Private ruling: Managed Investment Trusts
Published: October 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2009

Ruling: Q1: Is Head Trust a managed investment trust (MIT) for the purposes of subsection 12-400(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) by virtue of the operation of item 7 of Schedule 5 to the Tax Laws Amendment (2010 Measures No. 3) Act 2010 (the transitional provisions)? | A1: Yes.

Relevant facts and circumstances: Head Trust 1) Head Trust is an Australian unit trust. 2) Head Trust has less than 25 members. 3) X is a unitholder of Head Trust. 4) X has at all times since 26 May 2010 had at least 50 partners. 5) The trustee of Head Trust is XYZ Pty Ltd (Trustee). 6) Head Trust will at the relevant times be a managed investment scheme (as defined in section 9 of the Corporations Act 2001 ) and the Trustee holds a financial services license which covers operating the managed investment scheme. 7) X Partnership Agreement has been entered into by the partners. 8) None of the partners in X are individuals who hold (or have rights to acquire) more than 10% of the distributions or value of the partnership, or control of more than 10% of the rights attaching to interests in the partnership. 9) Head Trust is a registered scheme under section 601EB of the Corporations Act 2001 and will remain a registered scheme for the life of the trust. 10) The Trustee operates, and has day-to-day control over, Head Trust within the meaning of section 9 of the Corporations Act 2001 . X 11) X is an English limited partnership (ELP). 12) An ELP is a "limited partnership" within the meaning of s 995-1(1) of the Income Tax Assessment Act 1997 . 13) ELPs are formed under the Limited Partnerships Act 1907 (FOREIGN COUNTRY) (LPA) and are governed by this Act and the Partnership Act 1890 (foreign country). The provisions of the Partnership Act 1890 (foreign country) are broadly equivalent to the Australian state Partnership Acts. The overall effect of the statutory provisions for limited partnerships is that, except for certain minimum provisions, most other features of the limited partnership can be amended by the partnership agreement. 14) Section 4(2) of the LPA provides that an ELP must consist of one or more general partners and one or more limited partners. Section 4 further provides that each limited partner must, at the time of entering the partnership, contribute capital or property of a stated value. 15) Under English statute, the general partner of an English limited partnership has control of the management of the limited partnership. Section 6 of the LPA provides that a limited partner shall not participate in the management of the partnership's business or they risk losing their limited liability. A limited partner's rights under the LPA are limited to a right to inspect the books of the ELP and examine the state and prospects of its business and to advise the partners of the ELP thereon. 16) The general partner is entitled to manage and represent the limited partnership in respect of transactions in the ordinary course of business. Under the partnership agreement, transactions outside the ordinary course of business require a unanimous decision of the partners. 17) The limited partnership may choose to appoint a separate manager who will carry out most of the management of the partnership that would otherwise be required of the general partner. 18) The general partner and limited partners are joint owners of the partnership assets. 19) The limited partnership can, in certain circumstances, acquire assets in the name of the firm. The LPA (as amended) states that the name of the firm must include the words "limited partnership" or the letters "LP". 20) In the unit register of Head Trust, the units issued to X are recorded under the name ABC LP (or a similar name that includes the notation "LP"). 21) An English limited partnership may operate as a "closed ended fund" or an "open ended fund". In the former, there is generally no ability for a limited partner to transfer, or request redemption of, its partnership interest. X is a closed ended fund. 22) X has and at all relevant times had, at least 50 limited partners. The partnership interests were offered to the wholesale funds market, and therefore the majority of the limited partners are widely held collective investment vehicles. 23) No individual, together with its associates, will hold a 10% or greater interest in X. 24) X has been a 'collective investment scheme' for the purposes of section 235 of the foreign country Financial Services and Markets Act 2000 (FSMA) since the admission of third party investors. Other matters and assumptions The following is a list of other matters that are relevant for this Ruling. To the extent these matters relate to future events, for the purposes of this Ruling the Commissioner makes assumptions pursuant to paragraph 357-110(1)(b) of the TAA 1953 that the statements apply for the period to which the Ruling relates: (a) A previous PBR issued by the Commissioner to Head Trust confirmed that Head Trust was a MIT in accordance with subsection 12-400(1) of Schedule 1 to the TAA 1953 (as at the time) for the income years ending 30 June 2010 to 30 June 2014. (b) Head Trust will not satisfy the definition of a MIT under subsection 12-400(1) of Schedule 1 to the TAA 1953. (c) The Trustee of Head Trust will be a resident of Australia under the income tax laws of Australia and of no other jurisdiction. (d) The Trustee of Head Trust holds a financial services licence under section 761A of the Corporations Act 2001 which covers the operation of a managed investment scheme. (e) X will at all relevant times remain a unit holder of Head Trust and have more than 50 members.

Relevant legislative provisions: Corporations Act 2001 section 9 | Taxation Administration Act 1953 Schedule 1 subdivision 12-H | Taxation Administration Act 1953 Schedule 1 subsection 12-400(1) | Taxation Administration Act 1953 former Schedule 1 subsection 12-400(1) | Taxation Administration Act 1953 former Schedule 1 subsection 12-400(2) | Tax Laws Amendment (2010 Measures no.3) Act 2010 Schedule 5 | Financial Services and Markets Act 2000, United Kingdom subsection 235(1) | Financial Services and Markets Act 2000, United Kingdom subsection 235(2) | Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001

Reasons for decision: Summary: Subdivision 12-H of Schedule 1 to the TAA 1953 deals with Pay As You Go withholding obligations for distributions of managed investment trust (MIT) income. Under the MIT withholding tax regime, foreign investors are eligible for a reduced rate of withholding tax on fund payments from MITs if they are a resident of a country with which Australia has effective exchange of information on taxation matters. The withholding rate is 15% for income years starting on or after 1 July 2012. For residents of a country with which Australia does not have effective exchange of information on taxation matters, the rate is 30%. The explanatory guide provided under section 12-375 of Schedule 1 to the TAA 1953 broadly states that a managed investment trust may be required to withhold an amount from payment of its Australian sourced net income if the payment is made to an entity whose address, or place for payment, is outside Australia. In order to determine whether an entity is a managed investment trust for the purposes of Subdivision 12-H of Schedule 1 to the TAA 1953, section 12-400 of Schedule 1 to the TAA 1953 defines the meaning of that term. Item 4 of Schedule 5 to the Tax Laws Amendment (2010 Measures No. 3) Act 2010 (Act 90 of 2010) substituted a new section 12-400 effective 29 June 2010. Trusts are required to satisfy the new definition for income years commencing 1 July 2010 in order to be eligible for the reduced withholding rate. However, for trusts that would have been MITs under the definition as it stood immediately before the commencement of Act 90 of 2010 (the former definition), but will not be MITs under the current definition, where certain conditions are satisfied, transitional rules will preserve the status of such a trust in relation to the income years 2011 to 2017 inclusive. Schedule 5 to Act 90 of 2010 inserted the following transitional provision applicable to income years ending 2011, 2012, 2013, 2014, 2015, 2016 and 2017: | Detailed Reasoning - 7 Transitional-trusts that were managed investment trusts etc. for income year starting before 26 May 2010: (1) This item applies if: (a) apart from this item, a trust is not a managed investment trust in relation to an income year; and (b) the income year is the 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 or 2016-17 income year. (2) The trust is a managed investment trust in relation to the income year if: (a) the trust is a managed investment trust (within the meaning of section 12-400 in Schedule 1 to the Taxation Administration Act 1953 immediately before the commencement of this Schedule) in relation to the income year; and (b) in relation to an income year starting before 26 May 2010, the trust: (i) was a managed investment trust (within that meaning); or (ii) would have been a managed investment trust (within that meaning) if the trustee of the trust had made the first fund payment in relation to the income year in that income year and before 26 May 2010. As this ruling applies to the years ending 2015, 2016 and 2017, the transitional provisions may apply to Head Trust for the purposes of satisfying section 12-400 of Schedule 1 to the TAA 1953. In order for the transitional rules to apply: (1) Head Trust must not be a MIT as defined under the current subsection 12-400(1) of Schedule 1 to the TAA 1953; (2) The income year must be 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 or 2016-17; (3) Head Trust must be a MIT within the meaning of former section 12-400 in Schedule 1 to the TAA 1953 in relation to the income year(s); and (4) Head Trust must have been a MIT within the meaning of former section 12-400 for an income year starting before 26 May 2010. Each condition is now considered. (1) Head Trust must not be a MIT under current subsection 12-400(1) For a trust to qualify as a MIT in relation to an income year, there are 8 conditions that must be satisfied under subsection 12-400(1) in Schedule 1 to the TAA 1953. Where a trust fails one of the conditions, the trust will not qualify as a MIT under the current subsection 12-400(1). One of the conditions set out in subsection 12-400(1) in Schedule 1 to the TAA 1953 provides that the trust must satisfy either or both of the 'widely held' requirements under section 12-402 in relation to the income year (paragraph 12-400(1)(f)). To satisfy the widely held test under subsection 12-402(1), a trust must have at least 25 members. Head Trust currently has less than 25 members. Head Trust therefore fails the 'widely held' test under paragraph 12-400(1)(f). As a result, Head Trust does not satisfy the current definition of MIT under subsection 12-400(1) of Schedule 1 to the TAA 1953. | Detailed Reasoning - (2) The income year must be 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 or 2016-17: The income years Head Trust is seeking to rely on the transitional provisions, being the years ending 2015, 2016 and 2017, fall within those listed in the transitional provisions. | Detailed Reasoning - (3) Head Trust must have been a MIT within the meaning of former section 12-400 in relation to the income year(s): In order for the transitional provisions to apply, Head Trust must meet the definition of MIT under the former subsection 12-400(1) in relation to the income years 2014-15, 2015-16 and 2016-17. Under former subsection 12-400(1) of Schedule 1 to the TAA 1953, there are three conditions that need to be considered in order to determine whether a particular trust is a managed investment trust in relation to an income year. Former section 12-400 states: (1) A trust is a managed investment trust in relation to an income year if: (a) the trustee of the trust makes the first foreign country fund payment in relation to the income year; and (b) the conditions in this table are satisfied. | Detailed Reasoning - Condition: 1 At the time the payment is made, or at an earlier time in the income year: (a) a trustee was an Australian resident; or (b) the central management and control of the trust was in Australia. 2 At the time the payment is made, the trust is a managed investment scheme (as defined by section 9 of the Corporations Act 2001 ) and is operated by a financial services licensee (as defined by section 761A of that Act) whose licence covers operating such a managed investment scheme. 3 At the time the payment is made: (a) units in the trust are listed for quotation in the official list of an foreign country approved stock exchange in Australia; or (b) the trust has at least 50 foreign country members (ignoring objects of a trust); or (c) one of the entities covered by a paragraph of subsection (2) is a member of the trust. (2) These are the entities: … (d) an entity that is recognised, under a foreign country foreign law relating to corporate regulation, as an entity with a similar status to a managed investment scheme and that has at least 50 members; … Each condition outlined in the table under paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953 is now considered. | Detailed Reasoning - Item 1: The Trustee of Head Trust will satisfy Item 1, as it will be an Australian resident. | Detailed Reasoning - Item 2: Head Trust is a managed investment scheme as defined by section 9 of Corporations Act 2001. Additionally, the Trustee operates the Trust pursuant to a financial services licence that covers operating registered schemes. Therefore Item 2 will be satisfied. | Detailed Reasoning - Item 3: Sub-item 3(c) of the table in former paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953 requires that, at the time the trustee makes the first fund payment, one of the entities covered by a paragraph of former subsection 12-400(2) of Schedule 1 to the TAA 1953 is a member of the trust. One type of entity that must be a member of the trust is described in former paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953 as: an entity that is recognised, under a foreign law relating to corporate regulation, as an entity with a similar status to a managed investment scheme and that has at least 50 members. X is a member of Head Trust for the purposes of former section 12-400 of Schedule 1 to the TAA 1953. The question is whether X is an entity recognised under foreign law relating to corporate regulation, with a similar status to a managed investment scheme and that has at least 50 members. As X is a resident in the foreign country, the partnership must be recognised under foreign country law as an entity with similar status to a managed investment scheme. The term 'similar' is not defined in the tax legislation. Therefore, the term takes its ordinary meaning. The Macquarie Dictionary defines similar as 'having likeness or resemblance, especially in a general way'. The FSMA governs collective investment schemes in the foreign country and accordingly is the relevant foreign law relating to corporate regulation for the purposes of former paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953. Section 235 of the FSMA provides: (1) In this Part "collective investment scheme" means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. (2) the arrangement must be such that the persons who are to participate (participants) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions. (3) the arrangements must also have either or both the following characteristics- (a) the contribution of the participants and the profits or income out of which payments to be made to them are pooled; (b) the property is managed as a whole by or on behalf of the operator of the scheme; … Exceptions are provided under the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 which explains circumstances where arrangements will not amount to collective investment schemes. Relevantly, Item 10 states: Group schemes 10. Arrangements do not amount to a collective investment scheme if each of the participants is a body corporate in the same group as the operator. In the context of applying section 235 of the FSMA to X, it is considered that X meets the requirements of a 'collective investment scheme' as: • the partners of X work together with a common view to profit; • the limited partners of X do not have day-to-day control of the management of the partnership; • the contributions of X are considered to be pooled; • the general partner is the operator of X and has control of the management of X, although a manager can be appointed to carry out most of the general partner's functions; and • the majority of X interests are held by third party investors and are not held in the same group as the operator. Therefore, having determined that X is recognised as a 'collective investment scheme' under foreign country law, in particular, section 235 of the FSMA, the next step involves determining whether a collective investment scheme has a similar status to that of a managed investment scheme by comparing the definition of 'collective investment scheme' under section 235 of the FSMA and the definition of 'managed investment scheme' under section 9 of the Corporations Act 2001. | Detailed Reasoning - Managed investment scheme: Section 9 of the Corporations Act 2001 relevantly defines a managed investment scheme as: (a) a scheme that has the following features: (i) people contribute money or money's worth as consideration to acquire rights ( interests ) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members ) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); ... Comparison between Australian and Foreign Country law ' scheme' The requirement under section 9 of the Corporations Act 2001 that there be a 'scheme' has been considered by the Courts in Australia and has been given a wide meaning that broadly includes 'some programme or plan of action' ( Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209 at 225; Australian Softwood Forests Pty Ltd v Attorney-General for New South Wales (1981) 148 CLR 121 at 129), coupled with a series of steps or course of conduct to effectuate the purpose and pursue the programme or plan ( Australian Securities and Investments Commission v. Takaran Pty Ltd (2002) 170 FLR 388 at [15] (Takaran) ). In the context of section 9 of the Corporations Act 2001, a scheme will almost invariably include a profit making feature or objective ( Takaran at [15]). Similarly, subsection 235(1) of the FSMA requires that a collective investment scheme whose purpose or effect is to enable persons taking part in these arrangements to participate in or receive profit or income. These two requirements of a 'scheme' and an 'arrangement' are similar as they both require some sort of business or profit making purpose or plan. | Detailed Reasoning - 'contribute money or money's worth': The first feature of a managed investment scheme under paragraph (a) of the definition of that term in section 9 of the Corporations Act 2001 is that people make a contribution to the scheme as consideration to acquire rights to the benefits produced by the scheme. Paragraph 235(3)(a) of the FSMA similarly requires that such an arrangement have the characteristics that the contributions of participants are exchanged for rights to participate in profits or income. | Detailed Reasoning - 'pooled contributions': The second feature of a managed investment scheme under paragraph (a) of the definition of that term in section 9 of the Corporation Act 2001 is that the funds are either 'pooled' or 'used in common enterprise to produce financial benefits ...'. Subsection 235(3) of the FSMA similarly requires that the contributions of participants and the profits or income out of which payments are to be made to them are to be pooled. This is broadly consistent with the requirement that the contributions are used in common enterprise to produce the financial benefits. | Detailed Reasoning - 'no day-to-day control by members': The third feature of a managed investment scheme under paragraph (a) of the definition of that term in section 9 of the Corporations Act 2001 is that the members of the scheme do not have day-to-day control over the operation of the scheme. Similarly, subsection 235(2) of the FSMA provides that the arrangements must be such that the persons who are to participate do not have day to day control over the management of the collective investment scheme. Therefore it can be seen that the definition of 'collective investment scheme' and 'managed investment scheme' have similar meaning and therefore have similar status. As X satisfies the definition of 'collective investment scheme' under section 235 of the FSMA, it is recognised as an entity with a similar status to a managed investment scheme for the purposes of paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953. The final requirement under former paragraph 12-400(2)(d) of Schedule 1 to the TAA 1953 is that X must have at least 50 members. As X currently has more than 50 members, this requirement is satisfied. The exceptions under former subsection 12-400(3) do not apply as none of the partners in X are individuals who hold (or has rights to acquire) more than 10% of the distributions or value of the partnership, or control more than 10% of the rights attaching to interests in the partnership. Therefore, Item 3 of the table in former subsection 12-400(1) of Schedule 1 to the TAA 1953 is satisfied. In summary, there are three conditions outlined in the table of former subsection 12-400(1) of Schedule 1 to the TAA 1953 that must be satisfied for a trust to be a 'MIT'. Item 1 of the table in former section 12-400 of Schedule 1 to the TAA 1953 is satisfied as the Trustee of Head Trust is an Australian resident. Item 2 of the table in former section 12-400 of Schedule 1 to the TAA 1953 is satisfied as Head Trust is a managed investment scheme as defined by section 9 of the Corporations Act 2001 and the Trustee of Head Trust holds a financial services licence that covers operating such a scheme. X is a member of Head Trust. X is recognised as a 'collective investment scheme' for the purposes of section 235 of the foreign country FSMA. Collective investment schemes have a similar status to managed investment schemes as defined by section 9 of the Corporations Act 2001. X is therefore recognised under a foreign law as an entity with a similar status to a managed investment scheme, and has at least 50 members. As X is a member of Head Trust, Item 3 of the table in former section 12-400 of Schedule 1 to the TAA 1953 is satisfied. Having met all three conditions, it follows that Head Trust falls within the definition of MIT under the former subsection 12-400(1). Provided that Head Trust continues to satisfy all three conditions set out in the table in former paragraph 12-400(1)(b) of Schedule 1 to the TAA 1953 at all relevant times for the period to which the Ruling relates, Head Trust will be a MIT as defined by former subsection 12-400(1) in relation to the income years 2014-15, 2015-16 and 2016-17. | Detailed Reasoning - (4) Head Trust must have been a MIT within the meaning of former section 12-400 for an income year starting before 26 May 2010.: A Private Binding Ruling previously issued to Head Trust determined that Head Trust was a MIT for the purposes of former section 12-400 of Schedule 1 to the TAA 1953 for the income year starting 1 July 2009. Accordingly, Head Trust satisfies this requirement. | Detailed Reasoning - Conclusion: As Head Trust satisfies all the conditions under the transitional provisions, Head Trust will be a MIT for the purposes of subsection 12-400(1) of Schedule 1 to the TAA 1953 for the income years ending 2015, 2016 and 2017.