Private ruling: Sections 102M and 102R of the Income Tax Assessment Act 1936
Date of advice: 9 April 2020
Published: May 2020
Ruling period: The relevant income year
Date scheme commenced: The relevant commencement time

Ruling: Q1: Is Trust B carrying on a trading business as the term is defined in Section 102M of the Income Tax Assessment Act 1936 (ITAA1936)? | A1: No | Q2: By virtue of controlling 100% of the units in the Trust, is Trust A a Public Trading Trust for income tax purposes pursuant to Section 102R of the ITAA 1936? | A2: No

Relevant facts and circumstances: Trust A is a unit trust and Company A acts as Trustee. Trust A is an Australian resident trust for tax purposes. Its units were offered to the public at large. Trust A does not carry on a trading business in its own right for the purposes of section 102M of the ITAA 1936. Trust A has entered into an option to purchase land through an entity of Trust A's choice with the intention to establish a commercial solar farm. Trust A intends to incorporate Trust B as a wholly owned unit trust and will exercise the option to purchase the land through Trust B. The Trustee of Trust B will be Company B, a wholly owned subsidiary of Company A. Once the option is exercised, Trust B will arrange for the solar farm to be established by installing the necessary infrastructure assets. All infrastructure assets necessary to operate the solar farm will be held by the Trust B. The units in Trust A are stapled to a sister entity, Property Trust. The Trusts are stapled as a result of the Trust's identical unit holders, in identical proportions. Property Trust is taxed as a PTT in accordance with section 102R of the ITAA 1936, as the activities it carries on constitute a trading business. Property Trust will establish a wholly owned subsidiary, Company C, to operate the solar farm. Company C will lease the land and infrastructure assets from Trust B on commercial terms as a combined rental arrangement as both are necessary to operate the solar farm. Company C will remit an arm's length rental per annum plus outgoings to Trust B. Company C will also obtain a licence and any other commercial requirements necessary to operate the commercial solar farm. As a result of the rental arrangement between Company C and Trust B for the land and solar infrastructure, Trust B would accordingly expect to derive rental income. Trust B is not anticipated to hold other investments in any entities, land or infrastructure. Trust A and Trust B satisfy the definition of unit trust per section 102M of the ITAA 1936. The solar assets The Solar PV modules will be installed in regular arrays and will be fixed to metal mounting structures; The foundations for the mounting structures will be connected to the ground in such a way as to withstand the reactive forces of the loads working on the mounting structure. Cabling connects the modules to field combiner boxes mounted near the modules and from these boxes to the central inverters. Other solar assets such as inverters, transformers and so forth, will also be mounted on foundations and therefore connected to the ground. There will also be a facility substation, workshop, maintenance buildings, fences and security systems etc completing the solar assets.


Reasons for decision: Summary: Trust B is not carrying on a trading business as the term is defined in section 102M. | Detailed Reasoning - Detailed reasoning: Trading Trust Subsection 102N(1) of the Income Tax Assessment Act 1936 (ITAA1936) states - 102N(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. Paragraph 102N(1)(a) requires Trust B to be carrying on a trading business in order to be satisfied. Section 102M defines a trading business as a business that does not consist wholly of eligible investment business. Eligible Investment Business The term 'eligible investment business' is defined in section 102M of the ITAA 1936 to relevantly include - (a) investing in land for the purposes, or primarily for the purpose, of deriving rent. The term 'land' is defined in section 102M of the ITAA 1936 to include an interest in land and fixtures on land. | Detailed Reasoning - Common law: At common law, the general rule regarding fixtures is that an item attached to land by more than its own weight will be a fixture (subject to a contrary objective intention). In TEC Desert Pty Ltd v Commissioner of State Revenue (2010) 241 CLR 576 ( TEC Desert ), the High Court observed at paragraph 23: Accordingly, some statement of basic principle is appropriate. In the seventh edition of Megarry and Wade's The Law of Real Property, the following appears [20] The meaning of 'real property' in law extends to a great deal more than 'land' in everyday speech. It comprises, for instance, incorporeal hereditaments; and it includes certain physical objects which are treated as part of the land itself. The general rule is ' quicquid plantatur solo, solo credit ' ('whatever is attached to the soil becomes part of it'). Thus if a building is erected on land and objects are permanently attached to the building, then the soil, the building and the objects affixed to it are all in law 'land', i.e. they are real property, not chattels. They will become the property of the owner of the land, unless otherwise granted or conveyed. In determining whether or not the Solar Assets are fixtures at common law, it is generally accepted that the inquiry involves identifying two broad factors: the degree of annexation and the object of purpose of that annexation. These two factors can overlap and are discussed below: | Detailed Reasoning - Degree of Annexation: If an item of property has been attached to the land other than merely resting on its own weight, there is a rebuttable presumption that the item is a fixture. However, if an item merely rests on its own weight, there is a rebuttable presumption that the item is a chattel (see Australian Provincial Assurance Co v Coroneo (1938) 38 SR (NSW) 700). It is clear that most of the Solar Assets are attached to the land by more than their weight alone. · The Solar PV modules will be installed in regular arrays and will be fixed to metal mounting structures; · The foundations for the mounting structures will be connected to the ground in such a way as to withstand the reactive forces of the loads working on the mounting structure. Cabling connects the modules to field combiner boxes mounted near the modules and from these boxes to the central inverters. Other solar assets such as inverters, transformers and so forth, will also be mounted on foundations and therefore connected to the ground. There will also be a facility substation, workshop, maintenance buildings, fences and security systems etc completing the solar assets. Therefore, it is reasonable to say that the Solar Assets have a substantial degree of annexation to the land. The foundations for the mounting structures and the way they are driven into the ground and the fact that the mounting structures are fixed directly to them with the solar panels fixed to the mounting structures in turn indicates a greater degree of connection to the land than merely the weight of the items. | Detailed Reasoning - Object of annexation: The second factor requiring consideration is the affixer's object of annexation at the time of annexation. The importance of this factor was described in Darmanin v Cowan [2010] NSWSC 1118 at 201: It also seems that in determining the objective intention of the affixer, regard can be had to his or her status; in the sense that an owner of land is seen as being more likely than a limited owner such as tenant to intend an article to be for the property's permanent improvement ( Leigh v Taylor, at 162 ); conversely it has been said that a limited holder would be unlikely to intend making a "present to somebody else" ( National Dairies ), especially where the limited interest is of short or uncertain duration ( Ball-Guymer v Livantes (1990) 102 FLR 327) where a prefabricated office building, capable of removal albeit after some dismantling of the structure was built by a licensee under agreement terminable on one week's notice, was held not to be a fixture. In Pegasus Gold Australia Ltd v Metso Minerals (Australia) Ltd [2003] NTCA 03 (Pegasus Gold), Mildren J (with whom Martin CJ and Thomas J agreed) found that certain mining assets were chattels. His Honour's decision relied heavily on the object of annexation. His Honour notes that it might be said that the annexation of the equipment was there for the tenant's better enjoyment of the lease. He continues at paragraph 26: Nevertheless, it is difficult to see how it was ever the objective intention of the appellant to affix the equipment to the soil in such a manner that the equipment became part of the soil and thereby a fixture, given that both the terms of the lease and the Mining Act require the appellant to remove the equipment eventually, that it was economic to do so, and that it could be done without damage either to the soil or to the equipment. In Commissioner of State Revenue v Uniqema Pty Ltd [2004] VSCA 82 (Uniqema), the Court found the assets constituted chattels, notwithstanding that the equipment was "very substantial and complex". The Court noted that the equipment was clearly removable. The finding particularly relied on the tenant's ongoing right to remove the assets and the obligation to remove the assets at the conclusion of the lease, together with the mutual acknowledgement of the tenant's ownership of the assets. In Commissioner of State Revenue (Vic) v Snowy Hydro ltd [2012] VSCA 145; 43 VR 109; 2012 ATC 20-326, the Victorian Court of Appeal upheld the decision of Davies J at first instance that electricity generator units were fixtures. The fact that the entity that paid for the construction of the units was also the owner of the freehold interest in the land on which it was constructed was an important part of the reasoning that the units were fixtures. The joint judgement stated at 26 to 29: 26. After referring to the authorities, her Honour said: These cases illustrate the importance of the particular factual context to the question of the status of a power generating plant as a fixture or as a chattel and highlight that in determining whether an item has become a fixture or remains a chattel, each case must be decided according to its own particular circumstances. Each case must be considered on its own facts. In my view the facts show that the objective intention of installing the units at the Peaker Facility site was for the long term use of that site as a gas turbine electricity generation plant and that the units should be characterised as fixtures... ... It is clear the units and components of the units were removable, mobile and transportable and that it was necessary to bolt them to the land only to ensure their efficient and safe use. Clearly also, there may be some economic incentive to move them. However, in this case, those qualities do not prevent them from having the character of fixtures. I am satisfied that the units were not intended to be located at the Peaker Facility site for a temporary purpose but, rather, for the use of the land as a power plant. The same considerations apply to the ancillary plant. In forming this view I have taken into account the evidence on behalf of the taxpayer of its possible intention to move the units elsewhere. However, when it purchased the equity interests the units had the character of fixtures. It may be that the taxpayer's future use of the units may transform their character into chattels at some time, but at the time of acquisition of the equity interests, which is the relevant time at which their character is to be decided, the units did not have that character. 27 In our respectful opinion, her Honour's conclusion was entirely correct, for the reasons which she gave. It was abundantly clear that the units were installed on the land 'for the long term use of that site as a gas turbine electricity generation plant'. The taxpayer took issue with her Honour's phrase 'the use of the land as a power plant', making the obvious point that it was the equipment, not the land, which produced the power. The phrase in question was, however, no more than a shorthand way of reiterating the conclusion which her Honour had more fully expressed - and explained - in the earlier (highlighted) passage. 28 Nor could it be doubted that the immediate purpose of affixing the units to the land was to make them stable, for the purposes of safe and efficient operation. But it would have been wholly artificial for the consideration of purpose to be confined to that immediate, practical purpose. The units were bolted down so that the entire site could function safely and efficiently as a power plant, to which purpose the site had been unconditionally, and indefinitely, dedicated. 29 As the Commissioner pointed out, there is a direct analogy with the conclusion arrived at by the Full Court of the Supreme Court of Western Australia in National Dairies. That case concerned plant and equipment placed on land for the purposes of integration into a milk processing factory. The items of equipment were capable of being removed and relocated, either within the site or to a different site. The Full Court nevertheless upheld the trial judge's conclusion that 'the equipment was annexed to the land for the better enjoyment of the land for use as a milk processing plant' Trust B will purchase and own the land that the solar farm assets will be constructed on. While it is true that the solar assets are individual pieces of equipment that can be easily moved without material damage, it is also true that they are interconnected to form an integrated system that will operate for a long duration in generating electricity, and were installed for the better enjoyment of the land on which they were constructed. In addition, as Trust B owns the land on which the solar farm has been constructed, there is no obligation to remove the solar farm assets in any particular time period as there may be if they were on rented land. The object of annexation, having regard to the objective circumstances, is that the Solar Assets are a permanent part of the relevant land. Therefore, the purchase of land, including the solar assets which are fixtures, by the Trust B is considered an investment as there is an expectation for Trust B to derive a profit in return for the purchase. The assets are leased to Company C to operate the commercial solar farm and are therefore investments in land for the purpose, or primarily for the purpose, of deriving rent. The rent is charged on commercial terms and is expected to generate a profit in Trust B in return for the investment in land. The activities of Trust B constitute wholly eligible investment business and therefore Trust B is not carrying on a trading business as the term is defined in section 102M. Therefore, paragraph 102N(1)(a) is not satisfied. Paragraph 102N(1)(b) is not satisfied as Trust B does not control the affairs or operations of another entity in respect of a trading business. Conclusion Trust B is not carrying on a trading business as the term is defined in section 102M. | Summary: Trust A does not carry on a trading business, or control any other entities that carry on a trading business. Therefore, Trust A does not satisfy the definition of a Public Trading Trust for the purposes of section 102R. | Detailed Reasoning - Detailed reasoning: Public Trading Trust Subsection 102R(1) relevantly provides that - 102R(1) A unit trust is a Public Trading Trust in relation to a relevant year of income if: (a) ... (b) where the relevant year of income is the year of income commencing on 1 July 1988 or a subsequent 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 conditions 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. Public Unit Trust Subsection 102P defines Public Unit Trust: 102P(1) For the purposes of this Division, but subject to the succeeding provisions of this section, a unit is a public unit trust in relation to a year of income if, at any time during the year of income: (a) any of the units in the unit trust were listed for quotation in the official list of a stock exchange in Australia or elsewhere; (b) any of the units in the unit trust were offered to the public: or (c) the units in the unit trust were held by not fewer than 50 persons. The units in Trust A were offered to the public and the units are held by more than 50 persons. Therefore, Trust A is considered a public unit trust in accordance with section 102P. Trading Trust Subsection 102N(1) provides that a unit trust is a trading trust in relation to a year of income for the purposes of Division 6C if, at any time during the year of income, the trust: (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. Paragraph 102N(1)(a) does not apply as Trust A did not carry on a trading business at any time during the relevant year of income. Control Under paragraph 102N(1)(b), Trust A would only be a trading trust in relation to a year of income if it was considered to control, or be able to control, directly or indirectly, the affairs or operations of Trust B carrying on of its trading business. The act is silent on the definition of the term 'control' for the purposes of Division 6C. Therefore, its meaning will be construed with reference to its ordinary meaning. 'Control' is defined in the Macquarie Dictionary, 2001, rev. 3 rd edn, to mean: 1. To exercise restraint or direction over; dominate, command; 2. To hold in check, curb. Therefore, the concept of 'control' encompasses both the positive aspect of directing or commanding and the negative aspect of restraining. The control of a company may operate at both the shareholder and director level. Shareholders exercise control by means of majority voting rights as well as negative control. Mahoney JA in North Sydney Brick & Tile Co Ltd v. Darvall & Anor (1986) 10 ACLR 837 at 844 commented on a shareholder's negative control: The part that the shareholder plays in the restrictions imposed by these articles is, in a sense, negative rather than positive: they empower him to prevent ... but do not authorise him to permit ... But a power to prevent, in this sense, may constitute a power to control within the section. The respective roles played by shareholders and directors were summarised by Stephen, Mason and Wilson JJ in FCT v. Commonwealth Aluminium Corporation Ltd (1980) 143 CLR 646 at pp 659-60: ... Important decisions, whether involving questions of policy or not, are invariably taken by the directors who are ultimately responsible to the company in general meeting for the conduct of the business operations. The shareholders, through their power to control the company in general meeting and perhaps through their power to elect directors, may be said to control the company, but as a general rule they do not exercise de facto control of the company's business. The words 'able to control' require a present ability to control, whether or not that ability is exercised, but does not include a power by some means or other to obtain the ability to control if that power is not exercised. In WP Keighery Pty Ltd v FC of T (1959) 100 CLR 66 at pp 86-87, Dixon CJ, Kitto and Taylor JJ said: But to describe a company as capable of being controlled by a person or group of persons is to attribute to that person or group a presently existing power of control. 'Capable of being controlled' in this context cannot be interpreted so widely as to be satisfied whenever a possibility of obtaining control over a company exists by reason of something in its constitution or its special circumstances ... The truth is that 'capable of being controlled' connotes the existence of either one person whose enforceable and immediately exercisable rights enable him to control, or a number of persons whose enforceable and immediately exercisable rights enable them, if they act in concert, to control | Detailed Reasoning - The affairs or operations of another person: The effect of the words 'directly or indirectly' imply that although the trustee may not, in fact, control or be able to control the affairs or operations of another person, they do so or may do so through their control of an interposed entity ( British American Tobacco Co Ltd v. Inland Revenue Commissioners (1943) AC 335). The terms 'affairs' and 'operations' are not defined in the legislation. The Macquarie Dictionary , relevantly, defines 'operation' as follows: ● A course of productive or industrial activity; ● A particular course or process; ● A business transaction, especially one of a speculative nature or on a large scale. Therefore, the meaning of 'operations' is quite narrow. We regard it as a reference to the day-to-day business of the company. The term 'affairs' has a much broader meaning. Winn J in R v. Board of Trade, ex parte St Martin Preserving Co Ltd [1964] 2 All ER 561 AT 568, said: ... the phrase 'affairs of the company' comprises all its business affairs, interests or transactions, all its investment or other property interests, all its profits and losses, and its goodwill. For the purposes of Division 6C of Part III of the ITAA 1936, it is reasonable to adopt this broad meaning, given the context within which the provision is intended to operate, as evidenced from the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1985 (which introduced Division 6C): Paragraph (b) of section 102N is a safeguarding provision against arrangements to circumvent the operation of Division 6C by having activities that would constitute a trading business of a public trust carried on by an associated entity. By taking income from the associate in the form of eligible investment income, the trust could otherwise ensure that the relevant trust did not qualify as a trading business and so avoid the operation of Division 6C. The affairs of Trust B in this case refer to the ownership of land and infrastructure, being the solar farm assets, established by Trust B for the purpose of deriving a profit from the rental arrangement. | Detailed Reasoning - Conclusion: Trust A does not carry on a trading business, or control any other entities that carry on a trading business. Therefore, Trust A does not satisfy the definition of a Public Trading Trust for the purposes of section 102R.