Edited version of your written advice

Authorisation Number: 1051302642163

Date of advice: 6 November 2017

Ruling

Subject: Clean building managed investment trusts

Question 1

Will the Building qualify as a “clean building” under section 12-430 of Schedule 1 to the TAA 1953?

Answer

Yes.

Question 2

Under paragraph 12-425(1)(b) of Schedule 1 to the TAA 1953, will the Trustee of the Asset Trust hold the Building if, as the tenant of the Building, it sub-leases some or all of the Building?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

XX / XX / 20XX

Relevant facts and circumstances

1. An entity will be engaged by Entity A to develop the Building on land owned by Entity A pursuant to the Project Deed.

2. As part of the Project Deed, the entity must use best endeavours to construct a building that obtains a 6 Star Green Star Rating from the Green Building Council of Australia.

3. Construction of the Building is expected to commence on XX / XX / 201X or at a later date as specified in the Project Deed.

4. Entity A will grant a long term lease (“the Ground Lease”) to the Trustee of the Asset Trust at, or within 10 days after, the Date of Practical Completion. This is expected to be in 20XX.

5. The Trustee of the Asset Trust will sublease the majority of the Building to Entity A, with the remaining space available for subleasing to other entities under the Project Deed.

6. A total of 80% of the net lettable area (“NLA”) of the Building will be office space.

7. The Trustee of the Asset Trust will sublease 58% of the NLA of the Building to Entity A. Entity A’s use of the space will comprise:

a. Office space (44% of NLA)

b. Display space (11% of NLA), and

c. A digital workshop (3% of NLA).

8. The display space will be open to the general public and provide Entity A the opportunity to host events.

9. The main users of the digital workshop will be the tenants in the Entity A space. Other tenants in the Building will have access to the digital workshop.

10. Of the remaining 42% of the Building’s NLA:

a. a further 27% of NLA will be office space subleased to other businesses

b. shared office space used as a client floor for meetings and breakout rooms will comprise 9% of NLA, and

c. the remaining 6% of NLA will be retail and childcare facilities.

11. The Trustee of the Asset Trust is liable for all repairs and maintenance of the Building for the duration of the Ground Lease and the Project Deed.

Assumption

1. The Building will, at all relevant times, maintain at least a 5 Star Green Star rating as certified by the Green Building Council of Australia.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 section 12-425

Taxation Administration Act 1953 Schedule 1 section 12-430

Reasons for decision

Question 1

Will the Building qualify as a “clean building” under section 12-430 of Schedule 1 to the TAA 1953?

Summary

All of the requirements of section 12-430 of Schedule 1 to the TAA 1953 are met. Therefore, the Building will qualify as a clean building.

Detailed reasoning

Section 12-430 of Schedule 1 to the TAA 1953 provides the requirements for a building to qualify as a clean building.

Paragraph 12-430(1)(a) of Schedule 1 to the TAA 1953 requires that the construction of the building commenced after 1 July 2012. As construction has not yet commenced on the Building, this requirement is satisfied. Further, as construction of the Building has not commenced, subsection 12-430(2) of Schedule 1 to the TAA 1953 is not relevant to the current case.

Paragraph 12-430(1)(b) of Schedule 1 to the TAA 1953 requires that the building satisfies subsections 12-430(3) and 12-430(4) of Schedule 1 to the TAA 1953.

Subsection 12-430(3) of Schedule 1 to the TAA 1953 requires that the building is a commercial building that is any of, or a combination of any of, an office building, a hotel for use wholly or mainly to provide short term accommodation for travellers or a shopping centre. There are currently no regulations that have been made under paragraph 12-430(3)(b) of Schedule 1 to the TAA 1953.

The Explanatory Memorandum to the Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012 (Cth) (“EM”), which introduced section 12-430 of Schedule 1 to the TAA 1953, states the following with respect to the building use requirements:

1.32 For the purposes of these provisions, the meaning of office building, hotel and shopping centre will take their ordinary meanings.

1.33 An office building is a commercial building used to provide office space and associated facilities. Incidental uses, such as a child care centre, limited retail and food outlets will not exclude the building from being an office building. In each case, whether or not a building is considered to be an office building is a question of fact.

1.34 For example, a distribution centre that stores goods and has an office component is not an office building under ordinary concepts. This is regardless of whether the distribution centre is currently in use or not.

The Building will have at least 80% of its NLA as commercial office space. Of the remaining 20% NLA, 6% comprises retail and childcare facilities, and the remaining 14% consists of a display space and digital workshop.

Retail and childcare facilities are specifically referred to in the EM as incidental uses which do not exclude a building from being an office building. The percentage of NLA attributable to these facilities in the Building is incidental, being 6%.

In addition, paragraph 12-430(3)(a) of Schedule 1 to the TAA 1953 allows for a building to be a clean building where its use is a combination of an office building and retail. This further supports the position that the NLA attributable to retail facilities does not exclude the Building from being a clean building under the provision.

The display space and workshop are uses for a building not specifically contemplated in the EM. The question is whether these functions are “incidental uses” and do not disturb the prima facie conclusion that the Building is an office building within the meaning of subparagraph 12-430(3)(a)(i).

In Fuel Tax Ruling FTR 2008/1 Fuel tax: vehicle’s travel on a public road that is incidental to the vehicle’s main use and the road user charge (“FTR 2008/1”) the Commissioner considered the meaning of the phrase “incidental to” in the context of determining what constitutes “incidental use” of vehicles and fuel in regard to whether an entitlement to a fuel tax credit is available under the Fuel Tax Act 2006. The Commissioner first considered the dictionary definitions in paragraphs 140 and 141 of FTR 2008/1.

The Macquarie Dictionary relevantly defines incidental as:

1. Happening or likely to happen in fortuitous or subordinate conjunction with something else.

2. Incurred casually and in addition to the regular or main amount: incidental expenses. … .

…

5. Incidental to, liable to happen in connection with; naturally appertaining to.

The Australian Oxford Dictionary relevantly defines incidental as:

1. (often foll. by to) having a minor role in relation to a more important thing, event, etc. not essential.

The Commissioner continues in paragraph 145 of FTR 2008/1 by considering these definitions in the context of the fuel tax credit legislation:

The expression incidental to in the context of subsection 43-10(4) has a relational and comparative aspect. The relational aspect considers whether or not something is inessential or separable from the principal thing. The comparative aspect looks at the thing’s significance from a quantitative point of view. Both of these aspects have a role to play in determining whether travel is incidental to the vehicle’s main use.

In the context of the EM, the phrase “incidental use” is also intended to have a relational and a comparative aspect as it considers that “an office building is a commercial building used to provide office space and associated facilities.”

Both the display space and digital workshop meet the “relational” aspect of the term “incidental use”. Both of these functions are in support of the broader function being that of a commercial office building.

With respect to the comparative aspect, the display space, childcare facilities, digital workshop, and retail facilities take up 20% of the NLA. The remaining 80% of NLA is office space for both commercial tenants and Entity A. The dominant characterisation of the Building is that of an office building. The fact that 20% of the NLA is for other incidental purposes does not stop the Building from being considered an office building under ordinary concepts. It can be readily distinguished from paragraph 1.34 of the EM, which considers a distribution centre with a small office attached as not an office building under ordinary concepts.

The incidental uses of the Building, being not only a minor quantity of NLA, but also facilities that are intrinsically linked with the primary use of the Building as an office building subleased to Entity A and other tenants, are such that they should not exclude the Building from being an office building, and therefore a commercial building under subsection 12-430(3) of Schedule 1 to the TAA 1953.

Subsection 12-430(4) states that the building must have, and maintain at all times a 5 Star Green Star rating as certified by the Green Building Council of Australia. This Ruling is made on the basis that this requirement is satisfied.

The Building is therefore a clean building under section 12-430 of Schedule 1 to the TAA 1953.

Question 2

Under paragraph 12-425(1)(b) of Schedule 1 to the TAA 1953, will the Trustee of the Asset Trust hold the Building if, as the tenant of the Building, it sub-leases some or all of the Building?

Summary

The Trustee of the Asset Trust will be considered to “hold” the Building for the purposes of paragraph 12-425(1)(b) of Schedule 1 to the TAA 1953 if, as the tenant of the Building, it sub-leases some or all of the Building to other entities.

Detailed reasoning

The intent behind the clean building MIT regime is to encourage investment in new energy efficient commercial buildings by reducing withholding tax rates on fund payments made from eligible MITs. This benefit is restricted to income derived solely from investing in clean buildings.

Paragraph 12-425(1)(b) of Schedule 1 to the TAA 1953 states:

A trust is a clean building managed investment trust in relation to an income year if during the income year:

…

(b) it holds one or more clean buildings (including the land on which the buildings are situated)

The term “hold’ is not defined for the purposes of the clean building MIT regime. No further guidance is provided in the EM. The word should therefore take its ordinary meaning having regard to the context in which it appears in the legislation.

The term “hold” or “holds” is defined in the Macquarie Dictionary to relevantly include “have ownership or use of, keep as one’s own, occupy”. It therefore has an element of possession and control.

In A.C.N 007 764 249 Pty Ltd (in liquidation); Smith v. Deputy Commissioner of Taxation & Ors (Unreported, Federal Court of Australia, Mansfield J, 5 May 1997), at 57, the word “holds” was considered in the context of the Deputy Commissioner of Taxation, on issue of a notice, requiring a person who “holds or may subsequently hold” money for or on behalf of a taxpayer who has a tax debt to pay the amount of the debt to the Deputy Commissioner. In that context, “holds” was considered by Mansfield J to have a:

“sense of holding or possession of the money with the practical power (but for the notice) to effect the disposition or application of the money to the taxpayer or in accordance with the taxpayer’s instructions.”

In interpreting the meaning of “holds” here, the statutory context which needs to be considered is that paragraph 12-425(1)(b) of Schedule 1 to the TAA 1953 only applies to a trust that is a withholding MIT (see paragraph 12-425(1)(a) of Schedule 1 to the TAA 1953), which means that it must be a managed investment trust because of paragraph 275-10(1)(a) of the ITAA 1997. This requires the trust to satisfy subsection 275-10(3) of the ITAA 1997, one of the requirements of which is not being a trading trust (paragraph 275-10(3)(b) and subsection 275-10(4) of the ITAA 1997). This means that a managed investment trust must carry on eligible investment business (EIB) as defined in section 102M of the ITAA 1936.

Paragraph (a) of the definition of EIB states “investing in land for the purpose, or primarily for the purpose, of deriving rent”. The term “land” is defined in section 102M of the ITAA 1936 to include an interest in land and fixtures on land. An interest in land is not defined for the purposes of Division 6C of the ITAA 1936. However, the use of the verb “includes” indicates a legislative intention for the word “land” to have an expansive meaning.

Section 2B of the Acts Interpretation Act 1901(Cth) (AIA 1901) states that in any Act:

"land " includes messuages, tenements and hereditaments, corporeal and incorporeal, of any tenure or description, whatever may be the estate or interest in them.

Section 2 of the AIA 1901 states that the AIA applies to all Acts (including the ITAA 1936) unless a contrary intention appears. Given the legislative intention to give “land” a broad meaning in section 102M of the ITAA 1936, there is nothing to indicate that the AIA definition of “land” is inconsistent and cannot be used in interpreting the definition of land in section 102M of the ITAA 1936.

The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1985, which inserted Division 6C of the ITAA 1936, confirms Parliament’s intention to include a lease of land as an interest in land. It states in relation to clause 16:

"land" is defined to include an interest in land; it will thus include real estate and leasehold estate”

Accordingly, a leasehold interest in land constitutes land for the purpose of paragraph (a) of the definition of EIB in section 102M of the ITAA 1936.

Given this statutory context, it would be inappropriate to interpret the general word “holds” as having a stricter meaning (in terms of the nature of the proprietary interest) for a clean building managed investment trust, than the meaning that applies to an ordinary managed investment trust in the context of Division 6C of the ITAA 1936, without any indication that Parliament intended to restrict the meaning of ‘holds’ in this way.

In other taxation contexts, the term “hold” is defined to include leasehold interests. For example, the table in section 40-40 of the ITAA 1997 provides that the holder of a depreciating asset can include the lessee, the owner of a quasi-ownership right, the economic owner, and/or the legal owner. In addition, for the purposes of Division 40 of the ITAA 1997, there can be more than one holder of an asset.

Entity A, as the legal owner of the land (and hence any fixtures on the land), can be considered to hold the Building for the purposes of Division 40 of the ITAA 1997. By extension, a legal owner would be clearly contemplated to be able to hold an asset for the purposes of the clean building MIT regime.

This, however, does not preclude the Trustee of the Asset Trust from also holding the Building. An entity may hold an asset under items 1, 2 and 3 of the table in section 40-40 of the ITAA 1997 if it has a leasehold interest in the asset. As a lessee of the Building, during the term of the lease, the Trustee of the Asset Trust has exclusive possession of the Building subject to any covenants. This general sense of possession and control by the very nature of a lease, as well as the fact that Division 40 of the ITAA 1997 in considering “hold’ envisages multiple holders, and specifically those that have quasi-ownership rights such as a leasehold interest, as potential holders, is sufficient to conclude that the Trustee of the Asset Trust can also be taken to hold the Building for the purposes of the clean building MIT regime.

To summarise, the Trustee of the Asset Trust is considered to “hold” the Building for the following reasons:

● The Trustee of the Asset Trust holds a leasehold interest in the Building through the Ground Lease, thus granting it exclusive possession of the Building for the term of the Lease subject to any covenants.

● The term of the Ground Lease is long term. The Trustee of the Asset Trust therefore holds the Building for a time period that exceeds the time period that capital works deductions under Division 43 of the ITAA 1997 are available for the initial construction cost of the Building.

● The Trustee of the Asset Trust is liable for all repairs and maintenance of the Building for the life of the Ground Lease and Project Deed.

● The Trustee of the Asset Trust can be described as the “economic owner” of the Building, having been granted a quasi-ownership right (being the lease) which specifically includes the right to sub-lease.

● Entity A holding legal title to, and a reversionary interest in, the Building does not preclude the Trustee of the Asset Trust from also being a holder of the Building.

● The intent behind the clean building MIT regime is to encourage investment in new energy efficient commercial buildings. It would be inconsistent with the intent of the regime to interpret “hold” narrowly to only include entities that construct new clean buildings, or entities that are the legal owner of the land and any fixtures on the land (including a clean building). It would be inappropriate to deny clean building MIT treatment merely because the Trustee of the Asset Trust only holds a leasehold interest in the Building.

Therefore, the Trustee of the Asset Trust holds the Building for the purposes of paragraph 12-425(1)(b) of Schedule 1 to TAA 1953.

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