which the dividend is paid, or taken to have been paid.

34) 'Dividend' is defined in subsection s995-1(1) of the ITAA 1997 as having:

the meaning given by subsections 6(1) and (4) and 6BA(5) and section 94L of the Income Tax Assessment Act 1936.

35) Subsections 6(1) of ITAA 1936 relevantly provides that 'dividend' means:

(a) any distribution made by a company to any of its shareholders, whether in money or other property; and

(b) any amount credited by a company to any of its shareholders as shareholders...

36) In relation to the meaning of 'equity interest', subsection s995-1(1) of the ITAA 1997 provides that:

equity interest in an entity has the meaning given by:

(a) in the case of a company - Subdivision 974-C [of ITAA 1997]...

37) In relation to the term 'equity interest in a company', section 974-70 of the ITAA 1997 provides as follows:

Scheme giving rise to equity interest

974-70(1)

A *scheme gives rise to an equity interest in a company if, when the scheme comes into existence:

(a) the scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the existence of an interest; and

(b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a *debt interest in the company, or a *connected entity of the company, under Subdivision 974-B.

Note 1:

An equity interest can also arise under subsection (2) if a notional scheme with the combined effect of a number of related schemes would give rise to an equity interest under this subsection. To do this, the notional scheme would need to satisfy paragraph (b). This means that the related schemes will not give rise to an equity interest if the notional scheme would be characterised as (or form part of a larger interest that would be characterised as) a debt interest in the company or a connected entity.

Note 2:

An equity interest can also arise under section 974-80 (arrangements for funding return through connected entities).

Note 3:

Section 974-95 defines various aspects of the equity interest that arises.

38) Subsection 995-1(1) defines a 'scheme' as:

...(a) any * arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

Note:

The Commissioner may determine that, for the purposes of the debt and equity interest rules in Division 974, what would otherwise be a single scheme is to be treated as 2 or more separate schemes, and that the schemes are not related: see section 974-150.

39) Subsection 995-(1) of the ITAA 1997 also defines 'arrangement' to mean:

... any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

40) Subsection 974-75(1) of the ITAA 1997 sets out the conditions that must be satisfied for an 'equity interest' in a company and relevantly provides as follows:

A *scheme satisfies the equity test in this subsection in relation to a company if it gives rise to an interest set out in the following table

41) The distribution made by X to Z via the Y Trust and Trustee is a 'dividend' in relation to an equity interest of X, as the Trustee is a shareholder of X (according to its 'Electronic Register of Members') on the relevant dates that the X distributions were made.

42) Therefore, as X is not a resident of Australia, the dividend distributions made by X falls within the meaning of 'foreign equity distribution'.

The 'participation test'

43) Section 758-15 of the ITAA 1997 provides that:

An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%:

(a) the *direct participation interest the entity would have in the other entity if rights on winding-up were disregarded;

(b) the *indirect participation interest the entity would have in the other entity if:

(i) rights on winding-up were disregarded; and

(ii) section 960-185 only applied to intermediate entities that are not *corporate tax entities.

44) Z holds an interest in X via interposed entities (being the Y Trust and Trustee). Out of these interposed entities, it is the Trust which holds an interest in X and according to the definition of 'corporate tax entity' in section 960-115 of the ITAA 1997 (refer above to paragraphs 24 - 25), the Trust is not a corporate tax entity.

45) Consequently, as Z holds its interest in X via the Trust (being the intermediate entity), Z will only hold an 'indirect participation interest' in X pursuant to subsection 758-15(b) of the ITAA 1997.

46) Therefore, for Z to satisfy the participation test in section 758-15 of the ITAA 1997 in relation to X, Z must have an indirect participation interest in X of at least 10%.

Indirect participation interest

47) Subsection 960-185(1) of the ITAA 1997 sets out how to calculate the indirect participation interest that an entity (the 'holding entity') holds in another entity (the 'test entity') at a particular time and states that you must multiply:

(a) the holding entity's *direct participation interest (if any) in another entity (the intermediate entity) at that time;

by:

(b) the sum of:

(i) the intermediate entity's direct participation interest (if any) in the test entity at that time; and

(ii) the intermediate entity's indirect participation interest (if any) in the test entity at that time (as worked out under one or more other applications of this section).

48) Further, subsection 960-185(2) of ITAA 1997 provides that:

If there is more than one intermediate entity to which paragraph (1)(a) applies at that time, the holding entity's indirect participation interest is the sum of the percentages worked out under subsection (1) in relation to each of those intermediate entities.

49) According to paragraph 53 of Taxation Determination Income tax: where an Australian corporate tax entity is a beneficiary of a trust, can the trust 'hold' a direct control interest (within the meaning of section 350 of the Income Tax Assessment Act 1936) in a foreign company for the purpose of Subdivision 768-A of the Income Tax Assessment Act 1997? (TD 2017/22), where an Australian corporate tax entity holds its interest in a foreign company indirectly, section 960-185 of the ITAA 1997 states that the Australian corporate tax entity's indirect participation interest is worked out by multiplying the Australian corporate tax entity's direct participation interest in the intermediate entity by the intermediate entity's direct participation interest in the foreign company.

50) According to paragraph 54 of TD 2017/22, where an Australian corporate tax entity holds its interest in a foreign company indirectly through a trust, the 'intermediate entity' for the purposes of section 960-185 of the ITAA 1997 will be the 'trust'. This is because a trust is recognised as an 'entity', pursuant to section 960-100 of the ITAA 1997 (refer to paragraphs 16 - 18 above).

51) As Z holds its interest in X indirectly via an interposed entity, the Y Trust will be the only 'intermediate entity' for the purposes of calculating the 'indirect participation interest'.

52) Therefore, Z's indirect participation interest in X is worked out by multiplying Z's direct participation interest in Y Trust (as per subparagraph 960-185(1)(b)(i) of the ITAA 1997) by the Y Trust's direct participation interest in X (as per paragraph 960-185(1)(a) of the ITAA 1997).

Direct participation Interest

53) Section 960-190 of the ITAA 1997 sets out the method for calculating the direct participation interest that one entity holds in another entity.

54) Pursuant to subsection 960-190(1) of the ITAA

55) Further, subsection 960-190(2) of the ITAA 1997 provides that:

For the purposes of subsection [960-190](1):

(a) apply sections 350 and 351 of the Income Tax Assessment Act 1936 as if those sections apply for the purposes of this Division rather than only for the purposes of Part X of that Act; and

(b) do not apply subsections 350(6) and (7) and 351(3) and (4) of that Act.

Trust's direct participation interest in a foreign company

56) According to paragraph 55 of TD 2017/22, a trust's direct participation interest in a foreign company is worked out by reference to the trustee's 'direct control interest' in the foreign company under section 350 of the ITAA 1936 (as per item 1 in subsection 960-190(1) of the ITAA 1997).

57) Section 350 of ITAA 1936 relevantly states the following in relation to the 'direct control interest' that an entity holds in relation to a company:

350(1) [Interests held by entity]

Subject to subsection (7), an entity holds a direct control interest in a company at a particular time equal to the percentage that the entity holds, or is entitled to acquire, at that time of:

(a) the total paid-up share capital of the company; or

(b) the total rights of shareholders to vote, or participate in any decision-making, concerning any of the following:

(i) the making of distributions of capital or profits of the company to its shareholders;

(ii) the constituent document of the company;

(iii) any variation of the share capital of the company; or

(c) the total rights to distributions of capital or profits of the company to its shareholders on winding-up; or

(d) the total rights to distributions of capital or profits of the company to its shareholders, otherwise than on winding-up;

or, if different percentages are applicable under the preceding paragraphs, the greater or greatest of those percentages.

350(2) [Highest percentage to be applicable]

If the percentage of total rights to vote or participate in decision-making differs as between differing types of decision-making, the highest of those percentages applies for the purposes of paragraph (1)(b).

...

350(4) [Rights to distribution otherwise than on winding-up]

For the purposes of the application of subsection (1) to a company, the percentage that an entity holds, or is entitled to acquire, at a particular time (in this subsection called the test time) in a statutory accounting period of the company, of the total rights to distributions of capital or profits of the company to its shareholders, otherwise than on winding-up, is to be worked out by:

(a) ascertaining whichever of the following is applicable:

(i) the capital of the company as at the end of the statutory accounting period;

(ii) the profits of the company for the statutory accounting period; and

(b) assuming that the rights to such distributions that the entity holds, or is entitled to acquire, at the test time were the same at all other times during the statutory accounting period; and

(c) ascertaining the percentage concerned:

(i) at the end of the statutory accounting period instead of at the test time; and

(ii) on that assumption.

58) Paragraph 56 of TD 2017/22 states that the direct control interest the trustee holds in the foreign company 'at a particular time' is equal to the percentage of share capital, rights to distributions or rights to vote that the trustee holds in the foreign company at that time.

59) Subsection 350(4) of the ITAA 1936 provides that, in calculating the percentage of rights to distributions, the percentage needs to be calculated at the end of the statutory accounting period.

60) Paragraph 57 of TD 2017/22 states that the 'particular time' when applying section 350 of the ITAA 1936 (for the purpose of paragraph 768-5(2)(d) of the ITAA 1997) will be the time the foreign equity distribution is made (the 'test time').

Applying the law to your circumstances

61) To calculate the Y Trust's direct participation interest in X, you need to determine the Trustee's direct control interest in X. This is equal to the percentage of share capital that the Trustee holds in X at a 'particular time(s)', whereby this percentage needs to be calculated at the end of X's statutory accounting period.

62) The Trustee held P ordinary shares in X at the end of the income year ending 30 June 201I. There were Q ordinary shares of X issued at the end of the income year ending 30 June 201I.

63) The 'particular time(s)' (that is, the test time(s)) that the X dividend distributions were made to the Trustee were on 3 September 201H and 5 April 201I.

64) At both these test times, the Trustee was listed on X's 'Electronic Register of Members' as a shareholder.

65) The percentage of share capital that the Trustee held in X at both the above test times equals:

P x 100 = E%

Q

66) Therefore, the Y Trust's direct participation interest in X at both test times is equal to the Trustee's direct control interest in X, which is E%.

Beneficiary's direct participation interest in a Trust

67) Paragraph 58 of TD 2017/22 states that to work out the direct participation interest that an Australian corporate tax entity (beneficiary) holds in a trust, you need to determine the Australian corporate tax entity (beneficiary)'s 'direct control interest' in the Trust under section 351 of the ITAA 1936 (as per item 2 of subsection 960-190(1) of the ITAA 1997).

68) Section 351 of the ITAA 1936 relevantly states, in relation to the 'direct control interest' that a beneficiary of a trust holds in that trust, that:

351(1) [Interests held by entity]

An entity that is a beneficiary in a trust holds a direct control interest in the trust at a particular time equal to:

(a) the percentage of the income of the trust represented by the share of the income to which the beneficiary is entitled, or that the beneficiary is entitled to acquire; or

(b) the percentage of the corpus of the trust represented by the share of the corpus to which the beneficiary is entitled, or that the beneficiary is entitled to acquire;

or, if those percentages differ, the greater of those percentages.

351(2) [Entitlement to income or corpus of trust]

For the purposes of the application of subsection (1) to a trust:

(a) the percentage of the income of the trust represented by the share of the income to which the beneficiary is entitled, or that the beneficiary is entitled to acquire; or

(b) the percentage of the corpus of the trust represented by the share of the corpus to which the beneficiary is entitled, or that the beneficiary is entitled to acquire;

at a particular time (in this subsection called the "test time'") in a year of income of the trust, is to be worked out by:

(c) ascertaining whichever of the following is applicable:

(i) the income of the trust for the year of income;

(ii) the corpus of the trust as at the end of the year of income; and

(d) assuming that the share to which the entity is entitled, or that the entity is entitled to acquire, at the test time was the same at all other times during the year of income; and

(e) ascertaining the percentage concerned:

(i) at the end of the year of income instead of at the test time; and

(ii) on that assumption.

69) Paragraph 59 of TD 2017/22 states that the direct control interest the beneficiary of a trust holds in that trust 'at a particular time' is equal to the percentage share of income or corpus to which the beneficiary is entitled (or entitled to acquire) at that time. As also stated above, the 'particular time' (for the purpose of paragraph 768-5(2)(d) of ITAA 1997) will be the time the foreign equity distribution is made (the 'test time').

70) Paragraph 60 of TD 2017/22 states that although subsection 351(1) of the ITAA 1936 requires the beneficiary's interest at the test time to be measured as a percentage of total income or corpus entitlements, it may be that the beneficiary's entitlement cannot be expressed as a percentage until the end of the year when the accounts of the trust are taken and the total trust income for the year is known. In such cases, subsection 351(2) of the ITAA 1936 enables the beneficiary's interest to be expressed as a percentage at the end of the income year instead of the test time, on the assumption however, that the relevant share to which the beneficiary is entitled (or entitled to acquire) at the test time was the same at all other times during the year of income.

71) Paragraph 62 of TD 2017/22 provides that a beneficiary's direct control interest in a discretionary trust is similarly equal to the percentage share of the income or corpus to which it is entitled (or entitled to acquire) at the test time.

Applying the law to your circumstances

72) To calculate Z's direct participation interest in the Y Trust, you need to determine the percentage share of income or corpus to which Z is entitled (or entitled to acquire) at the 'particular time' that the foreign equity distribution is made by X.

73) Usually, this percentage of total Y Trust income that Z is entitled to cannot be known until the end of an income year, when the Y Trust income for that total year is calculated. According to paragraph 20 above (in the 'Relevant facts and circumstances'), the total Y Trust income for the year ended 30 June 201I is AUD$T.

74) The Trustee Resolution dated 31 August 201H evidences the Trustee exercising discretion to give Z a 'vested and indefeasible interest' to the Y Trust's income arising from 'all distributions made by X to the Trustee' for the year ending 30 June 201I.

75) According to paragraph 20(a) above (in the 'Relevant facts and circumstances'), the X dividend that was paid by X (to the Trustee and transferred) to Z on 3 September 201H was AUD$U.

76) According to paragraph 20(b) above (in the 'Relevant facts and circumstances'), the X dividend that was paid by X (to the Trustee) on 5 April 201I for transferring to Z was AUD$V.

77) When the X distributions were made at the relevant 'test time(s)' (on 3 September 201H and 5 April 201I), Z's Y Trust income entitlement was already known.

78) Therefore, the percentage of total Y Trust income (in Australian Dollars) that Z is entitled to on 3 September 201H equals:

U x 100 = F%

T

79) The percentage of total Y Trust income (in Australian Dollars) that Z is entitled to on 5 April 201I equals:

(U + V) x 100 = G%

T

80) Therefore, Z's direct participation interest in the Y Trust on 3 September 201H is F% and on 5 April 201I is G%.

Z's indirect participation interest in X

81)      Z's indirect participation interest in X is worked out by multiplying Z's direct participation interest in Y Trust by the Y Trust's direct participation interest in X.

82)      On 3 September 201H, Z's indirect participation interest in X equals:

F% x E% = J%

83)      On 5 April 201I, Z's indirect participation interest in X equals:

G% x E% = K%

84)      For Z to satisfy the participation test in section 758-15 of the ITAA 1997 in relation to X, Z must have an indirect participation interest in X of at least 10%.

85)      As at both test times (on 3 September 201H and 5 April 201I), Z has an indirect participation interest in X of more than 10%, Z satisfies the participation test in section 768-15 of the ITAA 1997.

Receipt of foreign equity distribution in the capacity of trustee

86)      Paragraph 768-5(2)(e) of the ITAA 1997 requires that the entity receiving the foreign equity distribution:

(i) does not receive the distribution in the capacity of a trustee; or

(ii) receives the distribution in the capacity of a trustee of a *public trading trust...

87)      Z receives the X dividend distributions in its capacity as beneficiary of the Y Trust. Therefore, Z does not receive the X dividend distributions in the capacity of a trustee or in the capacity of a public trading trust and satisfies paragraph 768-5(2)(e) of the ITAA 1997.

Applicability of foreign income tax deductions

88)      Paragraph 768-5(2)(f) of the ITAA 1997 states in relation to the foreign equity distribution received by Z that:

the distribution is not one to which section 768-7 (which is about foreign income tax deductions) applies.

89)      According to paragraph 16 above (in the 'Relevant facts and circumstances'), the X dividend distribution is not one to which section 768-7 of the ITAA 1997 applies.

90)      Therefore, paragraph 768-5(2)(f) of the ITAA 1997 is satisfied.

Application of law to your circumstances

91)      As all the criteria in subsection 768-5(2) of the ITAA 1997 are satisfied, the X dividends received by Z are NANE income of Z.

ATO view documents

Taxation Determination TD 2017/22 Income tax: where an Australian corporate tax entity is a beneficiary of a trust, can the trust 'hold' a direct control interest (within the meaning of section 350 of the Income Tax Assessment Act 1936) in a foreign company for the purpose of Subdivision 768-A of the Income Tax Assessment Act 1997?