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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012729165962

Ruling

Subject: Public Trading Trust

Question

Is Trust A a public trading trust (PTT)?

Answer

No

This ruling applies for the following periods

Year of income ended 30 June 2015

Year of income ended 30 June 2016

Year of income ended 30 June 2017

Year of income ended 30 June 2018

The scheme commences on

1 July 2014

Relevant facts and circumstances

Trust A is a unit trust.

The only type of unit issued is (and will be) an Ordinary Unit.

The Unit holders are self-managed superannuation funds (SMSF).

Trust A propose to:

    • Issue sufficient Units to permit the purchase of vacant land

    • Enter into a building contract with an unrelated residential building firm to construct a residential property. The costs will initially be met from issue of units to the SMSF's and then, if necessary, by borrowing.

    • On completion lease back the residence to the building firm as a display home for a period of approximately three to five years (not fixed).

    • At the expiry of the lease the Trust A will either rent the home to a third party or sell the property.

    Based on the success of that project, Trust A may decide to repeat the exercise.

Relevant legislative provisions

Income Tax Assessment Act 1936 - Division 6C

Reasons for decision

Trust A will be a PTT in relation to a year of income where all of the four conditions in section 102R of the Income Tax Assessment Act 1936 (ITAA 1936) are satisfied:

    • the trust is a public unit trust

    • the trust is a trading trust

    • the trust is a resident unit trust or a public trading trust in a year preceding the relevant year of income, and

    • the trust is not a corporate unit trust (ie. already caught by Division 6B).

Public unit trust

Trust A is a public unit trust under the alternative test in subsection 102P(2) of the ITAA 1936 as 20% or more of the beneficial ownership of the trust is held by tax exempt entities (complying superannuation funds).

Trading trust

Pursuant to section 102N of the ITAA 1936, Trust A will be a trading trust if, at any time during an income year, the trustee carries on or was able to control a trading business.

A trading business is defined in section 102M of the ITAA 1936 as a business that does not consist wholly of eligible investment business.

However, this definition is read in conjunction with section 102MC of the ITAA 1936 which provides that a trust will not be carrying on a trading business in situations where the trustee derives not more than 2% of its gross revenue in an income year from sources other than an eligible investment business. However, this exception does not apply where the income is derived from a separate business activity which is not incidental or relevant to the eligible investment business.

Eligible investment business is defined in section 102M of the ITAA 1936 as including investing in land (including buildings and attached fixtures), primarily for the purpose of deriving rent, or investing or trading in specified types of assets or financial instruments (including shares, bonds, debentures, unsecured loans, units in a unit trust or rights, options in respect of those assets).

Any investment in land other than for the sole or primary purpose of deriving rent would not be an eligible investment business (ie a business of dealing in land or developing land for resale would not be an eligible investment business).

Therefore, Trust A will not be a trading trust if its business is limited to investments in land for the sole or primary purpose of deriving rent.

Trust A purpose is to earn rental income from its investment display home, thus it can be said that Trust As sole investment in land will be held primarily for the purpose of deriving rent.

Trust A's activities will therefore consist wholly of an eligible investment business and Trust A will not satisfy the definition of a trading trust under section 102N of the ITAA 1936.

In summary, Trust A is not a PTT as it does not meet all four conditions of section 102R of the ITAA 1936.


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