Edited version of your private ruling

Authorisation Number: 1012567907048

Ruling

Subject: Public Trading Trust

Question 1

Can the Commissioner confirm that the entity is, for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) for the 2012/13 financial year and subsequent years, a:

· Unit Trust;

· Public Unit Trust pursuant to section 102P ITAA 1936;

· Resident Unit Trust pursuant to section 102Q ITAA 1936; and

· An Eligible Unit Trust pursuant to section 102F ITAA 1936 and thus not a Corporate Unit Trust as defined in paragraph 102J(b) ITAA 1936?

Answer

No. The entity is not a unit trust.

Question 2

Do the activities of the subsidiary entity constitute a "trading business" as defined at section 102M of the ITAA 1936?

Answer

Not necessary to answer in the light of the answer to question 1.

Question 3

Do the changes proposed to occur in the 2012/13 financial year to the subsidiary entity result in the trustee of the entity having, or being able to, "control" directly or indirectly the subsidiary entity for the purposes of section 102N of the ITAA 1936?

Answer

Not necessary to answer in the light of the answer to question 1.

Question 4

Based on the Commissioner's answers to questions 1, 2 and 3 above, and assuming the proposed changes occur in the 2012/13 financial year, would the Commissioner consider for the 2012/13 and subsequent financial years that the entity is a public trading trust as defined in Division 6C of Part III of the ITAA 1936, assuming that:

i Certain Projects continue on into the future; or alternatively

ii Certain Projects cease, at some future point in time.

Answer

Not necessary to answer in the light of answer to Q1.

This ruling applies for the following periods:

1 July 2012 to 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The entity is a trust that has a corporate trustee.

The entity was established in order to provide certain benefits to employees in a particular industry arising in connection with their employment in that industry.

Broadly, the scheme under which the entity operates involves employers within the industry becoming members of the entity. The employer members are required to make weekly monetary contributions to the entity in respect of their workers to provide the benefits.

The entity credits these contributions to an account in the name of each of the relevant workers.

When a particular triggering event happens in respect of a worker the worker can make a claim and be paid a sum of money.

The entity is associated to a particular trust whose activities could be regarded as a "trading business" for the purposes of Division 6C of the ITAA 1936 .

A number of changes are proposed for the way this associated trust conducts its operations.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6C of Part III

Income Tax Assessment Act 1936 section 102M

Income Tax Assessment Act 1936 section 102R

Fringe Benefits Tax Assessment Act 1986 paragraph 58PB4(c)

Reasons for decision

The Commissioner does not accept the assertions that the entity is a unit trust for the purposes of Division 6C of Part III of the ITAA 1936.

Division 6C was inserted into the tax legislation by the Tax Laws Amendment Act (No 4) 1985. The Explanatory Memorandum to accompany the Bill that inserted this Division into the principal Act described the measures in the following terms:

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 unit holders in such trusts will be taxed on the basis applying to dividends paid by a company.

The relevant determinative provision in Division 6C is section 102R of the ITAA 1936. Subsection 102R(1) of the ITAA 1936 provides:

102R(1) A unit trust is a public trading trust in relation to a relevant year of income if:

(a) …

(b) where the relevant year of income is the year 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 pubic 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.

Any trust entity that wishes to make use of the provisions of Division 6C of the ITAA 1936 has to meet a number of threshold tests outlined in subsection 102R(1) of the ITAA 1936 regardless of whether there is a trade or business being carried on by the entity. The first of those tests to satisfy is that of whether the entity can be regarded as a unit trust. It follows that if an entity cannot meet this test then it will not be able to satisfy any of the other tests and cannot be regarded as a public trading trust.

Therefore, it is of primary importance to determine whether an entity satisfies the test of being a unit trust.

The expression "unit trust" is not defined in the ITAA 1936 however the term "unit" is described in section 102M of the ITAA 1936 as being:

unit, in relation to a prescribed trust estate, includes a beneficial interest, however described, in any of the income or property of the trust estate.

As the term unit trust is not defined for the purposes of Division 6C of the ITAA 1936 (or anywhere else in the taxation law) it is necessary to refer to the generally accepted meaning of the term which has evolved over time. The term does not have a fixed normative meaning, per CPT Custodian Pty Ltd v Commissioner of State Revenue of the State of Victoria (2005) 2005 ATC 4925 and any labels placed on any trust's title may not necessarily be accurate, per MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494. However there are some core characteristics which distinguish a unit trust from other forms of trust.

Various commentators have considered the word unit and the term unit trust as a functional word that describes the type of trust where the beneficial interest in the property of the trust is divided into discrete parcels of rights, commonly referred to as units, each right being a chose in action. An important point is that the trust property is not divided amongst the unit holders as is the case in a traditional private trust. Rather a unit holder's total unit holding represents a proportionate interest in the whole of the trust estate.

On the other hand by comparison, interests of beneficiaries in fixed trusts have beneficial interests in particular property or rights to property belong to particular persons.

A beneficiary's interest in a unit trust is determined by the quantity of the parcels of choses in action held by the beneficiary. The portion of any one beneficiary's interest in the unit trust is referrable to the quantity of the parcels of rights held by that beneficiary in relation to the total quantity of parcels of rights held in the unit trust.

In a unit trust as the numbers of units in the trust changes (by being issued or redeemed) the proportionate interest of each unit holder will change. In the case of a fixed trust, the rights of the beneficiaries remain regardless whether or not other property is added to the trust or additional beneficiaries included.

The concept that beneficiaries' interests be quantified into clearly delineated parcels of rights has been a common feature of unit trusts and a characterising feature of unit trusts as considered by the Courts. For instance in the CPT Custodian case the High Court considered a trust deed with the following terms at 2005 ATC 4929:

The beneficial interest in the Fund was divided into units, each said to confer an equal interest in all property for the time being held by the Trustee upon the trusts of the Deed, but excluding that part of the Fund credited to a distribution account for distribution to unit holders (cl 3.2). But no unit conferred "any interest in any particular part of the Trust Fund or any investment" and each unit had "only such interest in the Trust Fund as a whole as [was] conferred on a Unit under the provisions contained in [the Deed]" (cl 3.2). Unit holders were not entitled to require the transfer of any property comprised in the Fund, save as provided by the Deed (cl 28.13) but, by agreement with the Manager, distributions in specie might be made upon determination of the Fund (cl 15.5.5). A unit holder was not entitled to lodge a caveat claiming an estate or interest in any investment, being realty (cl. 7.1.3). Unit holders were bound by the terms of the Deed as if parties to it (cl 8). The Deed contemplated that all units might be held beneficially by a single und it holder (cl 29.4)

The High Court considered that the nature of the unit holder's interest in that unit trust and stated at 2005 ATC 4932:

Further, the units are discrete bundles of rights; each unit is not held in joint ownership with the totality of issued units.

The units represent a unit holder's own portion of the interests in the whole of trust and does not give rise to a beneficial ownership in the trust property either individually or collectively unless that is specifically provided for. At 2005 ATC 4933 the Court said:

The submissions respecting the beneficial ownership by each unit holder have been rejected earlier in these reasons. The trusts exemplified in the Deed recognised (cl 29.4) that all issued units might be in the one beneficial ownership, but the trusts were drawn in terms conferring individual rights attached to each unit. They were not drawn to provide a single right of a cumulative nature so that the whole differed from the sum of the parts. There could be no such single right unless held jointly or in common, but the Deed was not cast in such terms.

The use of the term 'unit' in a trust deed is not, of itself, required provided the effect of the terms of the deed creates similar features that are commensurate to a unit trust deed.

Although the issuing of units or the redeeming of units may not be considered essential to characterising a trust as a unit trust, the existence of such factors would weigh in favour of a trust being a unit trust. However it would appear essential for there to be a unit trust that whatever rights enure to the unit holder in that capacity, those rights relate to interests in the trust property which are shared with the other unit holders and do not relate to specific trust property referable only to the units held.

The nature of particular rights of unit holders under unit trusts will depend upon rights conferred by the trust deed. The rights of the unit holder may be of the equitable ownership of the property the subject of the trust or they may only be in relation to an entitlement to be considered as a recipient of a distribution and other due administration of the trust.

Recently the Administrative Appeals Tribunal (AAT) has handed down a decision in a case involving a worker entitlement fund covered by section 58PB of the FBTAA 1986 (the AAT case). The issue in that case was whether the entity could be regarded as being a public trading trust. The basic principle of whether the entity in question was a unit trust was examined in this case because if this test could not be met the entity could not qualify as a public trading trust.

The AAT held that the entity in that case was not a unit trust for the purposes of Division 6C of the ITAA 1936. The AAT said:

In our view the applicant's case fails because the beneficial interests in the Fund were not divided into units, that is, discrete parcels of rights.

Are the beneficial interests in the income and capital of the entity unitised or discrete parcels of rights?

We acknowledge that the arrangements regarding the entity in this case differ from the entity in the recent AAT case because the members of the entity are employers who contribute funds on behalf of their employees (Workers) whereas in the AAT case, the members are employees for whom contributions have been or are being made by their employees. Those who stand to get any form of payment from the entity are not the Members of the entity as such. They are the employees of the Members.

Nevertheless given the principles outlined above it still would be necessary for all of the beneficial interests in the entity to be unitised, that is, divided into discrete parcels of rights for the entity to be regarded as a unit trust.

To determine this point it is necessary to examine various clauses of the Trust Deed for the entity.

The clauses of the Deed for the entity indicate that any beneficial interests that the Workers may have in the entity are not unitised, that is they are not discrete parcels of rights over the income or capital of the entity.

The income of the entity is not unitised and Workers do not have an interest in the income of the entity generally. The Trustee has a discretionary power over the income of the entity and also as to what constitutes income or capital of the entity. Under a particular clause there is a range of things that the income of the entity can be applied to by the Trustee and under a related clause any income of the entity that is not applied shall be retained in the entity and capitalised. The amount that is capitalised may be, at the discretion of the Trustee, be distributed to the sponsoring entities as beneficiaries in the proportion of 75 - 25%

The interests in the capital of the entity are also not unitised. There are no provisions in the Deed that splits the capital of the entity into discrete parcels of rights over the entire capital of the entity. This is because the maximum amount of Workers' interests in the entity is limited to the total of the amounts standing to the credit of their accounts at any one time. The aggregate of the totals of the accounts at any one time may be less than (or even greater than) the aggregate of the capital of the entity.

Furthermore the Workers do not have any entitlement to the amount standing to the credit of their accounts until a crystallising qualifying event happens in respect of them, as set out in the Deed clauses. Until such events occur Workers only have a right to due administration of the Trust Fund as Buss JA stated in Commissioner of State Revenue v Serana Pty Ltd (2008) 36 WAR 251 at [139]:

Accordingly, in some circumstances, property may be held on trust but, at least for the time being, none of the beneficiaries may have an equitable estate or interest in the property, except in the sense that the beneficiaries have a right to due administration of the trust property in accordance with the trustee's duties.

It has been asserted that the circumstances of the AAT case are different to that of the entity in this case because there is no express term in the Deed of the entity that states that the rights arising under the Deed are personal to beneficiaries. The Commissioner disagrees with this assertion.

In the AAT case it was pointed out that a beneficiary under the entity in question who attempts to assign or alienate their entitlements forfeits those entitlements because this is provided for in the Deed for that entity, which indicates that the rights of the members in that entity were personal. Nevertheless, we consider that it is implied from the Deed for the entity that the rights of Workers arising under the Deed are personal to those Workers for the following reasons:

Firstly, the Recital for the Deed states that the sponsors have agreed to establish a scheme to provide particular benefits to Workers in the industry.

Secondly, it is stated in a clause of the Deed that the entity is set up solely to provide particular benefits to Workers.

Thirdly, alienation or assignment of interests by a Worker may jeopardise the Fringe Benefits Tax exemption available to employers in respect of contributions to the entity as it would be inconsistent with the purpose of the entity to allow Workers to assign or alienate their interests in the entity.

We also consider that the entitlement that the Workers have under the Deed for the entity is not an absolute indefeasible entitlement, because the rights of the Workers are personal in nature and not capable of assignment and also because under certain circumstances a Worker's right may be forfeited. These features militate against a finding that the Workers' interests in the entity are units.