ATO ID 2002/242: Fixed trust operated by a local government entity
Date of decision: 30 January 2002
Year of income: Year ending 30 June 2002
Business line: Public Groups and International

Issue
Is a fixed trust operated by a local government entity a unit trust for the purposes of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. A fixed trust operated by a local government entity is not a unit trust and therefore the provisions of Division 6C of the ITAA 1936 do not apply.

Facts
The local government entity is a tax exempt entity under section 50-25, item 5.1 of the Income Tax Assessment Act 1997 (ITAA 1997). The local government entity proposes to establish a trust in order to separate the ownership and management of an investment portfolio from its other assets so as to better manage the portfolio. The trustee of the proposed trust will be a private company. The trustee will be the owner of the assets of the proposed trust. The local government entity will be the only investor in the proposed trust. It will also be the sole beneficiary of the proposed trust and will have a vested indefeasible interest in both the income and capital of the proposed trust. The local government entity will not have the right to sell down or transfer its interest in the proposed trust until such time as it calls for the trust to be wound up.

Reasons for decision
Summary: A unit trust is a trust in which the ownership is divided into a number of units which are held by the beneficiaries. However, the only beneficiary of the proposed trust is the local government entity. The main criteria for the existence of a unit trust (i.e., unitholders with fractional interests) will not be present. Therefore, the proposed trust will not a unit trust but, rather, would be a fixed trust. Division 6C of the ITAA 1936 only applies to a unit trust. The trust proposed by the local government entity will not be a unit trust. Consequently, Division 6C will not apply to any income that the proposed trust may earn.

Legislative references: Income Tax Assessment Act 1936 Division 6C
Subject references: Unit trusts Property trusts Trading trusts Public trading trusts Tax exempt entity