Private ruling: Managed Investment Trusts and Part IVA
Published: July 2013
Ruling period: 1 July 2012 to 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Trust be a managed investment trust (MIT) as defined in subsection 12-400(1) of Schedule 1 to the Taxation Administration Act 1953 from the income year commencing 1 July 20XX? | A1: Yes | Q2: Will Part IVA of the Income Tax Assessment Act 1936 apply, or will the Commissioner seek to apply Part IVA, to the Scheme as described in the ruling before 20XX? | A2: No | Q3: Will Part IVA of the Income Tax Assessment Act 1936 apply, or will the Commissioner seek to apply Part IVA, to the Scheme as described in the ruling on or after 20XX? | A3: No

Relevant facts and circumstances: An investor indirectly invests in an Australian unit trust. This Australian unit trust holds units in several other Australian unit trusts (the Sub-Trusts). The Sub-Trusts purchase real estate property that is either already established or to be developed.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6C; | Income Tax Assessment Act 1936 Part IVA; and | Taxation Administration Act 1953 Schedule 1 subsection 12-400(1).

Reasons for decision: Summary: The Trust will be a MIT as defined in subsection 12-400(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) from the income year commencing 1 July 2012. | Detailed Reasoning - Overview of section 12-400 - Meaning of a managed investment trust: A MIT as defined in Schedule 1 to the TAA 1953 is part of a withholding tax regime that applies to certain distributions of Australian sourced income from an Australian trust that is a MIT to foreign investors. Subsections 12-400(1)(a) to (h) set out the requirements for a trust to qualify for the MIT withholding tax regime and the Commissioner's detailed reasoning is set out as follows. | Detailed Reasoning - Paragraph 12-400(1)(a) - Requirement 1: Pursuant to paragraph 12-400(1)(a) of Schedule 1 to the TAA 1953, the trustee of the trust must be an Australian resident, or the central management and control of the trust must be in Australia at the time the first fund payment is made or at an earlier time. The Trust Deed provides that the trustee of the Trust is a company incorporated in Australia. | Detailed Reasoning - Paragraph 12-400(1)(b) - Requirement 2: Paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953, requires the Trust, to not be a trust that is a trading trust for the purposes of Division 6C in Part III of the Income Tax Assessment Act (ITAA 1936). The Trust is not a trading trust for the purposes of Division 6C of the ITAA 1936 as it conducts eligible investment business. | Detailed Reasoning - Paragraph 12-400(1)(c) - Requirement 3: It is a requirement that a substantial proportion of the investment management activity carried on in relation to Australian located assets or taxable Australian property held by the trust, or assets it holds that are listed or quoted on an approved stock exchange, must be carried out within Australia throughout the income year. The term 'investment management activities' is not defined in the TAA 1953. Accordingly, the term is to be defined within the meaning of its common usage and the common law, the application of which is very fact specific. An 'investment management activity' is the management of an investment. It is this act of management which is the important factual consideration after it is determined if what is being managed constitutes an investment. 'Substantial proportion' as a phrase is not defined in the TAA 1953 and, therefore, takes its ordinary meaning. The word 'proportion' has the meaning of 'a comparative part or share', 'a comparative ratio' and the word 'substantial' has the meaning of 'of real importance or value, 'of large size or amount', 'essential; true in part' ( The Australian Oxford Dictionary , 2004, rev. 2nd edn, Oxford University Press, Melbourne). The assets of the Trusts are the units in the Sub-Trusts. These assets are situated in Australia. However these are not classified as 'investment management activities'. Investment means the acquisition of property to generate income. It is the facts surrounding new and additional investment in property by the Trust which will constitute 'investment management activity'. The Trust Deed, limits the power of the trustee somewhat by requiring the Trustee to seek directions from its unitholder in respect of any major matter arising in respect of any investments. Provided only the final decision is made offshore and all other activities leading up to that decision are carried out within Australia then a substantial proportion of the investment management activities in respect of the Trust are carried out within Australia. | Detailed Reasoning - Paragraph 12-400(1)(d) - Requirement 4: The Trust is an unregistered MIS within section 9 of the Corporations Act 2001 at the time the first fund payment will be made and it will remain such a MIS at all subsequent times. | Detailed Reasoning - Paragraph 12-400(1)(e) - Requirement 5: On the basis that the Trust is a wholesale unregistered trust, the provisions of section 601ED of the Corporations Act 2001 are satisfied. Furthermore the Trust does not have more than 20 retail clients as members and these members do not have more than a 10% interest in the trust (subsections 12-401(1)(b) and (c) of Schedule 1 to the TAA 1953). | Detailed Reasoning - Paragraph 12-400(1)(f) (Requirement 6): The Trust must satisfy the requirement in paragraph 12-400(1)(f)(iii) of Schedule 1 to the TAA 1953. As the Trust is a wholesale MIS that is not registered under the Corporations Act 2001 and falls within section 12-401, it must meet the widely held requirements in subsection 12-402(1) of Schedule 1 to the TAA 1953. On the basis that the Trust would be deemed to have 51 members, the widely held requirements in subsection 12-402(1) of Schedule 1 to the TAA 1953 are satisfied. | Detailed Reasoning - Paragraph 12-400(1)(g) (Requirement 7): For a trust that is a wholesale unregistered MIS under the Corporations Act 2001 , the closely-held requirements will not be breached unless: · 10 or fewer persons have a MIT participation interest in the Trust of 75% or more; or · a foreign resident individual has a MIT participation interest in the Trust of 10% or more. The investor is an entity that is covered by subsection 12-402(3) of Schedule 1 to the TAA 1953, accordingly its interest in the Trust is excluded from consideration for the purposes of the closely held requirement. The MIT participation interest held by the other unitholder is less than 75%. As well, no foreign individual would have a MIT participation interest of more than 10%. Accordingly the 'closely held requirement' will be satisfied. | Detailed Reasoning - Paragraph 12-400(1)(h) - (Requirement 8): As the Trust is covered by section 12-401 of Schedule 1 to the TAA 1953 it must also satisfy the licensing requirements in section 12-403 of Schedule 1 to the TAA 1953. The Trust will satisfy the requirements if it is operated or managed by a financial services licensee whose licence covers it to provide financial services to wholesale clients (paragraph 12-403(1)(a)(i) of Schedule 1 to the TAA 1953). The trustee of the Trust currently holds an AFSL. As all the requirements in section 12-400 of Schedule 1 to the TAA 1953 have been satisfied, the Trust will be a managed investment trust for the period ruled on. | Summary: Part IVA of the ITAA 1936 will not apply, nor will the Commissioner seek to apply Part IVA to the Scheme before 20XX. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 contains the general anti-avoidance rules regarding schemes to reduce income tax. The rules apply where the Commissioner makes a determination, based on an objective assessment of the relevant facts and circumstances that a taxpayer entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit. Based on the facts provided by the applicant, the Commissioner considers that the dominant purpose of entering into the scheme was not to obtain a tax benefit. | Summary: Part IVA of the ITAA 1936 will not apply, nor will the Commissioner seek to apply Part IVA to the Scheme on or after 16 November 2012. | Detailed Reasoning - Detailed reasoning: Based on the facts provided by the applicant, the Commissioner considers that the dominant purpose of entering into the scheme was not to obtain a tax benefit.