Edited version of your written advice

Authorisation Number: 1012796697786

Date of advice: 28 July 2015

Ruling

Subject: Division 6C - Proposed initiatives at a shopping centre

Relevant facts and circumstances

The below facts and circumstances have been edited to remove the details of the commercial arrangements for the purposes of confidentiality.

• The taxpayer is an Australian resident unit trust which owns a business.

• The Taxpayer currently derives periodic rental income from the business as well as a minimal amount of other types of income which are regarded as incidental and relevant to the renting of land on which the business is situated.

• The Taxpayer does not receive "excluded rent" (as defined in section 102M of the ITAA 1936).

• The Taxpayer is planning to extend the business including introducing certain initiatives.

• The initiatives will enable the business to:

• expand and enhance the ways the business and retailers can connect, communicate and engage with shoppers; and

• revolutionise and modernise customers' shopping experience and bring added value, flexibility and convenience to customers before, during and after their shopping experience.

• The initiatives will be exclusively used by customers and tenants of the business.

• the purpose of these initiatives is to increase the number of customers and transactions in the business, generating more sales and more rental income for The Taxpayer. In alignment with the Taxpayer's expansion, the initiatives will also attract new tenants to the business and encourage existing tenants to extend their leases in the business, which also result in more rental income for the Taxpayer.

• Parties who wish to use these initiatives will be charged an amount by the Taxpayer for these services.

Question 1

Will the income to be derived by the Taxpayer from the proposed initiatives be regarded as income from the carrying on of a business that is "incidental and relevant to the renting of land" for the purposes of subsection 102MB(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The income from the Taxpayer's proposed initiatives will be regarded as income from the carrying on of a business that is incidental and relevant to the renting of land for the purposes of subsection 102MB(2) of the ITAA 1936.

Detailed reasoning

Division 6C of Part III (Division 6C) of the ITAA 1936 treats a public trading trust, its unitholders and its trustee as if the public trading trust is a company for some tax purposes.

Subparagraph 102R(1)(a)(iii) of the ITAA 1936 provides that a public trading trust must be a trading trust. Subsection 102N(1) of the ITAA 1936 provides that a unit trust is a trading trust in relation to a year of income if, at any time during that year, its trustee is carrying on a trading business.

Section 102N of the ITAA 1936 treats a unit trust as a trading trust in relation to a year of income in which the trustee carries on a trading business (that is, has any activity that is not an 'eligible investment business' as defined in section 102M of the ITAA 1936 and modified by sections 102MA, 102MB and 102MC of the ITAA 1936).

Section 102M

Section 102M of the ITAA 1936 defines a trading business to be "a business that does not consist wholly of eligible investment business". Section 102M defines 'eligible investment business' to mean, amongst other things, one or more of:

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

(b) …

The relevant question in respect of paragraph 102M(a) is whether the business activities of The Taxpayer relate to the investing in land for the purpose, or primarily for the purpose, of deriving rent.

The Explanatory Memorandum to Tax Laws Amendment (2008 Measures No 5) Act 2008 (The EM), which introduced section 102MB, provides further clarification of the meaning of investment in land by providing a safe harbour for non-rental income.

Whether the proposed investments relate to fixtures on land or moveable property, the amendments confirm that they are considered investments in land.

In respect of fixtures on land, the definition of land provided at section 102M of the ITAA 1936 was amended as follows:

Land includes an interest in land and fixtures on land.

In respect of movable property, subsection 102MB(1) of the ITAA 1936 was amended to include:

For the purposes of this Division, investments in moveable property, being property that is:

(a) incidental to and relevant to the renting of land; and

(b) customarily supplied or provided in connection with the renting of land; and

(c) ancillary to the ownership and use of land;

are taken to be investments in land.

The investment in infrastructure for the proposed initiatives are considered to be fixtures on land and/or movable property and therefore are investments in land.

Subsection 102MB(2) of the ITAA 1936 provides that an entity's investments in land are taken to be for the purpose, or primarily for the purpose, of deriving rent during a year of income if:

(a) each of those investments is for purposes (other than the purpose of trading) that include a purpose of deriving rent; and

(b) at least 75% of the gross revenue from those investments for the year of income consists of rent

(except excluded rent); and

(c) none of the remaining gross revenue from those investments for the year of income is:

(i) excluded rent; or

(ii) from the carrying on of a business that is not incidental and relevant to the renting of the land.

In order for the income from the proposed initiatives to satisfy subparagraph 102MB(2)(c)(ii) of the ITAA 1936, the income from the carrying on of a business needs to be "incidental and relevant to the renting of land".

"Incidental and relevant to the renting of land"

The terms incidental and relevant are not defined in the Income Tax Acts, however it has been considered by the courts in the test of deductibility of expenses in section 8-1 of the Income Tax Assessment Act 1997 as requiring a connection or sufficient nexus to the gaining or producing of assessable income.

The ordinary meanings of these terms in the Australian Macquarie Dictionary are:

Incidental

2. Incurred casually and in addition to the regular or main amount: incidental expenses

….

5. Incidental to, liable to happen in connection with

Relevant

Bearing a upon or connected with the matter in hand; to the purpose

Therefore any investments in land that derive income other than from rent, must be "incurred casually", "happen in connection with" and "have a connection with" the renting of land.

The EM provides examples of types of income that are incidental and relevant to the renting of land, including:

• Billboards and advertising on the properties (refer Example 5.2);

• Mobile phone towers on the properties (refer Example 5.2); and

• Car parking fees from car park for shopping centre customers (refer Example 5.3 and 5.4).

Example 5.2 states:

A public unit trust earns $250 million in gross revenue in an income year from its investments in land. Each of the trust's investments has a purpose of deriving rent. The revenue comprises:

The trust would satisfy the 25 per cent safe harbour test as 80 per cent of its gross revenue from the properties is rent and the remaining revenue is not from carrying on a business that is not incidental and relevant to the renting of the land.

Whilst the income from Billboards and advertising and mobile phone towers is not considered to be rent for the purposes of paragraph 102MB(2)(b) of the ITAA 1936 and included in the 75% threshold, the example states that the remaining revenue is not from the carrying on of a business that is not incidental and relevant to the renting of land for the purposes of subparagraph 102MB(2)(c).

The car parking fee in examples 5.3 and 5.4 provide a distinction between two circumstances where one is considered incidental and relevant and also an example where it is not considered incidental and relevant to the renting of land. Example 5.3 and 5.4 state:

Example 5.3

A public unit trust owns and rents out a shopping centre that includes a car park for shopping centre customers. To deter use by non-customers long-stay users are charged fees. The revenue from car parking fees would be incidental to the rental of the land and would be non-rental income for the purposes of the safe harbour rule. The income from the car park is not from carrying on a business that is not incidental and relevant to the renting of the land.

Example 5.4

A public unit trust acquires land and buildings which comprise of office accommodation for rent and parking for the tenants. The trust subsequently decides not to make the parking available primarily for tenants but to run a car parking operation on the property. The income from the car parking operation would not fall within the 25 per cent safe harbour as it is income from carrying on a business that is not incidental and relevant to the renting of the land. The trust would be carrying on a trading business.

The above examples demonstrate that in the case of car parking income, it is only considered incidental and relevant to the renting of the land where the car parks are primarily rented to customers and tenants of the shopping centre and/or office accommodation. Where the car parks are not rented primarily to customers and tenants, but to others not associated with renting of the shopping centre and or office accommodation, the income will not be incidental and relevant to the renting of land.

It is considered that the Taxpayer's initiatives will provide the following benefits exclusively to the business' tenants and customers including:

• for tenants, using technology to remain competitive in the retail market and to adapt to new retail trends and customer expectations, which seek to improve the overall performance of the business and are directly connected with the derivation of rental income from the business;

• the initiatives will keep customers entertained and/or distracted so that they do not get bored or frustrated and leave the business, enhancing their experience and the likelihood or spending more money at retailers;

• expanding and enhancing the ways the business and retailers can connect, communicate and engage with shoppers; revolutionise customer's shopping experience before, during and after they physically come to the business; and

• enabling the business to remain competitive.

Furthermore, the proposed initiatives are primarily available for the benefit of the business' tenants and customers.

Conclusion

The income from the proposed initiatives of the Taxpayer are considered to be income derived from the carrying on of a business that is incidental to and relevant to the renting of land, pursuant to subsection 102MB(2) of the ITAA 1936.

Question 2

If the answer to Question 1 is in the affirmative, will the Taxpayer be regarded as "investing in land for the purpose, or primarily for the purpose of deriving rent"?

Summary

The Taxpayer will be regarded as investing in land for the purpose, or primarily for the purpose of deriving rent.

Detailed reasoning

In order for a business to not be an eligible investment business pursuant to section 102M of the ITAA 1936, The Taxpayer must be regarded as "investing in land for the purpose, or primarily for the purpose, of deriving rent."

Pursuant to subsection 102MB(2) of the ITAA 1936, it is considered that the Taxpayer's investments in land are taken to be for the purpose, or primarily for the purpose of deriving rent where that subsection is satisfied. It is considered that subsection 102MB(2) will be satisfied for the following reasons:

• each of the Taxpayer's investments in the proposed initiatives whether these be fixtures on land or moveable property include the purpose of deriving rent;

• at least 75% of the gross revenue from those investments for the income year will consist of rent; and

• none of the remaining gross revenue of the Taxpayer for the year of income will be from excluded rent or from the carrying on of a business that is not incidental and relevant to the renting of land.

Question 3

If the answer to Question 2 is in the affirmative, will the Taxpayer be regarded as carrying on an "eligible investment business" pursuant to section 102M of Division 6C of the ITAA 1936 such that it is not a "trading trust" pursuant to section 102N?

Summary

The Taxpayer will not be a trading trust pursuant to section 102N of the ITAA 1936.

Detailed reasoning

Section 102N of the ITAA 1936 provides the following definition of a trading trust:

(1) For the purposes of this Division, 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."

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

It is considered that the Taxpayer will satisfy an eligible investment business pursuant to section 102M as it is regarded as investing in land for the purpose, or primarily for the purpose, of deriving rent.

Therefore the Taxpayer will not be a trading trust pursuant to section 102N of the ITAA 1936.