Private ruling: Investment management activities
Published: March 2012
Ruling period: Other Period 1 July 2011 to 31 March 2012 | Substituted Accounting Period 1 April 2012 to 31 March 2013 | Substituted Accounting Period 1 April 2013 to 31 March 2014
Date scheme commenced: During the income year ended 30 June 2011

Ruling: Q1:  | A1: No.

Relevant facts and circumstances: A is the trustee of B and is a company incorporated under the Corporations Act 2001 (Corporations Act). B was established during the year ended 30 June 2011. B is a MIS that has not been registered under Chapter 5C of the Corporations Act. 90% of the units in B are owned by D. The remaining 10% of the units are owned by E on trust for D. Both D and E are private companies incorporated under the laws of country Z and have been established for the predominant purpose of investing in Australian real estate assets. They are ultimately owned by the government of Z. All management (including strategic and operational) and decision-making is carried out in Z, and a significant majority of their management persons are located in Z. Trust Activities B owns 100% of the units in C. The trustee of C is F, which is a wholly owned subsidiary of D. It holds no other investments. C owns 100% of the units in G. The trustee of G is H, which is also a wholly owned subsidiary of D. H, as trustee for G, is in a joint venture arrangement (JV). Initial investment decision The initial decision to invest in the scheme was made in Z, given that neither B nor C were in existence at the time that decision was made. A's activities A advises that neither D nor E play any part in the day to day management of B or of the properties held in the JV. In the event that B were to make any significant investments in the future, both entities would be required to approve the proposed transaction via special resolution. A is responsible for carrying out activities under the B Constitution in its role as the Responsible Entity even though the specific activities it performs are not listed in the B Constitution. It must comply with the Investment Strategy (as defined in the B Constitution) when it carries out any investment activities of B - that strategy being to invest in C and make such other investments from time to time with the approval of the unitholders by special resolution as mentioned above. A has carried out and/or expects to carry out activities (in Australia) in relation to the B investment in C. A has provided, by way of examples, how A executes, or may execute its obligation: · maintaining proper books of account and other accounting and tax services (notwithstanding that some of these services may be outsourced); · updating unitholders on the management of B and investment in C, including rates of return; · monitoring of fees and expenses payable from B; · reporting to statutory bodies; and · risk management and oversight function of B's investment in C. No additional investments are anticipated, however, if in the event B is to provide additional funding to C, by way of subscription of additional units, the following is a summary of the decision-making process that may be carried out by A: - In arriving at a decision, A may consult with the unitholders in accordance with the B Constitution. This may be done by way of A forming a decision and then recommending this decision to the unitholders. In this regard A as trustee has ultimate discretion with respect to decisions relating to investment management activities. - On acceptance of the offer, A is the entity responsible for executing the relevant documentation. - A will then issue additional units to the unitholders of B. A will be responsible for preparing and issuing the relevant documentation for execution.

Relevant legislative provisions: Taxation Administration Act 1953 section 12-400 of Schedule 1 | Taxation Administration Act 1953 paragraph 12-400(1)(c) of Schedule 1

Reasons for decision: Summary: Section 12-400 of Schedule 1 to the TAA sets out certain conditions which must be satisfied in order for a trust to be a managed investment trust for an income year. Amongst those conditions is that which relates to 'investment management activities' contained in paragraph 12-400(1)(c) of Schedule 1 to the TAA. The provision provides that: 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: (i) assets that are situated in Australia at any time in the income year; (ii) assets that are *taxable Australian property at any time in the income year; (iii) assets that are *shares, units or interests listed for quotation in the official list of an *approved stock exchange in Australia at any time in the income year; and In B, the activities that fall to be considered are those that are carried out in relation to the units held in C (being the only assets of the trust), should those units fall within either of subparagraph 12-400(1)(c)(i) or subparagraph 12-400(1)(c)(ii) of the TAA. Subparagraph 12-400(1)(c)(iii) of the TAA has no application as the units are not listed on an approved stock exchange in Australia. Assets that are situated in Australia The only assets held by B are units in C. Those units in C are the relevant assets for consideration irrespective of any interest the unit holder might have in the underlying property of the unit trust (refer Taxation Determination TD 2000/32). C is a trust that is situated in Australia, with F carrying out its duties as trustee of C in Australia. Therefore, based on the facts as presented, the units held by B in C are assets that are situated in Australia at any time of the year. As a result subparagraph 12-400(1)(c)(i) of the TAA is satisfied, and being the only assets of B it is not necessary to consider the application of subparagraph 12-400(1)(c)(ii) of the TAA. Investment management activities The term 'investment management activities' is not defined in paragraph 12-400(1)(c) of the TAA. Accordingly, the rules of statutory interpretation allow recourse to, amongst other things, the relevant Explanatory Memorandum introducing the Bill in order to ascertain its meaning. Paragraph 5.13 of the Revised Explanatory Memorandum to the Tax Laws Amendment (2010 Measures No. 3) Bill 2010 (the EM), states that: The relevant investment management activities are generally undertaken by the manager of the fund. Such decisions relate to the type of, and timing of the purchase of, investment assets. In The Macquarie Dictionary , [Multimedia], version 5.0.0, 1/10/01 the word 'management' means 'the act or manner of managing; handling, direction, or control'. In Barac v. Farnell 125 ALR 241 at 248, the word 'management' meant 'taking an active part in the running of the [assets], suggestive of control; not merely the doing of routine duties'. Control means 'authority to decide and direct and not merely to participate in decision-making': per McLure JA in Burton & ors v. Arcus & Anor [2006] WASCA 71 at paragraph 4. Thus, when the word 'management' is read in conjunction with the words 'investment' and 'activities', it denotes that the entity must have unfettered authority to make decisions over investments, subject to any agreement between the entity carrying on the investment function of a fund and its administrative manager. The EM is specific that activities which are directed to the operation and management of the fund are distinguishable from 'investment management activities'. In this respect the EM states at paragraphs 5.60 and 5.61: 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. A, as the trustee of B, undertakes activities such as: · maintaining proper books of account and other accounting and tax services (notwithstanding that some of these services may be outsourced); · updating unitholders on the management of B and investment in C, including rates of return; · monitoring of fees and expenses payable from B; · reporting to statutory bodies; and · risk management and oversight function of B's investment in C. The activities undertaken by A do not, in the main, exhibit elements of control over the assets of B. A has been assigned duties which the EM has identified as custodial duties: refer to paragraph 5.60 of the EM. The statement that in the event of a disposal of the interest in the JV, the exit could occur at either the C or G level, supports the position that the decision to exit may be taken by an entity or entities other than A. One activity the EM has identified as being an 'investment management activity' is the maintenance of proper books of accounts in relation to the portfolio. However, this activity is to be connected to the more significant investment management activity of having authority to invest and manage the assets of a fund. The extent and degree of the activities undertaken by A, in the main, do not lead to a conclusion that A has control, and therefore management, over the assets. The acquisition of the units in C is in accordance with a pre-formulated policy to make such an investment: Schedule 2 of the B Constitution. The mandate to acquire and retain the investment in C is an investment management activity that pre-dates the formation of B, and retains its currency in any year of income, as long as the trust continues to remain in existence. That decision was made by an entity or entities resident outside of Australia. Even if the maintenance of proper books of account can stand alone from the activity to invest and manage the assets of the fund, it must be considered in the context of paragraph 12-400(1)(c) of the TAA which requires that a 'substantial' proportion of the investment management activities in respect of the assets are carried out in Australia. The word 'substantial' is defined by The Macquarie Dictionary [Multimedia], version 5.0.0, 1/10/01 to mean, amongst other things: 8. of or relating to the essence of a thing; essential, material, or important… The investment management activity for B to maintain its investment in C is a decision that retains its currency in any year of income as long as the trust remains in existence, and is the most material or influential activity in the present circumstances. That decision continues to have its source in an entity or entities outside of Australia, and promulgated in the B Constitution. The maintenance of proper books of accounts is considered secondary to that activity. Therefore, as a substantial proportion of the investment management activities are carried out outside of Australia, subsection 12-400(1) is not satisfied: this conclusion accords with example 5.4 of the EM. A has expressly stated that there may be a requirement to consider additional funding to satisfy the funding requirements of C. This will require it to make certain decisions as to whether additional units may have to be issued to D and E and/or whether such a request from C is acceptable without amendment. This act by A will be no more than a passive role given that the Investment Strategy mandates that A invest in C. The decision to invest and continue to invest is a pre-formulated policy that pre-dates any actual decision or activity to be undertaken by A. Furthermore, as paragraph 12-400(1)(c) of the TAA requires 'a substantial proportion of the investment management activities' to be tested annually, this activity can only be tested when it is carried out or contemplated to be carried out. The scenario is a mere possibility in the future. Conclusion A substantial proportion of the investment management activities carried out in relation to B, in relation to the units held in C, have not been carried out by A in Australia pursuant to paragraph 12-400(1)(c) of Schedule 1 to the TAA.

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