Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 (130 of 2015)

Schedule 3   Instalment trusts

Income Tax Assessment Act 1997

1   After Division 230

Insert:

Division 235 - Particular financial transactions

Table of Subdivisions

Guide to Division 235

235-I Instalment trusts

Guide to Division 235

235-1 What this Division is about

This Division is about the tax treatment of particular kinds of financial transactions.

Subdivision 235-I - Instalment trusts

Guide to Subdivision 235-I

235-805 What this Subdivision is about

An entity that invests in an asset through an instalment warrant, instalment receipt, or other similar arrangement, is treated for most income tax purposes as if it had invested in the asset directly.

A regulated superannuation fund that invests in an asset through a limited recourse borrowing is treated in the same way.

Table of sections

Operative provisions

235-810 Object of this Subdivision

235-815 Application of Subdivision

235-820 Look-through treatment for instalment trusts

235-825 Meaning of instalment trust and instalment trust asset

235-830 What trusts are covered - instalment trust arrangements

235-835 Requirement for underlying investments to be listed or widely held

235-840 What trusts are covered - limited recourse borrowings by regulated superannuation funds

235-845 Interactions with other provisions

Operative provisions

235-810 Object of this Subdivision

The object of this Subdivision is to ensure that, for most income tax purposes, the consequences of ownership of an *instalment trust asset flow to the entity that has the beneficial interest in the asset, instead of to the trustee.

235-815 Application of Subdivision

(1) This Subdivision applies to:

(a) the entity that has the beneficial interest in an *instalment trust asset as the beneficiary of an *instalment trust; and

(b) the trustee of the instalment trust.

(2) This Subdivision applies for the purposes of this Act, apart from:

(a) Part VA of the Income Tax Assessment Act 1936 (which is about tax file numbers); and

(b) Subdivisions 12-E, 12-F and 12-H in Schedule 1 to the Taxation Administration Act 1953 (which are about PAYG withholding).

Joint investments

(3) This Subdivision applies in relation to 2 or more entities that hold an interest in a trust as joint tenants, or as tenants in common, in the same way it applies in relation to a single entity that holds such an interest.

Note: Each investor that is treated by this Subdivision as jointly owning an instalment trust asset is treated for CGT purposes as owning a separate asset: see section 108-7.

235-820 Look-through treatment for instalment trusts

(1) If an entity (the investor ) has a beneficial interest in an *instalment trust asset under an *instalment trust, the asset is treated as being the investor's asset (instead of being an asset of the trust).

Example: A dividend in respect of the asset is paid to the trustee. It is treated (but not for the purposes of the PAYG withholding provisions mentioned in paragraph 235-815(2)(b)) as if it had been paid directly to the investor.

(2) An act done in relation to an *instalment trust asset of an *instalment trust by the trustee of the trust is treated as if the act had been done by the investor (instead of by the trustee).

Example: A trustee disposes of the asset. Any capital gain or loss is made by the investor, not by the trustee.

(3) The investor is treated as having the *instalment trust asset in the same circumstances as the investor actually has the interest in the *instalment trust.

(4) Without limiting subsection (3), the circumstances include:

(a) whether the interest is held on capital account or on revenue account; and

(b) whether the interest is held as a joint tenant or tenant in common.

(5) Any consequence arising under the *GST Act for the trustee of the *instalment trust, as a result of anything done in relation to the *instalment trust asset, is treated as if it had arisen for the investor (instead of for the trustee), even if that consequence would not have arisen had the thing been done by or to the investor.

Example: If the trustee has a net input tax credit under the GST Act, the investor must apply the credit to reduce the investor's cost base for the instalment trust asset (even if the investor is not registered or required to be registered for GST purposes): see section 103-30.

235-825 Meaning of instalment trust and instalment trust asset

(1) A trust is an instalment trust if:

(a) the trust is covered by section 235-830 (about instalment trust arrangements) and satisfies the requirements in section 235-835 (about requirements for underlying investments to be listed or widely held); or

(b) the trust is covered by section 235-840 (about limited recourse borrowings by *regulated superannuation funds).

(2) An instalment trust asset is an asset that is, or is part of, the underlying investment of an *instalment trust (as mentioned in section 235-830 or 235-840, as the case requires).

235-830 What trusts are covered - instalment trust arrangements

(1) This section covers a trust if, under an *arrangement:

(a) an entity (the investor ) makes a *borrowing, or is provided with credit; and

(b) to secure the borrowing or provision of credit, the trustee of the trust acquires an asset or assets (the underlying investment ); and

(c) the investor has a beneficial interest in the underlying investment as the sole beneficiary of the trust; and

(d) for a provision of credit - the credit was provided to the investor to acquire the asset, or one of the assets, that comprises the underlying investment; and

(e) the investor is entitled to the benefit of all income from the underlying investment; and

(f) the investor is entitled to acquire legal ownership of the underlying investment on discharging its obligations relating to the borrowing or provision of credit.

Note: For paragraph (c), the sole beneficiary of the trust may be 2 or more entities that have an interest in the trust as joint tenants or tenants in common: see subsection 235-815(3).

(2) However, this section does not cover a trust if the investor is a trustee of a *regulated superannuation fund and the *arrangement includes a *borrowing.

(3) This section does not cover a trust if the underlying investment is subject to any charge, security or other encumbrance (apart from any charge securing the obligations relating to the *borrowing or provision of credit).

235-835 Requirement for underlying investments to be listed or widely held

(1) A trust satisfies the requirements in this section if:

(a) each asset that is, or is part of, the underlying investment is:

(i) a *share, a unit in a unit trust or a stapled security; or

(ii) an interest in an entity that holds an interest in a share, a unit in a unit trust or a stapled security either directly, or indirectly through one or more interposed entities; and

(b) each such share, unit or stapled security:

(i) is listed for quotation in the official list of an *approved stock exchange; or

(ii) meets the widely held requirement set out in the applicable item of the following table.

(2) A *share, unit in a unit trust or a stapled security that fails the widely held requirement set out in the table in subsection (1) is treated as satisfying that requirement if the failure:

(a) is of a temporary nature only; and

(b) is caused by circumstances outside the investor's control.

(3) In applying subsection (1), disregard an asset, or the cash proceeds from disposing of an asset, if:

(a) the trustee became entitled to the asset in respect of a *share, unit or stapled security that was, or was part of, the underlying investment just before the entitlement arose; and

(b) the asset is not a *share, unit in a unit trust, or stapled security; and

(c) if the asset is an interest in an entity, or a right, option or similar interest that gives the holder an entitlement to acquire an interest in an entity:

(i) an interest in the entity is listed for quotation in the official list of an *approved stock exchange; or

(ii) the entity meets a widely held requirement set out in column 2 of item 1 or 2 of the table in subsection (1); and

(d) the underlying investment comprises one or more other assets that are not disregarded under this subsection.

Example: Examples of the types of assets disregarded by this subsection are:

(a) assets that represent distributions and capital payments in respect of the underlying investment; and

(b) bonus rights issued in respect of the underlying investment.

(4) Despite subsections (1) to (3), the underlying investment does not satisfy the requirement in this section if an asset that is, or is part of, the underlying investment is an *ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applies.

235-840 What trusts are covered - limited recourse borrowings by regulated superannuation funds

This section covers a trust if:

(a) under an *arrangement, an asset or assets (the underlying investment ) is acquired by the trustee of the trust for the benefit of a trustee of a *regulated superannuation fund to secure a *borrowing; and

(b) until the borrowing is repaid, the arrangement is covered by:

(i) the exception in subsection 67A(1) of the Superannuation Industry (Supervision) Act 1993 (which is about limited recourse borrowing arrangements); or

(ii) the exception in former subsection 67(4A) of that Act (which was about instalment warrants).

235-845 Interactions with other provisions

(1) Section 106-50 (about absolutely entitled beneficiaries) does not apply to an *instalment trust asset.

(2) Section 106-60 (about securities, charges and encumbrances) does not apply to an *instalment trust asset.

(3) Nothing in this Subdivision limits Division 247 (which is about capital protected borrowings).

Note: Division 247 may apply to an arrangement to which this Subdivision applies.