PAYG withholding: meaning of managed investment trust

Can an unregistered managed investment scheme satisfy the definition of managed investment trust in relation to the condition in Item 2 in the table in subsection 12-400(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

No, an unregistered managed investment scheme cannot satisfy the definition of managed investment trust in relation to the condition in Item 2 in the table in subsection 12-400(1) of Schedule 1 to the TAA. An unregistered managed investment scheme is not operated by a financial services licensee whose license covers operating such a managed investment scheme.

An investment fund is being established which will consist of a number of unit trusts. Each of the proposed trusts will have the same Australian corporate trustee (proposed trustee). The proposed trusts will be managed investment schemes as defined in section 9 of the Corporations Act 2001 (CA).

The proposed trustee currently holds an Australian Financial Services License (AFSL) under section 913B of the CA. The AFSL authorises the proposed trustee to: (a) provide financial product advice for listed classes of financial products (b) deal in financial product by: (i) issuing, applying for, acquiring, varying or disposing of a financial product in respect of listed classes of financial products (ii) applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of listed classes of financial products (iii) underwriting interests in managed investment schemes, and an issue of securities to wholesale clients.

The proposed trusts will make fund payments within the meaning of section 12-405 of Schedule 1 to the TAA in relation to the income year ended 30 June 2010 or later income years.

'Managed investment trust' is defined under section 12-400 of Schedule 1 to the TAA. 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 the table in subsection 12-400(1) are satisfied.

The relevant issue is whether the proposed trusts satisfy Item 2 in the table in subsection 12-400(1) of Schedule 1 to the TAA. This condition is satisfied if, at the time of the first fund payment in relation to the income year: (a) first element - the trust is a 'managed investment scheme' (as defined by section 9 of the CA) (b) second element - the trust is operated by a 'financial services licensee' (as defined by section 761A of the CA), and (c) third element - the licence of the entity operating the managed investment scheme covers operating such a managed investment scheme.

First element

This element is taken to have been satisfied. It is accepted in this case that the proposed trusts will be managed investment schemes under section 9 of the CA.

Second element

This element is satisfied. 'Financial services licensee' is defined in section 761A of the CA as an entity that holds an AFSL. AFSL is defined by section 761A of the CA as a licence under section 913B of the CA that authorises a person who carries on a financial service business to provide financial services. The licensee must be the entity that operates the trust.

The proposed trustee is a financial services licensee who holds an AFSL. The proposed trusts will be operated by the proposed trustee who will manage and direct the activities of the proposed trusts and will be responsible for the operation of the proposed trusts.

Third element

This element is not satisfied.

Section 911A of the CA requires a person who carries on a business of providing financial services to hold an AFSL covering the provision of the financial services involved. Under section 766A of the CA a person provides financial services if they: (a) provide financial product advice (b) deal in a financial product (c) make a market for financial products (d) operate a registered managed investment scheme (e) provide a custodial or depository service (f) engage in conduct of a kind prescribed by regulations.

The proposed trustee holds an AFSL which covers providing financial product advice and certain dealings in certain financial product. The AFSL of the proposed trustee does not cover operating a registered managed investment scheme.

It is considered that the requirement that the licence covers operating a managed investment scheme is a reference to a licence which specifically deals with providing the particular financial service of operating a registered scheme as provided for under paragraph 766A(1)(d) of the CA. A licence in relation to the provision of other financial services is not a licence which covers operating such a scheme.

Also, the provision of financial services as defined in section 766A of the CA does not extend to operating unregistered schemes. No licence is required to operate an unregistered scheme and no licence covers the operation of such a scheme.