ATO ID 2003/326: Equity interests in companies
Date of decision: 30 April 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
In the absence of subsection 974-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) applying, can units in a trust, which is not taxed as a company under either Division 6B or Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936), be characterised as an equity interest?

Decision
No. In the absence of subsection 974-70(2) of the ITAA 1997 applying, units in a trust, which is not taxed as a company under either Division 6B or Division 6C of the ITAA 1936 cannot be characterised as an equity interest.

Facts
Trust 1 raises funds by issuing units to investors. Trust 1 uses these funds to acquire units in Trust 2. The units entitle Trust 1 to all of the income and capital of Trust 2 except in certain exceptional circumstances. Trust 2 uses these funds to subscribe for a non-share equity interest issued by Y. Trust 1 and Trust 2 are not taxed as companies under either Division 6B or Division 6C of the ITAA 1936. The interests are not treated as giving rise to an equity interest in a company under subsection 974-70(2) of the ITAA 1997.

Reasons for decision
Summary: The use of the term 'equity interest' in Subdivision 974-C of the ITAA 1997 is qualified in that it must be an equity interest in a company. As the units in Trust 1 and Trust 2 are not interests in a company these units will not give rise to an equity interest as defined by sections 974-75 or 974-80 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 Division 6B Division 6C
Subject references: Debt equity borderline