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Tax Laws Amendment (2010 Measures No. 3) Bill 2010

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2008-2009-2010

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Tax laws amendment (2010 MEASURES N o . 3) bill 2010

 

 

 

SUPPLEMENTARY EXPLANATORY MEMORANDUM

 

 

 

Amendments to be moved on behalf of the Government

 

 

(Circulated by the authority of the

Treasurer, the Hon Wayne Swan MP)



T able of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1            Definition of a managed investment trust....................... 5



The following abbreviations and acronyms are used throughout this supplementary explanatory memorandum.

Abbreviation

Definition

ITAA 1997

Income Tax Assessment Act 1997

MIT

managed investment trust

US

United States



Definition of a managed investment trust

Schedule 5 to the Bill amends the definition of a managed investment trust (MIT).  The amended definition will apply for the purposes of the MIT withholding tax rules in Subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953 , and for the purposes of the deemed capital account rules for MITs in Division 275 of the Income Tax Assessment Act 1997 (ITAA 1997).

These amendments to the definition of a MIT in Tax Laws Amendment (2010 Measures No. 3) Bill 2010 will also apply in relation to capital gains tax events happening on or after 1 November 2008, for the purpose of Subdivision 126-G of the ITAA 1997.

Proposal announced :  These amendments have not previously been announced.

Financial impact These amendments in relation to the definition of a MIT will have an unquantifiable (but insignificant) revenue impact over the forward estimates period.

Compliance cost impact :  Low.



C hapter 1     

Definition of a managed investment trust

Investment management activities — amendment 1

1.1                   This amendment will broadly allow a trust to qualify as a managed investment trust (MIT) if a substantial proportion of the investment management activities (relating to assets of the trust that have a relevant connection with Australia) are carried out in Australia (‘the investment management requirement’).

1.2                   The investment management requirement only applies in respect of assets of the trust that have a relevant connection with Australia.  Restricting the investment management requirement to such assets ensures that trusts that have a mix of Australian and offshore assets, where the investment management activities are located where the assets are located, remain eligible for the definition of a MIT. 

1.3                   Assets that have a relevant connection with Australia are assets of the trust that are situated in Australia, taxable Australian property or shares, units or interests traded on an Australian stock exchange.

Example 1.1 :  Trust with both Australian and offshore investments

AMT is an Australian trust that holds Australian property and an interest in an offshore joint venture investment.  The Australian investment manager of AMT performs, in Australia, the preparatory work around market analysis, identifying potential investments and carrying out due diligence on potential investments. AMT also invests in an offshore joint venture which owns real estate in the United States. The offshore joint venture enters into investment management agreements with a United States (US) wholly-owned subsidiary of AMT’s investment manager with respect to the management of the offshore real estate portfolios. As the Australian investment manager of AMT performs in Australia the investment management activities in relation to the Australian assets, AMT satisfies the investment management requirement and may qualify as a MIT (provided it satisfies the other requirements to be a MIT).

Example 1.2 :  Investment in international equities

AMF is an Australian trust that invests in both Australian shares and holds an international equities portfolio. The Australian investment manager of AMF performs all investment management activities in relation to the Australian equities in Australia and makes key decisions in relation to where to invest, industry sector, allocation to the respective countries and industry sector. The Australian investment manager of AMF enters into a sub-advisory investment management agreement with offshore professional investment managers in the respective countries and sub-delegates the investment decisions to the offshore investment managers to make investments on behalf of AMF that are within the specific investment mandate in relation to the international equities. An offshore custodian is appointed to hold the offshore equities portfolio.

As there is a substantial proportion of the investment management activities in relation to those relevant Australian assets which is carried on in Australia, AMF satisfies the investment management requirement and may qualify as a MIT (provided it satisfies the other requirements to be a MIT). This will be the case whether the offshore assets of AMF constitute 20 per cent of the overall assets of AMF, or say 80 per cent of the assets.

Example 1.3 :  Offshore fund manager for Australian assets

PT unit trust is an Australian trust holding commercial property in Australia.  The 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.  Officers of SFM Co are flown to Australia on two occasions over the course of the income year.  While in Australia these officers make certain investment management decisions as to the purchase of property and carry out final due diligence work associated with that purchase by PT unit trust.  SFM Co has no physical presence in Australia and has carried out preparatory activities in relation to the investment management in Singapore.  As the substantial proportion of the investment management activities in relation to the Australian assets of PT unit trust are undertaken from an office in Singapore, PT unit trust would not satisfy the investment management requirement and could not qualify as a MIT.

Widely-held rules for registered wholesale trusts — amendments 2, 5, 7, 8, 13, 14 and 15

1.4                   These amendments prescribe the widely-held tests to apply for registered trusts that are wholesale trusts within section 12-401.  The trust will pass the widely-held test if it satisfies one of two criteria.  They are:

•                the trust has at least 25 wholesale members; or

•                one or more specified widely-held entities together hold at least 25 per cent and no single other type of entity holds in excess of 60 per cent of interests of the trust.

25 wholesale member rule — nominal membership of specified listed entities

1.5                   In determining the number of members of the trust for the first criterion, there is a special rule for counting the members of the trust that are specifically listed widely-held entities holding an interest, either directly or indirectly in the value, over the control of, or rights to, distributions of income from the trust.

1.6                   Special look-through rules apply in establishing the level of holding in a trust.  These rules require identification of direct and indirect holdings requiring the interest to be identified by looking through other entities.  Further, rules apply to prevent double counting of holdings by specified widely-listed entities.

1.7                   Once the MIT participation interest or percentage holding is identified, it is multiplied by 50 (generally the minimum number of members that such an entity must have to qualify as a specifically listed widely-held entity) to provide a ‘notional member’ number of members.

1.8                   This notional member number is aggregated and added to the number of any other members (not counted through the notional member count and only including wholesale clients) to determine the total number of members of the fund.  If this number is at least 25 then the trust would be treated as widely held.

1.9                   The effect of this ‘notional member’ calculation is that a registered trust can qualify as widely held if it has only one member (for tax purposes) and that member is a specifically listed widely-held entity. However, the trust would still need to satisfy the remaining requirements to qualify as a MIT, including that the trust is a managed investment scheme except where it is wholly owned by certain special entities.

Qualifying specified widely-held member holding

1.10               The second criterion provides that a registered trust will be widely held if one or more specified widely-held entities together hold at least 25 per cent and no single other type of entity holds in excess of 60 per cent of interests of the trust.

1.11               To ensure the appropriate operation of the new widely-held test, two technical rules have been introduced: 

•        The first rule provides that to the extent an entity that is a specified widely-held entity (the first entity), has an interest in a trust (the purported MIT) through its interest in another specified widely-held entity (the second entity), only the interest of the first entity is taken into account for the purposes of the widely-held test.

•        The second rule is that if an entity that is not a trust indirectly holds an interest in a trust (the purported MIT) through a chain of trusts, only the interests of the non-trust entity are taken into account for the purposes of the widely-held test.  That is, the interests of interposed trusts are disregarded.  For the purposes of this rule, if the interposed entity is a specified widely-held entity, it is not treated as a trust (that is, it cannot be traced through).  This outcome is consistent with the underlying rationale for a list of designated widely-held entities, which are intended to be entities through which tracing is not required.

Closely-held rules

1.12               The trust must satisfy both the widely-held rules and the closely-held rules.

1.13               In the case of a wholesale registered trust, the closely-held test will not be satisfied where 10 or fewer persons have an interest of 75 per cent or more in the trust or one foreign resident individual has an interest of 10 per cent or more in the trust. 

Widely-held rules for registered trusts that are not wholesale trusts — amendments 2, 7, 8, 13, 14 and 15

1.14               The widely-held tests for registered trusts that do not fall within section 12-401 (a wholesale trust), will be satisfied if:

•                the trust is listed on an approved securities exchange in Australia;

•                the trust has at least 50 members; or

•                one or more specified widely-held entities together hold at least 25 per cent and no single other type of entity holds in excess of 60 per cent of interests of the trust.

1.15               In applying the 50 member test, members who are specified widely-held entities are treated in the same way as they are under the 25 wholesale member rule for registered wholesale trusts.  That is, the level of holding of the specified widely-held entity is identified and multiplied by 50.  This number is then added to other specified widely-held entities and other members to ascertain if the member requirement is met.

1.16               Similarly, the qualifying 25 per cent specified widely-held entity rule applies for registered trusts that are not wholesale trusts in the same way it does for registered wholesale trusts as outlined above.

Closely-held rule

1.17               In the case of a registered trust that is not a wholesale trust, the closely-held test will apply where 20 or fewer persons have an interest of 75 per cent or more in the trust or one foreign resident individual has an interest of 10 per cent or more in the trust.  Specifically listed widely-held entities are excluded from this test.

Widely-held rules for unregistered wholesale trusts — amendments 2, 5, 13, 14 and 15

1.18               There is only one widely-held rule for unregistered wholesale trusts.  Unregistered wholesale trusts will be widely held if the trust has at least 25 wholesale members. 

1.19               The manner in which the 25 members are calculated takes into account the notional membership of specified widely-listed entities. 

1.20               The closely-held test for unregistered wholesale trusts will not be satisfied where 10 or fewer persons have an interest of 75 per cent or more in the trust or one foreign resident individual has an interest of 10 per cent or more in the trust. 

Start-up rules — amendment 4

1.21               The start up rule is amended to extend the period during which trusts that are in a start-up phase are deemed to satisfy the widely-held requirements.  To qualify for the start-up rule, a trust must have been established any time in the eighteen months prior to the end of the income year.  This will provide trusts that are set up towards the end of an income year with additional time (of up to six months) in which to meet the widely-held requirements. 

Specifically listed widely-held entities — amendment 11

1.22               The specifically listed widely-held entities in subsection 12-402(3) is expanded to include five other listings.

1.23               Firstly, the amendment better defines those foreign entities that are recognised under foreign law as having a similar status to a managed investment scheme.  The amendment better targets this type of entity to a foreign collective investment vehicle which is an entity with at least 50 members that is recognised under a foreign law as being used for collective investment where member contributions are pooled together in exchange for rights to the benefits produced by the entity and where members do not have day-to-day control over the operation of the entity. This definition will more appropriately capture foreign collective investment vehicles such as US real estate investment trusts (US REITs) and foreign mutual funds.

1.24               Secondly, the amendment extends the list of specified widely-held entities to include tax-exempt foreign government pension funds (or their wholly-owned subsidiaries) where the principal purpose of the fund is to fund pensions for citizens or contributors to the fund (these are commonly referred to as ‘foreign government pension funds’).

1.25               Thirdly, the amendment extends the list of specified widely-held entities to sovereign wealth funds.  For the purposes of this Subdivision this means a fund that is wholly-owned by one or more foreign government agencies (or is a wholly-owned subsidiary of one or more such agencies), established using only public money or public property, and where all economic benefits of the fund have or are expected to pass to that foreign government. 

1.26               Fourthly, the amendment extends the list of specified widely-held entities to include an entity established and wholly-owned by an Australian government agency (being a Commonwealth, State or Territory agency).  To qualify, the capital of the entity and the returns on that capital must be used for the primary purpose of meeting statutory government liabilities or obligations (such as superannuation and compensation). This would include the Australian Future Fund (established under the Future Fund Act 2006) .

1.27               Finally, a specified widely-held entity will also include certain entities of a kind similar to an entity mentioned in the list that is specified in regulations. 

Transitional rules — amendments 16, 17, 18, 19 and 20

1.28               The transitional rules are amended to extend transitional relief rules (through the application date) to ensure:

•        the five-year transitional rule is extended to seven years;

•        the transitional rule for trusts, no longer qualifying as a MIT as a result of the amendments in Schedule 5 to Tax Laws Amendment (2010 Measures No. 3) Bill 2010, will also apply to the MIT capital account measure. The effect of this transitional rule is that a trust that meets either the current definition of MIT or the new definition of MIT will be able to make a capital account election in respect of the 2008-09 or 2009-10 income year if they existed in those years and met either of the MIT definitions in those years;

•        trusts that had not made a distribution, but were established, before 26 May 2010 may qualify as a MIT. This will allow certain trusts that have not made a ‘fund payment’ under the law, and therefore not technically qualifying as a MIT prior to 26 May 2010 to be able to qualify as a MIT (effectively treated as if the trust had made a distribution before 26 May 2010);

•        the transitional rules apply on a year-by-year basis.  This will enable the new definition to apply prior to the end of the seven-year period, where the trust now satisfies the new definition; and

•        trusts with substituted accounting periods can qualify as a MIT with effect from the first 1 July after Tax Laws Amendment (2010 Measures No. 3) Bill 2010 receives Royal Assent.

Consequential amendments — amendments 3, 6, 9, 10 and 12

1.29               These amendments make minor consequential amendments to give effect to the rules discussed above.