Tax Laws Amendment (Election Commitments No. 1) Act 2008 (32 of 2008)

Schedule 1   Distributions of managed investment trust income to foreign residents

Part 1   Amendment of the Taxation Administration Act 1953

1   Subdivision 12-H in Schedule 1

Repeal the Subdivision, substitute:

Subdivision 12-H - Distributions of managed investment trust income

Guide to Subdivision 12-H

12-375 What this Subdivision is about

A managed investment trust may be required to withhold an amount from a payment of its Australian sourced net income (other than dividends, interest and royalties) if the payment is made to an entity whose address, or place for payment, is outside Australia. If the payment is made to another entity, the managed investment trust is required to make information available to the recipient outlining certain details in relation to the payment.

If a custodian receives a payment that is covered by that information, it is required to withhold an amount from any related later payment to an entity whose address, or place for payment, is outside Australia. If the later payment is made to another entity, the custodian is required to make information available in relation to that later payment.

If an entity that is not a custodian receives a payment that is covered by that information, it is required to withhold an amount from that payment if a foreign resident becomes entitled to that payment. If a resident becomes entitled to the payment, the entity must make information available in relation to that payment.

Where there is an obligation to withhold, the applicable withholding rate is determined by the nature of the country or territory in which the recipient’s address, place for payment or residency is located.

Table of sections

Operative provisions

12-385 Withholding by managed investment trusts

12-390 Withholding by custodians and other entities

12-395 Requirement to give notice or make information available

12-400 Meaning of managed investment trust

12-405 Meaning of fund payment

12-410 Entity to whom payment is made

12-415 Failure to give notice or make information available: administrative penalty

12-420 Agency rules

Operative provisions

12-385 Withholding by managed investment trusts

(1) A trustee of a trust that is a *managed investment trust in relation to an income year that makes a *fund payment in relation to that income year to an entity covered by section 12-410 must withhold an amount from the payment.

Note 1: An entity may be covered by section 12-410 if the entity has an address outside Australia or payment is authorised to be made to a place outside Australia.

Note 2: If the payment is made to a recipient not covered by section 12-410, the trustee is required to give a notice to the recipient or publish information on a website setting out certain details about the payment: see section 12-395.

(2) The amount the trustee must withhold is:

(Fund payment * Rate applicable under subsection (3))

(3) The rate is:

(a) if the address or place for payment of the recipient is in an *information exchange country:

(i) 22.5% for *fund payments in relation to the first income year starting on or after the first 1 July after the day on which the Tax Laws Amendment (Election Commitments No. 1) Act 2008 receives the Royal Assent; or

(ii) 15% for fund payments in relation to the following income year; or

(iii) 7.5% for fund payments in relation to later income years; or

(b) otherwise - 30%.

(4) An information exchange country is a foreign country or foreign territory specified in the regulations for the purposes of this section.

(5) This section does not apply to an amount paid by a *managed investment trust to the extent that no *managed investment trust withholding tax is payable in respect of the payment or an amount reasonably attributable to the payment.

12-390 Withholding by custodians and other entities

Withholding by custodians

(1) A *custodian must withhold an amount from a payment (the later payment ) it makes if:

(a) all or some of the later payment (the covered part ) is reasonably attributable to the part of an earlier payment received by the custodian that was covered by a notice or information under section 12-395; and

(b) the later payment is made to an entity covered by section 12-410.

Note 1: The covered part referred to in paragraph (1)(a) is attributable to a fund payment made by a managed investment trust, or 2 or more fund payments made by one or more managed investment trusts.

Note 2: An entity may be covered by section 12-410 if the entity has an address outside Australia or payment is authorised to be made to a place outside Australia.

Note 3: If the payment is made to a recipient not covered by section 12-410, the custodian is required to give a notice to the recipient or publish information on a website setting out certain details about the payment: see section 12-395.

(2) The amount the *custodian must withhold is:

(Covered part * Rate applicable under subsection (3))

(3) The rate is:

(a) if the address or place for payment of the recipient is in an *information exchange country:

(i) 22.5% for *fund payments in relation to the first income year starting on or after the first 1 July after the day on which the Tax Laws Amendment (Election Commitments No. 1) Act 2008 receives the Royal Assent; or

(ii) 15% for fund payments in relation to the following income year; or

(iii) 7.5% for fund payments in relation to later income years; or

(b) otherwise - 30%.

Withholding by other entities

(4) An entity that is not a *managed investment trust or a *custodian must withhold an amount from a payment it receives if:

(a) the payment or part of it (the covered part ) was covered by a notice or information under section 12-395; and

(b) a foreign resident (the recipient ) is or becomes entitled:

(i) to receive from the entity; or

(ii) to have the entity credit to the recipient, or otherwise deal with on the recipient’s behalf or as the recipient directs;

an amount (the attributable amount ) reasonably attributable to the covered part.

Note: If the recipient not a foreign resident, the entity is required to give a notice to the recipient or publish information on a website setting out certain details about the payment: see section 12-395.

(5) The amount the entity must withhold is:

(Attibutable amount * Rate applicable under subsection (6))

(6) The rate is:

(a) if the recipient is a resident of an *information exchange country:

(i) 22.5% for *fund payments in relation to the first income year starting on or after the first 1 July after the day on which the Tax Laws Amendment (Election Commitments No. 1) Act 2008 receives the Royal Assent; or

(ii) 15% for fund payments in relation to the following income year; or

(iii) 7.5% for fund payments in relation to later income years; or

(b) otherwise - 30%.

(7) An entity is a resident of an *information exchange country if:

(a) the entity is a resident of that country for the purposes of the taxation laws of that country; or

(b) if there are no taxation laws of that country applicable to the entity or the entity’s residency status cannot be determined under those laws:

(i) for an individual - the individual is ordinarily resident in that country; or

(ii) for another entity - the entity is incorporated or formed in that country and is carrying on a business in that country.

(8) An amount required to be withheld under subsection (4) must be withheld:

(a) if the recipient is so entitled when the entity receives the payment - immediately after receipt; or

(b) if the recipient becomes so entitled at a later time - immediately after the later time.

Meaning of custodian

(9) An entity is a custodian if the entity is *carrying on a *business that consists predominantly of providing a custodial or depository service (as defined by section 766E of the Corporations Act 2001) pursuant to an *Australian financial services licence.

Exceptions

(10) This section does not apply:

(a) to a company unless the company would, apart from section 12-420, be acting in the capacity as *agent for the recipient; or

(b) to an amount paid or received by an entity to the extent that no *managed investment trust withholding tax is payable in respect of the amount or an amount reasonably attributable to the amount.

12-395 Requirement to give notice or make information available

Managed investment trusts and custodians

(1) An entity that is a *managed investment trust or a *custodian must comply with subsection (2) if:

(a) the entity makes a payment to another entity (the recipient ) from which an amount would have been required to be withheld under section 12-385 or subsection 12-390(1) if the payment had been made to an entity covered by section 12-410; and

(b) an amount is not required to be withheld from the payment because the recipient is not an entity covered by section 12-410.

Note: An entity may be covered by section 12-410 if the entity has an address outside Australia or payment is authorised to be made to a place outside Australia.

(2) The entity must:

(a) give to the recipient a written notice containing the details specified in subsection (3); or

(b) make those details available on a website in a way that the details are readily accessible to the recipient for not less than 5 continuous years.

(3) The notice must be given, or the details must be made available on a website, before or at the time when the payment is made and:

(a) must specify the part of the payment from which an amount would have been so required to have been withheld; and

(b) must specify the income year of the *managed investment trust to which that part relates.

Note: Failure to give the notice or make the details available as required by this section incurs an administrative penalty: see section 12-415.

Other entities

(4) An entity that is not a *managed investment trust or a *custodian must comply with subsection (5) if:

(a) the entity receives a payment; and

(b) another entity (also the recipient ) is or becomes entitled:

(i) to receive from the entity; or

(ii) to have the entity credit to the recipient, or otherwise deal with on the recipient’s behalf or as the recipient directs;

an amount attributable to the payment; and

(c) the entity would have been required to withhold an amount from the payment under subsection 12-390(4) if the recipient had been a foreign resident; and

(d) an amount is not required to be withheld from the payment because the recipient is not a foreign resident.

(5) The entity must:

(a) give to the recipient a written notice containing the details specified in subsection (6); or

(b) make those details available on a website in a way that the details are readily accessible to the recipient for not less than 5 continuous years.

(6) The notice must be given, or the details must be made available on a website, before or at the time when the amount is paid or credited to the recipient, or is dealt with on the recipient’s behalf or as the recipient directs, and:

(a) must specify the part of the payment referred to in paragraph (4)(a) from which an amount would have been so required to have been withheld; and

(b) must specify the income year of the *managed investment trust to which that part relates.

Note: Failure to give the notice or make the details available as required by this section incurs an administrative penalty: see section 12-415.

12-400 Meaning of managed investment trust

(1) A trust is a managed investment trust in relation to an income year if:

(a) the trustee of the trust makes the first *fund payment in relation to the income year; and

(b) the conditions in this table are satisfied.

(2) These are the entities:

(a) a *life insurance company;

(b) a *complying superannuation fund, a *complying approved deposit fund or a *foreign superannuation fund, being a fund that has at least 50 *members;

(c) a trust for which the conditions in table items 1 and 2 in subsection (1), and the condition in paragraph (a) or (b) of table item 3, are satisfied;

(d) 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;

(e) a trust:

(i) interests in which are owned directly by an entity covered by an earlier paragraph; or

(ii) interests in which are held indirectly by an entity covered by an earlier paragraph through a *chain of trusts;

where the conditions in table items 1 and 2 in subsection (1) are satisfied for the trust, or for each trust in the chain.

Exception: foreign resident individual having a substantial interest

(3) The condition in table item 3 in subsection (1) is not satisfied for a trust at a time if, at that time, one foreign resident individual, directly or indirectly:

(a) held, or had the right to acquire, interests representing 10% or more of the value of the interests in the trust; or

(b) had the control of, or the ability to control, 10% or more of the rights attaching to *membership interests in the trust; or

(c) had the right to receive 10% or more of any distribution of income that the trustee may make.

Start-up phase

(4) A trust that is created during an income year is a managed investment trust in relation to the income year if, at the time the trustee of the trust makes the first *fund payment in relation to the income year, the conditions in table items 1 and 2 in subsection (1) are satisfied for the trust.

Wind-up phase

(5) A trust that ceases to exist during an income year is a managed investment trust in relation to the income year if:

(a) at the time the trustee makes the first *fund payment in relation to the income year, the conditions in table items 1 and 2 in subsection (1) are satisfied for the trust; and

(b) the trust was a *managed investment trust in relation to the previous income year otherwise than because of subsection (4).

12-405 Meaning of fund payment

(1) The object of this section is to ensure that the total of the *fund payments that the trustee of a trust makes in relation to an income year equals, as nearly as practicable, the net income of the trust for the income year, disregarding these amounts ( excluded amounts ):

(a) a dividend (as defined in Division 11A of Part III of the Income Tax Assessment Act 1936) that is subject to, or exempted from, a requirement to withhold under Subdivision 12-F;

(b) interest (as so defined) that is subject to, or exempted from, such a requirement;

(c) a *royalty that is subject to, or exempted from, such a requirement;

(d) a *capital gain or *capital loss from a *CGT event that happens in relation to a *CGT asset that is not *taxable Australian property;

(e) amounts that are not from an *Australian source;

and disregarding deductions relating to excluded amounts.

(2) Work out as follows how much of a payment (the actual payment ) made by the trustee of a trust in relation to an income year is a fund payment in relation to that year:

Method statement

Step 1. Reduce the actual payment by so much of it that is attributable to excluded amounts.

Step 2. Work out what it is reasonable to expect will be the *net income of the trust for the income year:

(a) disregarding excluded amounts, expected excluded amounts and deductions relating to those amounts; and

(b) on the basis that a *capital gain from *taxable Australian property of the trust that was or would be reduced under step 3 of the method statement in subsection 102-5(1) of the Income Tax Assessment Act 1997 were double the amount it actually is.

Step 3. The fund payment is so much of the step 2 amount as is reasonable having regard to:

(a) the object of this section; and

(b) the step 1 amount; and

(c) the amounts of any earlier fund payments made by the trustee in relation to the income year; and

(d) the expected amounts of any later fund payments the trustee expects to make in relation to the income year.

(3) The expected *net income of the trust and the expected amounts of future *fund payments are to be worked out on the basis of the trustee’s knowledge when the actual payment is made.

(4) However, an amount is not a fund payment in relation to the income year unless it is paid:

(a) during the income year; or

(b) within 3 months after the end of the income year; or

(c) within a longer period (starting at the end of the period referred to in paragraph (b) and not exceeding 3 months) allowed by the Commissioner.

(5) The Commissioner may allow a longer period as mentioned in paragraph (4)(c) only if the Commissioner is of the opinion that the trustee was unable to make the payment during the income year, or within 3 months after the end of the income year, because of circumstances beyond the influence or control of the trustee.

12-410 Entity to whom payment is made

(1) An entity (the recipient ) is covered by this section for a payment made to it by another entity (the payer ) if:

(a) according to any record that is in the payer’s possession, or is kept or maintained on the payer’s behalf, the recipient has an address outside Australia; or

(b) the payer is authorised to make the payment to a place outside Australia.

(2) However, a recipient is not covered by this section for a payment if, at the time the payment was made, a *business the recipient carries on is carried on at or through an *Australian permanent establishment and the payment is attributable to that establishment.

12-415 Failure to give notice or make information available: administrative penalty

An entity that:

(a) is required to give a notice, or make details available on a website, under section 12-395 in relation to:

(i) a payment made to another entity; or

(ii) an amount paid or credited to, or dealt with on behalf of or as directed by, another entity; and

(b) fails to comply with that section;

is liable to pay to the Commissioner a penalty equal to the amount that would have been required to be withheld under this Subdivision (disregarding subsection 12-385(5) and paragraph 12-390(10)(b)) in relation to amounts attributable to the payment or amount if the notice had been given or the details had been made available.

Note: Division 298 in this Schedule contains machinery provisions for administrative penalties.

12-420 Agency rules

(1) This section applies to:

(a) a payment (the first payment ) made to an entity (the first entity ) in the capacity as *agent for another entity; and

(b) another payment made by the first entity to the extent that it is reasonably attributable to the first payment.

(2) This Subdivision has effect as if the first entity were not an *agent in relation to the payments.

Note: As a result of subsection (2), an agent may be required to withhold amounts under this Subdivision.