Private ruling: Managed Investment Trusts, Interest deductibility and Part IVA
Published: June 2013
Ruling period: 1 July 2012 to 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Trust be a managed investment trust (MIT) as defined in s 12-400(1) in Schedule 1 to the Taxation Administration Act 1953 (Cth) from the income year commencing 1 July 2012 provided that: · the Trust only conducts an 'eligible investment business' as defined in s 102M of the Income Tax Assessment Act 1936 (Cth); or · any entity that the Trust controls, directly or indirectly, only conducts an 'eligible investment business'? | A1: Yes | Q2: Will the interest payable by the Trust to the foreign pension fund under the Loan Agreement be deductible under section 8-1 of the Income Tax Assessment Act 1997 ? | A2: Yes | Q3: Will Part IVA of the Income Tax Assessment Act 1936 apply, or will the Commissioner seek to apply Part IVA? | A3: No

Relevant facts and circumstances: Investment in an Australian unit trust by a foreign pension fund.

Relevant legislative provisions: Subsection 12-400(1) in Schedule 1 to the Taxation Administration Act 1953 | Section 8-1 of the Income Tax Assessment Act 1997 | Part IVA of the Income Tax Assessment Act 1936

Reasons for decision: Detailed Reasoning - Overview of section 12-400 - Meaning of a managed investment trust: A MIT as defined in Schedule 1 of the Taxation Administration Act 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. Subsection 12-400 (1) (a) to (h) sets out the requirements for a trust to qualify for the MIT withholding tax regime, all of which are satisfied. | Detailed Reasoning - Paragraph 12-400(1)(a) (Requirement 1): Paragraph 12-400(1)(a) in Schedule 1 to the Taxation Administration Act 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): On the basis that the Trust will only hold units in an entity, which is an 'eligible investment business', it will not be seen to be carrying on a trading business itself. The Trust is not a trading trust for the purposes of Division 6C of the Income Tax Assessment Act 1936 as it conducts an '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 in relation to Australian located assets or taxable Australian property the trust or assets that a listed or quoted on an approved stock exchange be carried out within Australia throughout the income year. The term 'investment management activities' is not defined in the Tax Administration Act 1953 . Accordingly, the term is to be defined in the terms of its common usage and the common law and, 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 Tax Administration Act 1953 and, therefore, takes its ordinary meaning. The word 'proportion' has the meaning of 'a relative quantity' or a proportional part' and the word 'substantial' has the meaning of 'the essence of a thing', 'essential', that is, constitutes or involves an essential part, point or feature' and 'of ample or considerable amount, quantity or dimensions.' (The Oxford English Dictionary Second Edition). The assets of the Trust are the units and these assets are situated in Australia. These investments are managed by property managers for operational purposes appointed by the trustee. 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 trustee which will constitute 'investment management activity'. The Trustee is authorised to carry out such actions that include: · market analysis, identification of potential investments and carrying out of due diligence, culminating in the particular investment decision, · decisions relating to the type of, and timing of, the purchase of the relevant Australian assets of the fund, and · submits those investments it considers appropriate for approval. 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 the meaning of section 9 of the Corporations Act 2001 at the time of the first payment will be made. | 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 X 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)). | Detailed Reasoning - Paragraph 12-400(1)(f) (Requirement 6): The applicant must satisfy the requirement in paragraph 12-400(1)(f)(iii). As the Trust is unregistered and is covered by section 12-401, it must meet the widely held requirements in subsection 12-402(1). On the basis that the Trust would be deemed to have 51 members, the widely held requirements in subsection 12-402(1) 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. In applying these restrictions, the statutory provisions provide that MIT participation interests held by 'qualifying investors' are ignored. As the foreign pension fund will be a 'qualifying investor' and ignored, the MIT participation interest held by the trustee is less than 75% and accordingly the 'closely held requirement' will be satisfied. As well, no foreign individual would have a MIT participation interest of more than 10%. | Detailed Reasoning - Paragraph 12-400(1)(h) (Requirement 8): As the Trust is covered by section 12-401 it must also satisfy the licensing requirements in section 12-403. 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)(1)). The trustee holds an Australian Financial Services License (AFSL) which authorises it to provide financial services to wholesale clients. As all the requirements in section 12-400 have been satisfied, the Trust will be a managed investment trust for the period ruled on. | Summary: Will the interest payable by the Trust to the foreign pension fund be deductible under section 8-1 of the Income Tax Assessment Act 1997 ITAA 1997)? | Detailed Reasoning - Detailed reasoning: Section 8-1 In determining whether the interest payable is deductible to the Trust, it would be necessary to consider section 8-1. Broadly, section 8-1 allows a taxpayer to deduct from their assessable income any loss, or outgoing to the extent that: · It is incurred in gaining or producing assessable income; or · Necessarily incurred in carrying on a business for the purposes of gaining or producing their assessable income. However, a taxpayer cannot deduct a loss or outgoing under section 8-1 to the extent that it is, among other things, a loss or outgoing of capital, or of a capital nature. In determining whether an outgoing is deductible under the first limb of section 8-1, a sufficient nexus must exist between the loss or outgoing and the gaining or producing of assessable income. Whilst numerous cases have dealt with the nexus between an outgoing and the gaining or producing of assessable income, it is ultimately a matter of fact to be determined on a case by case basis. In respect of interest, it is generally accepted that interest paid on a borrowing used to acquire income producing assets such as units in a unit trust will be deductible under section 8-1 where it is expected that assessable income would be derived from the investment (see Taxation Ruling TR 95/33). Therefore, on the basis that the Trust is borrowing in order to finance the acquisition of income producing assets, any interest paid under the loan will prima facie be deductible to the Trust under section 8-1. However, a deduction is not available under section 8-1 in respect of returns on equity interests. As such, it needs to be determined whether the loan is an equity interest. Section 974-75 contains the basic test for an equity interest. The loan does not satisfy any of the Items in the table in section 974-75. Therefore the loan is not an equity interest. Furthermore there are no other provisions within Division 974 which would cause the loan to be an equity interest. As the loan is not an equity interest, the payments of interest made will therefore be deductible to the Trust under section 8-1. | Summary: Part IVA of the Income Tax Assessment Act 1936 will not apply to the arrangement. | 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.