Edited version of private advice

Authorisation Number: 1051782018078

Date of advice: 30 November 2020

Ruling

Subject: Income tax - trusts - non-resident trust - transferor trust

Question 1

Will the relationship between the management company and depositary for Trust A and Aus Trust constitute a trust relationship for Australian income tax purposes such that Trust A will be regarded as the relevant 'trust estate' for the purposes of determining net income as defined in section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

For the purposes of Division 6AAA of the ITAA 1936, will Aus Trust be an attributable taxpayer in relation to Trust A pursuant to section 102AAT of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

Income tax year ended 30 June 2020

Income tax year ending 30 June 2021

Income tax year ending 30 June 2022

Relevant facts and circumstances

Aus Trust

Aus Company is an Australian public company and the trustee of Aus Trust, an Australian unit trust.

Aus Trust is a registered managed investment scheme. Aus Company holds an Australian Financial Services Licence and is the Responsible Entity of Aus Trust.

According to the trust deed of Aus Trust:

•         all investors are presently entitled to all of the taxable income of Aus Trust;

•         there are currently multiple classes of units;

•         the rights to income and capital are the same for all classes of units;

•         the trustee may elect for the attribution managed investment trust (AMIT) provisions to apply to Aus Trust; and

•         the trustee may fund unit redemptions from the income received from Trust A.

Aus Trust expects to satisfy the conditions required to be a managed investment trust and AMIT and will make an election to be treated as an AMIT under Division 276 of the Income Tax Assessment Act 1997 (ITAA 1997).

Aus Trust has more than 50 members and is a public unit trust pursuant to section 102P of the ITAA 1936.

Aus Trust directly holds units in Trust A. The units in Trust A will be the only interest Aus Trust holds other than cash.

Trust A

Trust A is a segregated compartment of Trust B, a Luxembourg fonds commun de placement - fonds d'investissement alternatifs réservés.

Trust B is a reserved alternative investment fund and is an unregulated investment vehicle. It is not subject to the prudential supervision of the Commission de Surveillance du Secteur Financier, the Luxembourg supervisory authority of the financial sector, or any other Luxembourg supervisory authority. Trust B qualifies as an alternative investment fund within the meaning of the Luxembourg law.

Trust B is treated as a flow-through (tax transparent) entity for Luxembourg taxation purposes and as such will not be subject to corporate income tax, municipal business tax and net wealth tax in Luxembourg.

Trust B is organised as an umbrella fund and comprises of two separate sub-funds, one of which is Trust A.

Under Luxembourg law, each sub-fund represents a segregated pool of assets and liabilities. The rights and claims of creditors and counterparties of Trust B, arising in respect of the creation, operation or liquidation of a sub-fund are limited to the assets allocated to that sub-fund.

Each sub-fund is invested for the exclusive benefit of the investors in the sub-fund and in accordance with the sub-fund's investment objective and policy.

Trust A is operated by a Management Company.

The Management Company is vested with the exclusive right to manage Trust A in the exclusive interest of the unitholders.

The Management Company's responsibilities include the:

•         implementation of Trust A's investment objective and policies;

•         selection and retention of the Depositary and any other agents;

•         investment management function of Trust A including (but not limited to) the purchase, financing, management, administration and sale of investments;

•         performance of risk management of Trust A; and

•         performance of corporate and administrative functions on behalf of Trust A.

The investment objective of Trust A is to invest in funds that primarily invest in real estate related rights, estates and interests and real estate securities. The Management Company has full discretion to invest directly in real estate and indirectly in real estate via intermediary entities. This includes in real estate investment trusts and in liquid assets including cash, money market instruments, time deposits and derivatives for hedging purposes.

A separate entity is the appointed Depositary of the assets of Trust A. The Depositary will perform custodial duties on behalf of Trust A as governed under the prevailing Luxembourg regulations. This includes:

•         being responsible for the "safekeeping" of all the assets of Trust A and executing all financial transactions on behalf of Trust A;

•         effecting the sale, issuance, redemption and cancellation of units on behalf of Trust A;

•         carrying out instructions of the Management Company; and

•         ensuring the assets of Trust A, which are held in custody by the Depository, are segregated from those of the Management Company.

At the time of this ruling, the units issued in Trust A to Aus Trust are the only units issued in Trust A. The units issued by Trust A are denominated in AUD and are a distributing class. Units are issued at a price equal to the NAV of the assets of Trust A divided by the total number of units issued.

The Management Company is responsible for maintaining a register of unitholders and will recognise only one single unitholder per unit. Units will be issued fully paid and in registered form only.

On a quarterly basis, Trust A intends to distribute to unitholders the net available income attributable to the distribution Unit Class of Trust A, being the current income of the fund (less any funding hold backs or reserves to meet operating expense obligations as decided by the Management Company). Distributions are not guaranteed and are at the discretion of the Management Company.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 Division 6AAA

Income Tax Assessment Act 1936 section 102AAB

Income Tax Assessment Act 1936 section 102AAF

Income Tax Assessment Act 1936 paragraph 102AAF(1)(b)

Income Tax Assessment Act 1936 paragraph 102AAF(3)(b)

Income Tax Assessment Act 1936 section 102AAT

Income Tax Assessment Act 1936 subparagraph 102AAT(1)(a)(ii)

Income Tax Assessment Act 1936 sub-subparagraph 102AAT(1)(a)(ii)(C)

Income Tax Assessment Act 1936 paragraph 102AAT(1)(c)

Income Tax Assessment Act 1936 section 102P

Income Tax Assessment Act 1997 Division 276

Reasons for decision

Question 1

Summary

The relationship between the Management Company and the Depositary and Aus Trust constitutes a trust relationship for Australian income tax purposes and Trust A will be considered to be the relevant trust estate for the purposes of determining net income as defined in section 95 of the ITAA 1936[1].

Detailed reasoning

The term 'trust' is not defined in the ITAA 1936 or ITAA1997. Whether a trust relationship between the Management Company, the Depositary and Aus Trust exists upon Aus Trust's acquisition of units in Trust A should therefore be determined in accordance with guidance provided by the Courts.

Gaudron, McHugh, Gummow, Kirby and Hayne JJ in Associated Alloys Pty Limited v. ACN 001 452 106 Pty Limited (in liquidation) (Formerly Metropolitan Engineering and Fabrication Pty Limited) and Anor [2000] HCA 25, at paragraph 29, endorsed the joint judgment of Dixon CJ, Williams and Fullagar JJ, in Kauter v. Hilton (1953) 90 CLR 86 who, at page 97, identified:

...the established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries.

French J in Harmer & Ors v. Federal Commissioner of Taxation 89 ATC 5180; (1989) 20 ATR 1461 stated that a trust 'is notably a definition of a relationship by reference to obligations'. His Honour further stated at 89 ATC 5187 that there were four essential elements of a trust being:

•         the trustee who holds a legal or equitable interest in the trust property;

•         the trust property which must be property capable of being held on trust and which includes a chose in action;

•         one or more beneficiaries other than the trustee; and

•         a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.

All four essential elements of a trust are present so as to give rise to a trust relationship between the Management Company, the Depositary and Aus Trust. This is held because:

•         legal title to the assets of Trust A vests with the Depositary;

•         the assets of Trust A are capable of being held on trust;

•         Aus Trust is the sole unitholder (and therefore the sole beneficiary) in Trust A; and

•         pursuant to the terms of the relevant documents, the assets of Trust A are dealt with by the Management Company and the Depositary acting in a trustee capacity on behalf of, in the interests and for the benefit of, Aus Trust as a unitholder.

As such Trust A should be treated as the relevant trust estate in relation to which net income is to be determined under section 95, and Aus Trust will include so much of the net income of that trust estate to which it is made presently entitled.

Question 2

Summary

Aus Trust will not be an attributable taxpayer in relation to Trust A pursuant to section 102AAT.

Detailed reasoning

Division 6AAA, commonly referred to as the 'transferor trust provisions', imposes accruals taxation by attributing to Australian tax residents income derived by non-resident trust estates to which the Australian resident transferred property or provided services.

Trust A is not a 'resident trust estate' as defined in section 102AAB. As a trust estate that is not a resident trust estate, Trust A is a 'non-resident trust estate' as defined in section 102AAB and for the purposes of Division 6AAA.

Section 102AAT determines whether a resident entity is an 'attributable taxpayer' in relation to a year of income (the 'entity's current year of income') in relation to a particular non-resident trust estate. For an entity (such as Aus Trust) that is not a natural person to be an attributable taxpayer in relation to a particular trust estate that is a public unit trust within the meaning of that term under section 102AAF:

•         all the conditions under subparagraph 102AAT(1)(a)(ii) must be satisfied; and

•         paragraph 102AAT(1)(c) must not prevent the entity from being an attributable taxpayer.

Section 102AAF sets out the circumstances where a non-resident trust estate will be regarded as a public unit trust. On an application of paragraphs 102AAF(1)(b) and (3)(b), the units in Trust A will be taken to have been held by not fewer than 50 persons (as is the case for Aus Trust), such that

Trust A will be regarded as a public unit trust for the purposes of Division 6AAA, and the conditions under subparagraph 102AAT(1)(a)(ii) need to be considered in respect of Aus Trust.

Subparagraph 102AAT(1)(a)(ii) states:

(ii) all of the following conditions are satisfied:

(A) the trust estate was a non-discretionary trust estate, or a public unit trust, at all times during the entity's current year of income when the trust estate was in existence;

(B) the entity has transferred property or services to the trust estate after the IP time and before or during the entity's current year of income;

(C) the underlying transfer was made for no consideration or for a consideration less than the arm's length amount in relation to the underlying transfer;

(D) it is not the case that the sole purpose of the underlying transfer was the acquisition of units in the trust estate where the parties to the underlying transfer were at arm's length with each other in relation to the underlying transfer and the trust estate was a public unit trust at all times during the entity's current year of income when the trust estate was in existence; and

As the units in Trust A were issued to Aus Trust at a price equal to the NAV of the assets of Trust A divided by the total number of units issued (and therefore at market value):

•         no property has been transferred to Trust A by Aus Trust for less than the arm's length consideration;

•         the condition in sub-subparagraph 102AAT(1)(a)(ii)(C) is not satisfied; and

•         Aus Trust is not an attributable taxpayer in relation to Trust A pursuant to section 102AAT.

[1] All legislative references are to the ITAA 1936.