ATO ID 2003/325: Non-share distribution
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 distributions 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 a non-share distribution?

Decision
No. In the absence of subsection 974-70(2) of the ITAA 1997 applying, distributions 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 a non-share distribution.

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 the funds to subscribe for a non-share equity interest. Any non-share dividend received by Trust 2 will be distributed to Trust 1 which in turn distributes its net income to its investors. 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: Section 995-1 of the ITAA 1997 provides that 'non-share distribution has the meaning given by section 974-115.' The meaning of non-share distribution in section 974-115 of the ITAA 1997 is prefaced by the words 'a company'. Section 974-115 provides that: A company makes a non-share distribution to you if: (a) you hold a non-share equity interest in the company; and (b) the company: (i) distributes money to you; or (ii) distributes other property to you; or (iii) credits an amount to you; Trust 1 and Trust 2 cannot make a non-share distribution as they are not companies, nor do the related scheme provisions apply to treat the arrangement as giving rise to an equity interest in a company.

Legislative references: Income Tax Assessment Act 1997 section 974-115 section 995-1
Subject references: Debt equity borderline