Private ruling: Arrangement to purchase real property in a unit trust
Date of advice: 4 September 2018
Published: October 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: xx August 20xx

Ruling: Q1: Will the subscription for A Class units by the Companies occasion a “payment” for the purposes of section 109C of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No | Q2: Will the subscription for A Class units by the Companies be a “loan” for the purposes of section 109D of the ITAA 1936? | A2: No | Q3: Will the subscription for A Class units by the Companies occasion any other deemed dividend pursuant to Division 7A of the ITAA 1936? | A3: No | Q4: Will Part IVA apply to the Arrangement? | A4: We decline to rule on this issue.

Relevant facts and circumstances: You as nominee signed a contract of sale dated xx May 20xx to acquire real property (the Property). The property was purchased for $xx. 10% was paid as a deposit on purchase, and the balance is due to be paid at settlement. The property is intended to be held as a long-term investment for the rental yield. The property will be leased to an unrelated third party or parties. You will nominate xx Pty Ltd as trustee for the xx Unit trust (the unit trust) as the purchaser of the property. The unit trust will acquire the property and investors will then purchase units in the unit trust. The unitholders’ subscription funds for the units (the subscription amount) will be used to finance primarily, or entirely, the purchase of the property and its associated costs. There are two classes of units that can be purchased in the unit trust, ordinary units and A Class units: ● Ordinary units entitle the unitholder to income (if and to the extent that there is no A Class units on issue) and capital, and have voting rights – approximately 10% of the total subscription amount. ● A Class units entitle the unitholder to a share of the net income of the unit trust in each financial year in proportion to the respective unit holdings – approximately 90% of the total subscription amount. The arrangement involves five proposed participants: Two companies (A Class Unitholders) and three discretionary trusts (Ordinary Unitholders).

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 109C(1) | Income Tax Assessment Act 1936 subsection 109C(3) | Income Tax Assessment Act 1936 subsection 109D(1) | Income Tax Assessment Act 1936 subsection 109D(3) | Income Tax Assessment Act 1936 section 109J | Taxation Administration Act 1953 paragraph 357-110(1)(a) | Taxation Administration Act 1953 subsection 359-35(2) | Taxation Administration Act 1953 subsection 359-35(3)

Reasons for decision: Summary: No, the subscription amounts paid for acquiring A Class units by the companies is not a payment for the purposes of section 109C of the ITAA 1936 . | Detailed Reasoning - Detailed reasoning: Subsection 109C(1) of the ITAA 1936 states: A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either: (a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or (b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time. The term “payment” is defined in subsection 109C(3) of the ITAA 1936 to mean: ● a payment to, on behalf of or for the benefit of the entity ● a credit to, on behalf of or for the benefit of the entity; and ● a transfer of property to the entity. In this case, the company participants will make a payment of the subscription amounts to the unit trust. However, the subscription amounts are paid to purchase units in the unit trust (making an investment). The investors, including you, will receive units in exchange for the subscription amounts which will confer to you certain rights and entitlements to trust net income. Section 109J of the ITAA 1936 states: A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment: (a) discharges an obligation of the private company to pay money to the entity; and (b) is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length. By paying the subscription amounts the companies are discharging their obligation to pay money to the unit trust for the issue of the units. The units will be purchased at arm’s length as evident by the intention to fund the purchase price and associated costs of the property primarily, or entirely, through the subscription amounts. We also note that the trust deed of the unit trust provides that all A Class units must be issued, redeemed and forfeited at fair value. The trust deed also allows a unitholder to request that the fair value is determined by an expert. Therefore, as a result of section 109J of the ITAA 1936 applying to the payments by the company participants, the subscription amounts paid for acquiring A Class units by the companies are not a “payment” for the purposes of section 109C of the ITAA 1936. | Summary: No, the subscription amounts paid for acquiring A Class units by the companies is not a loan for the purposes of section 109D of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 109D(1) of the ITAA 1936 act states: A private company is taken to pay a dividend to an entity at the end of one of the private company ' s years of income (the current year ) if: (a) the private company makes a loan to the entity during the current year; and (b) the loan is not fully repaid before the lodgment day for the current year; and (c) Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and (d) either: (i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or (ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time. A “loan” includes a loan within its ordinary meaning (an ‘ordinary loan’), consisting of a payment and an obligation to pay. In addition, for the purposes of Division 7A the meaning of loan is extended by subsection 109D(3) of the ITAA 1936 which defines a “loan” for the purposes of Division 7A to include: (a) an advance of money; and (b) a provision of credit or any other form of financial accommodation; and (c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and (d) a transaction (whatever its terms or form) which in substance effects a loan of money. To determine whether the payment of the subscription amounts are a “loan”, the relevant issue here is whether there is an express or implied obligation to repay the amount. This is the central concept of what amounts to an ordinary loan as explained by Sackville and Lehane JJ in Federal Commissioner of Taxation v. Radilo Enterprises Pty Ltd as included in Taxation Ruling 2010/3 Income tax: Division 7A loans: trust entitlements (TR 2010/3) at paragraph 46: A loan involves an obligation on the borrower to repay the sum borrowed. The matter is put this way by Dr Pannam: A loan of money may be defined, in general terms, as a simple contract whereby one person ('the lender') pays or agrees to pay a sum of money in consideration of a promise by another person ('the borrower') to repay the money upon demand or at a fixed date. The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid.… This key requirement of a promise or obligation of repayment is what differentiates a loan from a gift or other interactions. As mentioned earlier, the subscription amounts paid are to purchase units in the unit trust (making an investment). The investors, including you, will receive units in exchange for the subscription amounts which will confer to you certain rights and entitlements to trust net income. There is no obligation on the unit trust to repay that subscription amount in any way other than what is expected from an investment. In other words, the unit trust is not obliged to return to you anything other than any entitlement you may have to net income of the trust. In the event of redemption of your units, the redemption will happen at fair value at the time of redemption. The trust deed stipulates that redemption only happens on exercise of the trustee’s discretion, at the request of the unitholder or upon vesting. Therefore, there is no obligation to repay the capital at any future date, but rather a plan of what happens if redemption is triggered. This is similar to someone buying and selling shares in a listed company on the Share Market. When you sell the shares, you receive the market value of the shares as a return of capital on ceasing your investment. That return of capital is not regarded as repayment of a loan that you made to the listed company. Therefore, we conclude that the subscription amounts paid for acquiring A Class units by the companies is not a “loan” for the purposes of section 109D of the ITAA 1936 . | Summary: No, Division 7A will not apply to the subscription for A Class units by the companies. | Detailed Reasoning - Detailed reasoning: We do not believe that simply by purchasing A Class units in the unit trust in exchange for the subscription amount, there will be a transfer of value, direct or indirect, from the companies to the Family Trusts. The entire subscription amount for the A Class units will be invested into the property to avoid, where possible, obtaining excessive external debt to fund the purchase of the property. Therefore, we conclude that the subscription amounts paid for acquiring A Class units by the companies would not give rise to any other deemed dividend under Division 7A . | Summary: We decline to rule on this issue. | Detailed Reasoning - Detailed reasoning: Section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (the TAA) provides that the Commissioner may make a ruling on the way in which a relevant provision would apply to a person in relation to a specified scheme. In order to do this, a scheme must be fully specified (that is, all material facts must be supplied and you must be reasonably certain of these facts). If a scheme is not fully specified, then a ruling cannot be made. The Commissioner may also decline to rule where the Commissioner considers that the correctness of the private ruling would depend on which assumptions were made about a future event or other matter in accordance with subsections 359-35(2) and (3) and paragraph 357-110(1)(a) of the TAA. Situations where the Commissioner may decline to rule are discussed in paragraphs 39 and 40 of Taxation Ruling TR 2006/11 Private Rulings . At this point in time the Commissioner is not able to provide you with a private ruling on whether Part IVA applies to this arrangement because the arrangement in question is only in its early stages and does not form a complete scheme, and therefore, the correctness of the ruling would depend on making a number of assumptions about future events and other matters. In addition, it may only be the start of a scheme and not an entire scheme of itself. Therefore future events can alter the scheme and render any ruling made in relation to Part IVA on the arrangement at this early stage not applicable; and further, would provide no certainty about whether or not Part IVA may apply to this arrangement in the future. A decision to decline to make a ruling is reviewable under the Administrative Decisions (Judicial Review) Act 1977 . For further information about your review rights, please read the explanatory notes attached to this letter.

Reasons for Decision: These reasons for decision accompany the Notice of private ruling | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.