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Advice

Subject: Division 6C of the ITAA 1936 and public trading trusts

Question

Will the Fund (Trust) be a public trading trust for the purposes of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Advice

Yes.

This advice applies for the following period:

Year ending 30 June 2012.

The arrangement commences on:

Year beginning 1 July 2011.

Relevant facts and circumstances

Company A is a private Australian company that is a resident for Australian tax purposes.

Company A is proposing to become the trustee of the Trust (Trustee) which is to be settled in due course.

In anticipation of establishing the Trust, the applicant has prepared a draft trust deed (Trust Deed) and draft Information Memorandum, copies of which have been provided.

It is intended that the Trust will act as an investment vehicle for Australian and foreign investors pursuant to the terms of the Trust Deed.

The manager of the Trust will be Company B (Manager).

The Trust will primarily invest in a focused portfolio of:

· licenses, both Australian and offshore (Licenses); and

· Australian and offshore entities which own licenses (License Companies).

Accordingly, it is expected that the Trust will derive income and gains from the following:

· leasing income (from leasing the Licenses);

· dividend income from the License Companies;

· interest income from cash deposits and loans to the License Companies; and

· disposal of investments.

The applicant has advised that the Trust will be a public unit trust and a resident unit trust, but not a corporate unit trust, for the purposes of paragraph 102R(1)(b) of the ITAA 1936.

Investment in the Trust will only be open to clients of Company A. At any given time, different classes of units (with different rights and entitlements) may be on issue.

The applicant proposes that, pursuant to the following main clauses of the Trust Deed, the powers and duties of the Trustee and Manager will be as follows:

· The Trustee will hold the trust assets on trust for unit holders

· The Manager will be appointed as manager of the trust assets by the Trust Deed. In this regard, the Trustee has not selected, appointed nor granted any power to, the Manager. Rather, the Manager attains its powers independently of the Trustee;

· The Trustee has no control over the Manager in the performance of the Manager's duties under the Trust Deed. In this regard, the Trustee must comply with all instructions given to it by the Manager with respect to the trust assets

· The Trustee has the power to operate the Trust (excluding the management of trust assets and liabilities) only. Such powers include the issue, acquisition, disposal, redemption and/or cancellation of units. In this regard, the Trustee has no obligation with respect to the trust assets other than those arising by virtue of the Trustee holding the trust assets on trust for unitholders;

· The Manager's duties include doing all the things necessary regarding the investment and management of the trust assets. In this respect, the Manager has absolute discretion as to the investment and management of the trust assets

· The Manager has all the powers which are reasonably necessary or which it considers desirable for it to carry out its functions and duties under the Trust Deed, including those listed in the Trust Deed. In particular, where the Trust invests in shares, the voting power with respect to such shares, lies with the Manager and not with the Trustee; and

· The Trust Deed provides no power for the termination of the Manager.

The Trustee, at the direction of the Manager or any of the License Companies, may borrow monies to fund the acquisition of Licenses and incur interest expenses.

The Manager will be entitled to a monthly management fee, payable from the assets of the Trust, of 1-2% per annum of the value of the investments as at the time the management fee is calculated.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Division 6C

Income Tax Assessment Act 1936 Section 102M

Income Tax Assessment Act 1936 Section 102N

Income Tax Assessment Act 1936 Section 102R

Income Tax Assessment Act 1936 Section 102S

Reasons for decision

Division 6C - Introduction

Division 6C of the ITAA 1936 (comprising sections 102M to 102T of the ITAA 1936) treats certain trusts, known as public trading trusts, as companies. The trustees of such trusts are taxed at the company rate and distributions to beneficiaries are taxed as dividends. Provided that trusts confine their investments to 'eligible investment business' as defined in section 102M of the ITAA 1936 (that is, certain 'passive-style' investments such as investing in rental land or equities) Division 6C of the ITAA 1936 will not apply and the trust will retain the right to be taxed under normal trust rules.

Is the Trust a Public Trading Trust?

The definition of 'public trading trust' is set out in section 102R (and more specifically, for present purposes, in paragraph 102R(1)(b)) of the ITAA 1936. Paragraph 102R(1)(b) of the ITAA 1936 states:

102R Public trading trusts

(1) 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 commending on 1 July 1988 or a subsequence 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 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.

The applicant has submitted that the Trust will satisfy subparagraphs 102R (1)(b)(i), (iii) and (iv) of the ITAA 1936. As such, the Trust will be a public trading trust if it satisfies subparagraph 102R(1)(b)(ii) of the ITAA 1936, that is, if the Trust is a trading trust in relation to the relevant year of income.

Trading trust

The term 'trading trust' is defined in subsection 102N(1) of the ITAA 1936, which states:

102N Trading trusts

(1) For the purposes of this Division, a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee:

(a) carried on a trading business; or

(b) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business.

Subsection 102N(1) of the ITAA 1936 is a test that determines the status of a trust. The test, in determining whether a trust is a trading trust, looks to the trustee of the trust. If the trustee satisfies either of paragraphs 102N(1)(a) or (b) of the ITAA 1936 , the trust is a trading trust. Therefore, to apply the test to a trust, it is crucially important to identify the trustee of the trust.

Trustee

The word 'trustee' is not specifically defined for the purposes of Division 6C of the ITAA 1936. However, subsection 6(1) of the ITAA 1936 does define the term 'trustee' as follows:

6 Interpretation

(1) In this Act, unless the contrary intention appears:

trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

(a) an executor or administrator, guardian, committee, receiver, or liquidator; and

(b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

The definition of 'trustee' includes not only the entities ordinarily understood to be a trustee but also every other person that satisfies the definition. In this respect, the statutory definition extends the ordinary meaning of the term. As such, in deciding if a trust is a trading trust, it is necessary to identify, in addition to the trustee appointed by the parties, every other person that answers the definition of trustee.

In this case, the trustee appointed by the parties, Company A, is the Trustee. As the Trustee does not satisfy paragraphs 102N(1)(a) or (b) of the ITAA 1936, it is necessary to examine:

· whether there is any other person that answers the statutory definition; and

· whether that person satisfies either paragraph 102N(1)(a) or (b) of the ITAA 1936.

1. Is there any person that satisfies the definition of trustee?

The Manager is appointed by the Trust Deed as the manager of the Fund Assets and is obligated to 'do all things necessary regarding the investment and management of the Fund Assets' with 'absolute discretion as to … the investment and management of the Fund Assets'. The Trust Deed sets out various powers and duties of the Manager in the Trust Deed.

It is apparent that the Manager is obligated and empowered to perform various functions in relation to the investment and management of the Fund Assets. This raises a question whether the Manager, in performing these functions, is to act in a fiduciary capacity. If so, the Manager is a person that satisfies paragraph (b) of the statutory definition of the term 'trustee' in subsection 6(1) of the ITAA 1936.

The term 'acting in any fiduciary capacity' is not defined and therefore takes its ordinary meaning within its use in a particular legislative context. The term 'fiduciary capacity' or 'fiduciary relationship' is difficult to define and the High Court stated in Breen v Williams [1996] HCA 57 (Breen v Williams) 'the law has not, as yet, been able to formulate any precise or comprehensive definition of the circumstances in which a person is constituted a fiduciary in his or her relationship with another'.

However, there are accepted categories of fiduciary relationship. Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 (Hospital Products) at 96 lists partners, agents and principals, employers and employees, companies and directors and solicitors and clients as accepted fiduciary relationships. Of course, the relationship between trustees and beneficiaries is added to the list as Gibb CJ in Hospital Products stated at 69:

Furthermore, the High Court in Breen v Williams, after reviewing various authorities, did identify the following as pointing towards, though not determining, the existence of a fiduciary relationship:

However, the categories of fiduciary relationship are not closed and the courts have identified various circumstances that, if present, point towards, but do not determine, the existence of a fiduciary relationship. These circumstances, which are not exhaustive and may overlap, have included: the existence of a relation of confidence; inequality of bargaining power; an undertaking by one party to perform a task or fulfil a duty in the interests of another party; the scope for one party to unilaterally exercise a discretion or power which may affect the rights or interests of another end; and a dependency or vulnerability on the part of one party that causes that party to rely on another.

As the above extract clearly states, the categories of fiduciary relationship are not closed and therefore the Manager may be acting in a fiduciary capacity if the circumstances under which the Manager manages the Fund Assets display enough fiduciary characteristics to make it a fiduciary.

The Federal Court in Australian Securities Commission v AS Nominees Ltd (1995) 18 ACSR 459 (AS Nominees) did have an opportunity to apply the above points to a manager of a unit trust. This case involved three companies - ASN, Ample and Securities (all of which were founded by Mr Windsor) - operating a number of trusts (superannuation funds (the SIPs) and unit trusts (the Ample Trusts)). ASN and Ample operated as trustee companies of the trusts whereas Securities (which was controlled directly by Mr Windsor) acted as manager of the trusts. In holding that Securities, as the manager of the trusts, was in a fiduciary relationship with the investor-beneficiaries, Finn J stated the following:

Whether or not Securities is in a fiduciary relationship with the beneficiaries of the SIPs and/or the Ample trusts is a matter of some legal significance given the level of its involvement in the transactions to be considered.

It is the case that Securities has acted as a manager for both the SIPs and the Ample trusts. By manager I mean the party who sought out both investors in, and investments for, the trusts.

Turning directly to the fiduciary question. My preferred approach is to resolve it by reference to what Securities in fact did for the trusts and to the context in which this occurred. The ASC [Australian Securities Commission] has submitted that Securities, in any event, is in a fiduciary relationship with the investor-beneficiaries. That conclusion is one with which I agree for the following reasons.

When one has regard (i) to the functions actually performed for the trusts by Windsor who is Securities' alter ego (reference will be made to these in later analyses of the transactions); (ii) to the level of responsibility for identifying and securing trust investments in fact conceded to Windsor by the boards of ASN and Ample; (iii) in the case of SIP1 and SIP3, to the terms of the respective trust deeds and of the "manager's" undertakings in them; (iv) to the appreciation Windsor must reasonably be taken to have had of the vulnerability of the trusts to Securities' actions; and (v) to the awareness he must reasonably be taken to have had that the function Securities was performing was for the benefit of the trust beneficiaries - the conclusion in my view is irresistible that Securities was in a fiduciary relationship with the beneficiaries of the respective trusts in rendering services to them.

The more prominent of the criteria which have been endorsed or relied upon in case law in this country for identifying fiduciary relationships - (i) undertaking: see Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 72 per Gibbs CJ and 96-7 per Mason J; (ii) vulnerability to another's power or vulnerability necessitating reliance: Hospital Products Ltd v United States Surgical Corp at 142 per Dawson J; Mabo v State of Queensland (No 2) 175 CLR 1 at 200-1 ; 107 ALR 1 per Toohey J; and (iii) reasonable expectation: Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543- when applied to the factors I have identified above, confirm in my opinion the conclusion I have reached. Securities is so circumstanced vis-a-vis the beneficiaries of the various trusts of ASN and Ample that the beneficiaries of each individual trust are entitled to expect that Securities will act in the interests of those beneficiaries to the exclusion of its own or any third party's interests, in its dealings for or on behalf of that trust. On the various criteria I have noted above see generally Glover, Commercial Equity: Fiduciary Relationships, ch 3. This being a clear case it is unnecessary to examine those criteria and their present application in any detail.

Finn J expressly stated that the manager, who sought out both investors in, and investments for, the trusts, was in a fiduciary relationship with the beneficiaries of the respective trusts in rendering services to them. As such, AS Nominees is a clear authority establishing a fiduciary relationship between the manager of a unit trust and its beneficiaries. If the facts of the present case are not materially different from those of AS Nominees, it can be concluded that the Manager has a fiduciary relationship with the Members.

In deciding whether AS Nominees can apply to the present case, the first consideration is whether the Manager is a party that seeks out both investors in, and investment for, the Trust. This issue should be resolved, as stated by Finn J, not only by the express terms and conditions of the Trust Deed, but also by circumstances under which the various functions are performed and to be performed by the Manager. The Manager is the party who has and will seek out investors as it has issued the Information Memorandum, which contains an offer and invitation to invest in the Trust together with information relevant to potential investors. Furthermore, the Manager is the party who is obligated and empowered to perform various functions related to the investment and management of the Fund Assets. Therefore, the Manager is a manager to which the conclusion made by Finn J can apply.

The next consideration is whether the present case displays the factors that are indicative of the existence of a fiduciary relationship. It appears that the present case displays most of the factors Finn J identified above. To be more specific, the following factors are of particular relevance:

· The functions to be performed by the Manager for the Trusts:

There is no doubt that the Trust Deed creates a trust. A trust is 'an equitable obligation binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation.' According to this definition, it is the trustee that must be under the equitable obligation.

The Trustee, even if appointed as a trustee by the Trust Deed, is under no such equitable obligation because its obligation under the Trust Deed is limited to holding the legal title of the Funds Assets for the Members. Other than holding the legal title, the Trustee is under no equitable obligation and all the duties and obligations related to the dealing with the Fund Assets are with the Manager. This shows that the Manager is under an obligation to perform most of the functions that would otherwise be performed by a trustee. In other words, the sum total of the functions performed by the Trustee and the Manager is equal to normal functions performed by a trustee. In such a situation, the Manager should be taken to have made an undertaking to manage the Fund Assets in the interests of the Members.

· Vulnerability to another's power or vulnerability necessitating reliance:

Expressed by Toohey J in Mabo v The State of Queensland [No 2] (1992) 175 CLR 1, 'the source of the [fiduciary] obligation … is precisely the power to affect the interests of a person adversely'.

The Trust Deed gives The Manager an unfettered discretion as to the management of the Fund Assets contributed by the Members and the Trustee must follow the directions of the Manager in respect of this. This places the Members in 'a position of disadvantage or vulnerability … which causes him [the Members] to place reliance on the other [the Manager] and requires the protection of equity'.

This aspect of the fiduciary characteristic was expressly endorsed by McLelland J in Australian Fixed Trusts Pty Ltd v Clyde Industries Ltd [1959] SR (NSW) 33, who stated:

I have come to the conclusion that as a matter of construction that the custodian trustee and, so far as may be relevant the managers, would be responsible to the [unit] holders for any improper exercise of power and for any breaches of duty not essentially different from responsibility of trustees to beneficiaries under many common forms of trust instruments. In many common forms beneficiaries would not be empowered to interfere directly with the management of the trust property by the trustees and would be confined to taking action in relation to abuse of power or breach of duty.

· The terms of the Trust Deed:

The Trust Deed imposes various duties on the Manager. For example, it must act honestly, efficiently and fairly and must carry out its obligations under the Trust Deed to the standard that could reasonably be expected of a competent investment management professional in relation to global financial market. These duties are not only consistent with the fiduciary obligations but also confirm the existence of a fiduciary relationship.

· The awareness the Manager must reasonably be taken to have that the function it performs is for the benefit of the Members:

The Manager is not a mere agent or entity appointed by the Trustee to carry out certain functions on behalf of the Trustee. It is 'the source and origin' of the Trust according to Hope J.A. in Parkes Management Limited v Perpetual Trustee Co & PT Ltd (1977) 3 ACLR 303 (Parkes Management) who stated:

The deed did not simply provide for the creation of a trust, the appointment of a trustee, and the employment by the trustee of some person as manager, as might occur in other forms of trust. The manager was the source and origin of the trust, and subject to what might be regarded as supervision by the trustee, substantially carried out the trust. In effect, the manager was the entrepreneur of an investment scheme, which contemplated that both it, and those who contributed money to the scheme, should derive financial benefit. … To the unit holders, the identity of the manager must have been a matter of considerable significance. To the manager, its office was the source of valuable rights.

The only factual difference that Parkes Management has from the present case is that the manager was subject to supervision of the trustee. In the present case, the Manager is under no such supervision. However, this factual difference does not prevent the above extract from being applied to the present case. The Manager is 'the source and origin' of the Trust and the 'entrepreneur' of the Trust, which contemplated that both the Manager and the Members should derive financial benefit. Therefore, the Manager, as source and origin of the Trust, must be aware, or taken to be aware, that the function it is to perform under the Trust Deed is for the benefit of the Members.

As early as 1987, well before Finn J created the authority of AS Nominees in 1995, the above conclusion was recognised by the Companies and Securities Law Review Committee, which stated:

The fact that the manager's powers under a normal public unit trust deed are original rather than being derived from the trustee poses a question as to the relationship of the manager to the unitholders. Insofar as the manager enjoys original discretions as to investment of trust funds and other matters affecting the interests of unitholders, it is arguable that the manager owes fiduciary duties to the unitholders.

Having regard to the above factors identified, the conclusion is, to use Finn J's language, irresistible that the Manager is so circumstanced vis-à-vis the Members that the Members are entitled to expect that the Manager will act in the interest of them to the exclusion of its own or any third party's interest, in its dealings for or on behalf of the Trust.

Before making a conclusion as to this issue, a question arises whether the Trust Deed contains an express term that negates the existence of the fiduciary relationship identified above. For example, Mason J in Hospital Products said that a fiduciary relationship,

if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.

The Trust Deed has a clause which we have not quoted in this published ruling .

In deciding whether the above clause has an effect of negating a fiduciary relationship that otherwise exists, it is important to repeat what Finn J said in AS Nominees:

Turning directly to the fiduciary question. My preferred approach is to resolve it by reference to what Securities in fact did for the trusts and to the context in which this occurred.

In the present case, the fiduciary relationship exists not because of any covenant given by the Manager but because of the activities that the Manager has and will be undertaking in relation to the Trust. The Manager is the 'source and origin' of the Trust evidenced by its promotional activities. As such, the above clause will have no bearing on the conclusion that there is a fiduciary relationship.

Even if the clause if the Trust Deed quoted above were intended to exclude the existence of a fiduciary relationship, the clause would be ineffective. John Glover in Commercial Equity: Fiduciary Relationship states as follows:

In theory at least, a contract term might exclude liability for breach of a particular fiduciary duty. It might be arguable that terms to a similar effect should be implied in an appropriate case. However, courts would be slow to give such provisions the effect that a fiduciary might intend for them. On contractual principles, it would need to be shown that the beneficiary, at the time of agreeing, knew the martial facts with sufficient particularity to make an informed waiver or consent.

The above quotation was expressly endorsed by Finn J in AS Nominees.

Accordingly, it is concluded that the Manager is a person acting in a fiduciary capacity. It follows therefore that the Manager is the 'trustee' for the purposes of subsection 102N(1) of the ITAA 1936.

1.1 'Unless the contrary intention appears'

In the above section, it has been concluded that the Manager is the trustee of the Trust for the purposes of subsection 102N(1) of the ITAA 1936 because the Manager is a person that satisfies the definition of trustee in subsection 6(1) of the ITAA 1936. However, this definition is subject to a condition - the opening words of s 6(1) of the ITAA 1936 which state 'unless the contrary intention appears'. This condition makes it abundantly clear that not every person that answers the statutory definition will be a trustee. If the context of legislation displays an intention that the statutory definition is not to apply, the fact that a person satisfies the statutory definition will not of itself make the person a trustee. Such an outcome was reached in a recent decision of the Full Federal Court in Leighton v Federal Commissioner of Taxation [2011] FCAFC 96 (Leighton).

In Leighton, the Full Federal Court made the following observations:

More recent in time but to like effect is the following observation by the High Court in Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 at 503, [28] in respect of the definition of "trustee" in s 6 of the ITAA 1936:

"In considering this definition it is important to note that it is said in s 6(1) to apply "unless the contrary intention appears". Thus, it is not to be assumed that every person or entity which answers the statutory definition will be a trustee for the purposes of Div 6 of Pt III. The opening words of the definition speak of a trustee in the ordinary sense of a person who holds property on trust while paras (a) and (b) include persons in whom trust property is not vested."

Thus, to be liable as a "trustee", Mr Leighton must stand in some relation to a proprietary right by virtue of which net income of the trust estate arises.

As shown in above extract, Leighton, in dealing with the interpretation of the word 'trustee' that appears in relation to the trustee's liability to pay tax under Division 6 of the ITAA 1936, decided that the condition prevented the statutory definition from applying in that particular legislative context. This decision, however correct it may be, would be of little relevance in interpreting the word 'trustee' appearing in a different legislative context.

Unlike the provisions considered by Leighton, subsection 102N(1) of the ITAA 1936 does not impose any taxation liability on the trustee. As such, the decision in Leighton does not shed any light on whether there is any intention that the statutory definition should not apply in relation to subsection 102N(1) of the ITAA 1936. This question can only be answered in the light of the purpose of Division 6C of the ITAA 1936 and the particular role subsection 102N(1) of the ITAA 1936 plays to achieve the purpose.

The purpose of Division 6C of the ITAA 1936 is to tax some trusts as companies. The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 4) 1985 (EM) which introduced Division 6C of the ITAA 1936 states as follows:

By this clause it is proposed to insert a new Division - "Division 6C - Income of certain public trading trusts" - in Part III of the Principal Act. The new Division, comprising sections 102M to 102T, will tax as a company the trustee of a public unit trust carrying on a trade or business (to be known as a "public trading trust"). The measures will also ensure that distributions of income or other profits to unitholders in such trusts will be taxed on the basis applying to dividends paid by a company. (emphasis added)

The EM expressly states that Division 6C of the ITAA 1936 is intended to apply to a 'public unit trust carrying on a trade or business'. The intention is that a trust that behaves like a company by carrying on a trade or business should be taxed like a company. This intention, which is hardly surprising, is repeated in the EM:

"trading business" is the phrase used in section 102N to refer to the activities carried on by a unit trust to establish whether it is a trading trust to which the new Division will apply if the particular trust is also a public unit trust.

The legislative intention to apply Division 6C of the ITAA 1936 to a unit trust carrying on a trade or business is implemented in subsection 102N(1) of the ITAA 1936. However, subsection 102N(1) of the ITAA 1936 questions whether the trustee, not the trust, is carrying on a trading business etc. If the word 'trustee' in subsection 102N(1) of the ITAA 1936 is interpreted according to its ordinary meaning, the operation of Division 6C of the ITAA 1936 can be easily avoided by a trust whose trading or business activities are carried on by an entity that is not appointed as a trustee. In other words, the purpose of Division 6C of the ITAA 1936 would be easily frustrated if the statutory definition were intended not to apply subsection 102N(1) of the ITAA 1936. In such a situation, it is plainly clear that the context of legislation displays no intention that the statutory definition should not apply. In fact, if there is one example where the statutory definition is clearly intended to apply, it must be subsection 102N(1) of the ITAA 1936.

Accordingly, the conclusion is that the Manager is the trustee of the Trust according to the statutory definition. As a result, it becomes necessary to consider whether the Manager satisfies subsection 102N(1) of the ITAA 1936.

2. Whether the entity satisfies subsection 102N(1)

Subsection 102N(1) of the ITAA 1936 is conclusively satisfied if paragraph 102N(1)(a) of the ITAA 1936 is met.

Paragraph 102N(1)(a) of the ITAA 1936 inquires whether the trustee, which includes the Manager in this case, carried on a trading business at any time during a year of income.

A 'trading business' is defined in section 102M of the ITAA 1936 to mean 'a business that does not consist wholly of eligible investment business'.

An 'eligible investment business' is also defined in section 102M of the ITAA 1936 to mean one or more of:

(a) investing in land for the purpose, or primarily for the purpose, of deriving rent; or

(b) investing or trading in any or all of the following:

(i) secured or unsecured loans (including deposits with a bank or other financial institution);

(ii) bonds, debentures, stock or other securities;

(iii) shares in a company;

(iv) units in a unit trust;

(v) futures contracts;

(vi) forward contracts;

(vii) interest rate swap contracts;

(viii) currency swap contracts;

(ix) forward exchange rate contracts;

(x) forward interest rate contracts;

(xi) life assurance policies;

(xii) a right or option in respect of such a loan, security, share, unit, contract or policy;

(xiii) any similar financial instruments.

(c) investing or trading in financial instruments (not covered in paragraph (b)) that arise under financial arrangements, other than arrangements excepted by section 102MA..

There is little doubt that the Manager will be carrying on a trading business for the purposes of paragraph 102N(1)(a) of the ITAA 1936 and the business will consist of investing in the Licences and entities owning licences, that is, License Companies. Investing in the Licences is not within the meaning of an eligible investment business. Therefore, the Manager will carry on a business that does not consist wholly of eligible investment business. As such, the Manager, in carrying on its functions as the Manager (and ultimately the trustee) of the Trust, will carry on a trading business and therefore the Trust is a trading trust for the purpose of subsection 102N of the ITAA 1936.

As paragraph 102N(1)(a) of the ITAA 1936 is satisfied, there is no need to consider paragraph 102N(1)(b) of the ITAA 1936.

Conclusion

As all the requirements of subparagraph 102R(1)(b) are satisfied, the Trust will be a public trading trust for the purposes of Division 6C of the ITAA 1936.