Private ruling: Managed investment trust withholding tax
Published: August 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Is Entity A a 'foreign superannuation fund' as defined in section 995-1 of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997 ) (for the purposes of subsection 12-402(3)(b) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the TAA 1953 ))? | A1: Yes. Entity A is a 'foreign superannuation fund' as defined in section 995-1 of the ITAA 1997 (for the purposes of subsection 12-402(3)(b) of Schedule 1 to the TAA 1953).

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Establishment The rulee, Entity A, is part of a group of entities which is the principal administrator for company retirement pension plans in the Country A for a specific industry. The relevant entities include Entity A, Entity C and ( Entity B ) (together referred to as the Entity A Entities ). The Entity A Entities are 'mutual' organisations and all contributions are invested for the purpose of funding pension benefits to be paid to employees of the member organisations. Entity A has more than 50 members. The Entity A Entities do not have a fixed termination date. Profile and overview of activities The central management and control of the Entity A Entities is in Country A. The Entity A Entities do not have a place of business or management in Australia. Entity A is organised as a legal body (with a legal persona). Entity C is organised as a legal body in the form of an association. Entity B is a wholly owned subsidiary of Entity A and is organised as a Country A public company. Entity A and Entity B are highly regulated Country A pension funds which are supervised by the Country A regulator as these entities are classified as insurance (pension) companies under Country A regulatory law. Entity C itself is technically not regulated. However, as all contributions payable to Entity C are paid directly into Entity A's bank accounts and invested and managed by Entity A, a highly regulated entity, Entity C's pension insurance activities are 'indirectly' fully regulated under Country A Law. Entity A, Entity C and Entity B are three legally different pension providers within the Entity A group which offer three different strategies for a company pension plan out of the various statutory strategies allowed under Country A insurance/regulatory laws (i.e. member companies can choose which strategy they would like to follow and which of the three Entity A pension providers they would Like to contract with. Membership and pension arrangements Entity A accepts membership from companies to provide pension benefits for their employees. The member companies commit to undertakings with respect to pension arrangements for their employees and where the company is a member of the Entity A entities it outsources the pension liability/obligation and the related administration to Entity A. Members of Entity A entitled to the listed benefits are both the company concluding the agreement ('member companies') and also their employees insured with Entity A ('member employees'). Membership in Entity A can also be acquired by employees who have received a benefit commitment from Entity B or Entity C, if they conclude an insurance agreement for retirement benefits with Entity A after the end of their working relationship or after termination by the sponsor company in Entity B or Entity C. Under the agreement between Entity C and Entity A, contributions payable to Entity C from financial institutions for the future pension benefits of their employees are paid directly into Entity A's bank account. This is as Entity C is set up as an entity that does not have bank accounts or any other internal resources or infrastructure. Entity B receives contributions from financial institutions which are then directly transferred to Entity A. Entity A performs all central functions of the occupational pension and takes care of the administration (including assessment of pension payments/claims and investment of pension contributions). Entity A is required to invest the funds received on behalf of Entity C and from Entity B together with the pension insurance contributions it receives in respect of its own members to generate a return for funding future and current pension payments to the insured individual members of Entity C, Entity B and Entity A (or their dependants). In case Entity A is not able to fulfil pension payments, under a counter insurance arrangement, Entity C and Entity B have to make respective payments to Entity A and Entity A would have to use such funds to pay out pensions to insured persons. Types of benefits The Articles of Incorporation ('Articles') of Entity A, Entity C and Entity B specify their purpose to provide retirement, occupational disability and surviving dependents' pensions to their members (or surviving dependents). This is also a requirement of the Country A regulator. 100% of the funding in the Entity A Entities is allocated to retirement benefits/pension payments. The Entity A Entities provide three principal types of pension benefits: • Retirement pension • Disability pension • Survivor's pension/death benefits The 'retirement pension' is payable to member employees on reaching the retirement/pensionable age of 65 years. The 'disability pension' is payable to member employees in the event of professional disability or a reduced professional capacity. Professional disability is assumed when a person can no longer carry out a professional activity which is adequate to their professional education and qualifications due to physical infirmity or due to weakness of the person's physical or mental stale. A disability pension will be paid if the ability to carry a professional activity is reduced prior to the planned retirement date. The survivor's pension/death benefits are payable to a surviving spouse or children of member employees on the death of a member employee or a pension recipient: • A spouse will generally receive annuity payments in the event of death of the pension receiver (the 'Widow's Pension'). • Under specific requirements, benefits will be paid to children under a specified age in case of death of the insured pension (the 'Orphan's Pension'). • Widow's and Orphan's Pensions together cannot exceed the overall pension entitlement of the member employee. Contribution arrangements The pension benefits are funded by the contributions payable from member companies/financial institutions for the future pension benefits of their member employees as well as income generated from the investment of such contributions. Employees of Entity A member firms are able to make additional contributions towards their future pension benefits. It is possible to convert part of their gross salary into a payment to the occupational pension system provided by Entity A, i.e. part of the gross salary will be transferred to Entity A and will be directly credited to the pension account of the respective employee increasing the pension benefit of the employee. Payment of benefits Pension payment applications must be submitted to Entity A. Entity A will assess whether the applicant qualifies and an unfavourable assessment can be reviewed by the Entity A Supervisory Board. Where the requirements for a retirement pension, death benefit, an occupational disability pension or a surviving dependant pension are satisfied, pension payments are made by Entity A directly to the individual who is entitled to the pension. This applies to the individuals who are entitled to a pension payment from any of the Entity A Entities. The pensions are calculated and paid solely as annuity payments (monthly pension payments). Where the recipient of the pension is a member of Entity C or Entity B, Entity A is making that payment at the direction of the relevant pension fund (as required under the arrangements between the three entities). That is, the pension payment is actually a liability of the relevant pension fund, not Entity A. Resignation When a member employee resigns from their position with the participant member company there are three alternatives: • New employer is also a member of Entity A: The pension plan/contributions can be continued • New employer is not a member of Entity A: The existing pension claim of the member employee is generally set to be non-contributory and the person is entitled to pension payments on the basis of their claim upon the retirement date • New employer not a member of Entity A but agrees to a partial membership in Entity A: The pension plan/contributions can be continued provided the new employer agrees to fully take over the respective pension promise. Australian real estate investment Entity A has indirectly invested in an Australian Unit Trust (an AUT ) for the purposes of investing in Australian real estate assets. Entity A's investment in the AUT is held via an interposed structure (the Entity A Special Fund ). Entity A is the sole investor/beneficiary of the interposed structure. The interposed structure is a Country A special investment fund in the form of a domestic asset pool (or investment fund). The Entity A Special Fund is not a legal entity. The assets of the Entity A Special Fund are legally owned by a management company which administers and accounts for the assets for the benefit of the investors/beneficiaries. The special investment fund will invest in real estate.

Relevant legislative provisions: Income Tax Assessment Act 1997, subsection 295-95(2) | Income Tax Assessment Act 1997, subsection 995-1(1) | Taxation Administration Act 1953, Schedule 1, paragraph 12-402(3)(b) | Taxation Administration Act 1953, Schedule 1, subsection 12-402(4) | Taxation Administration Act 1953, Schedule 1, subsection 12-402(5) | Superannuation Industry (Supervision) Act 1993, Subsection 10(1) Question 1 | Summary | Entity A is a 'foreign superannuation fund' for the purposes of subsection 12-402(3)(b) of Schedule 1 to the TAA 1953. | Detailed reasoning | Foreign superannuation fund | Paragraph 12-402(3)(b) of Schedule 1 to the TAA 1953 applies to | ...a *foreign superannuation fund, being a fund that has at least 50 *members; | Subsection 995-1(1) of the ITAA 1997 provides the following definition: | foreign superannuation fund: | (a) a * superannuation fund is a foreign superannuation fund at a time if the fund is not an * Australian superannuation fund at that time; and | (b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year. | Subsection 995-1(1) of the ITAA 1997 provides the following definition: | superannuation fund has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 . Subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act ) provides the following definition: | superannuation fund means: | (a) a fund that: | (i) is an indefinitely continuing fund; and | (ii) is a provident, benefit, superannuation or retirement fund; or | (b) a public sector superannuation scheme. | Subsection 10(1) of the SIS Act supplies the following definitions: | public sector fund means a superannuation fund that is: | (a) covered by paragraph (a) of the definition of superannuation fund ; and | (b) part of a public sector superannuation scheme. | ... | public sector superannuation scheme means a scheme for the payment of superannuation, retirement or death benefits, where the scheme is established: | (a) by or under a law of the Commonwealth or of a State or Territory; or | (b) under the authority of: | (i) the Commonwealth or the government of a State or Territory; or | (ii) a municipal corporation, another local governing body or a public authority constituted by or under a law of the Commonwealth or of a State or Territory. | Subsection 995-1(1) of the ITAA 1997 provides the following definition: | Australian superannuation fund has the meaning given by section 295-95. | Subsection 295-95(2) of the ITAA 1997 provides: | A *superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if: | (a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and | (b) at that time, the central management and control of the fund is ordinarily in Australia; and | (c) at that time either the fund had no member covered by subsection (3) (an active member ) or at least 50% of: | (i) the total *market value of the fund's assets attributable to *superannuation interests held by active members; or | (ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members; | is attributable to superannuation interests held by active members who are Australian residents. | Entity A clearly cannot be a public sector superannuation scheme within the meaning of subsection 10(1) of the SIS Act because it is not established for Australian public servants and it was established under the laws of Country A and not under the authority of any Australian state or territory or municipal body etc. Consequently, in order to qualify Entity A must be | • a fund; | • indefinitely continuing and | • a provident, benefit, superannuation or retirement fund | Fund | The term 'fund' is not defined in the tax legislation and should therefore be given its ordinary meaning subject to the context in which it appears. The Australian Oxford Dictionary, 2004, Oxford University Press, Melbourne, defines the term 'fund' as a 'permanent stock of something ready to be drawn upon...a stock of money, especially one set apart for a purpose'. | In the High Court of Australia decision of Scott v. FC of T (No 2) (1966) 14 ATD 333 at 351 (Scott's Case), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income therefore being capitalised'. | Hill J in Walstern Pty Ltd v. Commissioner of Taxation [2003] FCA 1428; (2003) 54 ATR 423 at [54]; (2003) 2003 ATC 5076; [2004] ALMD 1904; [2004] ALMD 1901; [2004] ALMD 1899; [2004] ALMD 1898; (2003) 138 FCR 1, at paragraph 49, subsequently cited Windeyer J's views in Scott's Case where he stated that 'for present purposes, the point is the need for 'money' or 'other property to constitute a fund'. | In relation to Entity A, contributions are made from member companies on behalf of their member employees (as well as contributions related to Entity C and Entity B). The contributions are then invested by Entity A with any gains being used for funding future and current pension payments to the individual members of Entity C, Entity B and Entity A (or their dependants). | Therefore, Entity A is a 'fund' for the purposes of section 10 of the SIS Act. Indefinitely continuing fund | The phrase 'indefinitely continuing' is not defined in the income tax legislation and should therefore be given its ordinary meaning subject to the context in which it appears. The Australian Oxford Dictionary defines 'indefinite' as (1) vague, undefined, and (2) unlimited, and 'indefinitely' as (1) for an unlimited time and (2) in an indefinite manner. | Entity A does not have a fixed termination date and will continue to exist unless Entity A is liquidated. Therefore Entity A is an indefinitely continuing fund. | Provident, benefit, superannuation or retirement fund | Although the expression 'provident, benefit, superannuation or retirement fund' is not defined in the Act, its meaning was considered in Walstern Pty Ltd v. Commissioner of Taxation, at paragraph 54, where the following paragraph was quoted from Scott's Case: ...there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age.' | Further, the High Court in Mahoney v. FCT (1967) AITR 463 broadly identified that: | • 'provident' refers to the making of provision against possible or expected future events; | • 'benefit' refers to the making or provision of benefits of some specific future kind, such as a funeral benefit, rather than benefits in a general sense; | • 'superannuation refers to the making of provision for financial support for an employee, or for the employee's estate or dependents, to arise on the employee's retirement, death or other cessation of employment; and | • the word 'retirement' in this context carries its ordinary meaning. | The purpose and function of each Entity A Entity is as follows: | • 'provident': to provide for the financial needs of the employees of Country A employers operating in the specified industry on their retirement/disability; | • 'benefit': to provide income in the form of a retirement, disability or survivor's pension, to retired employees (or their dependants); | • 'superannuation': the fund is a provision for financial support for retired employees (and their nominated estate or dependents) following their retirement, death or other cessation of employment. | Accordingly, Entity A is a superannuation fund for the purposes of the definition of 'foreign superannuation fund'. | Entity A provides direct superannuation benefits to the individual members. Entity A does not merely provide insurance to an employer (to guarantee that the employer has sufficient resources to meet superannuation claims). Likewise, Entity A does not act as an investment entity which merely generates income for the benefit of an employer out of which the employer can pay superannuation benefits. | Definition of 'Australian superannuation fund' | As outlined above, a fund will only qualify as a foreign superannuation fund where it is also not an Australian superannuation fund. | All paragraphs of section 295-95 must be satisfied in order for Entity A to be considered an Australian superannuation fund. This will clearly not be the case because Entity A was established outside Australia and its central management and control is outside Australia. | Accordingly, Entity A is not an 'Australian superannuation fund'. | Conclusion | Entity A has at least 50 members. | As discussed above, Entity A is a superannuation fund that is not an Australian superannuation fund. Hence, Entity A is a 'foreign superannuation fund' for the purposes of section 995-1 of the ITAA 1997 and is also therefore a 'foreign superannuation fund' for the purposes of subsection 12-402(3)(b) of Schedule 1 to the TAA 1953. | Question 2 | Summary | The Entity A Special Fund is a 'trust'. | Entity A is a member of the AUT for the purposes of subsection 12-402(4) of Schedule 1 to the TAA 1953. | Detailed reasoning | Member of the AUT | Entity A's investment in the AUT is held via an interposed structure (the Entity A Special Fund). Entity A is the sole investor/beneficiary of the Entity A Special Fund. | The Entity A Special Fund is not a legal entity. The assets of the Entity A Special Fund are legally owned by a management company which administers and accounts for the assets for the benefit of the investors/beneficiaries (Entity A is the sole 'beneficiary'). | For the purposes of the widely held rules in section 12-402 of the TAA 1953 it is necessary to identify the members of the AUT. | Ordinarily, a company that is the legal owner of the units in the AUT would be regarded as a member of the AUT. | However, if the Entity A Special Fund is a trust, it is necessary to consider subsection 12-402(4) of Schedule 1 to the TAA 1953 which provides: | The rules are as follows: | (a) if an entity that is not a trust holds interests in the trust indirectly, through a *chain of trusts: | (i) treat the entity as a member of the trust; and | (ii) do not treat a trust in the chain of trusts as a member of the trust; | Subsection 12-402(5) of Schedule 1 to the TAA 1953 adds: | For the purposes of paragraph (4)(a), treat an entity covered by subsection (3) as an entity that is not a trust. | Paragraph 12-402(3)(b) of Schedule 1 to the TAA 1953 covers, among other things, 'foreign superannuation funds' that have at least 50 members. | In deciding whether Entity A has an investment via a chain of trusts in the AUT it is necessary to determine whether the Entity A Special Fund is a trust. | Is the Entity A Special Fund a 'trust' | ATO Interpretative Decision ATO ID 2008/61 Income Tax: Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund provided the following explanation: | ...Justice French in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 stated that a trust 'is notably a definition of a relationship by reference to obligations'. His Honour went on to state that the four essential elements of a trust are: | 1. the trustee who holds a legal or equitable interest in the trust property | 2. the trust property which must be property capable of being held on trust and which includes a chose in action | 3. one or more beneficiaries other than the trustee, and | 4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property. | ATO Interpretative Decision ATO ID 2007/42: Income tax: Transferor trusts: Division 6AAA applied the same principles to conclude that a Stichting which was created in the Netherlands and which was governed by the law of the Netherlands could be treated as a trust for Australian income tax purposes. | The facts of the present case, in light of the essential elements of a trust which were detailed above, are as follows: | 1. The management company holds a 'legal' interest (more precisely, the equitable interest) in the 'trust' property (being units in the AUT). | 2. The units in the AUT are property which is properly capable of being held on 'trust'. | 3. There is an investor ('beneficiary'), namely, Entity A. | 4. Also there is a personal obligation on the management company to deal with the trust property for the benefit of Entity A. The personal obligation on the management company to deal with the trust property for the benefit of Entity A is also annexed to the property in the sense that the obligations of the management company are imposed in relation to the moneys which were invested by Entity A in the Entity A Special Fund. | As all four elements have been satisfied, it is considered that the Entity A Special Fund is a 'trust' for the purposes of Australian income tax. | Conclusion | It has been decided in the answer to Question 1, above, that Entity A is a foreign superannuation fund. Entity A has more than 50 members. Hence, it is covered by paragraph 12-402(3)(b). | Consequently, as a result of subsection 12-402(5), Entity A will be deemed to be an entity that is not a trust when applying paragraph 12-402(3)(b). | Accordingly, Entity A will be considered to be a member of the AUT because Entity A's interest is held through a 'chain of trusts', namely, through the Entity A Special Fund. | Miscellaneous | Fund payment | This ruling only deals with a 'fund payment' as defined in section 12-405 of Schedule 1 to the TAA 1953 or an amount reasonably attributable to a fund payment. Among other things, this advice does not deal with dividend and interest income or foreign sourced income. | Is Entity A a trustee of another trust? | It is noted that this ruling does not deal with the question of whether Entity A is, itself, a trustee of another trust for the purposes of paragraph 840-805(4)(c) of the ITAA 1997. | It was decided in ATO Interpretative Decision ATO ID 2012/71: Income Tax Managed Investment Trust Withholding Tax: foreign superannuation fund that holds an indirect interest in a Managed investment trust ('MIT') that paragraph 840-805(4)(c) of the ITAA 1997 is not satisfied if a foreign superannuation fund, which holds an indirect interest in a MIT, is a trustee of another trust. An entity which does not satisfy paragraph 840-805(4)(c) will not be subject to managed investment trust withholding tax and the trustee of the managed investment trust might in certain cases be required to deduct tax under subsection 98(4) of the ITAA 1936. | This private ruling also does not deal with any exposure draft legislation which might, if it is enacted, modify the effect of paragraph 840-805(4)(c).


If the answer to Question 1 is yes, is Entity A considered to be a member of the Australian Unit Trust (the AUT ) for the purposes of subsection 12-402(4) of Schedule 1 to the TAA 1953? | Yes. Entity A is considered to be a member of the AUT for the purposes of subsection 12-402(4) of Schedule 1 to the TAA 1953?