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Date of advice: 25 October 2017

Ruling

Subject: Public Trading Trusts

Question 1

Did XYZ Trust (the Trust) satisfy the requirements to be a ‘public trading trust’ (PTT) under paragraph 102R(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) for the income year ended 30 June 20XX?

Answer

No.

Question 2

Did the Trust satisfy the requirements in section 713-130 of the Income Tax Assessment Act 1997 (ITAA 1997) allowing it to make a valid choice to become the head company of a tax consolidated group for the income year ended 30 June 20XX?

Answer

No.

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commenced on

1 July 20WW

Relevant facts and circumstances

1. Since settlement, the main business activity of the Trust has been investment in land and buildings with the primary purpose of deriving rent.

2. During the income year ended 30 June 20XX more than 20% of the beneficial interests in the Trust were owned by superannuation funds.

3. For a few years prior to, but not during the income year ended 30 June 20XX, the Trust owned and operated a specific business. This was in addition to the investments in land and buildings. During those years, the Trust satisfied the requirements of paragraph 102R(1)(b) of the ITAA 1936.

4. The business was sold prior to the income year ended 30 June 20XX.

5. After the sale of the business, the sole business activity of the Trust was investing in land and buildings for the primary purpose of deriving rent.

6. In the year preceding the income year ended 20XX, the Trust purchased a company, XYZ Pty Ltd, with the intention of buying property in another state. This company was a wholly-owned subsidiary of the Trust. The business activities of XYZ Pty Ltd consisted wholly of the investment in land and buildings with the primary purpose of deriving rent.

7. In the income year ended 30 June 20XX, the Trust made an election to form a tax consolidated group with the Trust as the Head Company and XYZ Pty Ltd as a subsidiary company.

8. The Trust was issued with an income tax consolidation letter from the ATO confirming the start date for the tax consolidated group.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 102M

Income Tax Assessment Act 1936 paragraph 102R(1)(b)

Income Tax Assessment Act 1997 section 713-130

Reasons for decision

Question 1

Did the Trust satisfy the requirements to be a PTT under paragraph 102R(1)(b) of the ITAA 1936 for the income year ended 30 June 20XX?

Detailed reasoning

Paragraph 102R(1)(b) of the ITAA 1936 provides that a unit trust is a PTT in relation to a relevant year of income commencing on 1 July 1998 or a subsequent year of income where:

(i) the unit trust is a public unit trust in relation to the relevant year of income;

(ii) the unit trust is a trading trust in relation to the relevant year of income; and

(iii) either of the following conditions is satisfied:

(A) the unit trust is a resident unit trust in relation to the relevant year of income;

(B) the unit trust was a public trading trust in relation to a year of income preceding the relevant year of income.

Prior to legislative amendments, during the income year ended 30 June 20XX, there was also a fourth element in subparagraph 102R(1)(b)(iv) of the ITAA 1936 that has since been repealed. It required the unit trust to not be a corporate unit trust:

(iv) the unit trust is not a corporate unit trust within the meaning of Division 6B in relation to the relevant year of income.

Each of the subparagraphs above from (i) to (iv) are required to be satisfied cumulatively. The determination of whether or not a unit trust is a PTT is an annual test and therefore these requirements need to be met each income year in order for a unit trust to be considered a ‘public trading trust’. That is, each income year, the relevant unit trust must:

● be a ‘public unit trust’

● be a ‘trading trust

● satisfy either of the conditions in subparagraph 102R(1)(b)(iii) of the ITAA 1936, and

● not be a ‘corporate unit trust’.

The term ‘public unit trust’ is defined in section 102P of the ITAA 1936. For the income year ended 30 June 20XX, subsection 102P(2) of the ITAA 1936 deemed a unit trust to be a 'public unit trust' where an 'exempt entity' held a beneficial interest in 20% or more of the property or income of the unit trust. Section 102M of the ITAA 1936 specifically defined 'exempt entity' to mean, among other things, 'the trustee of a complying superannuation fund'.

For the income year ended 30 June 20XX, more than 20% of the beneficial interests in the Trust were owned by the trustees of complying superannuation funds. Therefore the Trust was a ‘public unit trust’ satisfying subparagraph 102R(1)(b)(i) of the ITAA 1936.

In order to meet the requirement of a ‘trading trust’ under subparagraph 102R(1)(b)(ii) of the ITAA 1936, the definition of ‘trading trust’, as defined in section 102N of the ITAA 1936, is required to be satisfied. Section 102N of the ITAA 1936 as it was for the income year ended 30 June 20XX provided the following:

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.

Section 102N of the ITAA 1936 refers to the term ‘trading business’. This 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 mean a number of different business activities but relevantly states that it includes ‘investing in land for the purpose, or primarily for the purpose, of deriving rent’.

After the cessation and sale of the business prior to the income year ended 30 June 20XX, the Trust’s business activities consisted wholly of the investment in land and buildings with the primary purpose of deriving rent. This activity is covered under the definition of an ‘eligible investment business' in section 102M of the ITAA 1936. Therefore, as the Trust operated wholly as an ‘eligible investment business’ in the income year ended 30 June 20XX, it cannot be said to be a ‘trading business’.

The only entity that the Trust controlled during the income year ended 30 June 20XX was XYZ Pty Ltd. The business activities of XYZ Pty Ltd, which was a wholly owned subsidiary of the Trust, also consisted wholly of the investment in land and buildings with the primary purpose of deriving rent. As such, it also cannot be said to be a ‘trading business’ in the income year ended 30 June 20XX as it operated wholly as an ‘eligible investment business’.

As the Trust is not considered to have carried on a ‘trading business’ and was not in the control of another person carrying on a trading business, the Trust did not satisfy the definition of ‘trading trust’ in section 102N of the ITAA 1936.

The Trust was not a ‘trading trust’ for the income year ended 30 June 20XX and therefore it did not satisfy the requirements of subparagraph 102R(1)(b)(ii) of the ITAA 1936 in that year. It is not necessary to consider the other requirements under paragraph 102R(1)(b) of the ITAA 1936 as the failure of any one of the requirements would mean that the Trust is not a PTT.

Therefore, the Trust did not satisfy the requirements to be a PTT under paragraph 102R(1)(b) of the ITAA 1936 for the income year ended 30 June 20XX.

Question 2

Did the Trust satisfy the requirements in section 713-130 of the ITAA 1997 allowing it to make a valid choice to become the head company of a tax consolidated group for the income year ended 30 June 20XX?

Detailed reasoning

The consolidation regime in Part 3-90 of the ITAA 1997 allows groups of wholly-owned entities to be treated as a single company taxpayer for income tax purposes. A consolidated group is able to be formed provided the membership requirements as outlined in Division 703 of the ITAA 1997 are satisfied.

The eligibility requirements to be a head company of a consolidated group are provided in subsection 703-15(2) of the ITAA 1997. These requirements include that the entity must be an Australian resident, it must not be a subsidiary member of a consolidatable group or consolidated group and that the entity must be a company that has all or some of its taxable income (if any) taxed at a rate that is or equals the corporate tax rate.

As the Trust was a trust in the income year ended 30 June 20XX, it did not satisfy the requirements under section 703-15 of the ITAA 1997 to be the head company of a consolidatable group. From this, the Trust could not make a valid choice to become the head company of a tax consolidated group under section 703-50 of the ITAA 1997 for the income year ended 30 June 20XX.

For these reasons, absent specific rules, a trust would generally not be eligible to be a head company and therefore unable to elect to form a consolidated group. However, a modification to the requirements in section 703-15 of the ITAA 1997 is the operation of Subdivision 713-C of the ITAA 1997. For the income year ended 30 June 20XX, the Subdivision provided rules that enabled a ‘corporate unit trust’ (CUT) or PTT to make an election to be treated as a head company of a consolidated group.

Section 713-130 of the ITAA 1997 provides that a trust may make a choice under section 703-50 of the ITAA 1997 as if the trust were a company (identified throughout the Subdivision as the assumed company), but only if:

● the assumed company was eligible to be a head company, on an assumption that it beneficially owned the membership interests in other entities that are legally owned by its trustee; and

● the day specified in the choice is the first day of an income year for which the trust is a CUT or PTT.

In making the election, the CUT or PTT is treated like a company for income tax and other related purposes. The choice applies to the CUT or PTT for the rest of its existence, even if the group later deconsolidates or the trust subsequently ceases to meet the conditions to be characterised as a CUT or PTT. That is, a choice to form a consolidated group is also an irrevocable election for the trust to be treated like a company for income tax and other related purposes.

To determine whether the Trust was able to meet the requirements in section 713-130 of the ITAA 1997 to be eligible to be the head company of a consolidated group and therefore make a valid choice to become the head company of a tax consolidated group for the income year ended 30 June 20XX, it needs to have been either a CUT or PTT in that year.

As established in Question 1, the Trust was not a PTT in the income year ended 30 June 20XX. It is therefore necessary to consider whether it was a CUT in the income year ended 30 June 20XX.

For the income year ended 30 June 20XX, a 'corporate unit trust' was defined in section 102J of the ITAA 1936 (prior to it being repealed). The requirements that needed to be satisfied in order for a unit trust to be considered a CUT were as follows:

● the unit trust is an ‘eligible unit trust’ in the relevant year of income

● the unit trust is a ‘public unit trust’ in the relevant year of income, and

● the unit trust is either a resident unit trust in relation to the relevant year of income or the unit trust was a corporate unit trust in the year preceding the relevant year of income.

For the purposes of the Trust, it is an Australian resident unit trust and was a ‘public unit trust’ in the income year ended 30 June 20XX.

It is therefore necessary to determine if the trust was an 'eligible unit trust' as defined in section 102F of the ITAA 1936. Section 102F of the ITAA 1936 provided that a unit trust is an ‘eligible unit trust’ where the business or other property of the trust is transferred to the trust and the shareholders or unitholders of the transferor company or trust are given a preference or advantage in taking up units in the new public unit trust. Since settlement, the Trust has not been subject to the transfer of business or other property that would constitute the Trust meeting the definition of an ‘eligible unit trust’ and is therefore not a CUT under section 102J of the ITAA 1936.

The failure to meet the requirement of being a CUT or PTT results in the Trust not satisfying the requirements in section 713-130 of the ITAA 1997 to be eligible to be the head company of a consolidated group.

Therefore, as the Trust did not satisfy the requirements in section 713-130 of the ITAA 1997 it was not able to make a valid choice to become the head company of a tax consolidated group for the income year ended 30 June 20XX.