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20% tracing rule in Division 6C

Last updated 21 February 2023

Under the new system for managed investment trusts (MITs), modifications have also been made to the '20% tracing rule' contained in Division 6C of the Income Tax Assessment Act 1936. Division 6C applies to a trust if it is both:

  • a trading trust (broadly, a trust that carries on activities other than holding solely passive investments such as shares, property and fixed interest assets)
  • a public unit trust.

If Division 6C applies to a trust, the trust will effectively be taxed as a company.

Previously, a trust could be treated as a public unit trust when one or more tax exempt entities or complying superannuation entities owned 20% or more of the beneficial interests in the trust (the 20% tracing rule).

Under the modifications to Division 6C, super funds and exempt entities – that are entitled to a refund of excess imputation credits – will now be exempt from the 20% tracing rule for public trading trusts.

As such, a trust will not be a public trading trust just because certain tax-exempt entities and complying superannuation entities hold more than 20% of interests in the trust.