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Edited version of your written advice
Authorisation Number: 1051283035879
Date of advice: 15 September 2017
Ruling
Subject: Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936)
Question 1
Will Division 6C of the ITAA 1936 apply to the trust?
Answer
No.
This ruling applies for the following periods:
1 July 2017 to 30 June 2018
1 July 2018 to 30 June 2019.
1 July 2019 to 30 June 2020.
1 July 2020 to 30 June 2021.
1 July 2021 to 30 June 2022.
1 July 2022 to 30 June 2023.
1 July 2023 to 30 June 2024.
1 July 2024 to 30 June 2025.
1 July 2025 to 30 June 2026.
1 July 2026 to 30 June 2027.
1 July 2027 to 30 June 2028.
1 July 2028 to 30 June 2029.
The scheme commences on:
1 July 2017
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
● The Company is a not for profit organisation and is income tax exempt.
● The Company and their Partner (“The Partner”) are progressing a tender to become the supplier of “Company B”.
● The Partner is an Australian private company and not tax exempt.
● The proposed structure for the Company and the Partner is to establish a trust (“the Trust”) which will contract with the government and through which Company B will operate, assuming the tender is successful. The Company and the Partner will be the beneficiaries of this trust, each holding 50% of the shares in the trust. The trustee has declared the Trust over $10 provided by a settlor.
● It is intended that the Trust will be funded by loans (both third party loans and loans from the Beneficiaries/ entities associated with the beneficiaries).
● Relevant terms of the draft deed for the Trust include:
n Clause X: No beneficiary is permitted to transfer, assign or otherwise deal with its interest in the income or capital of the Trust fund. Notwithstanding anything contrary in this deed, this clause is irrevocable and may not be amended, modified or replaced by the trustee.
n Clause Y: The trustee may not declare that a beneficiary is to be removed as a beneficiary or that a beneficiary’s interest in the income or capital of the Trust Fund is amended in any way for the purposes of this deed. Notwithstanding anything to the contrary in this deed, this clause is irrevocable and may not be amended, modified or replaced by the trustee.
n Clause Z: With the consent of the beneficiaries, the trustee may, by deed or written instrument, add to, vary, delete or revoke any provisions of this deed (other than those that are stated to be irrevocable), including any provisions which confer powers, authorities and discretions on the trustee, except that any such addition, variation, deletion or revocation must not:
n (a) amend the definition of beneficiaries set out in the Trust Deed (that the beneficiaries are the Company and the Partner);
n (b) vary a beneficiary’s entitlement to the income or capital of the trust;
n (c) extend the vesting date; or
n (d) vary the nature of the trusts created by this deed.
● The trust satisfies all other Division 6C requirements apart from being a unit trust in that it meets the definitions of a public trust, a resident trust and a trading trust.
Relevant legislative provisions
Income Tax Assessment Act 1936 Division 6C
Reasons for decision
Question 1
Will Division 6C of the ITAA 1936 apply to the trust?
Summary
The trust is not a unit trust due to the interests of the beneficiaries being unable to be cancelled, extinguished or redeemed by processes akin to the cancellation, extinguishment or redemption of shares in a company.
Detailed reasoning
The term ‘unit trust’ is not defined within the legislation.
The recent high court ruling in Elecnet (Aust) Pty Ltd v FC of T [2016] HCA 51 (“Elecnet”) considered the definition of a unit trust for the purposes of Division 6C. The majority stated that there was no difference between the meaning of a unit trust for the purposes of Division 6C and the common usage of the expression ‘unit trust’.
The majority stated that the purpose of Division 6C is to treat unit trusts for tax purposes as analogous to the relationship between companies and shareholders. This means that a ‘unit trust’ would be made up of units that are able to be regularly cancelled, extinguished or redeemed by processes akin to the cancellation, extinguishment or redemption of shares in a company
In the present case, clauses X and Y of the trust deed prohibit the cancellation, extinguishment or redemption of each beneficiary’s interests in the capital and income of the prospective trust. Given the findings in Elecnet, these clauses warrant that the trust would not be a unit trust for the purposes of Division 6C.
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