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Ruling

Subject: Whether a unit trust is a 'corporate unit trust'

Question

Will a Proposed Transaction cause Aus Trust to be a 'corporate unit trust' as defined in section 102J of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Relevant facts and circumstances

Company A is the Head Company of a tax consolidated group: Aus Group. Company B, a member of the Aus Group tax consolidated group holds certain property in Australia. Company X, a non-resident company which is not a member of the tax consolidated group, holds certain overseas property.

Aus Group intends that the property in Australia and Overseas be held, directly or indirectly, by a separate vehicle.

Aus Group has established Aus Trust and all units in Aus Trust are owned by Company A. Aus Trust is thus a subsidiary member of the Aus Group consolidated group. Aus Group has also established Overseas Trust which will hold the Overseas property and be a wholly owned sub-trust of Aus Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 102J

Income Tax Assessment Act 1997 section 701-40

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Aus Trust.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The Proposed Transaction will not cause Aus Trust to be a 'corporate unit trust' as defined in section 102J of the ITAA 1936.

Detailed reasoning

Exit History Rule

The exit history rule is contained in section 701-40 of the ITAA 1997:

701-40(1)

If the entity ceases to be a *subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to any thing covered by subsection (2) (an eligible asset etc.) after it becomes that of the entity because subsection 701-1(1) (the single entity rule) ceases to apply to the entity.

Assets, liabilities and businesses covered

701-40(2)

 This subsection covers the following:

(a)   any asset;

(b)   any liability or other thing that, in accordance with accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is a liability;

(c)   any business;

 that becomes that of the entity because subsection 701-1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group.

Head company history inherited 701-40(3)

Everything that happened in relation to any eligible asset etc. while it was that of the *head company, including because of any application of section 701-5 (the entry history rule), is taken to have happened in relation to it as if it had been an eligible asset etc. of the entity.

Note 1:

If the eligible asset etc. was brought into the group when an entity became a subsidiary member, section 701-5 (the entry history rule) would have had the effect that things happening to the eligible asset etc. while it was that of the entity would be taken to have happened as if it was that of the head company. Such things will in turn be taken by this subsection to have happened in relation to the eligible asset etc. as if it were that of the entity that takes the asset out of the group.

Note 2:

Other provisions of this Part may affect the tax history that is inherited (eg asset cost base history is affected by section 701-45).

*denotes a term defined in section 995-1 of the ITAA 1997.

The effect of the exit history rule is that any eligible asset etc. that leaves a consolidated group with an entity because the SER ceases to apply to that entity, will be treated as if it belonged to the leaving entity from the time it was acquired by the entity that held it at the time the SER began to apply.

The effect of the exit history rule on the potential application of Division 6B of Part lll of the ITAA 1936

In so far as is relevant to Aus Trust, it will be a 'corporate unit trust' in terms of section 102J of the ITAA 1936 if it is, inter alia, an 'eligible unit trust' in the year of income.

A trust is an 'eligible unit trust' as defined in section 102F of the ITAA 1936, if, inter alia, an item of property that, at any time during the year of income or a preceding year of income, was property of the unit trust became property of the unit trust in pursuance of an arrangement that is a prescribed arrangement in relation to a company and, at any time before the property became property of the unit trust, the property was the property of the company or an associate of the company.

Therefore, Aus Trust would be an 'eligible unit trust' if any of the Trust's property became so under a prescribed arrangement in relation to a company and the property was previously that of the company or an associate of the company.

However, because of the exit history rule, the property of Aus Trust with which it exits the consolidated group will be treated as though it always belonged to Aus Trust. Hence, even if there was a prescribed arrangement in terms of section 102E of the ITAA 1936, the conditions set down in section 102F of the ITAA 1936 cannot be met (ie the property cannot previously have been property of the company or an associate).

It is not necessary to consider the other conditions in section 102J of the ITAA 1936 as the failure of any one of these would mean Aus Trust is not a 'corporate unit trust'. As it is not an eligible unit trust, Aus Trust will not be a corporate unit trust as defined in section 102J of the ITAA 1936.