Edited version of private ruling

Authorisation Number: 1011480515678

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Ruling

Subject: categorisation of trust

Question

Is the Trust a unit trust for the purposes of Division 6C of the Income Tax Assessment Act 1936?

Advice/Answers

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2005

Relevant facts and circumstances

The trustee was previously issued a private ruling in relation to the same question.

That ruling was based on the facts set out below:

According to the trust deed of the Trust, a fixed trust, there is only one beneficiary (the beneficiary).

The beneficiary is a tax exempt entity pursuant to Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997). The beneficiary will have a vested indefeasible interest in both the income and capital of the Trust.

As per the copy of the trust deed provided, the beneficiary will not have the right to sell down or transfer their interest in the Trust until such time as there is a call to wind the trust up.

The Trust intends to enter into a partnership with another fixed trust to establish a business (the Business).

The benefit of the Trust investing via a fixed trust structure is that it reduces the risk that the beneficiary could be personally sued by a creditor of the business.

The applicant for this current request has stated that the facts are unchanged from the previous ruling, except in one respect. That change is that the association has now established a business.

The applicant provided a copy of the relevant documentation.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 102M,

Income Tax Assessment Act 1936 section 102-R and

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Summary

The question is whether the Trust is a unit trust for the purposes of Division 6C of the Income Tax Assessment Act 1936?

The Commissioner considers that the trust is not a unit trust.

Detailed reasoning

Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936) only applies to public trading trusts which, by definition, must be unit trusts (section 102R of the ITAA 1936).

There is no definition of a unit trust for the purposes of Division 6C of the ITAA 1936 generally. However, a unit trust is of the same essential nature as any other trust, except that in the unit trust the beneficial ownership is divided into a number of units which are held by the beneficiaries, instead of named beneficiaries or a class of beneficiaries who are entitled to specified or discretionary interests in an ordinary family trust. Section 102M of Division 6C of the ITAA 1936 contains a definition of 'unit' and 'unit holders'. Both of these terms however are defined exclusively 'in relation to a prescribed trust estate' which in turn leaves the term 'unit trust' undefined.

Jacobs' Law of Trusts in Australia, 5^th ed, Butterworths, Sydney 1986 notes, at paragraph 314, page 59, that a unit trust 'may take as many forms as human ingenuity can devise'.  There are however two broad categories of unit trusts - private unit trusts and non-private unit trusts. In relation to non-private unit trusts, Jacob's Law of Trusts in Australia, p 59 states:

…basically what happens is that a manager (usually a private company) will purchase property and vest it in a trustee (usually a professional trustee company) initially on trust for the manager on the terms of a trust deed, which divides the trust property into a large number of shares (or units).  The manager then sells the units to the public at a price based on their market value plus a service charge to cover the expenses involved, the trustee's remuneration and a profit to the manager.  The manager then creates a market in the units by undertaking to repurchase and resell the units on demand; additionally, the units may be sold to the public on the open market, where they may or may not be listed on a stock exchange.  Additional units may be created in the future, if further property is acquired by the trust.

The main difference between a non-private and a private unit trust is that a right to participate in a private unit trust is not made to the public. Arguably therefore, any trust under which the beneficiaries enjoy fractional rights or interests to participate in either the income or capital, or more commonly, both income and capital of the trust, appear to fall within the concept of a private unit trust.

A fixed trust is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997):

a trust is a fixed trust if persons have fixed entitlements to all of the income and corpus of the trust.

As the Trust has one beneficiary, and that beneficiary has a fixed entitlement to all the income and capital of the trust, the Trust is clearly a fixed trust.

However, there are no units or unit holders, which is one of the main criteria for the existence of a unit trust. Therefore, the Commissioner does not consider the Trust to be a unit trust to which Division 6C of the ITAA 1936 will apply.

The establishment of the business does not materially change the nature of the trust, and the establishment of that business is within the trustee's powers as set out in the trust deed.

By agreement with the applicant, this ruling has been made for a period of five income years, following on from the previous ruling.

The applicant has relied on the Commissioner's view as set out in the relevant ATO ID. That ATO ID is still current and supports the applicant's position.