Edited version of your written advice

Authorisation Number: 1012722925808

Ruling

Subject: Public Trading Trusts under Division 6C

Question 1

Will the Trust be a public trading trust in accordance with Division 6C of the ITAA 1936?

Answer

No.

Question 2

Will each of the Sub-Trusts be a public trading trust in accordance with Division 6C of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

1 July 2014 - 30 June 2015

1 July 2015 - 30 June 2016

Relevant facts and circumstances

The Trust

The Trust was established as a unit trust by the Trustee, by deed poll in 20XX.

The Trustee will administer the Trust in accordance with its fiduciary obligations and the trust deed.

The Trustee will hold the assets of the Trust for the benefit of the unit holders.

The assets of the Trust include a bank account and 100% interest in unit trust subsidiaries (the Sub-Trusts).

The Trustee does not carry on a business other than holding units in each of the Sub-Trusts.

The Trustee holds units in the Sub-Trusts solely for the purposes of investment and they were not acquired as part of a prescribed arrangement as defined in Division 6B of the ITAA 1936.

The Trust is an Australian resident unit trust for tax purposes. The Trustee is and will continue to carry on a business in Australia and the central management and control of the Trust is and will continue to be in Australia.

The Sub-Trusts

Each Sub-Trust acquired land from a third party vendor and not as part of a 'prescribed arrangement' as defined in Division 6B of the ITAA 1936:

The primary activity carried on by the trustee of each Sub-Trust is investing in land for the purpose of deriving lease rental payments from the Company.

The Sub-Trusts are Australian resident unit trusts for tax purposes. The trustees will continue to carry on a business in Australia and the central management and control of the Sub-Trusts is and will continue to be in Australia.

The Company

The Company was incorporated in 20XX and was converted to a public company in the same year. The Company is an Australian resident for tax purposes.

The Stapled Securities

In 20XX, the units of the Trust were stapled to the shares in the Company (the Stapled Securities). The Stapled Securities will be listed on the Australian Stock Exchange as part of the Initial Public Offering of the Trust, the Company and their wholly owned subsidiary entities (the Fund).

The Trustee does not and is not able to control (directly or indirectly) the affairs or operations of the Company or its wholly owned subsidiaries. The Stapling Deed provides that:

The parties acknowledge and agree that nothing in this agreement is to be interpreted as any Stapled Entity having or exercising control over any other Stapled Entity.

The Trustee will manage the Trust such that it will not at any time during the year of income be closely held (in accordance with the Australian Securities Exchange (ASX) listing requirements).

Further, the ASX listing requirements and the trustee of each Sub-Trust should ensure that a Sub-Trust will not be closely held.

The Stapled Securities in the Fund are not listed for the primary purpose of allowing the Trust to qualify as a public unit trust for the purposes of subsection 102P(3).

Lease Arrangement

The primary activity carried on by the trustee of each Sub-Trust is investing in land for the purpose of deriving lease rental payments from the Company.

The trustee of each Sub-Trust entered into a lease agreement with the Company for the lease of its parcel of land, with effect from 1 July 20XX.

The commercial lease agreement between the Company and the trustee of each Sub-Trust will:

• be on usual commercial lease terms for a period of five years with an option to renew;

• provide that the trustee of each Sub-Trust will lease the whole of its parcel of land to the Company;

• provide for exclusive possession of the land; and

• require that the Company pay the trustee of each Sub-Trust on an annual basis a fixed lease rental payment, which will be increased by X% on the first day of January each year.

The commercial lease agreements entered into by each of the Sub-Trusts and the Company are not 'financial arrangements' for the purposes of the ITAA 1936 and ITAA 1997.

The lease rental payment is not calculated by reference to the profits or receipts of the Company.

The lease rental payment paid to the trustee of each Sub-Trust by the Company represents rent for the rights granted by each trustee of the Sub-Trusts under their respective lease agreements.

The lease agreement between the Company and the trustee of each Sub-Trust is not an arrangement that is a licence to the Company to use the land but is rather a lease for Australian property law purposes.

Operation of Residential Parks

The Company will, through its subsidiaries operate 'residential parks' and 'manufactured home estates' on the land leased from the Sub-Trusts. The operation and management of the residential accommodation will be conducted by the Company (and its subsidiaries). Effectively, this involves:

• licensing parcels of the land to residents; and

• receiving a payment for the granting of the rights under a residential site agreement for the period the resident occupies the land.

All income in relation to residential site agreements will be legally and beneficially derived by the Company for the relevant income years.

All income from the residential site agreements will not be legally or beneficially derived by the Trust or the Sub-Trusts for the relevant income years.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 102E

Income Tax Assessment Act 1936 Section 102F

Income Tax Assessment Act 1936 Section 102G

Income Tax Assessment Act 1936 Section 102J

Income Tax Assessment Act 1936 Section 102

Income Tax Assessment Act 1936 Section 102M

Income Tax Assessment Act 1936 Section 102MB

Income Tax Assessment Act 1936 Section 102N

Income Tax Assessment Act 1936 Section 102P

Income Tax Assessment Act 1936 Section 102R

Income Tax Assessment Act 1936 Section 102T

Reasons for decision

All references are to the Income Tax Assessment Act 1996 (ITAA 1936) unless otherwise stated.

Question 1

Division 6C provides a statutory exception to the Division 6 system of trust taxation. Under Division 6C, a public unit trust which is conducting or engaged in a trading business - that is, anything that is not wholly eligible investment business - will be a public trading trust and taxed as a corporation. The main operative provisions are in section 102T.

Where a qualifying unit trust confines their investments to eligible investment business (as defined in section 102M), Division 6C will not apply and the trust will retain the right to be taxed under normal trust rules.

Paragraph 102R(1)(b) provides that a unit trust is a public trading trust in relation to the relevant year of income if:

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:

(i) the unit trust is a resident unit trust in relation to the relevant year of income, or

(ii) the unit trust was a public trading trust in relation to a year of income preceding the relevant year of income; and

iv. the unit trust was not a corporate unit trust within the meaning of Division 6B in relation to the relevant year of income.

These requirements are considered fully below.

Public Unit Trust - subparagraph 102R(1)(b)(i)

Section 102P provides that a unit trust will be a public unit trust if at any time during the year of income any of the units in the unit trust were listed for quotation on the ASX or elsewhere.

However, where the Commissioner is of the opinion that any of those units were offered to the public for the purpose, or for purposes that included the purpose, of enabling the unit trust to be treated as a public unit trust for the purposes of Division 6C, the unit trust shall not be taken to be a public unit trust (subsection 102P(3)).

Further, subsection 102P(4) provides that a unit trust that would be a public unit trust in relation to a year of income only by virtue of having its units listed on the ASX, shall be deemed not to be a public unit trust if, during the year of income, not more than 20 persons held, or had the right to acquire, units in the unit trust that would entitle the holder/s to not less than 75% of:

(a) the beneficial interests in the income of the unit trust; or

(b) the beneficial interests in the property of the unit trust.

The Trust will qualify as a public unit trust for the income years ending 30 June 20YY and 30 June 20ZZ as its units will be listed on the ASX as part of the Stapled Securities during this period. The Commissioner accepts that the Stapled Securities in the Fund are not listed for the primary purpose of allowing the Trust to qualify as a public unit trust, (subsection 102P(3)) and that the Trustee will manage the Trust such that it will not at any time during the year of income be closely held (in accordance with the ASX requirements) (subsection 102P(4)).

Accordingly, the unit trust will be a public unit trust during the years ending 30 June 20YY and 30 June 20ZZ.

Resident Unit Trust - sub-subparagraph 102R(1)(b)(iii)(A)

The Trust is agreed to be a resident unit trust as its Trustee is incorporated in Australia and the central management and control of the Trust is and will continue to be in Australia (see subsection 95(2)).

Corporate Unit Trust - subparagraph 102R(1)(b)(iv)

Section 102J provides that a unit trust is a corporate unit trust in relation to a relevant year of income if, among other things, the unit trust is an 'eligible unit trust'.

For the purposes of Division 6B, a unit trust will be an 'eligible unit trust' in relation to a year of income under section 102F if the property of the unit trust was acquired as part of a 'prescribed arrangement' in certain circumstances.

Section 102E provides that, an arrangement that is a 'prescribed arrangement' in relation to a company is a reference to an arrangement under which-

(a) a shareholder in the company was, by reason of being a shareholder in the company, to be granted a right or an option to acquire, either directly or indirectly through any interposed companies or trusts, a unit or units in the unit trust; and

(b) the units in the unit trust were to be held or dealt with, or the income or property of the unit trust was to be applied, during any year of income, in such a way that, in the opinion of the Commissioner, if section 102G were applied in relation to the unit trust in relation to the year of income, the unit trust would be a public unit trust in relation to the year of income.

The Trustee holds units in the Sub-Trusts solely for the purposes of investment and the interests were not acquired as part of a 'prescribed arrangement'.

Trading Trust - subparagraph 102R(1)(b)(ii)

Section 102N provides that a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee:

(a) carried on a trading business; or

(b) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business.

Trading business

Trading business is defined in section 102M as a business that does not consist wholly of 'eligible investment business'.

'Eligible investment business' is relevantly defined in section 102M to mean one or more of:

(a) investing in land for the purpose, or primarily for the purpose, of deriving rent; or

(b) investing or trading in any or all of the following:

….

(iv) units in a unit trust;

…

On the basis that the activities of the Trustee is limited to holding units in each of the Sub-Trusts, the Applicant has submitted that this holding of these units in the Sub-Trust unit trusts is investing in units within the meaning of 'eligible investment business' found in section 102. This submission calls for closer examination as holding property of any form does not necessarily equate to investing in that property, yet to invest in property one needs to hold the property. This distinction between 'investing in' and 'holding of' is only determined by the particular circumstances of the relevant taxpayer.

The meaning of 'investing in' is a necessary consideration in ascertaining if an 'eligible investment business' is investing in units in a unit trust.

Investing In

The term 'investing in' is not defined for the purposes of Division 6C. Accordingly, reference is to be made to the ordinary meaning of the term (taking into account any relevant case law).

The Macquarie Dictionary defines 'investing' as

to put (money) to use, by purchase or expenditure, in something offering profitable returns, especially interest or income.

A number of cases have considered the meaning of the word 'invest', including:

Marks and Ors v Roe and Ors where Mandie J noted that:

As to the meaning of 'invest' and 'investment' in this context, the applicants referred to what was said by PO Lawrence, J in In re Wragg [1919] 2 Ch 58, 64-65 that: 'Without attempting to give an exhaustive definition of the words 'invest' and 'investment', I think that the verb 'to invest' when used in an investment clause may safely be said to include as one of its meanings 'to apply money in the purchase of some property from which interest or profit is expected and which property is purchased in order to be held for the sake of income which it will yield…' .' In re Wragg was a case involving the construction of an investment clause in a trust deed and, even so, His Lordship did not purport to give an exhaustive definition. I think that in ordinary commercial usage the words 'invest' and 'investment' in relation to shares have a connotation of laying out money in their purchase with a purpose of yielding profit (whether that profit arises by way of dividends, capital appreciation or otherwise).

Inland Revenue Commissioners v. Rolls-Royce Ltd, where it was considered by MacNaghten J whether royalties could be said to be 'income derived from investments' for the purposes of the Finance Act 1939, relevantly noting at p341 that:

The word 'investment', though it primarily means the act of investing, is in common use as meaning that which is thereby acquired; and the primary meaning of the transitive verb 'to invest' is to lay out money in the acquisition of some species of property; consequently, letters patent, which are undoubtedly a species of property, may properly be described as an investment.

Melville v. Mutual Life and Citizens Assurance Co Ltd¹, where Lockhart J stated (in interpreting a provision of the Life Insurance Act 1945 preventing the assets of a statutory fund from being invested in any company carrying on life insurance) that (at p653):

'Invest' is not defined in the Act. It is defined by the Shorter Oxford English Dictionary, so far as relevant, as meaning: 'to employ (money) in the purchase of anything from which interest or profit is expected... to make an investment... colloq. to lay out money

Accordingly, the act or action of 'investing' should generally exhibit the following characteristics:

• money is outlaid, applied or employed; and

• interest or profit is expected from the thing on which the money has been outlaid, applied or employed.

The Trust's only assets are a bank account and 100% of the units in the Sub-Trusts.

Each Sub-Trust acquired land from a third party vendor, and has entered into a lease agreement with the Company for the lease of the entirety of its parcel of land. Under the individual lease agreements between the trustee of the Sub-Trust and the Company, the Company will pay the trustee of each Sub-Trust a fixed lease rental payment on an annual basis, which will be increased by X% on the first of January of each year.

The Company will then licence parcels of the land to residents under residential site agreements. The residents will make payments for the granting of the rights under the residential site agreement for the period they occupy the land.

Given the above structure, it is reasonable for the Trustee to expect to receive profit from holding the units in the Sub-Trusts, in the form of distributions.

The Trustee's action in acquiring 100% of the units in the Sub-Trusts involves both outlaying money and an expectation of profit from holding the units and accordingly, is an 'eligible investment business' according to the definition in section 102M.

Accordingly, the Trustee is not carrying on a 'trading business' as defined in section 102M, as it is carrying on a business that consists wholly of 'eligible investment business'.

Control

However, the Trust could still be a trading trust under section 102N if, at any time during the year of income, the Trustee:

…

(b) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business.

The Trustee does not and cannot control a trading business as:

• the Trustee does not and is not able to control (directly or indirectly) the affairs or operations of the Company or its wholly owned subsidiaries, who may be expected to be carrying on a trading business. For the avoidance of doubt, the Stapling Deed provides that:

The parties acknowledge and agree that nothing in this agreement is to be interpreted as any Stapled Entity having or exercising control over any other Stapled Entity

and

• the Trustee of each of the Sub-Trusts is not carrying on a trading business (see conclusion to question 2).

Conclusion

Upon listing of the Stapled Securities, the Trust is not a public trading trust for the relevant income years on the basis that the Trust is:

• a 'resident unit trust'

• not a 'corporate unit trust'

• a 'public unit trust' and

• not a 'trading trust'.

Question 2

As set out above, paragraph 102R(1)(b) provides that a unit trust is a public trading trust in relation to the relevant year of income if:

v. the unit trust is a public unit trust in relation to the relevant year of income;

vi. the unit trust is a trading trust in relation to the relevant year of income;

vii. either:

(i) the unit trust is a resident unit trust in relation to the relevant year of income, or

(ii) the unit trust was a public trading trust in relation to a year of income preceding the relevant year of income; and

viii. the unit trust was not a corporate unit trust within the meaning of Division 6B in relation to the relevant year of income.

These requirements are considered fully below.

Public Unit Trust - subparagraph 102R(1)(b)(i)

Paragraph 102P(1)(c) provides that a unit trust will be a public unit trust at any time during the year of income if the units in the trust were held by not less than 50 persons.

Subsection 102P(10) provides that, for the purposes of section 102P, where units in a unit trust are held by the trustee of another trust estate, a person, who has a beneficial interest in property of that other trust estate that consists of those units (whether or not that beneficial interest is deemed to be held by virtue of subsection 102P(10)), is deemed to hold those units. This effectively allows the beneficial ownership of units in a unit trust to be traced through any interposed trusts to the ultimate beneficiary.

As the units in the Sub-Trust are held by the Trustee, the unitholders who have a beneficial interest in the property of the Trust shall be deemed to hold the units of the Sub-Trusts. Upon the listing of the Stapled Securities, the Trust will have at least 50 investors, and those investors will be deemed to hold the units of the Sub-Trusts. Accordingly, each Sub-Trust will qualify as a public unit trust on the basis of subsection 102P(10).

Resident Unit Trust - sub-subparagraph102R(1)(b)(iii)(A)

The Sub-Trusts are agreed to be resident unit trusts as the central management and control of each Sub-Trust is and will continue to be in Australia (paragraph 95(2)(a)).

Corporate Unit Trust - subparagraph 102R(1)(b)(iv)

As stated above, section 102J provides that a unit trust is a corporate unit trust in relation to a relevant year of income if, among other things, the unit trust is an 'eligible unit trust'.

For the purposes of Division 6B, a unit trust will be an 'eligible unit trust' in relation to a year of income under section 102F if the property of the unit trust was acquired as part of a 'prescribed arrangement' in certain circumstances (as outlined in section 102E).

The Trustee holds units in the Sub-Trusts solely for the purposes of investment and the assets of the Sub-Trusts were not acquired as part of a 'prescribed arrangement'.

Trading Trust - subparagraph 102R(1)(b)(ii)

Section 102N provides that a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee:

(a) carried on a trading business; or

(b) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business.

Trading business

'Trading business' is defined in section 102M as a business that does not consist wholly of 'eligible investment business'.

'Eligible investment business' is relevantly defined in section 102M to mean one or more of:

(a) investing in land for the purpose, or primarily for the purpose, of deriving rent; or

…

'Land' is defined in section 102M to mean an interest in land and fixtures on land.

The Tax Laws Amendment (2008 Measures No.5) 2008 introduced an extension of the meaning of the term 'investing in land' in section 102MB.

The Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No.5) Bill 2008 provides:

5.13 Under the current law there is some uncertainty about the scope of the term investing in land. These amendments clarify the meaning of investment in land by introducing into the law specific references to:

• fixtures on land [Schedule 5, item 7, section 102M] ; and

• moveable property that is incidental and relevant to the renting of the land, customarily supplied or provided in connection with the renting of the land, and ancillary to the ownership and use of the land [Schedule 5, item 8, subsection 102MB(1)] .

Example 5.1

A public unit trust invests in land used as a shopping centre. The property includes some fittings and moveable furnishings in the common areas that are for use by centre customers. The investment in the fittings and moveable property are included as part of the investment in land.

However, this extension should be read as an extension of the provision dealing with 'investing in land' in section 102M. This means that the application of section 102MB need only be necessary if it is of assistance to the application of the term 'eligible investment business' in subsection 102M.

The meaning of 'eligible investment business' in subsection 102M includes 'investing in land for the purpose, or primarily for the purpose, of deriving rent'.

The ITAA 1936 does not define 'rent' for these purposes. Accordingly, its meaning under general law is relevant.

The Encyclopaedic Australian Legal Dictionary defines 'rent' in the context of lease and tenancies as follows:

[a] period payment, usually in money, due by the tenant of land or premises to the landlord in consideration for the tenant's right to occupy the land or premises…

The lease agreements between the Company and each Sub-Trust are on usual commercial lease terms for a period of five years with an option to renew and:

i. provide that the trustee of each Sub-Trust will lease the whole of its parcel of land to the Company;

ii. provide for exclusive possession of the land; and

iii. require that the Company pay the trustee of each Sub-Trust on an annual basis a fixed lease rental payment, which will be increased by 4% on the first day of January of each year.

On the basis of the above, the lease rental payments paid by the Company to the Sub-Trusts are 'rent' for the purposes of section 102M.

Accordingly, the business of the trustee of each Sub-Trust comprises of 'investing in land for the purpose, or primarily for the purpose, of deriving rent'.

That is, the trustee of each Sub-Trust is wholly carrying on an 'eligible investment business' and is not carrying on a 'trading business'.

Conclusion

Upon listing of the Stapled Securities, each Sub-Trust will not be a public trading trust for the relevant income years on the basis that each Sub-Trust is:

• a 'resident unit trust'

• not a 'corporate unit trust'

• a 'public unit trust' and

• not a 'trading trust'.

¹ (1980) 31 ALR 649