Edited version of private ruling

Authorisation Number: 1011648295231

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Ruling

Subject: managed investment schemes

This ruling applies to:

A Ltd as responsible entity for the Property Syndicate ('the syndicate')

Question 1

Are the ownership interests in the syndicate unitised?

Answer

Yes.

Question 2

Will the interest remain unitised after the constitution of the syndicate is altered by proposed amendments for approval by a general meeting of the members?

Answer

Yes.

Question 3

Will the division of units, as contemplated in the step described in the Stapling Arrangement, produce ordinary income or statutory income for the purposes of calculating the 'net income of the trust estate' of the taxpayer during the income year ending on 30 June 2011?

Answer

No.

Question 4

Will the execution by the applicant of the agreement by which all units in the taxpayer are 'stapled' result in the inclusion of any amount of the net income of the trust estate of the taxpayer during the income year ending on 30 June 2011?

Answer

No.

This ruling applies for the following period

1 July 2010 to 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

A Ltd is the responsible entity ('RE') for a number of registered managed investment schemes ('MIS') under the Corporations Act 2001 (The Corporations Act) including the syndicate. Collectively, they are referred to as the 'property syndicates':

The RE is undertaking a restructure of some of these syndicates by stapling the ownership interests.

The syndicate is one of the participants and it holds commercial property from which rental income is derived.

It is proposed that the ownership interests in the syndicate will be stapled with other MIS.

The method of achieving this is one that causes each of the MIS to have its ownership interests to be unitised. These units are to be adjusted to the same value and then stapled to each other.

Relevant legislative provisions

Income Tax Assessment Act 1936 Div 6

Income Tax Assessment Act 1936 Div 6C

Income Tax Assessment Act 1997 Div 104

Income Tax Assessment Act 1997 Subdivision 108-A

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Questions 1 and 2

The terms of the syndicate are governed by the written constitution which is the undated constitution of the syndicate.

The syndicate begins on the date ASIC registers the syndicate under Part 5C.1 of the Corporations Act.

The clauses of the constitution define and explain various terms including:

Interest of Owners

Register

Owner

Syndicate Interest

Syndicate Assets

Fund

Real Property

It is also noted that the constitution defines the words 'unit' as units in the trust, 'unitholders' means the holders of units, 'trust constitution' means constitution for the trust but these words are not used in the constitution of which the definition sections forms part.

The syndicate is also subject to Part 5C of the Corporations Act as it is a managed investment scheme.

Subsection 601FC of the Part 5C.2 of the Corporations Act 2001 provides:

(2) [Property held on trust] The responsible entity holds scheme property on trust for scheme members.

Section 9 of the Corporations Act contains the Dictionary of the Corporations Act. It states in part:

scheme property of a registered scheme means:

(a) contributions of money or money's worth to the scheme; and

(b) money that forms part of the scheme property under provisions of the Act or the ASIC Act; and

(c) money borrowed or raised by the responsible entity for the purposes of the scheme; and

(d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and

(e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b) (c) or (d).

The Law

The joint judgment of the High Court in CPT Custodians Pty Limited v. Commissioner of State Revenue [2005] HCA 53 at paragraph 15 stated, '"unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning'.

There is however a consistent approach to what constitutes a unit trust which can be found in authoritative works. This definition reiterates the concept that the beneficial interest of the trust is held in 'units'. Units are expressed and defined as part of the whole beneficial interest of the trust (or in some circumstances of the whole beneficial interest of a particular kind). Other than this 'unit trusts' are, like all other trusts, subject to the terms of the impressed or stated trust and to the application of the law of trusts. The consistency of this approach can be viewed from the following extracts from commentators on the subject.

Ford: Principles of the Law of Trusts Loose-Leaf Service 2006 at [1690] states:

   The expression "unit trust" is a term of convenience and not a term of art capable of having legal consequences. Its only significance is as a label for a trust under the terms of which the benefit to beneficiaries is divided into units. Such a trust does not attract rules different from those that apply to trusts in which the beneficial interest is not so divided. For example, the question whether beneficiaries under a unit trust have an equitable proprietary interest in trust property depends on the terms of the trust, as in the case of any other trust, on the terms of the particular trust: CPT Custodians Pty Limited v Commissioner of State Revenue (2005) 221 ALR 196: 70 ALJR 1724; [2005] HCA 53.

JD Heydon MJ Lemming, Jacob's Law of Trusts in Australia, LexisNexis Butterworths 7th Edition 2006 at [310]

   Unit trusts are an extension into the field of commerce of the typical family trust (where settlors transfer property to a trustee on trust for their children in equal shares). ... In the case of unit trust, the scheme property is divided into a large number of units, which may, subject to their terms, be issued redeemed and traded publicly and privately . (Emphasis added)

Robert l. Pritchard, Chapter 18 'Unincorporated Joint Ventures', The Law of Public Company Finance , ed Austin and Vann, The Law Book Company Ltd 1986, p 397

   (ii) A unit trust is a variation of the ordinary trust. Its distinguishing feature is that the beneficial interest in the trust property is divided into units which may be independently dealt with by the holders.

H.A.J. Ford, Chapter 15 'Public Unit Trusts', The Law of Public Company Finance , ed Austin and Vann, The Law Book Company Ltd 1986, p 400

   The Unit Holder as a Beneficial Owner

   ... But in a unit trust the trustee's ownership of the property of the enterprise is not beneficial ownership. The beneficial interest is in the unit holders in fractions proportional to the number of units held by each of them. Under the terms of the deed, as usually drawn, a unit does not confer any interest in any particular part of the trust fund or any particular investment but only such interest in the trust fund as a whole as is conferred on a unit under the deed.

Accordingly, where beneficiaries are made entitled to a share of a beneficial interest under a trust, such as an interest in the income and capital, or in either one of these, and which entitlement is measured by reference to a fixed standard of measurement howsoever described (for example a percentage or a fraction or a fixed formula), then whether or not the deed itself labels the interests 'units' the beneficial interest have been unitised and the trust would be a 'unit trust' for the purpose of considering the application of Division 6C of the Income Tax Assessment Act 1936. As one example, where the phrase 'pro-rata' is used in specifying the relative interests of beneficiaries then this will mean the interest of the beneficiary of the trust will be identified as a proportion of, or share of, the whole of a beneficial interest (or class of interest) and in most occasions of this nature the holder of the beneficial interest will be a unit holder and the trust will be a unit trust.

Conclusion

On the basis of the operation of these provisions each member of this managed investment scheme holds its beneficial interest in the statutory trust of the scheme property as a unitised interest.

The draft amending deed poll does not alter or change this unitisation of the beneficial interest.

Question 3

The application describes steps which give all units the same value. This means there will be a division of the number of units to reach a market value of this value but the relative or percentage interests of the members in the syndicates will remain unchanged. The application also advises that draft calculations have been prepared based on market valuations and net tangible assets as of a certain date. These calculations will be updated for valuations and the Stapling Arrangement will proceed on this basis.

Where that division otherwise results in the unit holder having a partial interest in a unit their entitlement will be rounded down according to the application.

The taxpayer has advised that the relevant amounts involved in rounding process constitutes merely a 'nominal amount.'

The issue of additional units to unit holders as the result of the division of their units will not give rise to income being derived by the trustee of the trust under ordinary concepts for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

The taxpayer does not 'derive' any 'income' in the form of a present (or future), right, asset or financial advantage from the division of the units under Step 6 as described. The retention of a nominal amount from the rounding process does not have the character of income and in any event is merely nominal.

Accordingly, the division of units does not give rise to any income under ordinary concepts under section 6-5 of the ITAA 1997 for the year of income ended 30 June 2011.

The division of units does not result in the taxpayer acquiring any CGT asset, as defined in Subdivision 108-A of the ITAA 1997. Furthermore, no CGT event under Division 104 of the ITAA 1997 happens in respect of the taxpayer (as distinguished from the unit holders) from the division of the units.

In particular paragraph 104-35(5)(d) of the ITAA 1997 provides that CGT event D1 does not happen if the trustee of a unit trust issues units in the trust.

Question 4

Under the steps taken in the stapling arrangement, the execution of the stapling deed will in effect ensure that interests in each of the Stapled Property Syndicates can only be traded together. The stapled interests will trade as if they were a single security and will not be able to be traded or dealt with separately.

The Stapling Deed that is proposed to be entered into during the year of income ended 30 June 2011 merely precludes the trading of units in the syndicate except where the unit holder simultaneously trades specified interests in other property syndicates. The syndicate's Stapling Deed does not give rise to the syndicate deriving any 'income' in the form of a present or future, right, asset or financial advantage from the stapling of its units under the deed. Furthermore, the stapling does not result in the syndicate acquiring a CGT asset, as defined in Subdivision 108-A of the ITAA 1997 and no CGT event under Division 104 of the ITAA 1997 happens in respect of the syndicate (as distinguished from its unit holders) from the stapling of its units.

Therefore the execution of the stapling deed will not result in the inclusion of any amount in the net income of the trust estate of the syndicate during the year of income ended 30 June 2011.