ATO ID 2004/875: Consolidation - trust - unit trust
Date of decision: 28 October 2004
Year of income: Year ended 30 June 2005 Year ended 30 June 2006
Business line: Consolidation Centre of Expertise

Issue
Does Division 6B of the Income Tax Assessment Act 1936 (ITAA 1936) apply to treat a public unit trust as a corporate unit trust when the trust leaves a consolidated group with assets the trust acquired during the period of consolidation from third parties outside the consolidated group?

Decision
No. The trust would not be a corporate unit trust in terms of section 102J of the ITAA 1936. The exit history rule in section 701-40 of the Income Tax Assessment Act 1997 ((ITAA 1997) applies such that the property that the trust takes with it when it leaves the consolidated group would always have been property of the trust. Accordingly, the trust will not be an eligible unit trust because at no time before the property became the property of the unit trust, would the property have been the property of the company or an associate of the company. Therefore, the trust would not be a corporate unit trust.

Facts
A listed public company which has a number of subsidiary companies formed a consolidated group. The head company acquired all the units in a unit trust and the unit trust became a subsidiary member of the consolidated group. During the period of consolidation, the unit trust acquired property assets from third parties outside the consolidated group. After operating as a consolidated group for a period of time, a stapled group consisting of the property investment unit trust and the head company was formed. The head company issued units to its shareholders so that the unit trust was now owned by the head company's shareholders. These units were stapled to the shares in the head company to form the stapled group. When the unit trust left the consolidated group, it took with it the property assets which had been acquired by the unit trust from outside the consolidated group.

Reasons for decision
Summary: Exit History Rule The exit history rule is contained in section 701-40 of the ITAA 1997: Subsection 701-40(1) of the ITAA 1997 details the circumstances in which the provision will have application. When determining the income or loss of an entity that has ceased to be a member of a consolidated group because the Single Entity Rule (SER) ceases to apply to it, the history of any of the items mentioned in subsection 701-40(2) of the ITAA 1997 that is to be taken into account, is determined by subsection 701-40(3) of the ITAA 1997. Subsection 701-40(2) of the ITAA 1997 details the assets, liabilities and businesses which are covered by section 701-40 of the ITAA 1997. The assets, liabilities and businesses are those that became assets etc. of the entity because the SER ceased to apply to the entity when it left the consolidated group. Subsection 701-40(3) of the ITAA 1997 is the operative provision which states that when we are working out the income or loss of an entity that ceased to be a member of a consolidated group everything that happened to any item in subsection 701-40(2) of the ITAA 1997 while it was that of the head company is taken to have happened to it as if it belonged to the entity. In addition, the history of the assets etc. that is inherited includes the history of those assets that the head company inherited because of any application of the entry history rule. Therefore, everything that happened to an asset etc. of a joining entity, which was taken to have happened to it as though it was an asset of the head company because of an application of the entry history rule, is now taken to have happened to it as if it belonged to the leaving entity. Consequently, any asset etc that leaves a consolidated group with an entity because the SER ceases to apply to that entity will be treated as if it belonged to the leaving entity from the time it was acquired by the entity that held it at the time the SER began to apply. The effect of the exit history rule on the potential application of Division 6B of the ITAA 1936 In so far as is relevant to this trust, it would be a corporate unit trust in terms of section 102J of the ITAA 1936 if it is: The trust is a resident public unit trust. A trust is an eligible unit trust, as defined in section 102F of the ITAA 1936, if a property that, at any time during the year of income or a preceding year of income, was property of the unit trust became property of the unit trust in pursuance of an arrangement that is a prescribed arrangement in relation to company and, at any time before the property became property of the unit trust, the property was the property of the company or an associate of the company. Therefore, the trust would be an eligible unit trust if any of the trust's property became so under a prescribed arrangement in relation to a company and the property was previously that of the company or an associate of the company. However, because of the exit history rule, the property of the trust will be treated as though it always belonged to the unit trust. Hence, even if there was prescribed arrangement in terms of section 102E of the ITAA 1936, the conditions set down in section 102F of the ITAA 1936 cannot be met (i.e. the property cannot previously have been property of the company or an associate) and Division 6B of the ITAA 1936 cannot apply.

Legislative references: Income Tax Assessment Act 1936 section 102E section 102F section 102J
Subject references: Corporate unit trusts Inherited history rules Leaving entity Single entity rule Trusts Unit trusts