REAL ESTATE INVESTMENT IN AUSTRALIA - WHAT IS A MANAGED INVESTMENT FUND - DECEMBER 2014
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REAL ESTATE INVESTMENT IN AUSTRALIA WHAT IS A MANAGED INVESTMENT FUND DECEMBER 2014 Manuel Makas, Director, +61 2 9225 5957, manuel.makas@greenwoods.com.au Daniel Sydes, Director, +61 2 9225 5925, daniel.sydes@greenwoods.com.au
Contents The RMIT regime - snapshot 3 Requirements for MIT regime 4 Corporations act requirements 5 Residency requirement 6 Trading trust requirement 7 Investment management requirement 8 Widely held ownership requirement 9 Closely held ownership requirements 11 Attachment A - Summary of key requirements 13 Attachment B - Current EOI countries 14 Attachment C - Definition of qualifying investor 16 Attachment D - MIT decisions made by the Australian Taxation Office 17 Page 2 Real Estate Investment in Australia – What is a managed Investment Fund
The RMIT regime - snapshot
What is the MIT regime? The Managed Investment Trust (MIT) regime is a concessional withholding tax regime
that is used primarily by Australian REITs and managed funds. The key benefit of the
MIT regime is that the rate of withholding tax on distributions of net rental income and
capital gains made by an REIT may be as low as 15% in certain circumstances.
What is an MIT? A MIT is a unit trust which satisfies certain requirements. These requirements are
discussed in further detail in section 3.
MIT withholding tax rate The MIT withholding tax rate applies to distributions by MITs that are ‘fund payment’
amounts. The rate of withholding tax depends on the residence of the investor:
15% for investors resident in EOI countries,
30% in other cases.
A 10% withholding tax rate applies to eligible distributions by MITs which hold only
certain energy- efficient buildings where construction commenced after 30 June 2012.
What is a ‘fund payment’ In broad terms, a fund payment is a distribution of Australian source income (eg net
amount? rental income) including gross capital gains on taxable Australian property but
excluding dividends, interest and royalties. Dividends, interest and royalties continue
to be subject to the general withholding tax regime.
EOI countries An EOI country is a country with which Australia has an ‘effective exchange of
information’ agreement and which is listed in Regulation 44E of the Taxation
Administration Regulations (Cth). There are currently 60 countries on the list. The EOI
list includes most countries with which Australia has a tax treaty although this is not
always the case, and there are countries on the list which do not have tax treaties with
Australia. The complete list of EOI countries as at the date of this paper is attached at
Attachment B.
Requirements for MIT The eligibility requirements for the MIT regime are discussed in further detail on the
status next page. In practice, the critical issues tend to be whether the following
requirements are satisfied:
ownership requirement (the trust must satisfy a widely held ownership
requirement and must also not be closely held under the applicable tests)
investment management requirement—a ‘substantial proportion’ of the
‘investment management activities’ must be carried out in Australia.
If the MIT regime is not If the MIT regime is not available, the non-resident investor will be required to include
available? the trust distribution in their assessable income but may claim deductions for costs
associated with the investment (eg interest on money borrowed to acquire an interest
in the trust). The non-resident will be taxed at their relevant marginal rate upon
lodgment of their tax return.
Page 3
Real Estate Investment in Australia – What is a managed Investment FundRequirements for MIT regime
Reference to detailed
discussion in this
Requirement Description paper
Corporations Act The trust must be a managed investment scheme (MIS) within the Section 3
requirements meaning of section 9 of the Corporations Act 2001 (Cth)
(Corporations Act). Both registered and unregistered MISs can
satisfy this requirement.
The requirements to be satisfied under the widely held and closely
held tests will be dependent on whether the trust is a registered
MIS (retail fund), whether it chooses to voluntarily register or
whether it is unregistered (applicable to wholesale funds).
If the trust is a wholesale fund, then it must satisfy certain
licensing requirements with respect to being operated or managed
by the holder of an Australian Financial Services Licence (AFSL),
or by an entity that is exempt from holding an AFSL.
Residency The trustee of the trust must be an Australian resident or the Section 4
requirement ‘central management and control’ of the trust must be in Australia.
Trading trust The trust must not be carrying on a ‘trading business’ or control Section 5
requirement another entity that is carrying on a ‘trading business’.
Investment A substantial proportion of the investment management activities Section 6
management carried out in relation to the trust in respect of the ‘Australian’
requirement assets of the trust are carried out in Australia.
Widely held This requirement operates differently depending on whether the Section 7
ownership fund is a retail fund or a wholesale fund (registered or
requirement unregistered).
Closely held As is the case with the widely held ownership requirement, this Section 8
ownership requirement operates differently depending whether the fund is a
requirement retail fund or wholesale fund.
Page 4
Real Estate Investment in Australia – What is a managed Investment FundCorporations act requirements Managed investment scheme The trust must be a managed investment scheme (MIS) within the meaning of the Corporations Act 2001. The Corporations Act defines an MIS by reference to the pooling of funds to generate financial benefits for people who do not have day-to-day control over the operations of the fund. We recommend that legal advice should always be sought as to the satisfaction of this requirement. Does the MIS have to be registered for MIT purposes? The provisions allow for registered and unregistered MISs to obtain MIT status. In certain circumstances, an unregistered MIS can become an MIT where the entity is a wholesale fund or operated by a Crown entity not subject to registration requirements under the Corporations Act. Broadly, retail funds are required to obtain MIS registration (although a wholesale fund can opt to voluntarily register). To obtain this registration, a registered MIS must have a Responsible Entity (RE) that operates the scheme. REs must be a registered Australian public company and hold an Australian Financial Services Licence (AFSL) that authorises the operation of a registered managed investment scheme. Wholesale funds can choose whether to become registered or remain unregistered. In the instance that the fund remains unregistered, the trust must be operated by an AFSL holder or by an entity that is exempt from holding an AFSL. In this context, the AFSL must cover the provision of financial services to wholesale clients. Classifying the entity as a registered or unregistered MIS is relevant for the purposes of determining the requirements that need to satisfied under the widely held and closely held tests (discussed in detail at 7 below). Recent ASIC changes for REs ASIC has recently introduced changes to the financial requirements for REs which are not regulated by APRA. Broadly, in order for REs to continue to hold an AFSL, the RE will be required to meet the following additional requirements: provide 12-month rolling cash flow projections satisfy the increased net tangible asset capital requirements, and ensure that an increased amount of net tangible assets are held in cash. The above requirements will commence on 1 November 2012 for all existing and new REs. Potential and current MITs should ensure that the RE, where relevant, implements the new requirements. Page 5 Real Estate Investment in Australia – What is a managed Investment Fund
Residency requirement The trustee of the trust must be an Australian resident, or central management and control of the trust must be in Australia Page 6 Real Estate Investment in Australia – What is a managed Investment Fund
Trading trust requirement If the trust is a unit trust, the trust must not be a trading trust. If the trust is not a unit trust, then it must not carry on a trading business or control another entity that is carrying on a trading business. A trading trust is a trust that: is carrying on a ‘trading business’, or controls another entity that is carrying on a ‘trading business’. A ‘trading business’ is any business that does not consist wholly of ‘eligible investment business’ activities. The legislation contains a list of specific activities that qualify as eligible business investment activities. Broadly, these are passive investment activities such as investing in land for the purpose, or primarily for the purpose, of deriving rent and investing or trading in shares, units or other financial instruments. Example AC Trust currently owns a property from which it derives rental income. In addition, the AC Trust also derives income from residential development activities which it undertakes. In this scenario, the development activities would not be considered an ‘eligible investment business’. The AC Trust would therefore be considered a trading trust and would not be eligible to obtain MIT status. Page 7 Real Estate Investment in Australia – What is a managed Investment Fund
Investment management requirement
To satisfy this requirement, a ‘substantial proportion’ of the investment management activities carried out in relation to
the trust in respect of all the following assets of the trust are to be carried out in Australia throughout the income year:
assets that are situated in Australia at any time in the income year
assets that are ‘taxable Australian property’ at any time in the income year, and
assets that are shares, units or interests listed for quotation in the official list of an approved stock exchange.
The focus of this requirement is on the investment decisions (and related activities) of the trust. Such decisions relate
to the type of, and timing of the purchase of, investment assets.
Based on the limited guidance provided, the following activities will constitute investment management activities:
undertaking market analysis and identification of potential investment and opportunities
due diligence of potential acquisitions
providing recommendation on the asset mix of the trust (ie buy and sell recommendations), and
undertaking investment decisions (ie where to invest).
In determining whether such decisions are made in Australia or overseas, a substance-over-form basis for testing
should be applied. This means that:
appointing an Australian investment manager which subcontracts its role to a non-resident manager will not be
acceptable, and
appointing a non-resident manager that purports to make decisions in Australia on a fly-in, fly-out basis will also
not be acceptable.
The local management test is applied on an annual basis having regard to the services provided in each year of
income. Accordingly, if a non-resident entity is involved in the decision associated with the establishment of the trust,
the trust may still become an MIT in subsequent years of income if the ongoing management of the fund is assumed
by an entity in Australia
Example – ATO guidance
Some private rulings discussing the investment management requirement have been issued. In one particular private
ruling, the relevant investment management agreement provided that the trustee would provide, and be responsible
for, the day to day management of the trust’s businesses, operations and properties and the investment management
activities pertaining to the trust, including real estate investment and business management services.
The management agreement gave the trustee a very broad authority to conduct the significant majority of the
investment and business management activities of the trust. However, the investment management agreement did
ensure that the more significant aspects of the trust’s operations required unit holder approval.
This private ruling suggests that the Investment Manager needs to take a very active role in the management of the
trust, but notes that the unit holder may approve decisions the trustee has already made (ie approve decisions
already made rather than the unit holder making the decisions on behalf of the trustee).
Page 8
Real Estate Investment in Australia – What is a managed Investment FundWidely held ownership requirement
The widely held requirement is dependent on the type of fund and whether it is a registered or unregistered MIS.
Specifically:
if the trust is a retail fund, then it must be listed, or have at least 50 members or satisfy the 25/60 test (see below
for details)
if the trust is a registered wholesale fund (ie it has chosen to voluntarily register as an MIS), then it must have at
least 25 members or satisfy the 25/60 test, or
if the trust is an unregistered wholesale fund (ie it is not a registered MIS) it must have at least 25 members.
The tests involve counting the number of ‘members’ of the MIT and sometimes counting the size of the interest in the
MIT that investors hold, directly or indirectly (known as MIT participation interests). In certain circumstances
concessions are available (for example if the entity is a qualifying investor) to increase the number of deemed
members.
In determining the number of members for the purposes of the widely held and closely held requirements, it is
important to firstly understand the concept of a qualifying investor.
Qualifying investor
The categories of qualifying investor include:
complying superannuation funds, complying approved deposit funds and foreign superannuation funds with at
least 50 members
pooled superannuation funds with at least one complying superannuation fund member
Australian life insurance companies
another MIT
certain foreign collective investment vehicles (CIVs)
certain foreign pension funds and sovereign wealth funds, and
certain government agencies.
A complete list of qualifying investors is attached at Attachment C.
Determining the number of members
As a starting point in determining the number of actual or deemed members, each investor is counted as one
member regardless of the percentage they hold in the trust. For example, in the scenario that Trust A is owned
equally by three Australian companies, Trust A has three members.
However, the widely held requirement may, on a concessional basis, ‘deem’ members to exist for the purposes of
applying the widely held tests. The widely held ownership tests apply on a concessional basis where a fund has
investors that are qualifying investors. In calculating the number of members, a qualifying investor is deemed to be
more than one member based on the following formula:
No of members = qualifying investor’s MIT participation interest (%) multiplied by 50
Page 9
Real Estate Investment in Australia – What is a managed Investment FundSo, for example, if a foreign pension fund (a qualifying investor) owns 50% of an MIT, the portion owned by that fund would be taken to represent 25 members (where the formula provides that the number of numbers is determined by multiplying the MIT participation interest (50%) by 50). Broadly, the rationale is that qualifying investors are themselves sufficiently widely held so as to warrant a relaxation of the widely held ownership test that would otherwise apply. A complete list of qualifying investors is attached at Attachment C. 25/60 test The 25/60 test is an alternative test to the number of members test and is available for registered funds (including voluntarily registered funds), whether retail or wholesale. The 25/60 test is satisfied if: a qualifying investor(s) holds a MIT participation interest of 25% or more, and there is no single non-qualifying investor that holds a MIT participation interest of 60% or more. Tracing through interposed entities For the purposes of both the widely held and closely held requirements, tracing through interposed trusts is allowable for determining MIT participation interests of investors. However, the provisions do not allow for tracing through other entities. Example Trust A is ultimately owned by a qualifying investor and a non-resident limited partnership. The qualifying entity owns its 75% stake through a corporate entity. For the purposes of the member test and the 25/60 test, the 75% interest is taken to be held by the corporate entity and not the qualifying entity. Therefore, the trust will be taken to have only two members (being the limited partnership and the corporate entity). Page 10 Real Estate Investment in Australia – What is a managed Investment Fund
Closely held ownership requirements
Similar to the widely held test, the closely held requirement is dependent on the type of fund:
if the trust is a retail fund, it must not be the case that 20 or fewer persons (excluding qualifying investors) have a
75% or more MIT participation interest and there must be no foreign resident individual with a 10% or more MIT
participation interest, or
if the trust is a wholesale fund (whether registered or unregistered), it must not be the case that 10 or fewer
persons (excluding qualifying investors) have a 75% or more MIT participation interest and there must be no
foreign resident individual (ie human) with a 10% or more MIT participation interest.
In determining the MIT participation interest of the foreign resident individual, it appears that it is necessary to trace
through all types of entities. For example, a foreign resident individual that holds a 15% interest in a trust via a wholly
owned company would be taken to have a greater than 10% interest for this purpose.
Example – unregistered wholesale fund
Aus Trust is an unregistered wholesale fund.
Hedge Fund 1 and Hedge Fund 2 are offshore limited partnerships with numerous partners that are not qualifying
investors.
Foreign Pension Fund is a foreign superannuation / pension fund with at least 50 members.
FOREIGN
HEDGE HEDGE
PENSION
FUND 1 FUND 2
FUND
30% 10% 60%
AU
AUS TRUST
Widely held requirement
Prima facie, Aus Trust would have three members, Hedge Fund 1, Hedge Fund 2 and Foreign Super Fund. However,
because Foreign Super Fund is a qualifying investor, it will be counted as the following number of members:
No of members = 60% (MIT participation interest) x 50
= 30 1
Aus Trust will satisfy the 25 member test-Hedge Fund 1 and Hedge Fund 2 will be counted as 2 members (there is no
ability to trace through a limited partnership and so it counts as one member). Foreign Super Fund is a qualifying
investor and will be taken to be 30 members. Therefore, Aus Trust will be taken to have 32 members and satisfies the
member test.
Page 11
Real Estate Investment in Australia – What is a managed Investment FundThe 25/60 test will not be available to Aus Trust as it is an unregistered MIS. Closely held requirement The closely held requirement will not preclude the trust from obtaining MIT status in this scenario. Specifically: Hedge Fund 1 and Hedge Fund 2 do not hold greater than 75% interest in Aus Trust, and no single foreign resident individual has an interest in the trust of 10% or more. Page 12 Real Estate Investment in Australia – What is a managed Investment Fund
Attachment A - Summary of key requirements
Options for meeting the widely held
requirement
Listing Test Number of 25/60 test Closely held Retail Licensing
Members Test Exclusion Limitation
Compulsorily Yes 50 or more ‘Qualifying’ 20 or fewer N/A Corporations
Registered investor(s) has non ‘qualifying’ Act
Scheme ‘Qualifying’ 25% or more investors have requirements
investors can and no non- 75% or more
count as ‘qualifying’
several investor has or
members 60%
1 foreign
individual has
10% or more
Voluntarily No 25 or more ‘Qualifying’ 10 or fewer 20 or more Operated or
Registered investor(s) has non ‘qualifying’ retail investors managed by
Wholesale ‘Qualifying’ 25% or more investors have wholesale AFS
Scheme investors can and no non- 75% or more or licensee or
count as ‘qualifying’ certain Crown
several or Retail investors
investor has or ASIC-
members hold more than
60% excluded
1 foreign 10%
entities
Retail investors individual has
are not 10% or more
counted
Unregistered No 25 or more No 10 or fewer 20 or more Operated or
Scheme non ‘qualifying’ retail investors managed by
‘Qualifying’ investors have wholesale AFS
investors can 75% or more or licensee or
count as certain Crown
several or Retail investors
or ASIC-
members hold more than
excluded
1 foreign 10%
entities
Retail investors individual has
are not 10% or more
counted
Page 13
Real Estate Investment in Australia – What is a managed Investment FundAttachment B - Current EOI countries Current EOI countries The current EOI countries are detailed in the table below: EOI COUNTRIES Argentina Netherlands Antilles Jersey Bermuda New Zealand Gibraltar Canada Norway Guernsey China Papua New Guinea Belize Czech Republic Poland Cayman Islands Denmark Romania The Commonwealth of the Bahamas Fiji Russia Principality of Monaco Finland Slovakia The Republic of San Marino France South Africa The Republic of Singapore Germany Spain Saint Kitts and Nevis Hungary Sri Lanka Saint Vincent and the Grenadines India Sweden Anguilla Indonesia Taipei Aruba Ireland Thailand Belgium Italy United Kingdom Malaysia Japan United States of America Turks and Caicos Islands Kiribati Vietnam Cook Islands Malta Antigua and Barbuda Macau Mexico British Virgin Islands Mauritius Netherlands Isle of Man Republic of Korea Pending EOI countries The following countries have entered into information exchange agreements with Australia but have not yet achieved status as an EOI country. Page 14 Real Estate Investment in Australia – What is a managed Investment Fund
PENDING EOI COUNTRIES Bahrain Lichtenstein St Lucia Dominica Marshall Islands Vanuatu Grenada Montserrat Costa Rica Liberia Samoa Page 15 Real Estate Investment in Australia – What is a managed Investment Fund
Attachment C - Definition of qualifying investor
The categories of qualifying investor include:
1 complying superannuation funds, complying approved deposit funds and foreign superannuation fund with at
least 50 members
2 pooled superannuation funds with at least one complying superannuation fund member that has at least 50
members
3 Australian life insurance companies
4 another MIT
5 an entity that:
a. is recognised under a foreign law as being used for collective investment by means of pooling the
contributions of its members as consideration to acquire rights to benefits produced by the entity, and
b. that has at least 50 members, and
c. the contributing members of which do not have day-to-day control over the entity’s operation.
6 an entity, the principal purpose of which is to fund pensions (including disability and similar benefits) for the
citizens or other contribution of a foreign country, if:
a. the entity is a fund established by an exempt foreign government agency, or
b. the entity is established under a foreign law for an exempt foreign government agency, or
c. the entity is a wholly-owned subsidiary of either (a) or (b) above.
7 an investment entity that satisfies all of these requirements:
a. the entity is wholly owned by, or is a subsidiary of, one or more foreign government agencies
b. the entity is established using only the public money or public property of the foreign government concerned
c. all economic benefits obtained by the entity have passed, or are expected to pass, to the foreign government
concerned
8 an entity established and wholly-owned by an Australian government agency, if the capital of the entity, and
returns from the investment of that capital, are used for the primary purposes of meeting statutory government
liabilities or obligations (such as superannuation liabilities and liabilities arising from compensation or Workcover
claims).
Page 16
Real Estate Investment in Australia – What is a managed Investment FundAttachment D - MIT decisions made by the Australian
Taxation Office
The Australian Taxation Office (ATO) has released guidance materials outlining its view in respect of specific MIT
related issues. We note that the ATO’s view as summarised in the below table may or may not be binding on the
Commissioner and can only be relied upon in limited circumstances if any.
Reference Overview
ATO ID 2010/32 In this particular decision, the ATO determined that 1,000 limited partners of a German KG
(which is treated as a limited partnership for German and Australian tax law purposes)
were not to be considered ‘members’ of the trust for the purposes of determining whether
the number of members test within the MIT widely held requirement had been satisfied.
Specifically, the limited partners were determined to not have the interest or rights that
give rise to being a unitholder in the Australian trust.
ATO ID 2010/143 A United States (US) Real Estate Investment Trust (REIT) was determined to be a
qualifying investor for the purposes of the MIT widely held requirement. In making its
determination, the ATO relied heavily on the MD corporate code (the law under which the
US REIT was formed) in determining whether each of the following qualifying investor
criteria was satisfied:
the US REIT was recognised under a foreign law as being used for collective
investment
the REIT was pooling contributions of at least 50 members of the entity as
consideration to acquire rights to the benefits produced by the entity, and
members of the entity did not have day-to-day control over the operation of the entity.
ATO ID 2011/4 An Irish Investment Limited Partnership (Irish ILP) was determined to be a qualifying
investor. Similar to the approach in ATO ID 2010/143 outlined above, the ATO relied on
Ireland’s Investment Limited Partnership Act under which the partnership was formed to
determine whether the Irish ILP was a qualifying investor. The criteria to be satisfied were
the same as outlined in ATO ID 2010/143.
Private Rulings These private rulings consider (issued in October 2010) the concept of substantial
1011544672063 investment management activities being carried on in Australia.
and
1011543866023 In the scenario that is subject of the ruling, a unitholder in a trust (ie the potential MIT) had
entered into a management agreement with the trustee which provided a broad mandate
in relation to the day-to-day management of the trust’s business and operations and also
sourcing new investments, making recommendations, reporting, negotiating contracts and
risk policy development and enforcement. The management agreement also required that
the trustee seek the unitholder’s approval.
The ATO concluded that this arrangement will satisfy the requirement as even though the
unitholder could choose to not approve the trustee’s decisions, the trustee has undertaken
substantial activities in Australia.
Private Ruling In this private binding ruling (issued in May 2012), the ATO determined that the investment
Page 17
Real Estate Investment in Australia – What is a managed Investment FundReference Overview
1012119087422 management activities requirement was not satisfied.
The ATO considered that the following factors may be relevant in determining if a
substantial proportion of investment management activities is carried out in Australia
(having regard to the pattern of activities in the particular circumstances of that case):
the extent to which the investment manager has ‘control over the assets of the trust’,
where ‘control’ means the ‘authority to decide and direct and not merely to participate
in decisionmaking’ over investments of the relevant trust
the extent to which the investment and subsequent dealings in the trust’s asset(s) is
made under a specific pre-formulated investment mandate which pre-dates any actual
decision or activity to be conducted by the investment manager
the extent to which any such specific pre-formulated investment mandate was made
by an entity(s) resident outside of Australia
the extent to which the ‘investment management activities’ are ‘substantial’ or
‘material’ (e.g. the maintenance of proper books of accounts in relation to the trust’s
assets would of itself be unlikely to constitute a ‘substantial proportion of investment
management activities’), and
whether the activities are ‘investment management activities’ involving decisions
relating to ‘the type of and timing of the purchase of investment assets’ as opposed to
activities relating to the ‘operation and management’ of the trust such as the provision
of custodial services, servicing the underlying assets of the trust and provision of
professional services in relation to acquisitions or disposals of assets of the trust.
Private Ruling This private ruling (issued in August 2010) considers whether the trustee of an MIT had by
1011493321942 its power of veto the ability to ‘control the affairs or operations’ of a trading company
(OpCo) such that the MIT would breach the ‘trading trust’ requirements.
In the scenario that is the subject of the ruling, the trustee of the MIT had a power of veto
over certain ‘Shareholder Matters’ of OpCo which the ATO considered ‘pertained to
OpCo’s structure, future direction and ongoing corporate governance and management’.
In particular, the MIT trustee had the ability (through its veto power) to ‘block a resolution
put to shareholders by the Board of Directors’ in relation to the Shareholder Matters.
The ATO considered that ‘control’ for the purposes of the ‘trading trust’ requirements
includes the concept of ‘negative control’ such that the ability to block decisions in relation
to the ‘structure, scope and management’ of OpCo’s business and ‘effectively usurp the
discretion of the Board of Directors’ in relation to those matters resulted in the MIT
breaching the trading trust requirement.
Page 18
Real Estate Investment in Australia – What is a managed Investment FundSydney ANZ Tower 161 Castlereagh Street Sydney NSW 2000 Australia Phone +61 2 9225 5955 Fax +61 2 9221 6516 Melbourne 101 Collins Street Melbourne VIC 3000 Australia Phone +61 3 9288 1881 Fax +61 3 9288 1828 Perth QV.1 Building 250 St Georges Terrace Perth WA 6000 Australia Phone +61 8 9211 7770 Fax +61 8 9211 7755 greenwoods.com.au Page 19 Real Estate Investment in Australia – What is a managed Investment Fund
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