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

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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.

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Real Estate Investment in Australia – What is a managed Investment Fund
Requirements 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.

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Real Estate Investment in Australia – What is a managed Investment Fund
Corporations 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.

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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

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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.

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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).

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Real Estate Investment in Australia – What is a managed Investment Fund
Widely 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

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Real Estate Investment in Australia – What is a managed Investment Fund
So, 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).

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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.

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Real Estate Investment in Australia – What is a managed Investment Fund
The 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.

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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

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Real Estate Investment in Australia – What is a managed Investment Fund
Attachment 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.

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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

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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).

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Real Estate Investment in Australia – What is a managed Investment Fund
Attachment 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

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Real Estate Investment in Australia – What is a managed Investment Fund
Reference                       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.

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Real Estate Investment in Australia – What is a managed Investment Fund
Sydney
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Fax +61 2 9221 6516

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Melbourne VIC 3000
Australia
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Fax +61 3 9288 1828

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Australia
Phone +61 8 9211 7770
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