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Authorisation Number: 1012033819775

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Ruling

Subject: Income from eligible investment business

Question 1

Is the income received by the entity from licensing resource licenses, or the rights to access the resource under the resource access licenses, in connection with the leasing of land (which has access to the resource to which the resource access license relates) rent derived from investing in land, as referred to in the definition of eligible investment business in section 102M of the Income Tax Assessment Act 1936?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The entity is a managed investment scheme which invests in land, infrastructure, and resource assets in Australia. The entity derives income from leasing these assets to various enterprises. The assets are leased together as a package given that the carrying on of an enterprise (by the lessee or related party of the lessee) is conditional on obtaining access to the land as well as the associated infrastructure and resource entitlements (i.e. the land is not leased separately from the resource assets).

The entity currently holds resource access licenses (RALs) which it licenses (directly or indirectly) to the licensees in connection with the rental of land (being land which is connected to the source to which the RAL relates).

A RAL entitles its holder:

● to specified shares in the available resource within a specified management area or from a specified source (the share component), and

● to take the resource:

● at specified times, at specified rates or in specified circumstances, or in any combination of these, and

● in specified areas or from specified locations, (the extraction component).

RALs can be traded and transferred separately from any landholding.

Although RALs can be traded separately from any landholding, the RAL itself does not provide access to land for the purpose of accessing the resource.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6C,

Income Tax Assessment Act 1936 Section 102M,

Income Tax Assessment Act 1936 Subsection 102MB(1),

Income Tax Assessment Act 1936 Subsection 102N(1),

Reasons for decision

Summary

The income received by entity from licensing RALs, or the rights to access the resource under the RALs, in connection with the leasing of land (which has access to the resource to which the RAL relates) is rent derived from investing in land, as referred to in the definition of eligible investment business in section 102M of the ITAA 1936.

Detailed reasoning

Division 6C of the ITAA 1936 is concerned with whether the net income of a public unit trust in relation to an income year is more correctly that of a public trading trust, and therefore taxed at the corporate tax rate of 30%.

A public unit trust will not be a public trading trust, if it does not meet the definition of a trading trust (as provided by subsection 102N(1) of the ITAA 1936) due to its trustee not carrying on a trading business at any time during the income year, because its business consisted wholly of an eligible investment business.

The definition of eligible investment business provided by section 102M of the ITAA 1936 includes investing in land for the purpose, or primarily for the purpose, of deriving rent.

From the facts provided, the entity invests in both land and resource assets (i.e. RALs, or the rights to access the resource under the RALs) for the purposes of deriving rent (i.e. income from a lease). Land is defined by section 102M of the ITAA 1936 to include fixtures on land, but RALs or the rights to access the resource under the RALs are not considered to be fixtures as they are not affixed to the land and can be traded separately from any land interest.

The definition of investments in land for the purposes of Division 6C of the ITAA 1936 is however extended by subsection 102MB(1) of the ITAA 1936 as follows:

For the purposes of this Division, investments in moveable property, being property that is:

● incidental to and relevant to the renting of land; and

● customarily supplied or provided in connection with the rent of land; and

● ancillary to the ownership and use of land;

● are taken to be investments in land.

Therefore for a RAL, or a right to access the resource under a RAL, to be an investment in moveable property, it must first be determined to be property. Whilst property is not defined in the ITAA 1936, a number of cases have been considered by the Commissioner in relation to the meaning of property.

In Federal Commissioner of Taxation v. Orica Limited (formerly ICI Australia Limited) (1998) 194 CLR 500; 39 ATR 66; 98 ATC 4494 (as considered in Draft Taxation Ruling TR 2007/D10 Income Tax: capital gains: capital gains consequences of earnout arrangements), five members of the High Court endorsed the view of Kitto J in National Executors & Agency Co of Australasia v. Federal Commissioner of Taxation (1954) 91 CLR 540, at 583 that assignability is a sufficient, but not a necessary, attribute of property. Kitto J stated in that case that:

It may be said categorically that alienability is not an indispensable attribute of a right of property according to the general sense which the word 'property' bears in the law. Rights may be incapable of assignment, either because assignment is considered incompatible with their nature, as was the case originally with debts (subject to an exception in favour of the King) or because a statute so provides or considerations of public policy so require, as is the case with some salaries and pensions; yet they are all within the conception of 'property' as the word is normally understood ...

In McCaughey v. Commr of Stamp Duties (1945) 46 SR (NSW) 192 (as considered in Taxation Ruling 94/29 Income tax: capital gains tax consequences of a contract for the sale of land falling through), at 201 Jordan CJ said:

'The word "property" is used in different senses. It may denote either objects of proprietary rights, such as pieces of land, domesticated animals, and machines; or the proprietary rights themselves ... In common parlance it is usually employed in the former sense, but in the language of jurisprudence in the latter ... Property, in the sense of proprietary rights, may exist in relation to physical objects, or to intangible things such as debts or patent rights…

Therefore based on the interpretation of the courts, a RAL or a right to access the resource under a RAL, will be property because they can be assigned to another party and can be in the form of a proprietary right over a physical asset (i.e. a license to access a specified share or amount of the resource) or an intangible asset (i.e. a right to access the resource under a RAL).

Having determined that a RAL, or a right to access the resource under a RAL, is property, it is now necessary to determine whether or not they are moveable property for the purposes of subsection 102MB(1) of the ITAA 1936, and therefore taken to be investments in land for the purposes of section 102M of the ITAA 1936.

Based on a RAL, or a right to access the resource under a RAL, being leased together with the land, and their use being conditional with obtaining access to the land, it can be determined that such assets are moveable property for the purposes of section 102MB(1) of the ITAA 1936 as they are:

● incidental to and relevant to the renting of land

● customarily supplied or provided in connection with the renting of land, and

● ancillary to the ownership and use of land

● and therefore are taken to be investments in land for the purposes of section 102M of the ITAA 1936.

In conclusion, the income received by the entity from licensing RALs, or the rights to access the resource under the RALs, in connection with the leasing of land (which has access to the resource to which the RAL relates) is rent derived from investing in land, as referred to in the definition of eligible investment business in section 102M of the ITAA 1936.