Draft Taxation Determination

TD 95/D11

Income tax: can section 36A of the Income Tax Assessment Act 1936 apply if a sole trader who owns trading assets declares himself or herself to be a trustee of a discretionary trust over the assets?

• Please note that the PDF version is the authorised version of this draft ruling.
  This document has been finalised by TD 96/2.

FOI status:

draft only - for comment

Preamble

1. No.

2. Section 36A is founded on the existence of undivided fractional interests in trading assets and a change in those interests. The section does not apply to all changes in interests in trading assets. FC of T v. Westraders Pty Ltd 80 ATC 4357, per Mason J at 4367 and 4368; (1980) 11 ATR 24 at 36 and 37 and Glenfield Estates Pty Ltd v. FC of T 88 ATC 4548, per Lockhart J, with whom Wilcox and French JJ agreed, at 4561; (1988) 19 ATR 1426, at 1441 broadly support the view that section 36A comprehensively applies to changes in undivided fractional interests in trading assets.

3. If a sole trader declares himself or herself to be such a trustee, there is no change in any undivided fractional interests in the trading assets. The sole trader who legally (and beneficially) owned the trading assets, before the declaration, has a legal interest in the assets after the change - he or she retains legal title to the assets (albeit as a trustee) but has divested himself or herself of a beneficial interest in the assets. Because there is no change in any undivided fractional interests in the trading assets and the sole trader has no undivided fractional interest in the trading assets after the after the declaration of trust, subsection 36A(1) does not apply.

4. Section 36 also does not apply to the declaration of trust because the sole trader did not transfer the entirety of his or her ownership of the assets. Section 36 is concerned with the disposal of the whole or part of the assets of a business. When section 36 speaks of disposing of the assets of a business, Rose v. FC of T (1951) 84 CLR 118; 9 ATD 334 makes it clear that section 36 is speaking of a transfer of the proprietor's entirety of ownership of the assets. Because the sole trader's entire ownership in the assets is not disposed of on the declaration of trust by the sole trader (the sole trader retaining a legal interest in the assets), the same kind of difficulty that arose in the Rose case is present and section 36 cannot apply.

Definitions:

The expression 'trading assets' is used in this Taxation Determination to mean assets of a business (being trading stock, standing or growing crops, crop-stools or trees which have been planted and tended for the purpose of sale).

The expression 'undivided fractional interest' is used in this Taxation Determination in the same sense that it is used in the Rose case. A transfer of an undivided fractional interest in assets is the vesting in another or others of an undivided share or shares in the assets.

Example

Maybell Fresian owns a grazing business in Gippsland, Victoria. Maybell declares that she holds her business and all of its assets as trustee of her family discretionary trust.

Neither section 36A nor section 36 applies to the declaration of trust.

Commissioner of Taxation
30 August 1995

References

ATO references:
NO NAT 95/6458-6
BO TDUMG 94/1; TOW53

Related Rulings/Determinations:

TD 95/D10
TD 95/D12
TD 95/D13

Subject References:
declaration of trust
discretionary trust
disposal
ownership
trading stock
trustee
undivided fractional interests

Legislative References:
ITAA 36
ITAA 36A
ITAA 36A(1)

Case References:
Glenfield Estates Pty Ltd v. FC of T
88 ATC 4548
(1988) 19 ATR 1426

Rose v. FC of T
(1951) 84 CLR 118
9 ATD 334
FC of T v. Westraders Pty Ltd
80 ATC 4357
(1980) 11 ATR 24