Edited version of your written advice

Authorisation Number: 1012691422185

Ruling

Subject: Income tax: Trusts - Division 6C

Question 1

Is the trust a unit trust for the purposes of the application of Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

For a number of years commencing in the year ended 30 June 2012

The scheme commences on:

In the relevant income tax year

Relevant facts and circumstances

The trust is a managed investment scheme.

The beneficial interest in the managed investment scheme is divided into units.

The beneficiaries have an interest in the capital of the trust in the proportion that their unit holding has to the total units on issue and an interest in the distributable income pro rata with all other units of their type.

Beneficiaries cannot withdraw from the trust or require their units to be purchased or redeemed.

The trustee cannot acquire units and has no obligation to purchase or redeem any unit.

The deed may be modified or replaced by deed poll by either a special resolution or at the volition of the trustee.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6C

Reasons for decision

Is the trust a unit trust for the purposes of the application of Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The trust is a unit trust for the purposes of Division 6C of the ITAA 1936 as the beneficial interest in the trust is held in units, as proportions of the whole identified interest.

Detailed reasoning

Section 102R of Division 6C of the ITAA 1936 provides that for a trust to be a public trading trust it must be a unit trust. There is no legislative definition of a 'unit trust' for the purposes of Division 6C however interpretative guidance is provided by ATO Interpretative Decision ATO ID 2010/57 Income Tax Equity specific matters: trusts - whether a Managed Investment Scheme is a Unit Trust for the purposes of Division 6C of Part III of the Income Tax Assessment Act 1936 (ATOID 2010/57).

ATO ID 2010/57 considered a trust in which each individual beneficial interest in the trust was expressed as a fraction of the beneficial interest of all such interests collectively in the whole beneficial interest and where redemption of any individual unit in the unit trust was provided for in very limited circumstances. It was concluded that the trust was a unit trust because the beneficial interest in the trust was held in units, the common reference to fractions of the whole of an identified interest. ATOID 2010/57 states:

The joint judgment of the High Court in CPT Custodians Pty Limited v. Commissioner of State Revenue [2005] HCA 53 at paragraph 15 stated, '"unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning'.

There is however a consistent approach to what constitutes a unit trust which can be found in authoritative works. This definition reiterates the concept that the beneficial interest of the trust is held in 'units'. Units are expressed and defined as part of the whole beneficial interest of the trust (or in some circumstances of the whole beneficial interest of a particular kind). Other than this 'unit trusts' are, like all other trusts, subject to the terms of the impressed or stated trust and to the application of the law of trusts…

…

Features which may be found in some commercial unit trusts include rights of unit holders to have their units redeemed by the trustee (generally on payment of an amount worked out by reference to the unitholder's beneficial interest in the value of the trust assets reduced by outstanding trust liabilities, perhaps with a discount or adjustment of some kind).

Another feature often found is a right in the trustee to issue additional units for subscription (again generally for subscription of an amount per unit worked out by reference to a present unit's share value of the trust assets reduced by outstanding trust liabilities, and perhaps with a discount or adjustment of some kind).

Such features are not inherent in a trust being a unit trust for the purposes of considering the application of Division 6C of the ITAA 1936. However legislative intervention may make these or other features mandatory in a particular jurisdiction if the unit trust is not to be liable to be wound up, or if offences by the management or promotion of the trust are not to be committed. Such legislative intervention does not alter the general approach to identifying a unit trust, where no specific definition applies to the term.

That is, while there are certain features that may be found in some commercial unit trusts (for example right of redemption, right of trustee to issue additional units) these features are not required for the trust to be classified as a unit trust for the purposes of Division 6C of the ITAA 1936. Therefore, although clause n prohibits the trustee from subscribing for or acquiring units in the syndicate and places no obligation on the trustee to purchase or redeem any unit, and similarly provides the investors with no entitlement to require their unit holding to be purchased or redeemed, these factors alone will not exclude the trust from being a unit trust for the purposes of Division 6C of the ITAA 1936.

The trust considered in ATOID 2010/57 provided for the redemption of any individual unit in the unit trust only in very limited circumstances but was considered to be a unit trust because the beneficial interest in the trust was held in units, the common reference to fractions of the whole of an identified interest.

ATOID 2010/57 summarises:

Accordingly, where beneficiaries are made entitled to a share of a beneficial interest under a trust, such as an interest in the income and capital, or in either one of these, and which entitlement is measured by reference to a fixed standard of measurement howsoever described (for example a percentage or a fraction or a fixed formula), then whether or not the deed itself labels the interests 'units' the beneficial interest have been unitised and the trust would be a 'unit trust' for the purpose of considering the application of Division 6C of the ITAA 1936. As one example where the phrase 'pro-rata' is used in specifying the relative interests of beneficiaries then this will mean the interest of the beneficiary of the trust will be identified as a proportion of, or share of, the whole of a beneficial interest (or class of interest) and in most occasions of this nature the holder of the beneficial interest will be a unit holder and the trust will be a unit trust.

Considering the structure of the trust in the context of the guidance provided by the authoritative works summarised in ATOID 2010/57, the trust is a unit trust for the purposes of Division 6C of the ITAA 1936. The investors as the beneficiaries of the trust have an interest in the capital of the trust in the proportion that their unit holding has to the total units on issue and an interest in the distributable income pro rata with all other units of their type.

Similarly to the trust considered in ATOID 2010/57, the beneficial interest of the trust has been unitised and the trust is a unit trust for the purpose of the application of Division 6C of the ITAA 1936.

As demonstrated by ATOID 2010/57 the fact that trustee is not under an obligation to purchase or redeem any investors unit will not alter the classification of the trust as a unit trust.

ATO Interpretative Decision ATO ID 2003/43 (Withdrawn) Income Tax Application of Division 6C: Public trading trust - unit trust

ATOID 2010/57 replaced ATO Interpretative Decision ATO ID 2003/43 Income Tax Application of Division 6C: Public trading trust - unit trust (ATOID 2003/43) which was withdrawn on 12 March 2010.

ATOID 2010/57 better articulates the ATO's interpretation of the term 'unit trust' and places the appropriate emphasis in its interpretation on the unitisation of the trust - that is, to be a unit trust the beneficial interest must be divided into units. A power to issue more units and a right of unit holders to require redemption may be features of some unit trusts; however they are not necessary features for the classification. The authorities discussed in ATOID 2003/43 do not require these features to exist for a trust to be a unit trust and ATOID 2010/57 clarifies this fact.