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Authorisation Number: 1012592243899

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Ruling

Subject: Income tax: Eligible investment business

Question 1

Will the income earned by the taxpayer from the lease of land to a related entity (including the use of specific licenses) be regarded as passive income from investing in land, as referred to in the definition of ‘eligible investments business' in section 102M of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Will the Declaration Deed result in the income, in respect of a number of agreements, being derived by the taxpayer?

Answer

No

This ruling applies for the following periods:

1 July 2013 - 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The taxpayer is a currently a public trading trust for tax purposes.

The taxpayer conducts farming activities and has access to specific licences.

The taxpayer's operating assets (excluding land, buildings and specific licences) used in its business will be transferred to a newly created related entity which has the same trustee as the taxpayer.

The taxpayer and a related entity will enter into a lease in respect of the land, buildings and specific licences used to carry on its business.

The lease granted to the related entity in respect of the right to use the land is envisaged to incorporate use of the specific licences.

The trustee of the taxpayer entered into a number of agreements with a third party under which it agreed to perform certain activities.

Under the agreements, the assignment of the rights and obligations cannot be granted without written consent of the other party and the third party cannot unreasonable withhold it approval to any assignment.

The agreements between the trustee of the taxpayer and the third party cannot be assigned to trustee of the related party at law as the trustee cannot legally assign the benefit or obligation of that agreement to itself.

The trustee made a Declaration Deed in relation to the numerous agreements in which is declared that it would stop holding the agreements in its capacity as trustee of the taxpayer and start holding the agreements in its capacity as trustee of the related entity.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 102M

Income Tax Assessment Act 1936 section 102MB

Income Tax Assessment Act 1936 subsection 102MB(1)

Income Tax Assessment Act 1936 paragraph 102MB(1)(a)

Income Tax Assessment Act 1936 paragraph 102MB(1)(b)

Income Tax Assessment Act 1936 paragraph 102MB(1)(c)

Reasons for decision

Question 1

Will the income earned by the taxpayer from the lease of land to a related entity (including the use of specific licenses) be regarded as passive income from investing in land, as referred to in the definition of ‘eligible investments business' in section 102M of the Income Tax Assessment Act 1936 (ITAA 1936)?

Detailed reasoning

The term ‘eligible investment business' is defined in section 102M of the ITAA 1936 and includes (relevantly) investing in land for the purpose, or primarily for the purpose, of deriving rent. The taxpayer leasing the land to the related entity to carry on the business constitutes investing in land for the purpose of deriving rent and is therefore an ‘eligible investment business' as defined.

Whether the specific licences are taken to be an ‘investment in land' (for the purposes of Division 6C of the ITAA 1936) is determined under subsection 102MB(1) of the ITAA 1936. Broadly speaking, subsection 102MB(1) of the ITAA 1936 requires consideration of the following:

● whether the specific licences are ‘property';

● whether the specific licences are ‘moveable property'; and

● whether the specific licences (being moveable property) are incidental and relevant to the renting of land, customarily supplied or provided in connection with the renting of land and ancillary to the ownership and use of the land.

The terms ‘property' and ‘land' as they appear in section 102MB of the ITAA 1936 are defined in section 102M of the ITAA 1936. Property includes:

…a chose in action and also any estate, interest, right or power, whether at law or in equity over property.

Land includes:

…an interest in land and fixtures on land.

Are the specific licences property?

Section 102M of the ITAA 1936 provides the definition of ‘property' (for the purposes of Division 6C of the ITAA 1936) includes (relevantly) any right at law or in equity in or over property.

The licences provide a right to water and is therefore ‘property' for the purposes of section 102MB of the ITAA 1936.

Are the licences moveable property?

The term ‘moveable property' is not expressly defined in the ITAA 1936 and would therefore take its ordinary meaning.

The established principle in property law is property joined or attached to land in such a way that it cannot be removed without damaging the land becomes part of the land and is classified as a fixture on land. This principle is reflected in the definition of ‘land' in Division 6C of the ITAA 1936. Moveable property' can therefore be considered as property not joined or attached to the land.

Generally speaking, the relevant water rights Acts provide the holders of specific licences with entitlements to use water from specific water sources. The licences are therefore not part of the land and, as such, are considered ‘moveable property'

The licences (being moveable property) will therefore be taken to be investments in land under subsection 102MB(1) of the ITAA 1936 where they are:

● incidental to and relevant to the renting of land (paragraph 102MB(1)(a))

● customarily supplied or provided in connection with the renting of land (paragraph 102MB(1)(b)); and

● ancillary to the ownership and use of land (paragraph 102MB(1)(c)).

Are the licences incidental to and relevant to the renting of land?

The land you rent out is farm land. Access to water is incidental to and relevant to the renting of land for that purpose. Paragraph 102MB(1)(a) of the ITAA 1936 is satisfied.

Are the licences customarily supplied or provided in connection with the renting of land?

Access to water is customarily supplied or provided in connection with the renting of farming land. Paragraph 102MB(1)(b) of the ITAA 1936 is satisfied.

Are the licences ancilliary to the ownership and use of land?

Access to water is ancillary to the ownership and use of land used for farming purposes. Paragraph 102MB(1)(c) of the ITAA 1936 is satisfied.

As the requirements in subsection 102MB(1) of the ITAA 1936 are satisfied, the licences are therefore taken to be an investment in land under subsection.

Summary

The income earned from leasing land and the specific licences to a related entity is passive in nature as the activities constitute an investment in land for the purpose of deriving rent and amount to an ‘eligible investment business' as defined in paragraph 102M(a) of the ITAA 1936.

Question 2

Will the Declaration Deed result in the income, in respect of a number of agreements, being derived by the taxpayer?

Detailed reasoning

In order to determine which entity derives income for tax purposes, analysis of the contractual and legal obligations of the parties to the arrangement is required.

Under the numerous agreements, the trustee of the taxpayer was contracted to provide certain services to a third party that resulted in the income being derived by the taxpayer.

The facts state that the numerous agreements between the taxpayer and the third party cannot be legally assigned to the related entity on the basis that the trustee is the trustee of both the taxpayer and related entity and this led to executing a Declaration Deed.

As a result, the trustee made a legally effective Declaration Deed under which it declared that it would cease to hold the numerous agreements in its capacity as responsible entity for taxpayer and start to hold the agreements in its capacity as responsible entity for the related entity as at a time stipulated in the deed.

As the Declaration Deed is legally effective, the taxpayer will not derive the income provided, in respect of the agreements, while the Declaration Deed remains in effect.

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