Edited version of your private ruling

Authorisation Number: 1012594349450

Ruling

Subject: Interest derived in fund bank account

Question 1

Does a separate entity in the form of a trust exist for income tax purposes under either of the lease agreements?

Answer

No.

Question 2

If a separate entity in the form of a trust exists, how should this entity be treated for income tax purposes?

Answer

Not applicable

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The existing entity owns a number of premises which are currently leased under either of two versions of a lease agreement. The older version of the lease is progressively being replaced by the newer version as new leases are entered into.

A copy of both lease agreements has been provided and the clauses contained form part of the facts of this Ruling.

The premises are managed by a managing agent.

Within the lease agreements, a Promotion or Marketing Fund ("the Fund") are established for the sole purpose of recovering costs associated with marketing and promoting the premises and its tenants.

One invoice is issued to tenants each month containing standard charges for rent and outgoings. Included on this invoice are direct recoverable amounts like electricity and the Fund recoveries.

A marketing report shows the monthly receipts transferred and any expenditure incurred, and the running balance of the Fund.

Reports are provided to the existing entity as management reports.

The contributions to the Fund are transferred to the Fund bank account. These funds are kept in the bank account to be used by the existing entity as they determine for the purpose of promoting the building and tenants.

Decisions on marketing and promotional expenditure are undertaken by the existing entity. Approved expenditure is paid by the managing agents from the Fund bank account.

If a tenant vacates the premises, there is no right to a refund of contributions under either lease agreement.

If the existing entity winds up the Fund, under the old lease agreement, a scheme of repayment would be required if no other fund is established.

The new lease agreement does not provide any details on how the Fund is required to be wound up.

In an earlier year, expenditure was significantly less than the contributions received into the Fund. In the years following this, expenditure has exceeded contributions to the Fund, which has utilised some of the balance carried forward. However, the Fund bank account has continued to earn interest.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Summary

The Fund is not a separate entity for income tax purposes. Any interest derived on the Fund bank account is considered to have been derived by the existing entity.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 provides that a taxpayer's assessable income includes ordinary income which is derived directly or indirectly from all sources. Ordinary income generally includes interest earned from funds in a bank account.

Your question is about whether the existing entity is considered to have derived the interest income from the Fund bank account, or whether a separate entity in the form of a trust exists, in which case the trustee of that trust may have been considered to derive the interest.

The most widely referred to definition of a trust is that of Underhill (Law of Trusts and Trustees, 12th ed, p 3):

"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 trust property), for the benefit of persons (who are called the beneficiaries) of whom he may himself be one, and any of whom may enforce the obligation."

The essential elements of a trust (as set out in the 4th edition of Jacobs' Law of Trusts in Australia) are:

· the trustee holds a legal or equitable interest in the trust property;

· the trust property must be property capable of being held on trust;

· there must be one or more beneficiaries other than the trustee; and

· there is a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries.

Trusts may be express, implied or constructive.

An implied trust is a trust which is founded on an unexpressed, but presumed (i.e., implied) intention of the party creating it, and arises in favour of the person who was the original owner of the property dealt with or purported to be dealt with by the trust instrument.

However, it is important to note that not all fiduciary obligations imposed on a person necessarily result in a trust being established.

The Ruling application advises that there was no intention of any of the parties to create a trust or any separate entity. The purpose of the arrangement is to cover the cost of marketing and promoting the premises.

Both lease agreements provide for contributions to be made from tenants into a promotion or marketing fund. These contributions are banked into a separate bank account and are required to be used only for the stipulated purposes.

The old lease agreement created obligations which bound the existing entity with respect to how the monies are managed, recorded, and expended. The new lease agreement does not specify such requirements other than what the monies should be used for.

The marketing fund report is provided to the existing entity as a management report. This is similar to an entity having different 'branches' which are reported separately to management, but are still a part of the whole entity. This situation has existed for a number of years and gives support to your contention that there was never an intention to treat the Fund as a separate entity.

Attention is given to the fact that under both lease agreements, there is no requirement for the existing entity to expend all or any of the funds in any one year. Nor is there a requirement that the funds from any tenant must be expended on only the particular premises in which that tenant occupies (i.e., the existing entity could choose to use the funds to promote all its premises jointly). The existing entity makes the decisions as to how monies are spent (subject to the parameters in the lease agreements).

The tenants have no claim to any of the monies held within the Fund, even if their tenancy expires prior to the funds being spent.

Under the old lease agreement, if the fund was wound up, and no further similar fund was established, there was to be a repayment of funds that may be required at that time, although the method this would be done by had not been determined. It appears this repayment scheme would include current tenants of the building at that time, but is silent on previous tenants whose contributions may have not been used.

Under the new lease agreement, there is no such clause that provides for any repayment of monies should the Fund be discontinued at any time.

It can be seen from all of the above that a trust in the true sense of the word does not exist. Although there are contractual obligations imposed on the existing entity in how the monies are spent, this is not the same level of fiduciary obligations imposed upon a trustee dealing with specified trust property for the benefit of clearly defined beneficiaries.

The interest earned in the Fund bank account is therefore not assessable to a separate entity or trust, but is rightfully the income of the existing entity.

Question 2

Because it has been determined that a separate entity does not exist, an answer to this question is not required.