Senate

Tax Laws Amendment (2007 Measures No. 5) Bill 2007

Tax Laws Amendment (2007 Measures No. 5) Act 2007

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
This memorandum takes account of amendments made by the House of Representatives and to the Bill as introduced.

Chapter 8 - Australian property trusts and stapled securities

Outline of chapter

8.1 Schedule 8 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide holders of ownership interests in stapled entities with a capital gains tax (CGT) roll-over when a public unit trust is interposed between those holders and the stapled entities.

8.2 This Schedule also amends the Income Tax Assessment Act 1936 (ITAA 1936) to ensure that such restructures do not result in the interposed head trust being taxed as if it were a company. In addition, public unit trusts will be able to acquire controlling interests in, or control, foreign entities whose business consists primarily of investing in land outside Australia for the purpose, or primarily for the purpose, of deriving rent.

Context of amendments

CGT context

8.3 Stapled groups often consist of several different entities, such as unit trusts and companies, whose equity interests are stapled together. Every holder of interests in the entities in the stapled group must own proportionate equity interests in each of the entities whose equity is stapled. Issue of further equity by any of the entities is correspondingly limited so that each entity can issue equity only in association with proportionate issues of equity by the other entities. Trading in, or disposal of, equity is correspondingly limited too.

8.4 Over the last five years, tax advantaged real estate investment vehicles in the rest of the world (and particularly Asia) have grown significantly. In the United States of America (US), a tax preferred vehicle for property investment is called a Real Estate Investment Trust. A US Real Estate Investment Trust may be a trust or a company, but is taxed in the US only as a company. Its tax preferred feature is that, while it meets detailed prescriptive rules about its activities and its distribution policies, it can pay tax deductible dividends to its equity holders. Therefore a US Real Estate Investment Trust can avoid the effect of 'classical taxation' in the US, that is, taxation at company level and taxation again on distribution to equity holders, without credit for the tax paid at company level.

8.5 To enable Australian Listed Property Trusts to acquire overseas vehicles in exchange for their own equity, it is often necessary for the acquirer to issue only its own equity. For example, it is only where equity in a US Real Estate Investment Trust is exchanged for equity in the acquirer that the holders of the Real Estate Investment Trust are able to obtain a tax deferral in the US. In this respect, a stapled Australian Listed Property Trust is at a competitive disadvantage to a single entity seeking to acquire US Real Estate Investment Trusts. This is because the interest holders of the target Real Estate Investment Trust would be entitled to a CGT roll-over in the US if the acquirer was offering only its own equity but not if the acquirer was offering a combination of its own equity with other equity. An Australian Listed Property Trust equity which is stapled can only offer proportionate equity in each of the stapled entities and so cannot offer as much tax deferral as an acquirer offering only its own equity.

8.6 Subdivision 124-G of the ITAA 1997 provides a CGT roll-over for the holders of shares in an existing company under a scheme for reorganising the company's affairs. Subdivision 124-H of the ITAA 1997 provides similar relief where a new company is interposed between an existing unit trust and its unit holders.

8.7 Under the current CGT provisions, stapled entities are unable to establish a head trust and rearrange their corporate structure with a CGT roll-over for their interest holders.

8.8 These amendments will provide a CGT roll-over to allow for the reorganisation of stapled groups, and in particular Australian Listed Property Trusts. This will enable Australian Listed Property Trusts to rearrange their stapled structures and allow them to interpose a head trust so that they are treated as a single entity for the purposes of overseas acquisitions.

Divisions 6B and 6C context

8.9 Both Division 6B and 6C of Part III of the ITAA 1936 deal with taxing certain public unit trusts as companies.

8.10 Division 6B taxes public unit trusts like companies and their unit holders like shareholders (essentially when company assets or company business become assets or business of the unit trust as part of an arrangement by which shareholders in the company get units in the trust).

8.11 Division 6C of the ITAA 1936 also acts to protect the corporate tax base by taxing as a company the trustee of a public unit trust where the trust is carrying on a trading business, or 'controls' another entity carrying on a trading business. It is an all-or-nothing, year-by-year provision such that any active business activity conducted or controlled by a public unit trust in a year of income means that the trust is taxed like a company for that year in relation to all its income and activities. Its equity holders are taxed like shareholders for that year too.

8.12 Division 6C taxes public unit trusts in a similar manner to companies unless they are confined to certain traditional passive investment activities. A public unit trust is, broadly, a unit trust where any of the units are listed on a stock exchange or are offered to the public or the units in the unit trust are held by not fewer than 50 persons (section 102P of the ITAA 1936).

8.13 A unit trust is a 'trading trust' if it carries on a trading business or controls or is able to control, directly or indirectly, a trading business carried on by another person (section 102N of the ITAA 1936). A 'trading business' is any business that does not consist wholly of 'eligible investment business', that is, of certain traditional passive activities.

8.14 Company treatment does not extend to public unit trusts that carry on only 'eligible investment business' which consists only of investing in land or an interest in land primarily for rental purposes, or of investing or trading in certain equities or instruments, or a combination of any of these activities (section 102M of the ITAA 1936).

8.15 When a trust such as a newly interposed head trust owns or controls a trading business after a restructure, the trust (as a public unit trust) will be subject to taxation as if it were a company under the public trading trust rules in Division 6C.

8.16 The interposed head trust would then not only control subsidiary trusts producing passive income, but also any subsidiary companies or trusts producing active income. The result would be that the interposed head trust would be taxed as if it were a company, were it not for these amendments.

8.17 These proposed amendments will facilitate Australian public unit trusts acquiring property and property-holding entities offshore.

Summary of new law

8.18 This Schedule amends Division 124 of the ITAA 1997 by inserting Subdivision 124-Q. This Subdivision will provide a CGT roll-over for members of a stapled group:

·
where there has been an interposition of a public unit trust between the holders of ownership interests in the entities of the stapled group and the stapled entities; or
·
where there is a destapling of the stapled entities and a public unit trust that was one of the stapled entities, is interposed between the holders of ownership interests in the entities in the stapled group and the remaining formerly stapled entities.

8.19 This Schedule also amends Division 6C of the ITAA 1936 so that the imposition of such a head trust after a restructure will not lead to the trust being treated as a public trading trust (and therefore taxed as a company) provided certain other conditions are met.

8.20 Division 6C is also amended to allow a public unit trust to acquire a controlling interest in or control a foreign entity (such as a US Real Estate Investment Trust) whose business consists primarily of investing in land outside Australia for the purpose, or primarily for the purpose, of deriving rent, without the acquisition leading to the trust being taxed as if it were a company.

Comparison of key features of new law and current law

New law Current law
A CGT roll-over will be provided for holders of ownership interests of the stapled entities where, under a scheme for reorganising the stapled entities' affairs, they dispose of their ownership interests in the stapled entities in exchange for a proportionate number of ownership interests in an interposed public unit trust. No equivalent.
A public unit trust will not be treated as a public trading trust where:

·
the trust is interposed between the entities in the stapled group and their equity holders;

and through its holding of a previously stapled company or a previously stapled trust (that was taxed as a company), the trust controls a 'trading business' as defined in section 102M of Division 6C of the ITAA 1936.

If a public unit trust carries on a trading business or controls another entity that carries on a trading business, the public unit trust will be treated as a public trading trust and taxed as if it were a company in the relevant year of income.
Public unit trusts can acquire a controlling interest in or control a foreign entity whose business consists primarily of investing in land outside Australia for the purpose, or primarily for the purpose, of deriving rent. The acquisition of a controlling interest would lead to the trust being taxed as a company, if the foreign entity carried on a 'trading business'.

Detailed explanation of new law

8.21 Stapled entities are a group of entities that may consist of two or more trusts, or one or more companies and one or more trusts, whose ownership interests are stapled together to form stapled securities. 'Ownership interests' are defined according to subsection 125-60(1) of the ITAA 1997, and cover shares, trust interests, and options or the like, giving an entitlement to acquire a share or trust interest. [Schedule 8, item 6, subsection 124-1045(1)]

8.22 A stapled security is created when two or more different things are contractually bound together so that they cannot be sold separately. Many different types of securities can be stapled together, for example, many property trusts have their units stapled to the shares of companies with which they are closely associated (often because the property trust owns rental property and the associated company manages that property).

8.23 A stapled entity is an entity in relation to stapled securities if ownership interests in the entity form part of the stapled securities. [Schedule 8, item 6, subsection 124-1045(2)]

Exchange of the stapled securities

8.24 CGT roll-over applies when a public unit trust is interposed between holders of interests in the entities in a stapled group and the entities in the stapled group. [Schedule 8, item 6, subsection 124-1045(1)]

8.25 In the stapling arrangement, at least one of the trusts is a trust whose trustee is not assessed and liable to pay tax under Division 6B or 6C of Part III of the ITAA 1936, and if no company is involved at least one of the trusts is a trust whose trustee is assessed and liable to pay tax under Division 6B or 6C. The roll-over will only be available where the stapled entities include at least one entity that is taxed like a company and at least one entity that is not so taxed. [Schedule 8, item 6, paragraphs 124-1045(1)(b) and (c)]

8.26 The 'new trust case' is when the public unit trust interposed between the members and the stapled entities is a new unit trust (see Diagram 8.2).

8.27 The 'existing trust case' is when one of the stapled entities becomes the public unit trust interposed between the members and the other stapled entities (see Diagram 8.3).

8.28 The roll-over only applies if holders of interests in the entities in the stapled group (the 'exchanging members') who own the ownership interests in the stapled entities will, under a scheme for reorganising the affairs of the relevant stapled entities:

·
for a new trust case - no longer be the owner of those ownership interests and acquire ownership interests in a new unit trust (the 'interposed trust') and nothing else; or
·
for an existing trust case - retain their ownership interests in one of those trusts (also the 'interposed trust'), no longer be the owner of the remaining ownership interests that form the stapled securities and receive nothing other than ownership interests in the interposed trust or an increase in the value of their existing ownership interests in the interposed trust or both.

[Schedule 8, item 6, subparagraphs 124-1045(1)(d)(i) and (ii)]

8.29 In certain circumstances certain foreign holders are excluded from this requirement in the new trust case (see paragraphs 8.50 to 8.57).

8.30 The interposed trust must become the owner of:

·
for a new trust case - all of the ownership interests in the stapled entities; or
·
for an existing trust case - all of the ownership interests in the other stapled entities.

[Schedule 8, item 6, subparagraphs 124-1045(1)(e)(i) and (ii)]

8.31 It is not unusual in a stapled structure for one stapled entity to hold an ownership interest in another stapled entity in the structure. For example, the structure's trading company may own a non-controlling interest in the Division 6C public unit trust. If the public unit trust was interposed and was required to acquire shares in the company, it would be acquiring an indirect interest in itself, which may raise issues relating to the Corporations Act 2001 . Because of this, the requirements of the CGT roll-over will not be satisfied as the ownership interests in the trust owned by the company (unstapled securities) will not be exchanged for ownership interests in the interposed trust. Therefore ownership interests which one of the stapled entities may hold in another stapled entity within the stapled group are excluded from the operation of Subdivision 124-Q. This is however limited to any unstapled securities that have been issued up until the legislation is introduced in Parliament. [Schedule 8, item 6, subsection 124-1045(3)]

Conditions for the roll-over

8.32 Each exchanging member must own a percentage of the ownership interests in the interposed trust that reasonably equates to the percentage of the ownership interests the member owned in the stapled entities just after the scheme is completed (the 'completion time'). [Schedule 8, item 6, subsection 124-1050(1) , paragraph 124-1045(1)(f)]

8.33 A scheme for reorganising the affairs of the relevant stapled entities would be any arrangement or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. When the scheme is completed will be a factual matter, that is, when all the steps of the scheme have been done.

8.34 As Example 8.1 shows, the percentage of ownership interests before the completion time is the same as the percentage of ownership interests after the completion time.

Example 8.1

Stapled entities

Unit Trust X and Company Y are stapled entities. Unit Trust X has 4,000 units and options to acquire a further 1,000 units on issue. Company Y has 4,000 ordinary shares and options to acquire a further 1,000 ordinary shares on issue. There are no other ownership interests in either entity.

Reorganising Stapled entities

Under a scheme for reorganising the stapled entities, Unit Trust Z is interposed between the stapled entities and the owners of the interests in those entities. Unit Trust Z (the interposed trust) becomes the owner of all of the ownership interests (including the options) in both of the stapled entities. Exchanging members who owned units and shares in the stapled entities receive one unit in the interposed trust for every stapled security that they owned. The trustee of the interposed trust has advised that he considers one Unit Trust X option and one Company Y option represent approximately one tenth of an ownership interest in a stapled security just before the reorganisation. Therefore, for every 10 options that an exchanging member owns over units and shares in the stapled entities, they receive one unit in the interposed trust.Geoff owned 400 units in Unit Trust X with options to acquire a further 200 units, and 400 shares in Company Y with options to acquire a further 200 shares. The shares were stapled to the units, and the options were correspondingly stapled. He receives 420 units in the interposed trust - 400 for his 800 ownership interests in the stapled entities and 20 for his 400 options to acquire ownership interests. Geoff's percentage of the ownership interests in the interposed trust just after the completion time reasonably equates to his percentage of ownership interests in the stapled entities just before that time.

8.35 Just after the completion time, each exchanging member must have the same, or as nearly as practicably the same, proportionate market value of ownership interests in the interposed trust as the member had in the stapled entities before the completion time. This means that changes in the relative proportions of different kinds of ownership interests before the completion time are the same as the ownership interests after the completion time. [Schedule 8, item 6, subsection 124-1050(2)]

8.36 An anticipated reasonable approximation of the market value of ownership interests after the completion time is sufficient in working out whether an exchanging member complies with subsection 124-1050(2). [Schedule 8, item 6, subsection 124-1050(3)]

8.37 An anticipated reasonable approximation of market values of ownership interests may include valuations provided to exchanging members in scheme documents. [Schedule 8, item 6, subsection 124-1050(3)]

8.38 The member must be an Australian resident or a foreign resident at the completion time. If the member is a foreign resident:

·
some or all of their ownership interests in the stapled entities must have been taxable Australian property just before the completion time; and
·
their ownership interests in the interposed trust must be taxable Australian property just after the completion time.

[Schedule 8, item 6, subsection 124-1050(4)]

8.39 'Taxable Australian property' is defined in section 855-20 of the ITAA 1997. This provision ensures that assets cannot be rolled out of the Australian tax system.

Consequences of the roll-over for the exchanging members

8.40 If a member with post-CGT interests obtains the roll-over then the CGT consequences are as follows:

·
a capital gain or capital loss that a member makes from each of their ownership interests is disregarded [Schedule 8, item 6, subsection 124-1055(1)]; and
·
the first element of the cost base and reduced cost base of each of the member's ownership interests in the interposed trust is an amount that is reasonably attributable having regard to [Schedule 8, item 6, subsection 124-1055(2)]:

-
the total of the cost bases of all of their ownership interests in the stapled entities; and
-
the number, market value and character of their ownership interests in the interposed trust.

8.41 In some circumstances, the cost base of a member's ownership interests in the stapled entities would consist of a substituted market value cost base.

Example 8.2 To continue from Example 8.1, the total cost base for all of Geoff's ownership interest in the stapled entities was $2,310:

400 Unit Trust X units - $3 each
200 Unit Trust X options - $1 each
400 Company Y shares - $2 each
200 Company Y options - $0.55 each

All of his ownership interests were acquired after 19 September 1985. It is reasonable to aggregate the cost bases and allocate a cost base of $5.50 to each of his 420 units in the interposed trust that he receives under the reorganisation, that is $5.50 × 420 = $2,310.

8.42 If a member acquired all of their ownership interests in the stapled entities pre-CGT (ie, before 20 September 1985), they are taken to have acquired all of their ownership interests in the interposed trust pre-CGT. [Schedule 8, item 6, subsection 124-1055(3)]

8.43 If the member has both pre- and post-CGT interests in the stapled entities, the member is taken to have acquired some of their ownership interests in the interposed trust pre-CGT.

8.44 In determining the number of interests that are taken to have been acquired pre-CGT, the member should have regard to:

·
the number, market value and character of their ownership interests in the stapled entities; and
·
the number, market value and character of their ownership interests in the interposed trust.

[Schedule 8, item 6, subsection 124-1055(4)]

Example 8.3 Shares in Company P and units in Unit Trust Q are stapled together. Under a scheme for reorganising its affairs, a new trust, Unit Trust R will be interposed between the stapled structure and its members whereby the members exchange a share in Company P and a unit in Unit Trust Q together for a unit in Unit Trust R.Richard holds 1,000 shares in Company P and 1,000 units in Unit Trust Q. Under this scheme he will exchange his interests for 1,000 units in Unit Trust R.150 of Richard's interests in Unit Trust Q are pre-CGT.At the time of the scheme each share in Company P has a market value of $1 and each unit in Unit Trust Q has a market value of $4.50.The value of Richard's pre-CGT interests is $675 (ie, 150 units multiplied by a market value of $4.50).The value of his total interest in Company P and Unit Trust Q is $5,500 (ie, 1,000 units multiplied by a market value of $4.50 plus 1,000 units multiplied by a market value of $1).The proportion of Richard's total holdings which is pre-CGT is 0.1227 (ie, $675 divided by $5,500).As Richard receives 1,000 units in Unit Trust R, it would be reasonable for 122.7 of those units to be taken to be pre-CGT.As part of a unit cannot be pre-CGT and the remainder of the unit post-CGT, it would be reasonable for 123 of Richard's units in Unit Trust R to be taken to be pre-CGT interests.Alternatively, had the proportion of Richard's total investment which is pre-CGT been 0.1224, it would be reasonable for 122 of Richard's units in Unit Trust R to be taken to be pre-CGT interests.

8.45 The first element of the cost base and reduced cost base of each of the member's post-CGT ownership interests in the interposed trust is an amount that is reasonable having regard to:

·
the total of the cost bases of their post-CGT ownership interests in the stapled entities; and
·
the number, market value and character of their post-CGT ownership interests.

[Schedule 8, item 6, subsection 124-1055(5)]

Example 8.4 Shares in Company D and units in Unit Trust E are stapled together. Under a scheme for reorganising its affairs, a new trust, Unit Trust F will be interposed between the stapled structure and its members whereby the members exchange a share in Company D and a unit in Unit Trust E together for a unit in Unit Trust F.Kaye holds 100 shares in Company D and 100 units in Unit Trust E. Under this scheme she will exchange her interests for 100 units in Unit Trust F.The current market value of Company D's shares is $1.50 and the current market value of Unit Trust E's units is $7.The cost base of Kaye's shares in Company D is as follows: 50 shares have a cost base of $1.30, 20 shares have a cost base of $1.35 and 30 shares have a cost base of $1.40.The cost base of Kaye's units in Unit Trust E is as follows: 50 units have a cost base of $3.50, 20 units have a cost base of $5.10 and 30 units have a cost base of $5.50.The sum of Kaye's cost bases is as follows:

(50 × $1.30) + (20 × $1.35) + (30 × $1.40) + (50 × $3.50) + (20 × $5.10) + (30 × $5.50) = $576

As Kaye receives 100 units in Unit Trust F it will be reasonable for each interest to have a cost base of $5.76 (ie, $576 divided by 100 units).

Consequences of the roll-over for the interposed trust

8.46 The CGT consequences for the interposed trust in relation to the ownership interests in each of the stapled entities that the trustee of the interposed trust acquires under the scheme are as follows:

·
the trustee is taken to have acquired some ownership interests pre-CGT if some of the stapled entity's assets at the completion time were acquired pre-CGT; and
·
the number of ownership interests (worked out at the completion time) is the greatest possible (expressed as a percentage of all the ownership interests in the stapled entity acquired by the trustee) that does not exceed:

-
the market value of the stapled entity's assets it acquired pre-CGT; less
-
its liabilities,

expressed as a percentage of the market value of the stapled entity's assets less its liabilities. The amounts are to be worked out at the completion time. [Schedule 8, item 6, subsections 124-1060(1) to (3)]

8.47 The first element of the cost base and reduced cost base of each of the trustee's ownership interests in the stapled entity that is not treated by subsection 124-1060(3) as having been acquired pre-CGT, is a reasonable proportion of the total cost bases (as at the completion time) of the stapled entity's assets acquired post-CGT less its liabilities. [Schedule 8, item 6, subsection 124-1060(4)]

8.48 The cost base and the reduced cost base of ownership interests of the trustee of the interposed trust in respect of its ownership interests in each stapled entity will be established by applying section 124-1060. In applying section 124-1060, treat a liability that does not relate to any specific asset of a stapled entity as a liability in respect of all of the assets of the stapled entity. Further, if a liability relates to two or more of those assets, allocate the liability between those assets on a reasonable basis having regard to the market value of those assets. [Schedule 8, item 6, subsection 124-1060(5)]

8.49 An amount reflecting a membership interest of a unit holder in a trust is not a liability. Liabilities are to be determined at the completion time and not at the time of acquisition of assets.

Certain foreign holders are disregarded

8.50 It is a requirement of the roll-over, in the new trust case, that all the holders of ownership interests in the stapled entities acquire ownership interests in the new interposed trust.

8.51 However, issuing new ownership interests in Australian entities to foreign holders could in some cases contravene the laws of the foreign countries. This is normally dealt with by arranging for the new ownership interests to be issued to a sale agent, who then disposes of them, on behalf of the former foreign holders, and remits the net proceeds. For company restructures, such an arrangement is commonly known as a 'foreign share sale facility'. Similar arrangements are likely to be used for reorganisations of stapled entities, referred to here as a 'foreign sale facility'.

8.52 To ensure that holders of ownership interests in the stapled entities who receive ownership interests in the new interposed trust can obtain the CGT roll-over when a foreign sale facility is used, Subdivision 124-Q has the effect as if certain foreign holders are not exchanging members. [Schedule 8, item 6, subsection 124-1065(2)]

8.53 A foreign holder , as defined by section 9 of the Corporations Act 2001 , is a holder of securities whose address, as shown in the register which records the details of their holding, is a place outside Australia and the external Territories.

8.54 A foreign holder will be taken not to be an exchanging member if they own ownership interests in the stapled entities and:

·
the ownership interests are either disposed of to the interposed trust or cancelled;
·
an agent or nominee, appointed on behalf of the foreign holder, acquires new units and/or options, rights or similar interests in the interposed trust; and
·
the agent or nominee subsequently:

-
disposes of those ownership interests; and
-
gives the foreign holder an amount equal to the capital proceeds of the disposal less expenses.

[Schedule 8, item 6, subsection 124-1065(1)]

8.55 In some circumstances the agent or nominee may dispose of these interests on a pooled basis. That is, the agent or nominee may dispose of the interests together with other ownership interests that the agent or nominee acquired under the foreign sale facility.

8.56 In these circumstances the agent or nominee will be required to give the foreign holder of the ownership interests in the stapled entities an amount equal to their proportion of the capital proceeds ( less expenses). [Schedule 8, item 6, subparagraph 124-1065(1)(f)(ii)]

8.57 A foreign holder's proportion of the capital proceeds would be determined by reference to their ownership interests in the stapled entities relative to the total ownership interests of all the foreign holders in the stapled entities who receive capital proceeds from the agent or nominee.

Example 8.5 The Stapled Co Ltd (Stapled) and the Attached Unit Trust (Attached) are two entities stapled together. Stapled has 10,000 shares issued and Attached has 10,000 units. These are the only ownership interests.There are three foreign holders of ownership interests in the stapled entities:

·
Debbie holds 1,000 shares in Stapled and 1,000 units in Attached (10 per cent of the total ownership interests);
·
Kishma holds 1,500 shares in Stapled and 1,500 units in Attached (15 per cent of the total ownership interests); and
·
Lyn holds 500 shares in Stapled and 500 units in Attached (5 per cent of the total ownership interests).

Stapled and Attached propose to interpose a new unit trust - the Fastened Unit Trust (Fasten) - between themselves and the holders of ownership interests under an arrangement where its holders exchange one share in Stapled and one unit in Attached together for one unit in Fasten. However, as Debbie, Kishma and Lyn are unable to receive new units in Fasten a foreign sale facility is established with Jason as their agent.Fasten is interposed and the holders of ownership interests in the stapled entities exchange their ownership interests in Stapled and Attached for ownership interests in Fasten. Jason then acquires ownership interests in Fasten, on behalf of Debbie, Kishma and Lyn, and subsequently disposes of them on a pooled basis.Debbie's proportion of the capital proceeds would be determined by reference to her ownership interests in Stapled and Attached relative to the total holdings of Kishma, Lyn and herself (ie, the foreign holders who will receive capital proceeds from Jason).As the total holdings of Debbie, Kishma and Lyn totalled 30 per cent of Stapled and Attached, and Debbie held 10 per cent, she would be entitled to receive 33.33 per cent of the net capital proceeds from Jason (ie, 10/30).Similarly, Kishma would receive 50 per cent and Lyn would receive 16.67 per cent of the net capital proceeds.

Certain interposed trusts are not trading trusts

8.58 Without these amendments to Division 6C of the ITAA 1936, an interposed head trust that is a public unit trust would be a public trading trust, because it would be controlling an active trading business through its ownership of the subordinate company (or trust taxed as a company) which was formerly a part of the stapled group.

8.59 Under these amendments a public unit trust that is an interposed trust will not be a trading trust in relation to an income year if:

·
the trust is an interposed trust in relation to a scheme for reorganising the affairs of stapled entities (as referred to in the capital gains roll-over amendments in this measure) in relation to the year of income or an earlier year of income;
·
a roll-over was obtained by any entity under the roll-over amendments in this measure in relation to the scheme for the year of income or that earlier year of income; and
·
the trustee of the trust does not, at any time during the year of income carry on a trading business; or control, or be able to control, directly or indirectly, the affairs or operations of another entity that carries on a trading business, other than:

-
a company that was, before the scheme was completed, one of the formerly stapled entities;
-
a subsidiary of that company or an entity controlled or able to be controlled, directly or indirectly, by that formerly stapled company;
-
a trust whose trustee was, before the scheme for reorganisation was completed, assessed and liable to pay tax under Division 6B or 6C of the ITAA 1936 (ie, a trust taxed like a company) and that was, before the scheme was completed, one of the formerly stapled entities; or
-
an entity that is controlled or able to be controlled, directly or indirectly, by a formerly stapled trust that was taxed like a company.

[Schedule 8, item 4, section 102NA of the ITAA 1936]

8.60 Essentially, under these amendments a previously stapled company or a public unit trust that was taxed like a company (under Division 6B or 6C respectively), that is owned or controlled by the interposed trust, will be able to continue to operate as it had before the restructure, without the interposed trust being taxed as a company. The interposed trust will be able to own, or control, any previously stapled public unit trusts on the basis that they are not carrying on a trading business. [Schedule 8, item 4, section 102NA of the ITAA 1936]

8.61 Under a scheme for reorganising the affairs of the relevant stapled entities, the investors will exchange their ownership interests for ownership interests in the newly interposed trust, which may be a new trust or may be a trust that was formerly a stapled entity, but is now the interposed trust after the restructure. [Schedule 8, item 6, Subdivision 124-Q of the ITAA 1997]

8.62 As a result of the restructure, the interposed trust becomes the owner of the ownership interests in the stapled securities; or in the case where an existing trust becomes the interposed trust, it becomes the owner of the ownership interests in the other stapled entities.

8.63 This is demonstrated in Example 8.6.

Example 8.6 A group of stapled entities (Diagram 8.1) which consists of two trusts and a company choose to interpose a head trust such that the group's structure is now rearranged to provide investors with a single unit in the new head trust as opposed to holding a stapled security consisting of one unit in each of the two trusts and a share in the company (Diagram 8.2).Alternatively, the group of stapled entities may restructure, such that an existing public unit trust within the group assumes the head trust position (Diagram 8.3). This trust would then own the other trusts (if any) and also own the company that was part of the stapled group of entities before the restructure. Diagram 8.1: Before restructure

Before restructure

Diagram 8.2: After restructure - where a new head trust is interposed

After restructure - where a new head trust is interposed

Diagram 8.3: After restructure - where an original public unit trust of the stapled group is interposed

After restructure - where an original public unit trust of the stapled group is interposed

8.64 In addition, to facilitate the international competitiveness of Australian property trusts more generally, an amendment is made to Division 6C of the ITAA 1936 to allow the trustee of a public unit trust to acquire ownership interests in, or control, a foreign entity whose business consists primarily of investing in land outside Australia for the purpose, or primarily for the purpose, of deriving rent. [Schedule 8, item 3, subsection 102N(2) of the ITAA 1936]

8.65 In effect, these amendments will not cause a public unit trust to be a trading trust only because it has acquired ownership interests (including a controlling interest) in, or controls:

·
a foreign entity whose business (when considered together with the businesses of entities that the foreign entity controls or is able to control, directly or indirectly) consists primarily of investing in land outside Australia for the purpose, or primarily for the purpose, of deriving rent; or
·
a foreign entity controlled, or able to be controlled, directly or indirectly, by an entity covered by the dot point above.

This means that if a public unit trust acquires a US Real Estate Investment Trust whose business consists primarily of investing in land outside Australia for the purpose, or primarily for the purpose, of deriving rent, and the US Real Estate Investment Trust has a subsidiary that carries on a trading business, the public unit trust, while it may be taken to control the subsidiary, will not breach Division 6C. [Schedule 8, item 3, subsection 102N(2) of the ITAA 1936]

8.66 An amendment is also made to address the concern that a foreign entity that is a unit trust that is covered under this new provision is not again subject to the Division 6C rules because of the operation of subsection 102P(10). Subsection 102P(10) will not apply to a unit trust that is a foreign entity referred to in paragraph 8.65. [Schedule 8, item 5, subsection 102P(10) of the ITAA 1936]

8.67 This extension aids acquisitions of foreign landholding entities which might include some things other than 'eligible investment business', because foreign tax requirements and those of Division 6C may be different. For example, the tax rules in the US for a company to qualify as a US Real Estate Investment Trust allows some trading business, that is not allowed under the Division 6C rules (were it not for these amendments).

8.68 Because there is some doubt about whether Division 6B (which deals with corporate unit trusts) applies to a reorganisation of the kind contained in this measure, an amendment is made to section 102F to ensure that ownership interests in a unit trust or a company that is part of a scheme for reorganising the affairs of stapled entities referred to in this measure, are not property for the purposes of applying subsections 102F(1) and (2). Therefore, the shares in a previously stapled company which are given up for a unit in an interposed unit trust will not, by itself, be taken to trigger Division 6B of the ITAA 1936. [Schedule 8, item 1, subsection 102F(4) of the ITAA 1936]

Application and transitional provisions

8.69 The CGT roll-over amendments will apply in relation to CGT events that happen on or after 1 July 2006.

8.70 The other amendments apply to the 2006-07 year of income and later years of income.

Consequential amendments

8.71 Consequential amendments will also be made to Parts 3-1 and 3-3 of the ITAA 1997 to reflect the availability of this roll-over:

·
References to this roll-over will be added to Subdivision 112-B. Subdivision 112-B lists situations when the general cost base and reduced cost base rules may be modified [Schedule 8, items 7 and 8].
·
Reference to this roll-over will be added to Subdivision 115-D. Subdivision 115-D provides tax relief for shareholders in listed investment companies [Schedule 8, item 9].
·
A reference to Subdivision 124-Q will be added to the guide material of Division 124 [Schedule 8, item 10].
·
A reference to this roll-over will be added to the note in subsection 124-5(2) [Schedule 8, item 11].

8.72 Subsection 995-1(1) defines 'stapled entity' as having the meaning given by section 124-1045. [Schedule 8, item 12]


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