Private ruling: Withholding managed investment trust
Date of advice: 16 February 2018
Published: June 2018
Date scheme commenced: During the income year ended 30 June 2018

Ruling: Q1: Will the services the Manager intends to provide to the Trustee under the terms of the Investment Management Agreement (IMA) satisfy the requirement in paragraph 12-383(b) of Schedule 1 to the Taxation Administration Act 1953 (TAA) to have a substantial proportion of the investment management activities carried out in Australia? | A1: Yes. | Q2: Will the services the Manager intends to provide to the Trust satisfy the requirement under paragraph 275-10(3)(g) and subsection 275-35(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to have the Trust operated or managed by a financial services licensee holding an Australian financial services license or an authorised representative of such a financial services licensee? | A2: Yes.

Relevant facts and circumstances: 1. The trust was established as a unit trust to acquire an investment in Australia via Sub Trust. 2. Hold Trust holds units in the Trust. Hold Trust is a resident of X country. 3. During the period prior to the acquisition of Sub Trust, activities in respect to the investment were performed in X country. 4. The Trustee holds an Australian financial services licence as defined in section 761A of the Corporations Act which covers operating the Managed Investment Scheme (MIS). Investment Management Agreement 5. The Trust has entered into an IMA with the Manager. The Manager will provide investment management, finance and taxation, capital management and risk management services under the IMA to the Trust. 6. The Manager was appointed after the acquisition of the investment. 7. The Manager holds an Australian financial services licence as defined in section 761A of the Corporations Act which covers operating the MIS. The Manager’s remuneration 8. The Trustee will compensate the Manager for the services provided for under the IMA. This fee will be determined by reference to the activities undertaken by the Manager and paid in accordance with the IMA entered into between the Manager and the Trustee. Investment proposals after acquisition 9. Following its appointment, the Manager has submitted potential investment opportunities to the trust for consideration. 10. The Manager carried out services in respect of a proposed acquisition by Sub Trust and made recommendations in respect to the potential acquisition. 11. Sub Trust has entered into a conditional Sale and Purchase Agreement in respect to the proposed acquisition. The Trust 12. In accordance with the Trust Deed the Trustee may provide the services in relation to the Trust. 13. The Trustee, subject to certain restrictions, has the power to, amongst other things, acquire and dispose of assets, borrow funds, incur obligations and liabilities, provide security over the trust fund or any asset, institute legal proceedings and insure assets in respect to the trust and trust assets. 14. The trustee may, and where required to do so, must consult with the Trust unit holders before exercising a discretion or power conferred on the Trustee and must give due weight to the opinion of unit holders. 15. The Trust Deed restricts the he Trustee’s power to make decisions that relate to the type of, and timing of the purchase of investment assets, in respect to the certain matters. 16. The Trustee must seek directions from unit holders on any matter arising in respect of any investment along with a recommendation by the Manager for a particular course of action to be taken. 17. Trust Deed restricts the Trustee from making investments that do not comply with the Investment Strategy, varying the Investment Strategy, entering into borrowings, granting security over the funds or assets of the trust and entering into derivative transactions for investment purposes without firstly seeking approval via a unit holder resolution. The Trust unit holders 18. Subject to the Trust Deed, other than in certain circumstances outlined in the Trust Deed, the Trustee must not take any action with respect to the certain matters unless and until the action is approved by a special resolution of the unit holders. 19. In addition to other matters, unit holders can only consider certain matters on recommendation of the Manager. 20. It is likely that separate investment management activities will be performed in X country. For example: ● additional research and consideration in respect of their review of any investment recommendations or reports provided by the Manager or the Trustee that are specifically tailored to the circumstances of the Trust, as well as any financial results prepared on the performance of existing investments held by the Trust ● additional research and consideration in respect of the Australian investment type sector and its financial performance and growth prospects compared to other foreign jurisdictions when assessing whether to deploy further capital as recommended by the Manager or the Trustee ● consideration of how the Trust investment integrates with other assets in the unit holder’s portfolio and achieves the diversification and return on investment requirements of the fund. 21. The Trust’s investments will be assessed against the broader global objectives of unit holders and with its diversified portfolio in mind. Other 22. The Trust is not required to be registered under section 601EB of the Corporations Act pursuant to subsection 601ED(2) of the Corporations Act.

Relevant legislative provisions: Taxation Administration Act 1953 section 12-383 of Schedule 1 | Taxation Administration Act 1953 paragraph 12-383(b) of Schedule 1 | Income Tax Assessment Act 1997 subsection 275-10(3) | Income Tax Assessment Act 1997 paragraph 275-10(3)(g) | Income Tax Assessment Act 1997 section 275-15 | Income Tax Assessment Act 1997 section 275-35 | Income Tax Assessment Act 1997 subsection 275-35(1) | Income Tax Assessment Act 1997 paragraph 275-35(1)(a) | Income Tax Assessment Act 1997 sub paragraph 275-35(1)(a)(i) | Income Tax Assessment Act 1936 Part IVA | Corporations Act 2001 section 601EB | Corporations Act 2001 section 601ED | Corporations Act 2001 section 601ED | Corporations Act 2001 subsection 601ED(2) | Corporations Act 2001 section 761A | Corporations Act 2001 section 761G | Corporations Act 2001 section 761GA | Corporations Act 2001 section 766A

Reasons for decision: Summary: 23. The services the Manager intends to provide, under the terms of the IMA, in relation to the Trust will amount to a substantial proportion of the investment management activities being carried out in Australian in accordance with paragraph 12-383(b) of Schedule 1 to the TAA. | Detailed Reasoning - Paragraph 12-383(b) of Schedule 1 to the TAA: 24. Amongst other things, to qualify as a withholding MIT, the Trust must satisfy paragraph 12-383(b) of Schedule 1 to the TAA, which states: a substantial proportion of the investment management activities carried out in relation to the trust in respect of all of the following assets of the trust are carried out in Australia throughout the income year: … | Detailed Reasoning - Investment management activities: 25. The term ‘investment management activities’ is not defined for the purposes of paragraph 12-383(b) of Schedule 1 to the TAA 1953. 26. According to the Revised Explanatory Memorandum to the Tax Laws Amendment (2010 Measures No. 3) Bill 2010: What are investment management activities? 5.60 At a practical level, the activities involved in operating and managing a fund are quite varied and diverse, and depend on the nature of the underlying investments of the fund. Activities include - but are not limited to - the provision of custodian services, the management and servicing of the underlying assets of the fund (for example, commercial property) and the provision of professional services in relation to various acquisitions, due diligences and disposals of underlying assets. 5.61 These activities can be compared to the investment management activities of a fund - the activities of the fund manager in relation to the investments of the fund. The manager of a MIS is generally appointed to invest and manage the assets of the MIS (the 'portfolio'). The manager must keep the portfolio under review, keep proper books of account in relation to the portfolio and is generally subject to investment instructions (as per the agreement between the manager and operator of the fund) which may set out limitations to the manager's investment discretion. 5.62 Where the manager delegates any of its investment management obligations to another entity, the investment management activities include the activities undertaken in relation to the trust by that other entity. It is these activities that are central to the policy objectives of the MIT withholding tax rules - the policy being that a substantial proportion of the investment management functions in relation to the assets of the fund that have a relevant connection with Australia should be carried out in Australia. 5.63 The physical location of investment management activities does not only refer to the place where the final decision to invest (or not) is taken. The fund management activities of the entity must be examined holistically - including market analysis, identification of potential investments and carrying out of due diligence, culminating in the particular investment decision. 5.64 The other activities - such as asset management - that flow from attracting foreign capital to Australia are merely incidental to the fund management activities. It is possible that, particularly in the case of Australian assets under management, the asset management activities will occur in Australia in any case regardless of the nature of the investor/purchaser and whether or not such investments are structured through a trust that qualifies as a MIT. | Detailed Reasoning - Example 5.4: Meaning of investment management activities: PT unit trust is an Australian trust (established on 1 July 2012) that is operated by a trustee (responsible entity) and is a registered MIS. The only assets that PT unit trust holds are commercial property in Australia. It is not a trading trust and has more than 50 members (and so is widely held). Asset management, custodial services, accounting and legal services are provided in Australia, but the fund is managed by SFM Co - a fund manager based in Singapore. SFM Co does preparatory work around market analysis, identifying potential investments and carrying out due diligence on potential investments. This work is undertaken from its office in Singapore. As SFM Co has no presence in Australia, it is not carrying out the investment management activities in Australia. PT unit trust would not be a MIT for the withholding tax rules but would be treated in the same way as a MIT for the purposes of MIT capital account treatment (Division 275 of the ITAA 1997). 27. The EM indicates that the relevant investment management activities are generally undertaken by the manager of the fund. Such activities relate to the type of, and timing of the purchase of, investment assets. 28. Currently, the assets of the Trust are the units it holds in Sub Trust and these assets are situated in Australia. The Trust intends to acquire additional investments in Australian, in line with its investment strategy. In order for the Trust to satisfy the requirements of paragraph 12-383(b) of Schedule 1 to the TAA, a substantial proportion of the investment management activities in relation to the units the Trust currently holds in Sub Trust and in respect to any future assets that the Trust may hold must be carried out in Australia. 29. Investment means the acquisition of property to generate income. It is the facts surrounding new and additional investment in property by the Trust and decisions regarding the continued investment in and disposal of current and future investments which will constitute ‘investment management activity’. 30. The activities the Trustee is authorised to carry are stated under the relevant facts and circumstances. 31. The Trustee has entered into the IMA with the Manager, who will provide the investment management, finance and taxation, capital management and risk management services outlined in the IMA to the Trustee. 32. The Trustee’s power to make decisions that relate to the type of, and timing of the purchase of, investment assets has been limited by the Trust Deed, in respect to the certain matters. The Trust Deed requires the Trustee to seek directions from unit holders on any matter arising in respect of any investments along with a recommendation by the Manager for a particular course of action to be taken in respect to investment management activities. Further, the Trust Deed restricts the Trustee from making investments that do not comply with the Investment Strategy, varying the Investment Strategy, entering into borrowings, granting security over the funds or assets of the trust and entering into derivative transactions for investment purposes without firstly seeking approval via a unit holder resolution. 33. In this case, where the final decision in respect to investment is made outside of Australia, it is necessary to consider the meaning of ‘substantial proportion’ of the investment management activities. This requires an analysis of the facts concerning the process of the management of any investment activity. Provided only the final decision is made outside of Australia 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 assets of the Trust are carried out within Australia. | Detailed Reasoning - Activities carried out by the Manager: 34. The activities that have been or will be undertaken by the Manager in Australia are outlined under the relevant facts and circumstances. 35. The EM indicates that the relevant investment management activities broadly include market analysis, identification of potential investments, due diligence, deciding whether to invest or not, keeping the portfolio under review and keeping books of account. Considering the type of activities the Manager has commenced to carry out and will continue to carry out for the term of the IMA, the manager will carry out services which constitute investment management activities within the meaning of the EM during the relevant income years. | Detailed Reasoning - Initial investment decision and ongoing investment management activities: 36. The initial investment activity was carried out in X country at the time of entry into the investment. This was the most material investment management activity to date. In addition, separate investment management activities have and will continue to be performed in X country. 37. Paragraph 12-383(b) of Schedule 1 to the TAA refers to investment management activities performed throughout the income year. Although the initial investment decision was made in X country prior to the periods under consideration, with completion occurring during the income year. The Trust has a mandate to invest in Australia. The initial investment decision made by the Trust unit holders and the ongoing investment management activities to be carried out by unit holders, while significant, should be considered with other investment management activities carried out during the relevant income year. 38. The Manager commenced to carry out investment management activities in respect to the Trusts investment in Sub Trust following acquisition of the investment. The Manager will continue to carry out investment management activities in respect to the relevant assets of the Trust for the term of the IMA. | Detailed Reasoning - Substantial proportion of investment management activities carried out in Australia: 39. In accordance with paragraph 12-383(b) of Schedule 1 to the TAA a ‘substantial proportion’ of the investment management activities must be carried out in Australia. The term ‘Substantial proportion’ is not defined is not defined for the purposes of paragraph 12-383(b) of Schedule 1 to the TAA and, therefore, takes its ordinary meaning. 40. The Trust unit holders will maintain substantial control over the investment activity of the Trust in accordance with the Trust Deed and the under the terms of the IMA. The Trustee is not able to take any action with respect to the certain matters unless it has been approved by a special resolution of unit holders. In addition to other matters, unit holders can only consider certain matters on recommendation of the Manager. 41. The EM contemplates that fund managers are generally subject to investment instructions and are therefore unlikely to have unfettered authority to make investment decisions. Accordingly, the EM requires an examination of the activities performed and their nexus to the investments of the fund. Therefore, the investment management activities of the entity must be examined holistically. The place where the final decision in respect to the assets of the trust is made, and therefore the place of ultimate control, is only one consideration. It is necessary to recognise the activities carried out by the Manager in relation to the relevant assets, notwithstanding that the Manager does not hold ultimate investment control. 42. In this case the final investment decision and approvals on certain matters will reside with the Trustee. The Trustee is obliged to consult and give due weight to the views of the Trust unit holders. Hence, final investment approvals will be provided from outside Australia. 43. The decision for the Trust to invest in Sub Trust was made in X country, prior to the appointment of the Manager. 44. In accordance with the Trust Deed and the IMA, the Manager is required to consult with and make recommendations to unit holders and essentially obtain their approval. However, the Manager is still responsible for all investment management activities prior to the final decision being made. 45. Following the appointment of the Manager, the Trust, through its investment in Sub Trust, has commenced to engage in activities that may lead to an increase in Australian investments as a result of investment management activities carried out by the Manager. 46. The ongoing investment management activities carried out by the Manager are critical to future investments by the Trust and the Trust maintaining or altering its investment in Sub Trust and any other investments that the Trust may acquire. Therefore, although the ultimate decision as to what investment should be entered into and/or maintained is not made by the Manager, the Manager’s role is critical in determining and sustaining the Trust’s investment decisions. The final decision, and the process undertaken by unit holders in reaching that decision is but one of several investment management activities that will be carried out in respect of the Trust’s investments. The Manager will perform all other investment management activities culminating in the final decision. 47. A holistic examination of the activities that will be performed by the Manager throughout each relevant income year leads to the conclusion that the Manager will carry out a substantial proportion of the investment management activities in respect to the assets of the Trust in Australia throughout each relevant income year. | Detailed Reasoning - Conclusion: 48. As the Manager carries out its investment management activities in Australia, a substantial proportion of the investment management activities carried out in relation to the Trust in respect of all of the relevant assets of the Trust, are carried out in Australia. Therefore, the conditions in paragraph 12-383(b) of Schedule 1 to the TAA are satisfied. | Summary: 49. The services the Manager intends to provide to the Trust will satisfy the requirement under paragraph 275-10(3)(g) and subsection 275-35(1) of the ITAA 1997 to have the Trust operated or managed by a financial services licensee holding an Australian financial services license or an authorised representative of such a financial services licensee. | Detailed Reasoning - Licencing requirement: 50. Paragraph 275-10(3)(g) states: if the trust is covered by section 275-15 at the time the payment is made - it satisfies the licensing requirements in section 275-35 in relation to the income year. 51. In accordance with section 275-15, the Trust is not required to be registered under section 601EB of the Corporations Act pursuant to subsection 601ED(2) of the Corporations Act. | Detailed Reasoning - Subsection 275-35(1): 52. The Trust will satisfy the requirements in subsection 275-35(1) if: in relation to the income year if, at the time the payment mentioned in paragraph 275-10(3)(a) is made (the time of the first fund payment for the income year): (a) the trust is operated or managed by: (i) a financial services licensee (within the meaning of section 761A of the Corporations Act 2001 ) holding an Australian financial services licence whose licence covers it providing financial services (within the meaning of section 766A of that Act) to wholesale clients (within the meaning of section 761G of that Act);… 53. The Manager holds an Australian financial services licence as defined in section 761A of the Corporations Act. In order for the Manager to satisfy the requirements of paragraph 275-35(1)(a) the Manager must operate or manage the trust at the time the first fund payment for the relevant income year is made. 54. Whether a financial services licensee operates or manages a trust is a question of fact and degree to be determined in light of the relevant facts and circumstances. The words ‘operated’ and ‘managed’ are not defined in the ITAA 1997 and, therefore, take their ordinary meaning. 55. Strategic or high level decision making activities which form part of the central management and control in respect to an entity are distinct from the actions undertaken to invest the assets of an entity in accordance with an investment strategy and to perform the ongoing tasks which enable the continuing operation of the trust. The latter actions form part of the day-to-day operations of an entity rather than the strategic or high level decision making activities of the entity (Taxation Ruling TR 2008/9 Income tax: meaning of 'Australian superannuation fund' in subsection 295-95(2) of the Income Tax Assessment Act 1997 paragraphs 128 to 131 and Taxation Ruling TR 2017/D2 Income Tax: Foreign Incorporated Companies: Central Management and Control test of residency paragraph 7). 56. Former paragraph 12-403(1) (a) of the TAA also required the relevant trust to be operated or managed by a financial services licensee or an authorised representative of such a financial services licensee. The Revised Explanatory Memorandum (EM) of the Bill, that was enacted as the Tax Laws Amendment (2010 Measures No. 3) Act 2010, provides guidance in respect of the former paragraph 12-400(1) repealed by No 53 of 2016, section 3 and Schedule 4 item 6 effective 5 May 2016, which states at paragraph 5.60: At a practical level, the activities involved in operating and managing a fund are quite varied and diverse, and depend on the nature of the underlying investments of the fund. Activities include but are not limited to - the provision of custodian services, the management and servicing of the underlying assets of the fund (for example, commercial property) and the provision of professional services in relation to various acquisitions, due diligences and disposals of underlying assets. 57. The words ‘operated’ and ‘managed’ are a reference to the day-to-day conduct and management of the Trust’s activities and operations. 58. In accordance with clause 13.1 of the Trust Deed, the Trustee, subject to certain restrictions, has been granted the power to carry out the day-to-day management and operations (including acquisition and disposal of assets, borrow funds, incur obligations and liabilities, provide security over the trust fund or any asset, institute legal proceedings and insure assets) in respect to the trust and trust assets. 59. Currently, the assets of the Trust are the units it holds in Sub Trust. These assets are situated in Australia. It is anticipated that the Trust will acquire additional assets during the periods under consideration. The day-to-day activities in respect to the assets the Trust holds, evaluation and identification of suitable investments and in respect to the administration of the trust are performed by the Trustee and any other parties appointed by the Trustee for operational purposes (e.g. the Trustee Support Services Provider). The Trustee has procured the Manager to provide services in respect to the Trust. The services to be provided by the Manager under the IMA include activities necessary to be carried out in respect to the day-to-day management or operation of the trusts activities as distinct from those activities that are strategic or high level in nature such as the formulation of the trust’s investment strategy. 60. The Manager, in concert with the Trustee and in accordance with the authority provided to the Manager by the Trustee pursuant to the IMA, performs activities and carries out transactions that enable the day-to-day operations and activities of the Trust to occur. The activities carried out by the Manager under the IMA are formalistic or administrative in nature and are integral to the Trust’s ability to meet its key objectives and priorities in accordance with the Trust’s Investment Strategy. The activities carried out by the Manager in accordance with the IMA may be construed as activities in relation to the operation or management of the Trust.

Reasons for decision: In this 'Reasons for decision' all legislative provisions are to the ITAA 1997 unless otherwise indicated.