ATO Interpretative Decision

ATO ID 2002/242

Income Tax

Fixed trust operated by a local government entity
FOI status: may be released

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is a fixed trust operated by a local government entity a unit trust for the purposes of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

No. A fixed trust operated by a local government entity is not a unit trust and therefore the provisions of Division 6C of the ITAA 1936 do not apply.

Facts

The local government entity is a tax exempt entity under section 50-25, item 5.1 of the Income Tax Assessment Act 1997 (ITAA 1997). The local government entity proposes to establish a trust in order to separate the ownership and management of an investment portfolio from its other assets so as to better manage the portfolio.

The trustee of the proposed trust will be a private company. The trustee will be the owner of the assets of the proposed trust.

The local government entity will be the only investor in the proposed trust. It will also be the sole beneficiary of the proposed trust and will have a vested indefeasible interest in both the income and capital of the proposed trust.

The local government entity will not have the right to sell down or transfer its interest in the proposed trust until such time as it calls for the trust to be wound up.

Reasons for Decision

A unit trust is a trust in which the ownership is divided into a number of units which are held by the beneficiaries. However, the only beneficiary of the proposed trust is the local government entity. The main criteria for the existence of a unit trust (i.e., unitholders with fractional interests) will not be present. Therefore, the proposed trust will not a unit trust but, rather, would be a fixed trust.

Division 6C of the ITAA 1936 only applies to a unit trust. The trust proposed by the local government entity will not be a unit trust. Consequently, Division 6C will not apply to any income that the proposed trust may earn.

Date of decision: 30 January 2002

Year of income: Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
Division 6C

Income Tax Assessment Act 1997
section 50-25

Keywords
Unit trusts
Property trusts
Trading trusts
Public trading trusts
Tax exempt entity

Siebel/TDMS Reference Number: DW338063

Business Line: Public Groups and International

Date of publication: 22 March 2002

ISSN: 1445-2782

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