Private ruling: Public Trading Trusts
Date of advice: 18 August 2015
Published: August 2015
Ruling period: 1 July 2016 to 30 June 2036
Date scheme commenced: 1 July 2016

Ruling: Q1: Under the proposed scheme, will either Trust A or wholly owned Trust B be 'trading trusts' for the purposes of section 102N of the Income Tax Assessment Act 1936 ? | A1: No

Relevant facts and circumstances: 1. Trust A and Trust B are joint applicants for this private ruling. 2. Trust B is a recently established unit trust that is wholly owned (100%) group member of Trust A. 3. Trust A is a unit trust that falls within the definition of a "public unit trust' as defined in section 102P of the Income Tax Assessment Act 1936 ("ITAA 1936"). 4. Trust A's investment mandate is focused on aggregating property assets Currently, Trust A directly or indirectly (via its subsidiary unit trust and joint venture entities) holds interests in Australian real estate assets These assets have been acquired, built and held for the purpose of generating rental returns for the benefit of Trust A's unitholders. 5. Trust A acquired a parcel of land. 6. The Trust obtained development approval, and commenced construction of a building. 7. Construction of this building ("Stage 1") was completed and is generating rental income and approaching full occupancy for Trust A. 8. Trust A approached a number of parties in tenanting a future development on the remaining land. Company C expressed an interest to be involved both as a prospective tenant of any future development and also as a joint Property owner. In considering the joint ownership proposal Trust A's management concluded that having the same party involved in both the tenancy and joint ownership would strengthen any tenancy arrangement and decrease the level of project risk for Trust A. 9. Company C and Trust A agreed to commercial in-principle terms for a number of buildings to be constructed on the remaining vacant land. Company C would be joint owner and a long term tenant of both a purpose built facility and a building housing a car park, with Trust A retaining a reduced freehold interest. 10. Company C and Trust A agreed that Trust A would undertake a subdivision of the Property into three titles. The three components of the Property would be: • Stage 1; • Stage 2a - a purpose built facility • Stage 2b - a multi-story car park 11. Trust A would then sell down an interest in the two components to an special purpose vehicle associated with Company C ( "SPV D"), being: • a % interest in the Stage 2a; and • a % interest in the Stage 2b. 12. Trust B has been established by Trust A as a special purpose vehicle to acquire Trust A's remaining interests held in Stage 2a (%) and Stage 2b (%) and to undertake (in conjunction with SPV D) the construction of the improvements comprising the Stage 2a and Stage 2b and to hold those interests as income generating investments post completion. The reason for the establishment of Trust B to acquire, construct and hold the remaining interest in both components (as opposed to Trust A) is twofold: to quarantine any legal or commercial risks associated with the construction projects from Trust A, and to provide a 'ring fenced' structure for the external debt that will be required to fund the capital works on both components. 13. After construction is completed Stage 2b will be tenanted by Company C and held by Trust B and SPV D in equal shares (% each) as tenants-in-common. The proposed term of the lease arrangement between Trust B and SPV D (as tenants-in-common) and Company C (as tenant) is 20 years. 14. Stage 2b will be held by Trust B (as to %) and SPV D (as to %) as tenants-in-common. 15. Stage 2b will include a number of car parking spaces leased to Company C and a number of public car parking spaces. 16. The tenant reserved parking spaces will be subject to a 20 year lease arrangement, matching the term of the tenancy arrangement Company C has to lease Stage 2a. The parking spaces will be utilized employees working at the Stage 2a facility. 17. The public car parking spaces are intended to cater solely for using the Stage 2a facility and Stage 1 facility (both the same type of facility). It is proposed that stays beyond 15 minutes would be charged using automated (unmanned) machines. 18. Public car parking in excess of the tenants needs is a requirement for development approval to be granted for the site. 19. The Stage 2a facility would not be able to function appropriately without the parking being available to the public. 20. Charging for public car parking will discourage long term use and ensure reasonable access for people to utilise the Stage 2a facility. 21. The arrangements between Trust B and SPV D, as joint owners, and Company C as tenant are subject to normal commercial negotiations. Assumptions 22. The following assumptions are made: • Trust A is a unit trust that falls with the definition of a 'public unit trust' as defined in section 102P of the ITAA 1936 • Trust B's share of gross revenue from public space car parking as a proportion of the total gross revenue of Trust B will always be under 25%. • Trust B's share of gross revenue from tenant reserved car parking as a proportion of the total gross revenue of Trust B will always be under 25%. • Trust B's share of gross revenue from both car parking sources as a proportion of the total gross revenue of Trust B will be in excess of 25%.

Relevant legislative provisions: Section 102M of ITAA 1936 | Section 102MB of ITAA 1936 | Section 102N of ITAA 1936

Reasons for decision: Detailed Reasoning - Detailed reasoning: 1. All legislative references below are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated. 2. For the purposes of this ruling there is an assumption that Trust A is a unit trust that falls within the definition of a 'public unit trust' as defined in section 102P. 3. Pursuant to section 102N a trust will be regarded as a 'trading trust' if at any time during a year of income it directly carries on a 'trading business' or essentially controls the affairs of another person that carries on a trading business. 4. Therefore, given that Trust B is a 100% owned group member of Trust A, if the activities of Trust B are regarding as a 'trading business' Trust A would be regarded as a 'trading trust' for the purposes of section 102N. 5. A 'trading business' is defined in section 102M as 'a business that does not wholly consist of eligible investment business'. 6. An 'eligible investment business' has the following definition in section 102M: 'eligible investment business means 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: (i) secure or unsecured loans (including deposits with a bank or other financial institutions); (ii) bonds, debentures, stock or other securities (iii) shares in a company, including shares in a foreign hybrid company (as defined in the Income Tax Assessment Act 19970; (iv) units in a unit trust; (v) futures contracts; (vi) forward contracts; (vii) interest rate swap contracts; (ix) forward exchange rate contracts; (x) forward interest rate contracts; (xi) life assurance policies; (xii) a right or option in respect of such a loan, security, share, unit, contract or policy; (xii) any similar financial instruments; or (c) investing or trading in financial instruments (not covered by paragraph (b) that arise under financial arrangements, other than arrangements excepted by section 102MA. 7. Therefore if Trust B undertakes activities that are not considered to be 'investing in land for the purpose, or primarily the purpose, of deriving rent' (or other investments listed in section 102M) it will be determined to be carrying on a 'trading business' and therefore will be a trading trust for the purpose of section 102N. 8. Under the scheme described in the facts above Trust B will undertake the following activities: (i) in a joint arrangement with SPV D, leasing the Stage 2a facility to Company C for a 20 year period; (ii) in a joint arrangement with SPV D, leasing a number of reserved parking spaces to Company C, the tenants of Stage 2a facility. The parking spaces will be subject to a twenty year lease, which matches Company's tenancy arrangement for Stage 2a facility, and will be utilized by employees at the Stage 2a facility; and (iii) in a joint arrangement with SPV D, providing a number of public parking spaces to cater for the high demand for parking by people attending the Stage 2a facility. 9. It is accepted that leasing of the Stage 2a facility to Company C and the leasing of tenant reserved parking to Company C, for the same term as the Stage 2a facility lease, is 'investing in land for the purpose of deriving rent' and therefore both activities are an 'eligible investment business'. 10. However the provision of short term parking to the public is not considered to be 'deriving rent'. The common law meaning of the term 'rent' has been discussed in Taxation Determination TD 2006/78 Income tax: capital gains; are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78) 11. At paragraph 22 of TD 2006/78 the term rent has been described as follows • the amount payable by a tenant to a landlord for the use of the leased premises ( C.H. Bailey Ltd v Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010; United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76,80,86,93,99); • a tenant's periodical payment to an owner or landlord for the use of land or premises ( Australian Oxford Dictionary , 1999, Oxford University Press, Melbourne); and • recompense paid by a tenant to a landlord for the exclusive possession of corporeal hereditaments. ….. The modern conception of rent is a payment which is a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4 th Edition Reissue, Butterworths, London 1994, Ch 27 (1) 'Landlord and tenant', paragraph 212). 12. Paragraph 23 of TD 2006/78 states: A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession ( Radaich v. Smith (1959) 101 CLR 209; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693 and associated Decision Impact Statement 2008/4646 & 2008/4647). If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments are unlikely to be rent. 13. An example of the public parking contract is not available. However, generally public parking contracts involve a contractual right of a driver to enter the parking premises in a car to occupy one of the vacant parking spaces. Generally a person entering into a public car park contract does not have a right to exclusively possess a particular part of the car park; they have a right to park their car in one of the vacant parking space for a specified period. The person parking the car has no right to engage in any other activities in that space other than to park a car. 14. Since there is no exclusive possession of land, or a periodical payment or a lease for use of land, the revenue from the casual car parking does not fall within the ambit of rent. 15. However section 102MB provides for a 'safe harbour' tolerance if the casual car parking activity is 'incidental and relevant to the renting of the land'. 16. Subsection 102MB(2) states: For the purposes of this Division, an entity's investments in land are taken to be for the purpose, or primarily for the purpose, of deriving rent during a year of income if: (a) each of those investments is for purposes ( other than the purpose of trading) that include a purpose of deriving rent; and (b) at least 75% of the gross revenue from those investments for the year of income consists of rent (except excluded rent); and (c) none of the remaining gross revenue from those investments for the year of income is: (i) excluded rent; or (ii) from the carrying on of a business that is not incidental and relevant to the renting of the land. 17. Further subsection 102MB(3) states: In working out the gross revenue referred to in paragraph (2)(b), payments for the provision of services that: (a) are incidental to and relevant to the renting of the land; and (b) are ancillary to the ownership and use of the land; are taken to be rent derived from land. 18. If the elements of subsection 102MB(2) are satisfied by Trust B, the non-rental income derived from the public car parking facility can be taken to be for the purposes of deriving rent and therefore fall within the definition of an 'eligible investment business' under section 102M. Each of the entity's investment in land is for purposes that include a purpose of deriving rent 19. Trust B holds interest in two parcels of land, Stage 2a and Stage 2b. The Stage 2a component is clearly an investment in land for the purpose of deriving rental income. The Stage 2b includes public parking, which is not rental, and the leasing of reserved parking to the tenant of the Stage 2b facility for the same period (twenty years), which does constitutes an investment of land for the purpose of deriving rental income. Therefore the Stage 2b component 'includes' a purpose of deriving rent from land, and therefore paragraph 102MB(2)(a) is satisfied because all of Trust B's investments in land include the purpose of deriving rent. 75% of the gross revenue derived from rent (except 'excluded rent') 20. 'Excluded rent' is defined in section 102M as meaning: 'rent worked out by reference to the profits or receipts of an entity that uses any of the relevant land under an arrangement that is designed to result in the transfer of all, or substantially all, of what would otherwise be profits of the entity to another party to the arrangement.' 21. The leasing arrangements between Trust B and SPV D, as joint owners, and Company C, as tenant, are subject to normal commercial negotiations and the revenue from the Stage 2a component and the tenant reserved parking will not fall within the definition of 'excluded rent'. 22. The forecasted annual financial returns for Trust B's first full year of operation show that more than 75% of gross revenue will be derived from rent (with less than 25% derived from public car parking fees). Therefore paragraph 102MB(2)(b) is satisfied. Remaining gross revenue incidental and relevant to the renting of the land 23. Chapter 5 of the Explanatory Memorandum to Tax Laws Amendment (2008 Measures No. 5) Bill 2008 provides the following examples to assist demonstrate the legislative intention of section 102MB. | Detailed Reasoning - Example 5.16: A public unit trust owns and rents out a shopping centre that includes a car park for shopping centre customers. To deter use by non-customers long-stay users are charged fees. The revenue from car parking fees would be incidental to the rental of the land and would be non-rental income for the purposes of the safe harbour rule. The income from the car park is not from carrying on a business that is not incidental and relevant to the renting of the land. | Detailed Reasoning - Example 5.17: A public unit trust acquires land and buildings which comprise of office accommodation for rent and parking for the tenants. The trust subsequently decides not to make the parking available primarily for tenants but to run a car parking operation on the property. The income from the car parking operation would not fall within the 25 per cent safe harbour as it is income from carrying on a business that is not incidental and relevant to the renting of the land. The trust would be carrying on a trading business. 24. Example 5.16 is very similar to the provision of casual car parking for the Stage 2a facility. In example 5.16 the provision of a car park for shopping centre customers was stated as being incidental and relevant to the renting out the shopping centre. 25. The Stage 2a facility, with a large number of people traffic, requires a short term parking facility, and Stage 2a facility would not function satisfactorily without adequate parking facilities. The fees charged for the public parking assist in ensuring that the facility is used by visitors rather than by the public on a long term basis for non-Stage 2a facility purposes. 26. It is accepted that the revenue from the public parking is 'incidental and relevant' to the rental of the Stage 2a facility. Therefore paragraph 120MB(2)(c) is satisfied; none of the non-rental revenue is from 'excluded rent' or from carrying on of a business that is not incidental and relevant to the renting of the land. 27. Therefore under subsection 102MB(2) Trust B's investment in the Stage 2a component and the Stage 2b component is for the purpose, or primarily for the purpose, of deriving rent and therefore both will be 'eligible investment businesses' under section 102M. Trust A and Trust B will not be trading trust 28. Since the activities of Trust B are only eligible investment businesses it will not be a 'trading trust' under section 102N. It therefore follows that Trust A, by virtue of its ownership and control of Trust B, also will not be a trading trust under section 102N.