Edited version of your private ruling

Authorisation Number: 1012479226518

Ruling

Subject: Public trading trust

Question

Is the trust a public trading trust under Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The trust was established to invest in a syndicate.

The trust has issued X units of $Y each fully paid. The unit holders have an interest in income and capital of the trust in proportion to their unit holdings.

Schedule 1 of the Trust Deed lists the Foundation Units of which more than 20% of the units are held by complying superannuation funds.

The units were not listed for quotation on the stock exchange or were offered to the public.

The trust is a resident unit trust and is not a corporate unit trust within Division 6B of the ITAA 1936.

The Syndicated Venture Agreement for the undertaking outlines the terms in which the venture is to be conducted -

Schedule 1 provides a list of the participants which includes the name of the trust.

The participants have entered into the syndicated venture to progress an undertaking that will result in sales in accordance with the terms of the deed. The venture has been formed only for this purpose.

The participants shall share in a percentage of the profits made by the venture in proportions equal to the proportions of the project equity which they have invested.

The deed does not constitute any participant as agent of the other or imply that the participants intend constituting a partnership or other arrangement whereby one participant may be liable for the acts or omissions of the other.

The participants agree that all liabilities of the venture will be paid out of the assets and income of the venture. In the event that the assets and income of the venture are insufficient to meet any shortcomings of the venture then the participants shall share any such losses in the proportions of the project equity which they have invested.

The syndicated venture will be supervised by the project manager who will regularly report to a consultative committee.

The committee will be made of one person appointed by each participant. Subject to the terms of the agreement, the consultative committee has the power to bind the participants.

A syndicated venture bank account in the name of the nominee will be established as soon as practicable. The directors of the nominee or their delegates shall operate the bank account.

Balance Sheet and Profit and Loss Statements for the venture will be prepared for each financial year. A partnership return for tax purposes is to be prepared and lodged and shall provide each participant a schedule for inclusion in the income tax returns of the participant.

The participants agree to do all that is necessary to put in place mortgage and borrowing facilities to assist in the undertaking. Assets acquired shall be offered as security for the borrowing of the syndicated venture and for any bonds or guarantees required to complete the undertaking.

In the Definition section, -

'Profit' means the surplus earned by the syndicated venture. It includes a list of the costs to be taken into account in calculating the surplus.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6C

Income Tax Assessment Act 1936 section 102R

Income Tax Assessment Act 1936 section 102P

Income Tax Assessment Act 1936 section 102M

Income Tax Assessment Act 1936 section 102MD

Income Tax Assessment Act 1936 section 102N

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Division 6C of the ITAA 1936 treats certain trusts described as 'public trading trusts' as companies, by taxing the trustees of such trusts at the company rate.

A trust is a 'public trading trust' within Division 6C if it satisfies the requirements in section 102R of the ITAA 1936 in relation to the relevant year of income:

1. the trust is a public unit trust;

2. the trust is a trading trust;

3. either the trust is a resident unit trust or was a public trading trust in a prior year of income; and

4. the trust is not a corporate unit trust within Division 6B of the ITAA 1936.

Public unit trust

Subsection 102P(1) of the ITAA 1936 sets out 3 primary tests for determining whether a unit trust is a public unit trust in relation to a 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

(c) the units in the unit trust were held by not fewer than 50 persons.

A further test is contained in subsection 102P(2) of the ITAA 1997 where a unit trust will be treated as a public unit trust where an exempt entity or exempt entities held or had the right to acquire units that entitled them to 20% or more of the beneficial interests in either the income or the property of the trust.

Section 102MD of the ITAA 1936 applies the Division to trustees of exempt life assurance funds and complying superannuation funds.

In your case, whilst you do not satisfy any of the three primary tests, more than 20% of the beneficial interests in either the income or the property of the trust are held by complying superannuation funds. As the test in subsection 102P(2) is satisfied, the trust is a public unit trust.

Trading trust

In accordance with paragraph 102N(1)(a) of the ITAA 1936, a unit trust is a trading trust if at any time during the year of income, the trustee 'carried on a trading business'.

Section 102M of the ITAA 1936 defines trading business to mean a 'business that does not consist wholly of eligible investment business'.

In your case, the trust has entered into a syndicate for the purpose conducting an undertaking that will result in sales and did so for a percentage of profit. These activities are not 'eligible investment business' as defined in section 102M.

As the activities are carried out by the syndicate, to determine if the trustee is carrying on a trading business, we need to look at whether the arrangement constitutes a partnership. As a partnership is not a separate legal entity, it is the partners that are conducting and carrying on the business of the partnership. A partner in a partnership will carry on a trading business if the business of the partnership is that of a trading business.

The term partnership is defined in section 995-1(1) of the Income Tax Assessment Act 1997 to mean 'an association of persons carrying on business as partners or in receipt of ordinary or statutory income jointly, but does not include a company'.

The first limb of the definition reflects the general law definition of a partnership which is the relation that subsists between persons carrying on a business in common with a view of profit.

Taxation Ruling TR 94/8 outlines the factors we take into account in deciding whether persons are carrying on business as partners for income tax purposes in a given year of income.

Intention

- the mutual assent and intention of the parties

Conduct

(a) joint ownership of business assets

(b) registration of business name

(c) joint business account and the power to operate it

(d) extent to which parties are involved in the conduct of the business

(e) extent of capital contributions

(f) entitlements to a share of net profits

(g) business records

(h) trading in joint names and public recognition of the partnership

The weight to be given to these factors varies with the individual circumstances. The above list of factors is not exhaustive and no single factor is decisive, although the entitlement to a share of net profits is essential.

The Syndicated Venture Agreement outlines the terms in which the venture is to be conducted. The overall impression is that the arrangement between the participants has the features of a partnership because of the following -

· There is joint ownership of business assets. The syndicate will acquire assets and borrow funds for its acquisition. The assets will be offered as security for funds borrowed.

· A syndicated venture bank account in the name of the nominee will be established with the directors of the nominee or their delegates to operate the bank account.

· The venture will be supervised by the project manager who will regularly report to a consultative committee. The committee is made of one person appointed by each participant. Subject to the terms of the agreement, the consultative committee has the power to bind the participants.

· Each participant has contributed capital as listed in the schedule. All capital operating costs and other expenditure relating to the undertaking are met out of capital contributed.

The purpose of the undertaking is to generate mutual profits through the sale of assets. The Agreement provides for a sharing of any profits or losses arising from the undertaking. The Participants will share in a percentage of the profits or losses in proportions equal to the proportions of the Project equity which they have invested.

Books of account and minutes of meetings are kept and financial statements will be prepared for the venture at the end of the financial year. A partnership return for tax purposes will be prepared and lodged showing each participant's share of income from the venture.

Even though the Syndicated Venture Agreement states that the deed does not constitute any participant as agent of the other or imply that the participants intend constituting a partnership or other arrangement whereby one participant may be liable for the acts or omissions of the other, the true character of the relationship of the parties is that of a partnership. The facts indicate that the participants are carrying on business in common with a view to profit. The definition of 'partnership' both at general law and tax law is satisfied.

As a partner in a partnership, the trustee is carrying on a trading business. Therefore, the trust is a trading trust under section 102N of the ITAA 1936.

The trust is a resident unit trust and is not a corporate unit trust within Division 6B of the ITAA 1936.

Conclusion

As the trust satisfies all criteria in section 102R of the ITAA 1936, the trust is a public trading trust under Division 6C of the ITAA 1936.