Taxation Ruling

IT 2004

Property growth trusts

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FOI status:

May be releasedFOI number: I 1102983

NOTICE OF ARCHIVAL

PREAMBLE

1. In recent times publicity has been given to the income tax implications for unit holders in property growth trusts. This publicity has been triggered by what are reported to have been sharply different opinions expressed by Deputy Commissioners of Taxation in Sydney and Melbourne.

2. It is a feature of property growth trusts that they offer to investors a return largely or wholly out of the increase in the value of trust properties. Expenses associated with the properties, in particular interest on moneys borrowed to acquire them, are sufficient to offset, if not wholly then substantially, the rental income from the properties. They differ in this respect from the more conventional form of fixed investment trust where the contributions from unit holders are invested in income producing assets and the unit holders derive their return from the income flowing from those assets.

RULING

3. As a result of the decision of the High Court in Charles v. F.C. of T. (1954) 90 CLR it is now well settled that the taxability of moneys distributed to unit holders in a unit trust depends upon the character of the moneys in the hands of the trustees prior to distribution. Thus, a distribution to unit holders out of income, other than exempt income, would be assessable income of the unit holders. Conversely, a distribution out of non income or capital receipts would not be assessable income of the unit holders.

4. Whether or not a given receipt is of an income nature in the hands of the trustees must inevitably depend upon the circumstances of each case. Where the trustees are engaged in the business of buying and selling properties, or where properties are purchased and sold within twelve months, the proceeds of sales would be of an income nature and distributions to unit holders would be assessable.

5. In many cases, however, it will be a question of what was the trustees' purpose in acquiring the property. In some situations it may be clear that the sole or dominant purpose of the trustees in acquiring property was to sell it at a profit, in which case distributions to unit holders would also be assessable. On the other hand, and this would be particularly so where the property was held for a considerable length of time, the principal purpose of the trustees in acquiring the property may have been not so much resale at a profit but the preservation of the unit holders' capital while, at the same time, deriving a minimal amount of income from the property. In this latter event the proceeds of the sale of the property would not be of an income nature and the unit holders would not be assessable.

6. The variety of situations which may arise make it difficult to formulate one general rule for the operation of the income tax law in this area. Nevertheless it has been concluded that in the longer term property growth trusts, i.e. those where it is intended to hold property for more than 10 years and which do not permit too much scope for buying and selling properties, distributions to unit holders out of increases in the value of or the ultimate proceeds of sale of trust properties will not be regarded as assessable income of unit holders.

7. In the shorter term property growth trusts, i.e. those with a prospective life of less than 10 years, there are strong grounds for the conclusion that the trust properties are acquired for the dominant purpose of resale at a profit. Distributions to unit holders in trusts of this nature will be regarded as assessable income of the unit holders.

8. There are, at the date of this ruling, a small number of the shorter term property growth trusts in existence. Investors in these trusts have been advised by promoters of the trusts that the returns from the increase in value of the trust properties would not be taxable in the hands of unit holders. This advice has been given on the basis that the trust properties were not purchased for the dominant purpose of resale at a profit but to preserve the value of unit holders' contributions. In this small number of cases, it will be accepted that distributions to unit holders will not be assessable income to them.

COMMISSIONER OF TAXATION
16 DECEMBER 1982

References

ATO references:
NO J.207/384 p.2 f.82
BO V.O. : VJ172/15 p.3

Related Rulings/Determinations:

IT 2004 NOTICE OF ARCHIVAL

Subject References:
INCOME
PROFIT MAKING BY SALE
PROPERTY TRUSTS

Legislative References:
25
26(a)
97

Case References:
Charles v. F.C. of T
(1954) 90 CLR 598