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Ruling

Subject: Income Tax: Public Unit Trust - Section 102P of the ITAA 1936

Question 1

Is the Fund a public unit trust pursuant to section 102P of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Relevant facts and circumstances

The Fund is a unit trust which is unlisted. Its units are offered to the public by way of prospectus.

There are more than 50 Unit holders in the Fund in the income year.

The Trustee is responsible for the management and administration of the Fund.

The constitution of the Fund states that division of the class and reclassification of units is allowed.

Unit holders of the Fund can apply to withdraw from the scheme subject to certain conditions.

The Trustee can also choose to provide withdrawal offers to unit holders.

The Fund advises that the top 20 unit holders held more that 75% of the shares for the entire period.

No distributions have been made to Unit holders in the year.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 102P

Income Tax Assessment Act 1936 section 102R

Reasons for decision

To be classified as a public trading trust, the Fund needs to satisfy all of the requirements of paragraph 102R(1)(b) of the ITAA 1936.

Paragraph 102R(1)(b) states that:

A unit trust is a public trading trust in relation to a relevant year of income if:

(a) …; or

(b) where the relevant year of income is the year of income commencing on 1 July 1988 or a subsequent year of income:

(i) the unit trust is a public unit trust in relation to the relevant year of income;

(ii) the unit trust is a trading trust in relation to the relevant year of income;

(iii) either of the following conditions is satisfied

(A) the unit trust is a resident unit trust in relation to the relevant year of income

(B) the unit trust was a public trading trust in relation to a year of income preceding the relevant year of income; and

(iv) the unit trust is not a corporate unit trust within the meaning of Division 6B in relation to the relevant year of income.

Subparagraph 102R(1)(b)(i), requires that for the relevant income year, a unit trust must be classed as a public unit trust. A public unit trust is defined in subsection 102P(1) and it states:

102P(1) [Qualifying unit trusts] For the purposes of this Division, but subject to the succeeding provisions of this section, a unit trust is a public unit trust in relation to a year of income if, at any time during the year of income:

(a) any of the units in the unit trust were listed for quotation in the official list of a stock exchange in Australia or elsewhere;

(b) any of the units in the unit trust were offered to the public; or

the units in the unit trust were held by not fewer than 50 persons

Some guidance on the policy intent of section 102P is stated in the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1985 (EM), where it is stated:

Section 102P: Public unit trusts

Section 102P sets down a number of tests to be considered in determining whether a unit trust will be a "public unit trust" for the purposes of Division 6C. It also contains safeguards against arrangements that might otherwise defeat the purpose of the amendments. These will ensure that a unit trust which may otherwise come within the scope of Division 6C does not escape its operation by arranging specially to be put beyond the tests for determining whether a unit trust is a public unit trust. Other safeguards will ensure that public unit trust status does not apply in relation to unit trusts that are not public in nature.

You have confirmed the Fund has more than 50 members. You therefore satisfy subsection 102P(1) of the ITAA 1936.

However, while the qualification in subsection 102P(1) of the ITAA 1936 is met, it is subject to specific safeguards. Of specific relevance in this case is subsection 102P(4) of the ITAA 1936.

Subsection 102P(4) states that:

102P(4) [Unit trusts deemed not public unit trusts] Subject to subsection (5), a unit trust that, but for this subsection and subsection (7), would be a public unit trust in relation to a year of income by virtue only of subsection (1) shall be deemed not to be a public unit trust in relation to the year of income if, at any time during the year of income, one person or persons not more than 20 in number held, or had the right to acquire or become the holder or holders of, a unit or units in the unit trust that entitled the holder or holder thereof to not less than 75% of:

(a) the beneficial interests in the income of the unit trust; or

(b) the beneficial interests in the property of the unit trust.

The EM says of this subsection:

Subsection 102P(4) sets out circumstances in which a unit trust that would otherwise be a public unit trust in relation to a year of income, because of the operation of subsection (1) (but not subsection 2) of this section, is not to be treated as a public unit trust for the purposes of Division 6C. Subject to the operation of subsection (5), such a unit trust will not be a public unit trust if at any time during the year of income 20 or fewer persons held or had the right to acquire units in the trust entitling them to 75% or more of the beneficial interests in the income or property of the trust.

This subsection has two conditions. The first of these is if 20 or less people held or had entitlements to hold 75% or more of the income of the trust, then the fund would not be a public unit trust. The second condition requires 20 or less people held or had entitlements to hold 75% or more of the property of the fund, then the fund would not be a public unit trust.

The Fund has only one class of units. The top 20 unit holders held more than 75% of the shares for the entire period. There was consequently a concentration in ownership of units for the whole income year. The Fund satisfies 102P(4) of the ITAA 1936 and would therefore be taken not to be a public unit trust in the 2010-11 income year subject to subsection 102P(5) of the ITAA 1936..

The Commissioner has discretion under subsection 102P(5) of the ITAA 1936 which provides that:

102P(5) [Unit trust deemed public unit trust] Subject to subsection (7), where by virtue of subsection (4), a unit trust would, but for this subsection, be deemed not to be a public unit trust in relation to a year of income by reason that, at any time during the year of income, one person or persons not more than 20 in number held, or had the right to acquire or become the holder or holders of, the unit or units referred to in subsection (4) and the Commissioner is of the opinion that, having regard to:

(a) the length of the period or the aggregate of the lengths of the periods in the year of income during which one person or persons not more than 20 in number held, or had the right to acquire or become the holder or holders of, the unit or units referred to in subsection (4); and

(b) any other matter that the Commissioner considers relevant,

it is reasonable that the unit trust should be treated as a public unit trust in relation to the year of income, the unit trust shall be deemed to be a public unit trust in relation to the year of income.

The EM says of subsection 102P(5):

Subsection 102P(5) bears on the operation of subsection (4). It will over-ride the operation of that subsection by allowing the Commissioner to treat a unit trust as a public unit trust in relation to a year of income if, for only a short time during the year of income, the unit trust is closely held in terms of subsection (4). This will safeguard against any attempt to cloak a unit trust that has the real character of a public unit trust as other than public by fulfilling the test in subsection (4) for a minimal period.

Briefly stated, subsection 102P(5) will allow the Commissioner to deem a unit trust to be a public unit trust notwithstanding the fact it has satisfied the test contained in subsection 102P(4). .

However, the operation of subsection 102P(5) is further subject to conditions outlined in subsection 102P(7) which states that:

102P(7) [Unit trust deemed not public unit trust] Subject to subsection (8), a unit trust that, but for this subsection, would be a public unit trust in relation to a year of income by virtue only of subsection (1), shall be deemed not to be a public unit trust in relation to that year of income if:

(a) not less than 75% of the total of money paid or credited by the trustee of the unit trust during the year of income to unit holders as unit holders was paid or credited to one person or persons not more than 20 in number; or

(b) by reason of:

(i) any provision in the instrument by which the trust was created, or any contract, agreement or instrument authorising the variation or abrogation of the rights attaching to any of the units in the unit trust or relating to the conversion, cancellation, extinguishment or redemption of any such units;

(ii) any contract, agreement, option or instrument under which a person has power to acquire a unit or units in the unit trust; or

(iii) any power, authority or discretion in a person in relation to the rights attaching to any of the units in the unit trust,

the rights attaching to any of the units in the unit trust were, at any time during the year of income, capable of being varied or abrogated in such a manner (notwithstanding that they were not in fact varied or abrogated in that manner) that:

(iv) units in the unit trust that entitled the holder or holders thereof to not less than 75% of

(A) the beneficial interests in the income of the unit trust; or

(B) the beneficial interests in the property of the unit trust

would have been held by one person or persons not more than 20 in number;

(v) not less that 75% of the total of money paid or credited by the trustee of the unit trust during the year of income to unit holders as unit holders would have been paid or credited to one person or persons not more than 20 in number; or

(vi) in the case where no money was paid or credited by the trustee of the unit trust during the year of income to unit holders as unit holders - if money had been so paid or credited by the trustee of the unit trust during the year of income, not less than75% of the amount of that money would have been paid or credited to one person or persons not more than 20 in number.

not less that 75% of the total of money paid or credited by the trustee of the unit trust during the year of income to unit holders as unit holders would have been paid or credited to one person or persons not more than 20 in number; or

in the case where no money was paid or credited by the trustee of the unit trust during the year of income to unit holders as unit holders - if money had been so paid or credited by the trustee of the unit trust during the year of income, not less than75% of the amount of that money would have been paid or credited to one person or persons not more than 20 in number.

The EM says of subsection 102P(7):

Subsection 102P(7) is complementary to subsection (3) and will apply to deem a unit trust not to be a public unit trust where 75% or more of the income or property of the trust is paid to, or is capable of being required to be paid to, 20 or fewer persons, not withstanding that those persons might not hold 75% or more of the units in the trust.

To paraphrase, under subsection 102P(7), if either of the following two conditions are satisfied, the unit trust is deemed not to be a public unit trust.

· The first condition is if 75% of the total money paid or credited by the trustee was paid or credited to 20 or fewer people.

· The second condition is if the trust deed is capable of being amended so that 20 or fewer unit holders could hold 75% of either the trust property or the net income of the trust.

The first condition was not satisfied in the 2010-11 income year. There were no distributions payable for the income year.

The Constitution of the Fund allows for the consolidation, division or reclassification the units. It also provides for the issue of different classes of units and the division of units into different classes.

As such, the second condition is satisfied and would therefore result in the Fund being deemed not to be a unit trust by virtue of subsection 102P(7) of the ITAA 1936.

However, subsection 102P(7) is further subject to the exception in subsection 102P(8) which states that:

"102P(8) [Variation of rights] A unit trust shall not be deemed by subsection (7) not to be a public unit trust in relation to a year of income by reason that rights attaching to any of the units in the unit trust were, at any time during the year of income, capable of being varied in the manner mentioned in paragraph 7(b) if the Commissioner is of the opinion that the person or persons who were able to vary the rights in that manner intended not to vary the rights in that manner during the year of income.

The EM says of subsection 102P(8):

By subsection 102P(8), which has a similar operation to subsection (6), it is proposed that a public unit trust not be able to acquire non-public status by entering into arrangements to invoke the operation of subsection (7).

In this case, the trust was set up to provide a regular income stream to unit holders. It is considered unlikely that the entitlement to the capital of the trust would ever be varied by the trustee.

The Commissioner is of the opinion that it was never intended to vary the rights in the requisite manner as set out in paragraph 102P(7)(b) of the ITAA 1936 in the 2010-11 income year. Therefore, subsection 102P(7) of the ITAA 1936 will not operate to deem the Fund not to be a public unit trust..

Application to the discretion in subsection 102P(5) of the ITAA 1936.

The Commissioner must consider the period of time in which there was a concentration in ownership of the units and any other matters he considers relevant in determining whether it is reasonable to treat the Fund as a public unit trust for the income year.

Period of concentration in ownership

The EM provides more specific guidance by stating that subsection 102P(5) of the ITAA 1936 overrides the operation of subsection 102P(4) of the ITAA 1936 if for only a short time during the year of income the trust is closely held.

In this case the concentration of ownership is closely held for the entire period. The Commissioner does not consider this period as a "short time".

Other relevant matters

The Commissioner considers the actions of the Trustee to be relevant in the decision on whether to treat the Fund as being a public unit trust in the income year.

In addition, subsection 102P(5)(b) gives the Commissioner scope to consider any other relevant matters in the examination of the Funds status.

It is acknowledged that adverse economic and environmental conditions may have contributed to the lack of investors.

The Trustee had the responsibility to ensure the Fund remained a public unit trust as stated in the constitution.

While external environmental and economic conditions were not favourable, the Trustee allowed unit redemptions which resulted in a concentration in ownership and the loss of public unit status.

Given the importance of being a public unit trust, it is reasonable to expect that the Trustee would have taken, at the time, precautions to ensure public unit trust status was kept.

The Commissioner considers the actions of the Trustee resulted in the concentration in ownership. The Commissioner concludes that the other relevant circumstances do not support the exercise of the discretion to treat the Fund as being a public unit trust in the income year.

eing a public unit trust in the 2010-11 income year.

ble Entity to be relevant in the decision on whether to treat the Fund as

Conclusion

In exercising his discretion in subsection 102P(5) the Commissioner has regard to what is considered reasonable. In this case the economic climate and the individual circumstances are recognised, however, these factors are an inherent risk associated with the Fund's activity.

While the Commissioner is sensitive to these matters and given the period of time and actions of the Trustee, the Commissioner will not exercise his discretion to allow the Fund a public unit trust status per subsection 102P(5) of the ITAA 1936. Therefore pursuant to section 102P of the ITAA 1936, the Fund is not a public unit trust in the 2010-11 income year.