Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009-2010
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
Tax laws amendment (2010 MEASURES No. 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)
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Definition of a managed investment trust 5
Glossary
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 |
General outline and financial impact
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.
Chapter 1
Definition of a managed investment trust
Investment management activities - amendment 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').
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.
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.
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).
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.
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
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
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.
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.
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.
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.
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
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.
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
12. The trust must satisfy both the widely-held rules and the closely-
held rules.
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
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.
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.
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
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
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.
19. The manner in which the 25 members are calculated takes into
account the notional membership of specified widely-listed
entities.
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
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
22. The specifically listed widely-held entities in subsection 12-
402(3) is expanded to include five other listings.
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.
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').
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.
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).
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
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
29. These amendments make minor consequential amendments to give effect
to the rules discussed above.
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