United States real estate investment trusts and managed investment trusts

Is the taxpayer, a United States (US) Real Estate Investment Trust (REIT) that is a member of an Australian Trust, an entity that is covered by the requirements of paragraph 12-402(3)(e) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) for the purposes of determining the number of members of the Australian Trust in paragraph 12-402(1A)(b) of Schedule 1 to the TAA 1953?

Yes, the taxpayer, a US REIT that is a member of an Australian Trust, is an entity that is covered by the requirements of paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 for the purposes of determining the number of members of the Australian Trust in paragraph 12-402(1A)(b) of Schedule 1 to the TAA 1953.

The taxpayer (US REIT) is formed under the Corporations and Associations Article of the Annotated Code of Maryland (the MD Code) of the State of Maryland in the US.

US REIT also qualifies as a REIT under the US Internal Revenue Code 1986 (US IRC).

US REIT is governed by the provisions of the MD Code and the US IRC as well as the terms of its Declaration of Trust.

US REIT owns 100% of the units in a Maryland Real Estate Investment Trust (Maryland REIT).

Maryland REIT is also formed under, and is governed by, the MD Code .

Maryland REIT fails to qualify as a REIT under the US IRC.

The Declaration of Trust of US REIT states that the shares in the REIT will be validly issued by the REIT upon receipt of full consideration for which they have been issued.

US REIT and Maryland REIT are the only two 'members' of an Australian Trust as defined in subsection 960-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The units in the Australian Trust are not listed on the Australian stock exchange.

US REIT has a 'MIT participation interest' in the Australian Trust of 100% for the purposes of paragraph 12-404(1)(c) of Schedule 1 to the TAA 1953.

The trustee of the Australian Trust is an Australian resident.

The Australian Trust is not a trading trust covered by subsection 12-400(2) of Schedule 1 to the TAA 1953.

A substantial portion of the investment management activities carried out in relation to the Australian Trust are carried out in Australia in accordance with paragraph 12-400(1)(c) of Schedule 1 to the TAA 1953.

The Australian Trust is a managed investment scheme within the meaning of section 9 of the Corporations Act 2001.

The Australian Trust is not covered by section 12-401 of Schedule 1 to the TAA 1953 (trusts with wholesale membership).

The Australian Trust is registered under section 601EB of the Corporations Act 2001.

The Australian Trust satisfies the closely-held restrictions in subsection 12-402B(1) of Schedule 1 to the TAA 1953.

Subdivision 12-H of Schedule 1 to the TAA 1953 deals with Pay As You Go withholding obligations for distributions of managed investment trust income.

Under subsection 12-400(1) of Schedule 1 to the TAA 1953, there are various conditions that need to be considered in order to determine whether a particular trust is a managed investment trust in relation to an income year.

Based on the facts, the Australian Trust satisfies the conditions in paragraphs 12-400(1)(a) to (e) and paragraph 12-400(1)(g) of Schedule 1 to the TAA 1953, while paragraph 12-400(1)(h) is not relevant for present purposes. In relation to paragraph 12-400(1)(f), the applicable requirement is subparagraph 12-400(1)(f)(ii), which requires that where the Australian Trust is registered under section 601EB of the Corporations Act 2001 and is not covered by section 12-401, it must satisfy either or both of the widely-held requirements in subsections 12-402(1A) and 12-402A(1) of Schedule 1 to the TAA 1953.

Subsection 12-402(1A) of Schedule 1 to the TAA 1953 sets out the conditions that must be satisfied in the context of the facts of this case. Paragraph 12-402(1A)(a) requires that the units in the Australian Trust are listed for quotation in the official list of an approved stock exchange in Australia or, alternatively, paragraph 12-402(1A)(b) requires that the trust has at least 50 members. As units in the Australian Trust are not listed on the Australian stock exchange, it is necessary to consider whether it has at least 50 members.

Subsection 12-402(2) of Schedule 1 to the TAA 1953 outlines the methodology for determining the number of members of the trust for the purposes of paragraph 12-402(1A)(b) of Schedule 1 to the TAA 1953. Relevantly, it is necessary to work out the 'MIT participation interest' in the trust of members that are entities covered by subsection 12-402(3) and multiply it by 50 and then add that number to the number of members that are entities that are not covered by subsection 12-402(3).

In the context of the facts of the case, paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 is the applicable paragraph to determine whether US REIT and Maryland REIT, as members of Australian Trust, are entities covered by subsection 12-402(3) for the purposes of subsection 12-402(2) of Schedule 1 to the TAA 1953.

Paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 includes: an entity that is recognised under a foreign law as being used for collective investment by means of pooling the contributions of at least 50 members of the entity as consideration to acquire rights to benefits produced by the entity, if the members of the entity do not have day-to-day control over the operation of the entity.

According to the Revised Explanatory Memorandum (EM) to the Tax Laws Amendment (2010 Measures No 3) Bill 2010 (TLAB (No 3) Bill 2010), paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 targets: ... a foreign collective investment vehicle, which is an entity with at least 50 members that is recognised under a foreign law as being used for collective investment where the member contributions are pooled together in exchange for rights to the benefits produced by the entity and where members do not have day-to-day control over the operation of the entity. ... (paragraph 5.79 of the Revised EM to the TLAB (No 3) Bill 2010).

Therefore, the REITs must be recognised under a foreign law as being used for collective investment and the entity itself must also satisfy the remaining three requirements of subsection 12-402(3)(e) of Schedule 1 to the TAA 1953. That is, US REIT and Maryland REIT must involve: • the pooling of contributions of at least 50 members of the entity; • as consideration to acquire rights to benefits produced by the entity; and • the members not having day to day control over the operation of the entity.

The first requirement involves the entity being recognised under a foreign law as an entity which is used for collective investment.

Both US REIT and Maryland REIT were formed in the US State of Maryland under the MD Code and, accordingly, the MD Code is the relevant foreign law for the purposes of paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953. Section 8-103(b) of the MD Code provides that: To the extent any provision of this title is contrary to or inconsistent with sections 856 through 858 of the Internal Revenue Code [of the US] or the regulations adopted under those sections, the latter shall prevail as to any real estate investment trust qualifying under those sections and regulations.

Therefore, sections 856 to 858 of the US IRC must be considered alongside the MD Code when considering whether the foreign law recognises US REIT as being used for collective investment for the purposes of paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953. As Maryland REIT does not qualify under the US IRC, only the MD Code is the relevant foreign law in relation to Maryland REIT.

Section 8-101 of the MD Code defines a REIT as: an unincorporated business trust or association formed under this title which property is acquired, held, managed, administered, controlled, invested, or disposed of for the benefit and profit of any person who may become a shareholder.

This definition contemplates a profit-making purpose of the entity for the benefit of more than one person (the shareholders), which indicates a recognition by the MD Code that the entity is being used for collective investment.

The US IRC does not contain any provision that is inconsistent with the profit-making intention of a REIT. Furthermore, the collective nature of the entity is supported by section 856(a)(5) of the US IRC, which requires that the beneficial ownership of a REIT is held by 100 or more persons.

Therefore, both US REIT and Maryland REIT are recognised under a foreign law as being used for collective investment.

Paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 requires that the entity pool the contributions of at least 50 members.

A 'share' is defined in section 8-101 of the MD Code as a transferable unit of beneficial interest in a REIT.

While the MD Code does not contain a requirement as to the number of shareholders necessary for a REIT, section 856(a)(5) of the US IRC requires these shares to be owned by 100 or more persons.

The MD Code definitions of a REIT and share in a REIT, together with the numbers of shareholders required under the US IRC, are consistent with the notion of pooling of contributions of at least 50 members as required under paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953.

Therefore, as US REIT qualifies as a REIT under the US IRC, there is a pooling of the contributions of at least 50 members of the entity.

However, as Maryland REIT is wholly owned by US REIT and therefore has only one member (and accordingly fails to qualify as a REIT under the US IRC), it fails the requirement that it have at least 50 members. Maryland REIT is therefore not an entity covered by paragraph 12-401(3)(e) of Schedule 1 to the TAA 1953.

Paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 requires there be consideration from the 50 or more members of the entity to acquire rights to benefits produced by the entity.

The US REIT Declaration of Trust states that the shares in the REIT will be validly issued by the REIT upon receipt of full consideration for which they have been issued. Therefore, US REIT satisfies the condition under paragraph 12-402(3)(e) that contributions are made as consideration to acquire rights to benefits produced by US REIT.

The final requirement in paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 is that the members of the entity do not have day-to-day control over the operation of the entity. Sections 8-202 and 8-301 of the MD Code provides for the election of trustees at least every third year at an annual meeting of shareholders. Further, section 856(a)(1) of the US IRC requires a REIT to be managed by its trustees or directors.

Therefore, the members of US REIT do not have day-to-day control over the operation of the entity. US REIT therefore satisfies this final requirement of paragraph 12-402(3)(e).

As each of the elements are satisfied in relation to US REIT, US REIT is an entity covered by paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953. However, Maryland REIT, being wholly owned by US REIT and therefore having only one member, is not an entity covered by paragraph 12-402(3)(e). Note 1: in accordance with subparagraph 12-402(2)(c)(ii) of Schedule 1 to the TAA 1953, US REIT's 'MIT participation interest' in the trust is multiplied by 50. Therefore, as US REIT has a 'MIT participation interest' of 100%, US REIT's membership of the Australian Trust it is deemed to be equal to 50 members of the Australian Trust. Note 2: applying the methodology outlined in paragraph 12-402(2) of Schedule 1 of the TAA 1953 results in the Australian Trust having 51 members. As Maryland REIT is not a member of the trust that is an entity covered by subsection 12-402(3), it continues to count as one member.