ATO Interpretative Decision

ATO ID 2003/325

Income Tax

Non-share distribution
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

In the absence of subsection 974-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) applying, can distributions in a trust which is not taxed as a company under either Division 6B or Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936) be characterised as a non-share distribution?

Decision

No. In the absence of subsection 974-70(2) of the ITAA 1997 applying, distributions in a trust which is not taxed as a company under either Division 6B or Division 6C of the ITAA 1936 cannot be characterised as a non-share distribution.

Facts

Trust 1 raises funds by issuing units to investors. Trust 1 uses these funds to acquire units in Trust 2. The units entitle Trust 1 to all of the income and capital of Trust 2 except in certain exceptional circumstances.

Trust 2 uses the funds to subscribe for a non-share equity interest. Any non-share dividend received by Trust 2 will be distributed to Trust 1 which in turn distributes its net income to its investors.

Trust 1 and Trust 2 are not taxed as companies under either Division 6B or Division 6C of the ITAA 1936. The interests are not treated as giving rise to an equity interest in a company under subsection 974-70(2) of the ITAA 1997.

Reasons for Decision

Section 995-1 of the ITAA 1997 provides that 'non-share distribution has the meaning given by section 974-115.'

The meaning of non-share distribution in section 974-115 of the ITAA 1997 is prefaced by the words 'a company'. Section 974-115 provides that:

A company makes a non-share distribution to you if:

(a)
you hold a non-share equity interest in the company; and

(b)
the company:

(i)
distributes money to you; or

(ii)
distributes other property to you; or

(iii)
credits an amount to you;

as the holder of that interest.

Trust 1 and Trust 2 cannot make a non-share distribution as they are not companies, nor do the related scheme provisions apply to treat the arrangement as giving rise to an equity interest in a company.

Date of decision: 30 April 2003

Year of income: Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
section 974-115
section 995-1

Keywords
Debt equity borderline

Siebel/TDMS Reference Number: 3550222

Business Line: Public Groups and International

Date of publication: 15 May 2003

ISSN: 1445-2782

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