Private ruling: Division 6C Public Trading Trust
Date of advice: 6 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is Trust X a public trading trust for the purposes of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1936 Division 6B | Income Tax Assessment Act 1936 Division 6C | Income Tax Assessment Act 1936 Section 102M | Income Tax Assessment Act 1936 Section 102N | Income Tax Assessment Act 1936 paragraph 102N(1)(a) | Income Tax Assessment Act 1936 paragraph 102N(1)(b) | Income Tax Assessment Act 1936 Subsection 102P(1) | Income Tax Assessment Act 1936 Subsection 102P(2) | Income Tax Assessment Act 1936 Subsection 102P(3) | Income Tax Assessment Act 1936 Subsection 102P(12) | Income Tax Assessment Act 1936 Section 102R | Income Tax Assessment Act 1936 Paragraph 102R(1)(b)) | Income Tax Assessment Act 1936 Section 102S

Reasons for decision: Summary: Trust X is public trading trust under Division 6C of the ITAA 1936 for the XXXX-XX financial year for the following reasons: • The trust is a unit trust under section 102M of the ITAA 1936. • The trust is a public unit trust because it satisfies the provisions of subsection 102P(2) of the ITAA 1936 and is not excluded by subsections 102P(3) to 102P(9). • The trust is not carrying on any trading business in its own right; however, the trust is a trading trust under paragraph 102N(1)(b) of the ITAA 1936 because it has 100% ownership of the units in Trust A, which is carrying on a retail business. • The trust is a resident unit trust for tax purposes. • The trust is not a corporate unit trust within the meaning of Division 6B of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Division 6C of the ITAA 1936 treats certain trusts described as 'public trading trusts' as companies, by taxing the trustees of such trusts at the company rate. | Detailed Reasoning - Is the Trust a Public Trading Trust?: The definition of 'public trading trust' is set out in section 102R of the ITAA 1936 (and more specifically, for present purposes, in paragraph 102R(1)(b)) ITAA 1936 which is applicable to the XXXX-XX financial year states: | Detailed Reasoning - 102R Public trading trusts: (1) A unit trust is a public trading trust in relation to a relevant year of income if: (a)… or (b) where the relevant year of income is the year of income commending on 1 July 1988 or a subsequence year of income: (i) the unit trust is a public unit trust in relation to the relevant year of income; (ii) the unit trust is a trading trust in relation to the relevant year of income; (iii) either of the following is satisfied: (A) the unit trust is a resident unit trust in relation to the relevant year of income; (B) the unit trust was a public trading trust in relation to a year of income preceding the relevant year of income; and (iv) the unit trust is not a corporate unit trust within the meaning of Division 6B in relation to the relevant year of income. Note, subparagraph 102R(1)(b)(iv) was repealed by Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016 , effective for income years starting on or after 1 July 2016, which is after the period of the ruling request. Therefore Trust X must satisfy all the requirements specified in paragraph 102R(1)(b) of the ITAA 1936 to be considered a public trading trust. | Detailed Reasoning - Is Trust X a unit trust?: Section 102M of the ITAA 1936 provides the following definitions: • unit , in relation to a prescribed trust estate, includes a beneficial interest, however described, in any of the income or property of the trust estate. • unitholder , in relation to a prescribed trust estate, means the holder of a unit or units in the prescribed trust estate. • prescribed trust estate means a trust estate that is, or has been, a public trading trust in relation to any year of income. The terms "unit" and "unitholder" are defined exclusively in relation to a prescribed trust estate. The definition of a prescribed trust estate relies on the trust being able to be defined as a public trading trust, which in turn is dependent on the trust being classified as a unit trust. This definition leaves the term "unit trust" undefined. There is no general definition of the term "unit trust" for the purposes of Division 6 of the ITAA 1936 or the Act generally. It follows therefore that a trust must be a unit trust within the ordinary meaning of that term before the definitions of "unit" and "unitholder" in section 102M of the ITAA 1936 are operative. (That is the definitions of section 102M of the ITAA 1936 only operate if the unit trust is a unit trust under the ordinarily understood meaning of the term.) A unit trust is essentially the same as any other trust except that in a unit trust the beneficial ownership is divided into a number of units which are held by the unit holders, instead of named beneficiaries or a class of beneficiaries who are entitled to specified or discretionary interests in a trust such as a discretionary trust. In a unit trust, property is vested in a trustee or in trustees for the benefit of beneficiaries as in any other trust. In this case, the Trust X has issued a number of units to its unit holders. The unit holders have an interest in income and capital of the trust in proportion to their unit holdings. Accordingly, the Trust X meets the definition of a "unit trust". | Detailed Reasoning - Is Trust X a public unit trust?: Under subsection 102P(1) of the ITAA 1936 a unit trust will be a public unit trust in relation to a year of income if at any time during the year: (a) units were listed for quotation on an official stock exchange; (b) any of the units were offered to the public; or (c) the units were held by not fewer than 50 persons. A further test is contained in subsection 102P(2) of the ITAA 1936 where a unit trust will be treated as a public unit trust if an exempt entity or exempt entities held or had the right to acquire units that entitled them to 20% or more of the beneficial interests in either the income or the property of the trust. In accordance with former section 102MD of the ITAA 1936, a complying superannuation fund is treated as an exempt entity for the purposes of Division 6C for the XXXX-XX financial year. It is noted that section 102MD has been amended, effective from 1 July 2016. In this case, whilst the Trust X does not satisfy any of the three primary tests under subsection 102P(1) of the ITAA 1936, during the XXXX-XX financial year, the a complying superannuation fund, had an option to acquire 25% of the units of Trust X and therefore has the option to acquire more than 20% of the beneficial interests in either the income or the property of the Trust X in that year. However, a unit trust will not be a public unit trust if any of the provisions in subsections 102P(3) to 102P(9) of the ITAA 1936 apply. These provisions will only apply in circumstances where the units in the unit trust are offered to the public, or the unit trust is a public unit trust by virtue only of subsection 102P(1) of the ITAA 1936, neither of which apply in the current circumstances. Therefore the Trust X is a public unit trust because it satisfies the provisions of subsection 102P(2) of the ITAA 1936 and is not excluded by subsections 102P(3) to 102P(9) of the ITAA 1936. | Detailed Reasoning - Is Trust X a trading trust?: The term 'trading trust' is defined in subsection 102N(1) of the ITAA 1936, which states: | Detailed Reasoning - 102N Trading trusts: (1) 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. A trading business is defined in section 102M of the ITAA 1936 as a business that does not consist wholly of an eligible investment business. An eligible investment business is defined in section 102M to consist of: a. Investment in land for rental b. Investment or trading in loans, securities, shares, units in a unit trust, futures contracts, etc, c. Investing or trading in various financial instruments. Therefore, although the Trust X is not carrying on any trading business in its own right, because it has 100% ownership of the units in the Trust A, which is carrying on a business, Trust X will be a trading trust under paragraph 102N(1)(b) of the ITAA 1936. However, the definition in 102N of the ITAA 1936 is read in conjunction with section 102MC which provides that a trust will not be carrying on a trading business in situations where the trustee derives not more than 2% of its gross revenue in an income year from sources other than an eligible investment business. This exception does not apply where the income is derived from a separate business activity which is not incidental or relevant to the eligible investment business. It is noted that Trust X also has an interest in three other entities (A, B. and C) in the XXXX-XX financial year, these other entities did not trade. Therefore it is accepted that for the XXXX-XX financial year, Trust X was a trading trust under section 102N of the ITAA 1936. | Detailed Reasoning - Other matters: Trust X is a resident unit trust, and is not a corporate unit trust within the meaning of Division 6B of the ITAA 1936. | Detailed Reasoning - Conclusion: The Trust X satisfies all criteria in section 102R of the ITAA 1936, Trust X is a public trading trust under Division 6C of the ITAA 1936 for the XXXX-XX financial year. It should be noted that as part of the changes to the taxation of Managed Investment Trusts effective from 1 July 2016, amendments were also made to Division 6C of the ITAA 1936. As this ruling application is for the XXXX-XX financial year only, no consideration has been given to how these changes may impact on Trust X in future years.

Relevant facts: Trust X was established by Deed of Trust in XXXX financial year. | Trust X is an Australian resident unit trust and has issued a number of units which gives the unit holder an interest in the income and capital of the trust in proportion to their unit holdings. | There are a number of investors holding units in Trust X. | A company is the corporate trustee of Trust X. | Trust X was established to undertake the following activities: | • to acquire 100% of the units in the Trust A | • to acquire interests in a number of entities for the purpose of commencing new business operations. | • actively manage and control all business activities conducted by Trust X and Trust and other wholly-owned subsidiaries. | The trading group consists of the following entities: | Trust A commenced trading in the XXXX-XX financial year and returned gross revenue of $XXXX. | Entities A, B and C did not trade in the XXXX-XX financial year. | All important business decisions for the trading group are made by the directors of the company in its capacity as trustee of the Trust X. | A complying superannuation fund had an option to acquire 25% of the units in the Trust X in the XXXX-XX financial year. | The trustee for the Trust X and the trustee for trust A entered into a management deed. | Under the Deed of Management Agreement the trustee of the Trust X was appointed the manager under the following terms: | Without limiting the Manager's control over Trust A and in consideration for the Manager's undertakings contained in this Deed, Trust A appoints the Manager to control and manage the affairs and operations of Trust A in respect of the carrying on by Trust A of the Business as the Manager thinks fit in its absolute discretion on and subject to the terms and conditions contained in this Deed (the "appointment"). | Trust X is not a corporate unit trust within the meaning of Division 6B of the ITAA 1936.