Edited version of your written advice

Authorisation Number: 1051179010197

Date of advice: 18 January 2017

Ruling

Subject: Public Unit Trust - Application of Division 6C of the Income Tax Assessment Act 1936

Question 1

Does A1 Trust constitute a trading trust under paragraph 102N(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Will the proposed arrangement cause A1 Trust to constitute a trading trust under paragraph 102N(1)(a) of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20BB

Year ending 30 June 20CC

Year ending 30 June 20DD

Year ending 30 June 20EE

Year ending 30 June 20FF

The scheme commenced on:

1 December 20AA

Relevant facts and circumstances

The scheme that is the subject of this ruling is as follows:

1. A1 Management is the trustee and Responsible Entity of A1 Trust (the Trust).

2. A1 Management is wholly owned by ParentCo.

3. ParentCo holds a significant indirect interest in the Trust.

4. A1 Trust is a fund whose investments constitute eligible investment businesses under section 102M of the ITAA 1936.

5. The Trust is registered with the Australian Securities and Investments Commission (ASIC) as a managed investment scheme under Chapter 5C of the Corporations Act 2001.

6. The powers and responsibilities of the trustee and Responsible Entity are set out in the Trust's Constitution.

The current arrangement

7. The trustee and Responsible Entity provided management services to the Trust and performed its duties under the Constitution of the Trust in consideration of a management fee and a performance fee. These fees are set out in the Trust's Constitution.

The proposed arrangement

8. ParentCo wishes to ensure the structure of the Trust is more cost-effective by eliminating the ongoing need to pay management fees to the trustee and Responsible Entity.

9. To achieve this, the trustee and Responsible Entity will provide the management services and perform its duties under the Constitution of the Trust without receiving management or performance fees.

10. The Trust's Constitution will be amended to remove the management and performance fees, and cause the trustee and Responsible Entity to waive any right to fees with respect to the Trust that it would otherwise have under general trust law. The trustee and Responsible Entity will continue to be reimbursed for the expenses it incurs in providing management services and performing its duties under the Constitution of the Trust.

11. The Trust's Constitution will also be amended to allow the trustee and Responsible Entity to employ, or otherwise hire, on behalf of the Trust personnel to manage the assets of the Trust. These personnel may also be associates or employees of the trustee and Responsible Entity.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6C

Income Tax Assessment Act 1936 section 102M

Income Tax Assessment Act 1936 subsection 102N(1)

Reasons for decision

Question 1

Does A1 Trust constitute a trading trust under paragraph 102N(1)(a) of the ITAA 1936?

Detailed reasoning

Subsection 102N(1) of the ITAA 1936 states:

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.

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

Section 102M of the ITAA 1936 defines 'eligible investment business' as 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:

(i) secured or unsecured loans (including deposits with a bank or other financial institution);

(ii) bonds, debentures, stock or other securities;

(iii) shares in a company, including shares in a foreign hybrid company (as defined in the Income Tax Assessment Act 1997 );

(iv) units in a unit trust;

(v) futures contracts;

(vi) forward contracts;

(vii) interest rate swap contracts;

(viii) currency swap contracts;

(ix) forward exchange rate contracts;

(x) forward interest rate contracts;

(xi) life assurance policies;

(xii) a right or option in respect of such a loan, security, share, unit, contract or policy;

(xiii) any similar financial instruments; or

(c)  investing or trading in financial instruments (not covered by paragraph (b)) that arise under financial arrangements, other than arrangements excepted by section 102MA.

The Trust invests in the assets which all satisfy paragraph (b) of the definition of 'eligible investment business' in section 102M of the ITAA 1936.

The activities of the trustee and Responsible Entity in providing management services, and performing its duties under the Constitution of the Trust, are integral and incidental to its ownership of the assets of the Trust. The management services and the performance of its duties under the Constitution of the Trust are an essential part of being both a trustee under the general law, and a Responsible Entity under Chapter 5C of the Corporations Act 2001. Providing management services and performing these duties under the Constitution of the Trust does not constitute a 'trading business' under section 102M of the ITAA 1936.

As the trustee and Responsible Entity's activities in providing management services and performing its duties under the Constitution of the Trust does not constitute a 'trading business', the Trust does not currently constitute a 'trading trust' under paragraph 102N(1)(a) of the ITAA 1936.

Question 2

Will the proposed arrangement cause A1 Trust to constitute a trading trust under paragraph 102N(1)(a) of the ITAA 1936?

Detailed reasoning

The change to the cost structure of the Trust under the proposed arrangement does not impact on the conclusion above. Under the proposed arrangement the trustee and Responsible Entity's activities in providing management services and performing its duties under the Constitution of the Trust will not constitute a 'trading business', and the Trust will not constitute a 'trading trust' under paragraph 102N(1)(a) of the ITAA 1936.