Tax Laws Amendment (2007 Measures No. 3) Act 2007 (79 of 2007)

Schedule 10   Distributions to foreign residents from managed investment trusts

Part 1   Main amendments

Taxation Administration Act 1953

1   At the end of Division 12 in Schedule 1

Add:

Subdivision 12-H - Distributions of managed investment trust income to foreign residents

Guide to Subdivision 12-H

12-375 What this Division is about

A distribution to a foreign resident by managed investment trusts of their Australian sourced income and some capital gains may be subject to a single non-final withholding at the corporate tax rate. This includes distributions made to the foreign resident indirectly through one or more intermediaries, if relevant notices have been provided by payers.

Generally, the distribution must be made by the managed investment trust within 3 months after the end of its income year.

Division 6 of Part III of the Income Tax Assessment Act 1936 does not apply to trustees and intermediaries to the extent that they have to withhold under this subdivision (see section 99G of that Division).

Table of sections

Operative provisions

12-380 Object

12-385 Withholding by trustee of managed investment trust

12-390 Withholding by intermediary

12-395 Meaning of managed investment trust

12-400 Meaning of fund payment

12-405 Meaning of intermediary

12-410 Entity to whom payment is made

12-415 Notices

12-420 Agency rules

Operative provisions

12-380 Object

(1) The object of this Subdivision is to implement a withholding regime to assist the collection of Australian tax on distributions of Australian sourced income by *managed investment trusts to foreign residents (directly, or indirectly through one or more *intermediaries).

(2) This regime overcomes information problems in applying alternative withholding regimes by:

(a) providing for withholding at a flat rate - the *corporate tax rate; and

(b) clarifying when withholding is required when payments are made via *intermediaries, which is commonly the case with distributions from *managed investment trusts.

Note: Withholding other than at a flat rate would require managed investment trusts and intermediaries to know information about the foreign resident that they are unlikely to know.

12-385 Withholding by trustee of managed investment trust

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

(2) The amount the trustee must withhold is:

12-390 Withholding by intermediary

(1) An entity must withhold an amount from a payment (the later payment ) it makes if:

(a) the entity is an *intermediary in relation to a payment (the earlier payment ) it received; and

(b) all or some of the later payment (the notice part ) is attributable to the part of the earlier payment that was covered by the notice the entity received in relation to the earlier payment; and

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

Note: Paragraph (1)(b) means that the notice part 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, to an intermediary.

(2) The amount the entity must withhold is:

12-395 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).

12-400 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 from 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) 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.

12-405 Meaning of intermediary

(1) An entity is an intermediary in relation to a payment it receives at a time (the receipt time ) if:

(a) it is *carrying on a *business at the receipt time 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 (as defined by section 761A of that Act); and

(b) it received the payment in the course of that business; and

(c) before or at the receipt time, it received a notice of the kind referred to in section 12-415 in relation to the payment; and

(d) either:

(i) subsection (2) is satisfied for the entity at the receipt time; or

(ii) the business is carried on at the receipt time through an *Australian permanent establishment.

(2) This subsection is satisfied for an entity at the receipt time if:

(a) for a trust - at that time:

(i) the trustee was an Australian resident; or

(ii) the central management and control of the trust was in Australia; or

(b) for another entity - the entity is an Australian resident at the receipt time.

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 any of these conditions is satisfied when the payment is made:

(a) the recipient is a foreign resident;

(b) the payer believes, or has reasonable grounds to believe, that the recipient is a foreign resident;

(c) the payer has no reasonable grounds to believe that the recipient is an Australian resident, and either:

(i) the recipient has an address outside Australia (according to any record that is in the payer’s possession, or is kept or maintained on the payer’s behalf, about the transaction to which the payment relates); or

(ii) the payer is authorised to make the payment at a place outside Australia (whether to the recipient or to anyone else);

(d) the recipient has a connection outside Australia of a kind set out in the regulations.

(2) However, a recipient is not covered by this section for a payment if the recipient is an *intermediary.

12-415 Notices

(1) An entity that makes a payment to another entity (the recipient ) from which an amount would have been required to be withheld under this Subdivision if the payment had been made to an entity covered by section 12-410 may give the recipient a notice.

(2) The notice:

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

(b) if that part is worked out by reference to a *discount capital gain - must specify the amount of that gain; and

(c) must specify the income year of the *managed investment trust to which the relevant *fund payment relates.

(3) An *intermediary in relation to a payment cannot give a notice in relation to an amount:

(a) that is a payment only because of section 11-5; and

(b) that is attributable (wholly or partly) to the first-mentioned payment.

Note: Under section 11-5, an entity is taken to have paid an amount to another entity if the first entity applies or deals with the amount on the other entity’s behalf or as the other entity directs.

12-420 Agency rules

(1) This Subdivision has effect as if a payment made to an entity in the capacity as agent for another entity (the principal ) had been made to the principal.

(2) However, if the agent is an *intermediary in relation to the payment:

(a) this Subdivision has effect as if the intermediary were not an agent in relation to the payment; and

(b) for the purposes of this Subdivision, the receipt by the intermediary of the payment on behalf of the principal is not to be treated as a payment to the principal by any entity.

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