Private ruling: Mortgage Bond Securitisation
Published: February 2012
Ruling period: 2010 to 2015 income years
Date scheme commenced: 29 October 2010

Ruling: Q1: Is the interest derived on mortgages as a result of conducting the mortgage business described in this ruling eligible designated concession income (EDCI) and therefore is included in notional assessable income under subparagraph 385(2)(a)(i) of the Income Tax Assessment 1936 (ITAA 1936) of Entity X and certain other entities (even if the active income test is failed)? | A1: No. | Q2: Is the service fee derived for the servicing of mortgages EDCI and therefore included in notional assessable income under subparagraph 385(2)(a)(i) of ITAA 1936 of Entity X (even if the active income test is failed)? | A2: No. | Q3: Are the receipts under the swap arrangements EDCI and therefore are included in notional assessable income under subparagraph 385(2)(a)(i) of ITAA 1936 of Entity X and certain other entities (even if the active income test is failed)? | A3: No. | Q4: Are the profits or gains derived from the transfers of mortgages from Entity X to certain other entities involved in the scheme, EDCI and therefore are included in notional assessable income under subparagraph 385(2)(a)(i) of ITAA 1936 of Entity X (even if the active income test is failed)? | A4: No. | Q5: Are the profits or gains derived from the transfer of mortgages from certain other entities to Entity X, EDCI and therefore are included in notional assessable income under subparagraph 385(2)(a)(i) of ITAA 1936 of certain other entities (even if the active income test is failed)? | A5: No. | Q6: Are the profits or gains derived from the establishment of the government bonds and the ongoing obligations created by the swaps EDCI and therefore are included in notional assessable income under subparagraph 385(2)(a)(i) of ITAA 1936 of Entity X and a certain other entity (even if the active income test is failed)? | A6: No. | Q7: Do paragraphs 385(2)(b), 385(2)(c), and 385(2)(d) of ITAA 1936 apply to include an amount in notional assessable income of Entity X and certain other entities? | A7: No.

Relevant facts and circumstances: Entity Y is the head company of an Australian tax consolidated group. Entity X is a subsidiary of Entity Y and is incorporated overseas and is resident in a listed country. The Entity X's business involves originating loans secured by a mortgage (the mortgages) over residential properties through a broker network or by making loans directly to the borrowers. These mortgages are securitised through mechanisms provided by the overseas Government. A majority of these mortgages are converted into government bonds. Entities involved in this scheme may receive interest on the mortgages, servicing fees, and may earn profits or gains as a result of this scheme. Entities may also receive amounts and or make payments on various swap arrangements under this scheme. All the arrangements entered into by the entities involved in this scheme form part of the tax base for income tax purposes within the overseas country and are taxable or deductible in the overseas country. There are no specific exemptions or tax concessions which apply to the receipts of this scheme in the overseas country. All payments and receipts by related Australian entities are included in the calculation of the Australian taxable income. Entity X and certain other entities involved in this scheme are each a CFC or controlled foreign company as defined under section 340 of ITAA 1936. It is assumed that the eligible CFCs do not pass the active income test. It is assumed that the trust involved in this scheme is not a discretionary trust estate.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 317(1) | Income Tax Assessment Act 1936 Subsection 385(1) | Income Tax Assessment Act 1936 Subsection 385(2) | Income Tax Assessment Act 1936 Section 102AAT | Income Tax Assessment Act 1936 Section 102AAZD | Income Tax Regulations Act 1936 Regulation 152B

Reasons for decision: Detailed Reasoning - Questions 1 - 6: Section 385 of Part X ITAA 1936 considers additional assumptions for a listed country CFC. Subsection 385(1) makes two assumptions in arriving at the notional assessable income of a listed country CFC. These are: 1. that the only amounts included in notional assessable income are those set out in subsection 385(2), and 2. all other income is notional exempt income. In considering whether the amounts described in Questions 1 to 6 (Amounts) are included in the notional assessable income of the eligible CFCs pursuant to subparagraph 385(2)(a)(i), it is necessary to establish whether: § The active income test is failed; and § Adjusted tainted income exists which is EDCI in relation to the listed country or any other listed country. The active income test is set out in section 432 of the ITAA 1936. Broadly, the test imposes a requirement that the eligible CFCs have a tainted income ratio of less than 5%. However, the additional assumptions listed at subsection 385(2) effectively modify the adjusted tainted income of the eligible CFC to only include EDCI (and other specific amounts) where the eligible CFCs do not pass the active income test. In relation to this particular ruling, it is assumed that the eligible CFCs do not pass the active income test. Where the CFC is resident of a listed country, it is necessary to determine whether the eligible CFCs has derived any EDCI pursuant to the regulations in working out the amount of attributable income for the eligible entity. EDCI is defined in subsection 317(1) of ITAA 1936 as designated concession income in relation to the listed country and designated concession income is defined in subsection 317(1) as meaning, in relation to a listed country, income or profits as specified in the regulations in which foreign tax is imposed by the tax law of a foreign country, however is not payable due to tax concessions or any other particular feature, and this feature is of a kind specified in the regulations. Regulation 152B outlines designated concession income amounts at Part 2 of Schedule 9. Based on the facts provided Regulation 152B is not satisfied and accordingly, the Amounts are not designated concession income for Australian tax purposes. As the definition of EDCI is not satisfied, the Amounts are not included in the notional assessable income of the eligible CFC under subparagraph 385(2)(a)(i) of ITAA 1936. | Detailed Reasoning - Paragraph 385(2)(b): Section 102AAZD of ITAA 1936 applies only if an entity is an attributable taxpayer in relation to a trust estate. An entity will be an attributable taxpayer in relation to a trust estate if the conditions in section 102AAT of ITAA 1936 are satisfied. As the conditions in section 102AAT are not satisfied, Entity X is not an attributable taxpayer and section 102AAZD does not apply to include an amount in Entity X's notional assessable income under paragraph 385(2)(b). | Detailed Reasoning - Paragraph 385(2)(c): An amount of income under Division 6 of Part III ITAA 1936 is notional assessable income under paragraph 385(2)(c) of Part X ITAA 1936 if certain conditions are met as outlined in section 399 of Part X ITAA1936. The key assumption is that the modifications relating to the eligible CFC is also applied to the trust, unless the modification relates specifically to companies. The scheme as described under this ruling does not involve transactions conducted through trusts nor any trust estates. As such, Entity X and certain other entities are not presently entitled to any net income of any trust and do not have an amount of notional assessable income under paragraph 385(2)(c). | Detailed Reasoning - Paragraph 385(2)(d): An amount of income under Division 5 of Part III ITAA 1936 (as modified in accordance with the provisions in Part X of ITAA 1936) is notional assessable income under paragraph 385(2)(d) if certain criteria are met. Division 5 of Part III includes amounts in the assessable income of a partner in a partnership. The scheme as described under this ruling does not involve transactions conducted through partnerships. Accordingly Entity X and certain other entities do not have an amount of notional assessable income under paragraph 385(2)(d).

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