Trust Funds Australia Tax

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					Opportunity Australia
Legal and Tax Issues for Funds

2 December 2008
Betsy-Ann Howe and Robert Hanley


 Australians and their superannuation funds can invest in nearly anything
 The most popular form of investment after superannuation funds, are
 unit trusts or what we call managed funds. The funds sole asset can be
 a swap, a forest or a vineyard
 There are very few prohibited investments for superannuation funds. As
 long as they don’t borrow or charge their assets and invest prudentially,
 Australian superannuation funds can invest in all sorts of investments all
 around the world
 The trade-off for this flexibility is that we have an intrusive licensing and
 disclosure regime.
 We also have a complex tax system.

The Australian Funds Industry

        Source: Australian Bureau of Statistics, 5655.0 – Managed Funds, Australia, March 2008

Australian Specific Terminology

 Registered MIS v. Wholesale Fund
 Super Fund v Unit Trust v PST
 RE v Trustee
 Feeder Fund

A Managed Investment Scheme (“MIS”)

A MIS is a scheme that has the following characteristics:
  people contribute money to acquire rights to benefits produced by the
  money is pooled or used in a common enterprise to produce benefits for
  members of the scheme; and
  the members do not have day to day control over the operation of the
subject to exceptions


 There is a single licensing regime that applies to broker dealers,
 investment advisers, fund managers, distributors, custodians and a
 broad range of other participants in the financial services industry.
 The regime even applies to hedge funds and private entity sponsors
 The license issued is called an Australian financial services licence or
 An AFSL is required even if you provide services only to a limited
 number of clients and all of those clients are what we classify as
 wholesale clients. Generally, a wholesale client is someone who invests
 over A$500,000 or is otherwise a professional investor.

Licensing – Key Issues

 Issue 1 – Do you want to provide services to retail clients?
     Disclosure requirements
     Must satisfy ASIC experience, qualifications and resources to provide
     financial services and financial products you nominate.
     Preparing an application is involved and obtaining the licence usually takes 4
     to 6 months.

 Issue 2 - Will you obtain a wholesale licence or rely on an licensing
  exemption ?
     Either way, it’s a well worn path.
     There are many UK and other offshore managers managing Aust $s with a
     fully licensed Australian entity and others who do not have an AFSL


 Eight of the top 10 global institutional money managers have an affiliate
 that holds a retail AFSL.
 This includes State Street, Barclays, Fidelity, Legg Mason, Black Rock,
 Wellington and Vanguard.
 Of these, seven of them are licensed to operate retail managed
 investment schemes

Wholesale licence – Active and Passive

 Some Fund Managers have AFS licences but only for wholesale clients.
  A wholesale only AFSL involves less resources and disclosure.
 Limiting the AFSL to wholesale only doesn’t exclude you from accessing
  the retail market.
 If a Fund Manager wants to have a badged Australian retail pooled
  vehicle, they will partner with a trustee for hire such as Perpetual
  Trustees or Equity Trustees.
 If all of your clients will be wholesale clients and you will have no
  physical presence in Australia, even on a fly in and fly out basis, you
  may not require a licence in Australia. This is usually relied on by
  persons who are passive in the Australian market.

Wholesale - Passports

 Some Fund Managers will have AFSL licences but the rest probably rely on
 passporting relief from ASIC.
 This relief is based on principles of mutual recognition. Our firm obtained the
  relief on behalf of the industry.
 It is available for persons regulated in the UK, US, Singapore, Hong Kong and
 To obtain passporting relief:
     enter into a deed of reliance and lodge with the Australian regulator, ASIC (contains
     certain notices and undertakings in order to implement the Class Order)
     provide financial services in a manner which would comply, so far as is possible, with
     the regulatory requirements of the home jurisdiction
     satisfy a number of ongoing filing requirements. For example, a six month filing must
     be made with ASIC in relation to any regulatory changes in the home jurisdiction
     warn the client that you are exempt from holding an AFSL and your home jurisdiction
     laws may differ to the equivalent Australian laws.

Company Registrations

 In addition to the AFS Licence, you’ll need to register as a foreign
  company if you carry on business in Australia. ‘Carrying on business’ is
  a slightly broader test.


 Very likely one or more entities involved in an Australian offering will
 need an AFSL or need to rely on an exemption.
 Key decision – only target wholesale? If so, AFSL licensing is
 reasonably easy and quick.


       Taxation of Trusts
       Outbound Investment – Australian residents investing in foreign funds
       Inbound Investment – Non residents investing in Australian managed
        investment trusts

Fund vehicles

 In Australia, most Funds are established as Unit Trusts.
 A Unit Trust is generally treated as a transparent entity for tax purposes
 unless it falls within a set of provisions which treat the trust for tax
 purposes as if it were a company
 The most common instance of this is where the Unit Trust is a “Public
 Trading Trust”
 Limited Partnerships are not particularly popular because, with the
  exception of Venture Capital Limited Partnerships, Limited Partnerships
  are not transparent for tax purposes

Taxation of Trusts

 A Trust which is not a Public Trading Trust is not a separate taxable
 Generally, it is the beneficiaries of the Trust who are presently entitled to
 receive and retain the trust money who are taxable on it at their
 respective tax rates
 The trustee will be taxed on the balance, if any to which no beneficiary is
 presently entitled
 Non resident beneficiaries of Australian trusts are taxable on Australian
 source income and capital gains tax on gains arising from Taxable
 Australian Real Property (“TARP”)
 Australian resident beneficiaries of Australian trusts are taxable on
 worldwide income to which they are presently entitled

Taxation of Trusts – Public Trading Trusts

 A Public Trading Trusts is taxed as if it is a company and the unit holders as if
 they were shareholders in the company
 A public unit trust is a unit trust
           who’s units are listed on a stock exchange; or
           any of the units are offered to the public; or
           units in the unit trust are held by no fewer than 50 persons; or
           where 20% of the units are held by complying superannuation funds
 A “Public trading trust” is a public unit trust that either carries on a “trading
 business” or controls the carrying on of a “trading business”
 A “trading business” is a business that does not consist wholly of an eligible
 investment business
 An “eligible investment business is defined to mean either investing in land for
 the purpose or primarily the purpose of deriving rent or investing or trading in
 certain listed items such as loans, shares, futures contracts etc

Public Trading Trusts – Practical Issues

 The Public Trading Trusts rules are important for property funds and certain
  infrastructure arrangements and distressed assets / opportunity style private
  equity funds
 Management via splitting ownership across a number of trusts and / or
 companies and stapling – no “control” by any one entity of underlying
 Stapled trusts a common mechanism for preventing the Public Trading Trust
 rules from applying to the trust that holds the land or other eligible assets
 In practice the Public Trading Trust rules are considered to impose significant
  restrictions and costs
 Review of the provisions currently underway as an interim measure pending a
 wider scale review of the managed funds area generally

                              Stapled Trusts
                        Macquarie Infrastructure Group

1.   MIT I will withhold on distributions containing Australian source income.
2.   MIT I can flow through foreign tax credits and foreign service income without Australian Tax.
3.   MIT II Distributions will be subject to Dividend withholding tax unless MIT II has franking
Investment into Australian Funds

 New managed investment trust regime (“MIT”)– final withholding tax on
 certain trust distributions
 General withholding on fund payments
 Changes to CGT regime as it affects non residents
 Conduit foreign income rules
 Capital vs revenue distinction


 New legislation to reduce the level of withholding tax from a non-final rate of 30
 per cent to a final rate of 7.5 per cent on certain distributions from Australian
 managed investment trusts to certain foreign resident investors.
 The new provisions apply to:
     distributions of Australian source income (other than dividends, interest and royalties);
     from managed investment trusts; and
     to foreign investors who are resident in a country with which Australia has an
      exchange of information agreement on tax matters.

 Foreign investors from other countries will be subject to a 30 per cent final
  withholding tax.
 Distributions of dividends, interest and royalties will continue to be covered by
 the existing final withholding tax arrangements

Inbound Investment - MITs

 Recent change of significance is the new Managed Investment Trusts
 (MIT) regime
 Where the MIT provisions apply certain “fund distributions” are subject to
 concessional rates of withholding tax at the MIT level
 The rate of withholding will be:
    22.5% in the year ending 30 June 2009
    15% in the year ending 30 June 2010
    7.5% in the year ending 30 June 2011
  Final Tax for year ended 30 June 2010 onwards
 Rates apply where fund payment is made to address for payment in an
 information exchange country – note this includes Bermuda and BVI but
 not Singapore or Hong Kong

Example: MITs

Taxation of MIT income

           Item                                    Australian tax outcome

                             Receipt by Trusts     Assessable income but trustee not subject to Australian tax if fully
                                                   distributed to unitholders by the end of the financial year
 Rent from property

                             Distribution by Aus   1/7/2008 -            1/7/2009/ -            1/7/2010 -
                             Trust to Foreign       30/6/2009             30/6/2010
                                                         22.5%                   15%                  7.5% final
                                                                                                    withholding tax

                             Receipt by Trusts     Assessable Income but trustee not subject to Australian tax if fully
                                                   distributed to unitholders by the end of the financial year

 Gains on sale of property
                             Distribution by Aus   1/7/2008 –            1/7/2009 –             1/7/2010 -
                             Trust to Foreign       30/6/2009             30/6/2010
                                                         22.5%                   15%                  7.5% final
                                                                                                    withholding tax

CGT and non residents

 CGT only payable on gains on disposal of “taxable Australian property”

      Australian real property

      CGT assets used in carrying on a business through an Australian PE

      Indirect interests in Australian real property

      Rights or options to acquire any of the above

 Non residents not liable to CGT on sale of shares and units in Australian units trusts
 (unless land rich)

 Capital vs revenue distinction is important for non residents from jurisdiction with which
 Australia does not have a tax treaty – potential for tax in Australia if gains are not
 protected under the CGT exemption, eg private equity?

Outbound Investment

 Taxation of foreign income
    Australian residents are taxed on worldwide income
    Outbound investment’s of a non-resident generally taxed under the
    controlled foreign company (CFC) provisions or the foreign investment fund
    (FIF) provisions. These provisions aim to prevent the deferral of Australian
    tax on foreign income
    Certain foreign income is not taxed, however, in Australia including gains
    from disposal of shares in certain active businesses

Outbound Investment – CFCs & FIFs

 CFC provisions
    These are complicated rules
    Board of Taxation has released a position paper in January this year
    following consultation on possible reforms
    Board of Taxation also released an issues paper on 18 May which consider
    in more detail some of the proposed reforms.
    Of interest are the following:
         listed public company exemption
         active investment exemption
         distribution exemption

 FIF provisions
    Recent changes

Outbound Investment – Foreign Hybrids & FTCs

 Foreign Hybrid provisions
     How operate
     Inadequacies based on legal status of entities in other jurisdictions
     Flow through status for super funds

 Foreign tax credits
     removal of quarantining
     utilisation by Australian investors

Opportunity Australia
Legal and Tax Issues for Funds

2 December 2008
Betsy-Ann Howe and Robert Hanley


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