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Edited version of private advice
Authorisation Number: 1051616175720
Date of advice: 3 December 2019
Ruling
Subject: Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)
Question
Will the acquisition of interests in Asset Entity by an entity controlled by the Trustee of the XYZ Trust cause the XYZ Trust to be a 'trading trust' under paragraph 102N(1)(b) of the ITAA 1936?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Relevant facts and circumstances
XYZ Trust is an Australian resident unit trust, and a 'public unit trust' under section 102P of the ITAA 1936.
The Trustee of XYZ Trust is proposing to acquire, through a single entity, an indirect 99% interest in Asset Entity.
Asset Entity has various wholly-owned subsidiaries (each a Subsidiary Entity) that have constructed a type of asset that is attached to land.
Each Subsidiary Entity then enters into a contract with unrelated third parties for the latter to use the assets owned by that Subsidiary Entity, in return for the payment of a periodic fee to that Subsidiary Entity.
The Commissioner has been provided with considerable detail about the degree of physical annexation of the asset to the land, the object of annexation of the asset and the contracts with unrelated third parties for the use of the asset.
Reasons for decision
Subsection 102N(1) of the ITAA 1936 states:
For the purposes of this Division [6C], 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 to mean a business that does not consist wholly of eligible investment business.
The term 'eligible investment business' is defined in section 102M of the ITAA 1936 to relevantly include:
(a) investing in land for the purposes, or primarily for the purpose, of deriving rent.
The term 'land' is defined in section 102M of the ITAA 1936 to include "an interest in land and fixtures on land".
The term 'fixtures' is not defined in Division 6C of Part III of the ITAA 1936, and hence takes its meaning under the common law.
The common law doctrine of fixtures was summarised by the joint judgment of the High Court in TEC Desert Pty Ltd v Commissioner of State Revenue (WA) (2010) 241 CLR 576; [2010] HCA 49 at [23] - [24].
Having regard to the facts, we are satisfied that:
· the relevant assets are fixtures under the common law, meaning that the relevant type of asset is 'land' as defined in section 102M of the ITAA 1936, and
· the investments in the relevant type of asset are primarily for the purpose of deriving rent as required by paragraph (a) of the definition of 'eligible investment business' in section 102M of the ITAA 1936.
Therefore, the acquisition of interests in Asset Entity by an entity controlled by the Trustee of XYZ Trust will not cause XYZ Trust to be a 'trading trust' under paragraph 102N(1)(b) of the ITAA 1936.