Managed Investment Trusts - Further Information

A trust is a “managed investment trust” in relation to an income year if:

(a)   the trust has an Australian resident trustee or has its central management and control in Australia at the time ofthe first fund payment or earlier in the income year;

(b)   the trust does not carry on a trading business (see further explanation below) in the income year;

(c)   the trust’s investment management activities throughout the income year are carried out in Australia;

(d)   the trust is a managed investment scheme;

(e)   the trust meets the ‘widely held’ test at the time of the first fund payment.

In terms of whether a trust is carrying on a trading business, this requirement effectively excludes trading trusts from the managed investment trust category. A trading trust broadly includes a trust that operates a trading business, or controls, or is able to control, directly or indirectly the affairs or operations of another person in respect of the carrying on by that other person of a trading business.

Widely-held Test

registered trust satisfies the widely held requirements in relation to the income year if:

(a)   at the time the payment is made, units in the trust are listed for quotation on an Australian stock exchange or the trust has at least 50 members; and

(b)   at no time in the income year do any of the following situations exist:

i.    20 or fewer persons have a total MIT participation interest in the trust of 75% or more

ii.   one foreign resident individual has a MIT participation interest in the trust of 10% or more.

An unregistered trust satisfies the widely held requirements in relation to the income year if:

(a)  at the time the payment is made, the trust has at least 30 members, and

(b)  at no time in the income year do any of the following situations exist:

i.   12 or fewer persons have a total MIT participation interest in the trust of 75% or more

ii.   one foreign resident individual has a MIT participation interest (see further explanation below) in the trust of 10% or more.

There are also additional licensing requirements for wholesale trusts. Broadly, a trust satisfies the licensing requirements if the trust is operated or managed by:

(a)  a financial services licensee holding an Australian financial services licence whose licence covers the provision of financial services to wholesale clients;

(b)  an authorised representative of such a licensee; or

(c)  a Crown entity or its wholly-owned subsidiary.

An entity has a MIT participation interest in a trust if the entity, directly or indirectly:

(a)  holds, or has the right to acquire, interests representing a percentage of the value of the interests in the trust; or

(b)  has the control of, or the ability to control, a percentage of the rights attaching to membership interests in the trust; or

(c)  has the right to receive a percentage of any distribution of income that the trust may make.

MIT Withholding Obligation – When to Withhold

For withholding tax to apply, the foreign investor recipient of the fund payment must have a relevant connection outside Australia. This will occur if either:

(a)  according to any record in the trust’s possession, the recipient has an address outside Australia; or

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

If the managed investment trust does not have an obligation to withhold at that time, it may have an obligation to give a notice to the recipient or make certain information available on a website in respect of the payment. The obligation to give a notice or make information available on a website will continue through a chain of entities until the obligation to withhold is triggered.

Where a foreign resident invests in a managed investment trust through an interposed entity (a custodian), the custodian is required to withhold tax from a payment it makes where:

(a)  the payment is reasonably attributable to a payment received by the custodian that was covered by a notice or information that was made available on a website; and

(b)  the recipient of the payment has a relevant connection outside Australia.

Withholding is not required in respect of a payment made by a corporate custodian unless the custodian is acting in the capacity of a trustee or as an agent for a principal. For this purpose, both a public trading trust and a corporate unit trust is a company.

A non-custodian is required to withhold an amount where:

(a)  the non-custodian receives a payment, all or part of which is covered by a notice or information made available on a website; and

(b)  a foreign resident is, or becomes entitled to, an amount attributable to the payment received by the non-custodian.

MIT Withholding Obligation – Amount to Withhold

If the place, address or country of residence of a unitholder is in a jurisdiction with which Australia has effective exchange of information arrangements on tax matters, withholding is required at 7.5% for fund payments in relation to the 2010/11 income year and later income years. In any other case, withholding is required at the rate of 30%.

This information is intended as a guide to typical asset holding structures in Australia. Given the complexity and pace of change in Australian law, you should consider your own specific circumstances, and seek professional advice before deciding on a final structure.

One Investment Group can assist in the structuring of a Foreign Investor’s investment into Australia.

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