Private ruling: Trading trust
Published: December 2011
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: December 2011

Ruling: Q1: Will the Commissioner confirm that the unit trust will not constitute a trading trust in accordance with subsection 102N(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of the 2012 and 2013 income years, as a result of the proposed transaction? | A1: Yes

Relevant facts and circumstances: The unit trust is an Australian resident unit trust, settled in the 2011 income year. The unit trust is a public unit trust pursuant to section 102P of the ITAA 1936. The unit trust is a managed investment trust pursuant to section 12-400 of the Taxation Administration Act 1953 . An unrelated company has been appointed as investment manager for the unit trust. The unit trust does not control the affairs or operations of another person, such that paragraph 102N(1)(b) of the ITAA 1936 applies. The investment strategy of the unit trust is to invest in high-quality properties in a specific industry. This strategy is designed to establish a low-risk medium return investment profile. The investment qualities of the specific industry properties in the current unit trust portfolio include: · Long-term leases and relatively high rental returns due to the specialised nature of the buildings; and · The potential for rental growth through the ongoing expansion of existing facilities or developments. In the 2011 income year, the unit trust completed the acquisition of an Australian property portfolio, consisting of specific industry properties. The unit trust derives rental income in respect of this Australian property portfolio. No car parking income is earned by the unit trust, as the car parks are typically leased out to the tenant along with the property. Based on unit trust's financial results for the 2011 income year, the rental income derived from these properties accounted for approximately 97% of its gross income. The unit trust is proposing to execute various agreements in order to acquire the Land from X. The Facility 1 is the primary asset situated on the Land. The Land is currently subject to a long-term lease between X and the Y. Under the arrangements, Z will acquire the X business through the acquisition of the shares in X. Z does not currently have the capital and funding capacity to acquire both the business of X and the Land - such that it is not possible for Z to acquire the Land, perform the subdivision, and sell Lots 1 to 3 to unit trust. Assumptions At least 75% of the forecast gross revenue of the unit trust will consist of rent for the 2012 and 2013 income years; The unit trust will not derive any 'excluded rent', and will not derive any gross revenue from carrying on a business that is not incidental and relevant to the renting of land during the 2012 and 2013 income years; and The unit trust will make a capital election upon lodgement of its first income tax return (i.e., its 2011 income tax return) in February 2012.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6C, | Income Tax Assessment Act 1936 Section 102M and | Income Tax Assessment Act 1936 subsection 102N(1).

Reasons for decision: Summary: Division 6C of the ITAA 1936 governs the way the income of certain unit trusts is treated and applies to a unit trust that is a 'public trading trust'. Where a public unit trust is a 'trading trust' it is a 'public trading trust' under Division 6C of the ITAA 1936 and treated as a company for income tax purposes. Pursuant to paragraph 102N(1)(a) of the ITAA 1936, a unit trust is a 'trading trust' if at any time in relation to a year of income, the trustee of the unit trust '...carried on a trading business'. Paragraph 102N(1)(b) of the ITAA 1936 provides that a unit trust will be a "trading trust" if, at any time during the year of income the trustee: …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. Section 102M of the ITAA 1936 defines that phrase to mean a '...business that does not consist wholly of eligible investment business'. The section in turn defines 'eligible investment business' to mean inter alia one or more of: (a) investing in land for the purpose, or primarily for the purpose, or 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. | Detailed Reasoning - Paragraph 102N(1)(b of the ITAA 1936: The Applicant has stated that unit trust does not control the affairs or operations of another person. Accordingly it is not necessary to consider this aspect further. | Detailed Reasoning - Paragraph 102N(1)(a) of the ITAA 1936: The investment strategy of the unit trust is to invest in high-quality properties in a specific industry. The investment qualities of properties in the current unit trust portfolio include: · Long-term leases and relatively high rental returns due to the specialised nature of the buildings; and · The potential for rental growth through the ongoing expansion of existing facilities or developments. Under the proposed transaction the unit trust will purchase the Land and subdivide it into Lots 1, 2, 3 & 4. Lots 1 and 2, with specific industry properties situated on them, and Lot 3 will be leased to X concurrent to X's current lease of the Land to a third party. Further the Lots subject to the lease will be developed with a view to increase the rental income payable under the Lease. The subdivision of the Land and subsequent sale of Lot 4 to Z was a precondition to the sale. As such the unit trust would not have obtained access to the Land, and the properties situated on it, if it did not agree to the subdivision and sale of Lot 4. Under the proposed treatment of the acquisition and subsequent sale of Lot 4, it is not expected that the unit trust will recognise a gain or loss on the sale. The acquisition, subdivision, development and lease of the Land containing properties is in keeping with the unit trust's investment strategy and is consistent with a predominant purpose of the unit trust investing in land to derive income from rent: cf. London Australia Investment Co. Ltd v. Federal Commissioner of Taxation (1977) 138 CLR 106; (1977) 7 ATR 757; 77 ATC 4398, per Justice Gibbs at CLR 117. Moreover, the character and certainty of the investment return is an outcome of the investment structure. Objectively appraised, the structure of the investment is predominantly designed, principally and in-chief to derive rental income for the trustee from the investments in the Land and the properties situated thereon. The unit trust will not be conducting a 'trading business' during the relevant years of income, and will not be a 'trading trust' for the purpose of subsection 102N(1) of the ITAA 1936.

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