Private ruling: Trading Trust
Published: May 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016

Ruling: Q1: Will the scheme result in ABC Trust being treated as a trading trust as defined in section 102N of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No.

Relevant facts and circumstances: 1. ABC Trust owns multiple rental properties that it rents out to tenants. 2. ABC Trust has proposed to dispose of one of its rental properties. 3. A loss is expected to be made as a result of the disposal. 4. ABC Trust will continue to derive rental income from the other rental properties that it owns. 5. The trustee for ABC Trust does not undertake any activity other than being the trustee for trusts (including ABC Trust) that primarily derive rent from rental properties it owns.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 102M | Income Tax Assessment Act 1936 subsection 102N(1)

Reasons for decision: Summary: Subsection 102N(1) of the ITAA 1936 states: For the purposes of this Division, a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee: (a) carried on a trading business; or (b) controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business. Trading business is defined in section 102M of the ITAA 1936 as a business that does not consist wholly of eligible investment business. Section 102M of the ITAA 1936 defines eligible investment business as one or more of: (a) investing in land for the purpose, or primarily for the purpose, of deriving rent; or (b) investing or trading in any or all of the following… The ordinary meaning of the word 'primarily' as used within the section is taken to be 'principally' or 'chief' and can be interpreted to mean 'predominant' in the context of appraising whether an asset has been used for a 'predominant' purpose: Speedo Knitting Mills Pty Ltd v. Commonwealth of Australia (1981) 37 ALR 417 per Justice Woodward at pages 428-429. The test applied is whether the characterisation of the investment in land is predominantly for the purpose of deriving income from rent. Currently, ABC Trust derives rent from the multiple rental properties that it owns. It is disposing of one of those properties. It is not disposing of any of the other properties. It is expected to make a capital loss from the disposal. Further, the majority of its income from investments in land continues to be rent. In these circumstances, it is not considered that the disposal of one of its properties will cause ABC Trust to be a trading trust.