Private ruling: Income Tax: Consolidations - public trading trust as head company
Published: January 2013
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20YY
Date scheme commenced: 1 July 2012

Ruling: Q1: On the assumption roll-over will be obtained by any entity under Subdivision 124-Q of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the de-stapling restructure scheme, will the exemption in section 102NA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to prevent the Trust from becoming a trading trust for the purposes of Division 6C of the ITAA 1936? | A1: Yes | Q2: If the Trust commences to satisfy the conditions to be a public trading trust under section 102R of the ITAA 1936 at some time during its income year ending 30 June 20YY, will the Trust satisfy the requirements in section 713-130 of the ITAA 1997 to allow the Trust to make a choice to become the head company of a consolidated group in that income year? | A2: Yes | Q3: If the answer to Question two is yes, can the Trust make the choice to consolidate under section 703-50 of the ITAA 1997 with effect from 1 July 20XX? | A3: Yes - it must choose 1 July 20XX as the day specified in the choice if it wishes to consolidate the Trust group for the 20YY income year.

Relevant facts and circumstances: Current structure The stapled group consists of the following entities: · an Australian company (the Company). The Company is currently the head company of the Company tax consolidated group which was formed on 1 July 200Z; and · an Australian unit trust (the Trust) that is a managed investment trust. The Trust is not a trust whose trustee is assessed and liable to pay tax under Division 6B or Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936). The Trust is an ASIC registered managed investment scheme. The Trust has a number of wholly owned entities. All of the entities are currently dormant and three of them have carry-forward tax losses. The group's current corporate structure involves stapled securities (Securities). The Securities are listed on the Australian Securities Exchange (ASX) and are traded as stapled securities. Each Security comprises: · An ordinary share in the Company; and · A unit in the Trust. In addition to the Securities, the group also has the following options (Options) on issue: · options in the Company; and · options in the Trust. The Options are currently held by a small number of investors (Option holders) and each Company Option is stapled to a Trust Option. Accordingly, the Company Options and Trust Options are not separately exercisable and must be dealt with together. Each Option has a nil exercise price and entitles its holder to exercise the Option to acquire one Security. The Options are not listed on the ASX. De-stapling restructure scheme The steps to implement the de-stapling restructure scheme will be as follows: 1. The proposed restructure requires Securityholder approval under the constitutions of both the Company and the Trust. Assuming Securityholder approval of the required resolutions is obtained: 2. The Securities will be suspended from being traded on the ASX to enable the restructure to be implemented; 3. The Trust will acquire all the ordinary shares in the Company from the Securityholders; 4. The Trust will also acquire all of the Options held in the Company; 5. The units in the Trust will be listed on the ASX and the shares in the Company will be removed from the official list of the ASX. The above steps will not necessarily occur in the order listed above and several steps may occur simultaneously. If the de-stapling restructure scheme is approved it is anticipated that the restructure will be implemented in early 20XX - i.e. before the end of the groups 20XX income year. (Noting that the proposed consolidation will be in a subsequent income year). The taxpayer expects that the restructure will place the group in a better position to attract additional capital from investors subscribing for additional units in the Trust. If the additional capital is raised as anticipated the taxpayer expects that the capital raised will be used to invest in new businesses, investments or enterprises. The taxpayer anticipates that any new investment, business or enterprise will be acquired or established during the year ending 30 June 20YY and will be held directly under the Trust.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6C | section 102N | section 102NA | section 102P | section 102R | section 102S | section 102T | Income Tax Assessment Act 1997 Subdivision 124-Q | Subdivision 713-C | subsection 703-5(2) | section 703-15 | subsection 703-30(1) | section 703-50 | section 713-130 | section 713-135 | Issue 1 | Question 1 | Summary | Assuming roll-over is obtained by any entity under Subdivision 124-Q of the ITAA 1997 in respect of the de-stapling restructure scheme, the exemption in section 102NA of the ITAA 1936 will apply to prevent the Trust from becoming a trading trust for the purposes of Division 6C of the ITAA 1936 in that income year. | Detailed reasoning | Division 6C of the ITAA 1936 treats a public trading trust as if it is a company for particular income tax purposes. Subsection 102N(1) of the ITAA 1936 defines a trading trust for the purposes of Division 6C as being a unit trust that is carrying on a trading business, or controls another entity carrying on a trading business. | Division 6C of the ITAA 1936 was amended when Subdivision 124-Q of the ITAA 1997 was introduced. Subdivision 124-Q provides CGT roll-over for members of a stapled group where there is a de-stapling of the stapled entities and a public unit trust (being one of the former stapled entities) is interposed between holders of the ownership interests in the entities in the stapled group and the remaining formerly stapled entities. The Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 5) Bill 2007 (the EM) describes the purpose of Subdivision 124-Q as being: | 8.8 to allow for the reorganisation of stapled groups, and in particular Australian Listed Property Trusts. This will enable Australian Listed Property Trusts to rearrange their stapled structures and allow them to interpose a head trust so that they are treated as a single entity for the purposes of overseas acquisitions. | Section 102N of the ITAA 1936 deems a unit trust as a trading trust in relation to a year of income in which the trustee carries on a trading business or is able to control the affairs or operations of another person in respect of their carrying on of a trading business. | Section 102NA of the ITAA 1936 was inserted into Division 6C to ensure that the imposition of such a head trust after a de-stapling restructure will not lead to the trust being treated as a public trading trust under Division 6C of the ITAA 1936 provided certain other conditions are met. | Subsection 102NA(1) of the ITAA 1936 provides: | A unit trust is not a trading trust for the purposes of this Division in relation to a year of income if: | (a) the trust is an interposed trust in relation to a scheme for reorganising the affairs of stapled entities referred to in Subdivision 124-Q of the Income Tax Assessment Act 1997 in relation to the year of income or an earlier year of income; and | (b) a roll-over was obtained by any entity under that Subdivision of the Act in relation to the scheme for the year of income or that earlier year of income; and (c) the condition in subsection (2) is satisfied. | Subsection 102NA(2) of the ITAA 1936 provides: | The trustee of the trust must not, at any time during the year of income: | (a) carry on a trading business; or | (b) control, or be able to control, directly or indirectly, the affairs or operations of another entity that carries on a trading business, other than: | (i) a company that was, before the scheme was completed, one of the stapled entities referred to in Subdivision 124-Q of the Income Tax Assessment Act 1997 ; or (ii) a subsidiary of one of those stapled entities that is a company, or an entity that is controlled or able to be controlled, directly or indirectly, by that company; or | (iii) a trust whose trustee was, before the scheme was completed, assessed and liable to pay tax under Division 6B of this Division and that was, before the scheme was completed, one of those stapled entities; or | (iv) an entity that is controlled or able to be controlled, directly or indirectly, by the trust referred to in subparagraph (iii); | in relation to the year of income or an earlier year of income. | The intended effect of section 102NA is explained in the EM: | 8.60 Essentially, under these amendments a previously stapled company, owned or controlled by the interposed trust, will be able to continue to operate as it had before the restructure, without the interposed trust being taxed as a company. The interposed trust will be able to own, or control, any previously stapled public unit trusts on the basis that they are not carrying on a trading business. [Emphasis added] | The legislative intent behind the enactment of section 102NA of the ITAA 1936 was to help facilitate the reorganisation of stapled groups, particularly Australian Listed Property Trusts, by ensuring that the previously stapled entities could continue to operate in the same manner, without having the interposed unit trust taxed as a company. | The entities described in subparagraphs 102NA(2)(b)(i)-(iv) will therefore be entities that were controlled, directly or indirectly, by one of the stapled entities before the restructure was completed. | This means that if an entity that conducts a trading business is directly or indirectly controlled by one of the stapled entities before the restructure was completed, the interposed unit trust will not be deemed to be a trading trust under section 102NA of the ITAA 1936. | Under the proposed de-stapling restructure scheme, the Trust will acquire all the ordinary shares in the Company from the Securityholders and will also acquire all of the Options held in the Company. The Company consolidated group will sit underneath the Trust, as such, but for the operation of section 102NA of the ITAA 1936, the proposed de-stapling restructure scheme would result in the Trust becoming a trading trust under paragraph 102N(1)(b) of the ITAA 1936. | Therefore, assuming roll-over is obtained by any entity under Subdivision 124-Q of the ITAA 1997 in respect of the proposed de-stapling restructure scheme, the exemption in section 102NA of the ITAA 1936 will apply to prevent the Trust from becoming a trading trust for the purposes of Division 6C of the ITAA 1936 in that income year. | Question 2 and Question 3 | Summary | If the Trust elects to be treated as the head company of a new tax consolidated group it must choose 1 July 20XX as the day specified in the choice if it wishes to consolidate the Trust group for the 20YY income year. | Detailed reasoning | Subdivision 713-C of the Income Tax Assessment Act 1997 Corporate unit trusts (CUTs) and public trading trusts (PTTs) are subject to Divisions 6B and 6C of Part III of the ITAA 1936 respectively. Broadly, these Divisions effectively tax the income of the CUT or PTT as if the trust were a company. | Division 6C of the ITAA 1936 is relevant to this proposed restructure as it is intended that the Trust will become a PTT during the income year ending 30 June 2014. The Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 5) Bill 2007 summarises the operation of Division 6C as follows: | 8.11 Division 6C of the ITAA 1936 also acts to protect the corporate tax base by taxing as a company the trustee of a public unit trust where the trust is carrying on a trading business, or 'controls' another entity carrying on a trading business. It is an all-or-nothing, year-by-year provision such that any active business activity conducted or controlled by a public unit trust in a year of income means that the trust is taxed like a company for that year in relation to all its income and activities. Its equity holders are taxed like shareholders for that year too. | 8.12 Division 6C taxes public unit trusts in a similar manner to companies unless they are confined to certain traditional passive investment activities. A public unit trust is, broadly, a unit trust where any of the units are listed on a stock exchange or are offered to the public or the units in the trust are held by not fewer than 50 persons (section 102P of the ITAA 1936). | 8.13 A unit trust is a 'trading trust' if it carries on a trading business or controls or is able to control, directly or indirectly, a trading business carried on by another person (section 102N of the ITAA 1936). A 'trading business' is any business that does not consist wholly of 'eligible investment business', that is, of certain traditional passive activities. | An assumption made in providing this answer is that the trustee of the Trust will establish or acquire a trading business or maintain a controlling investment in an entity that conducts a trading business some time during the income year ending 30 June 20YY. It follows that the Trust will at that time meet the conditions to be characterised as a trading trust under section 102N of the ITAA 1936. | Once the Trust becomes a trading trust it will then satisfy the conditions listed in paragraph 102R(1)(b) of the ITAA 1936 to be characterised as a PTT for its entire 20YY income year. That is; | · The Trust will be a public unit trust in relation to the 20YY income year, | · The Trust will be a trading trust in relation to the 20YY income year, | · The Trust will be a resident unit trust in relation to the 20YY income year, and | · The Trust will not be a CUT in relation to the 20YY income year. | Absent any other consideration it would follow that sections 102S and 102T of the ITAA 1936 would apply to modify the taxation of the net income of the Trust for the entire 20YY income year, such that the Trust would effectively be taxed like a company. | However, the note to subsection 102T(1) of the ITAA 1936 provides a signpost that Division 6C of the ITAA 1936 may not apply where a public trading trust chooses to form a consolidated group. The note provides: | Note: Under Subdivision 713-C of the Income Tax Assessment Act 1997, this Act applies differently in relation to a public trading trust that chooses to form a consolidated group. | Subdivision 713-C was inserted into Part 3-90 of the ITAA 1997 by Tax Laws Amendment (2004 Measures No. 2) Act 2004 with application on or after 1 July 2002. The Subdivision provides rules that enable a CUT or PTT to make an election to be treated as a head company of a consolidated group. In making the election, the CUT or PTT is treated like a company for income tax and other related purposes. The choice applies to the CUT or PTT for the rest of its existence, commencing from the start of the day specified in the choice, even if the group later deconsolidates or the trust subsequently ceases to meet the conditions to be characterised as a CUT or PTT. That is, a choice to form a consolidated group is also an irrevocable election for the trust to be treated like a company for income tax and other related purposes. | The object | The consolidation regime in Part 3-90 of the ITAA 1997 allows groups of wholly-owned entities to be treated as a single company taxpayer for income tax purposes. A consolidated group is able to be formed provided the membership requirements as outlined in Division 703 of the ITAA 1997 are satisfied. | One of the key membership requirements is that there is a head company. An entity is a head company if all of the requirements listed in item 1 of the table in subsection 703-15(2) of the ITAA 1997 are met in relation to the entity. The requirements are that: | · the entity must be a company 1 that has some or all of its taxable income taxed at the corporate tax rate; | · the entity must be an Australian resident; and | · the entity must not be a wholly-owned subsidiary of another entity that meets the requirements set out in the first two dot points above. | CUTs and PTTs do not satisfy the first listed requirement because even though they are treated as a company for some purposes of the income tax law and effectively taxed at the company tax rate, they are not deemed to be a company. That is, the income tax treatment of a CUT or PTT is not identical to that of a company - for example, they use different loss recoupment rules to companies and are still eligible for a 50% CGT discount. For these reasons, absent specific rules, CUTs and PTTs would not be eligible to be a head company and therefore unable to elect to form a consolidated group. | However, as noted above, Subdivision 713-C of the ITAA 1997 was enacted to enable a CUT or PTT to be treated like a company and elect to form a consolidated group. First, the Subdivision provides rules that enable the trust to choose to form a consolidated group. Second, the Subdivision changes how the tax law applies in relation to the trust in a way corresponding to the way in which the tax law applies to a company. This change to the application of the tax law to the trust applies on and after the time the choice to form a consolidated group takes effect. | Making the choice | Section 713-130 of the ITAA 1997 provides that a trust may make a choice under section 703-50 of the ITAA 1997 as if the trust were a company (identified throughout the Subdivision as the assumed company ) if: | · the assumed company was eligible to be a head company, on an assumption that it beneficially owned the membership interests in other entities that are legally owned by its trustee; and | · the day specified in the choice is the first day of an income year for which the trust is a CUT or PTT. | The first condition tests the trust to ensure it is eligible to be a head company assuming it beneficially owned entities that are legally owned by its trustee. The second condition requires that the day specified in the choice is the first day of an income year for which the trust is characterised as a CUT or PTT. Both of these conditions must be satisfied on the day specified if the Trust's choice to form a consolidated group is to be effective. | Assuming that the Trust meets all of the requirements listed in item 1 of the table in subsection 703-15(2) of the ITAA 1997, it will be eligible to be a head company. The ruling application states that the Trust has a number of wholly owned entities and three of them have carry forward tax losses. If at the start of the 20YY income year the Trust wholly owns at least one entity, it will be eligible to be a head company within paragraph 713-130(a) of the ITAA 1997. | Assuming the Trust qualifies as a PTT in relation to the 20YY income year, as discussed above, the date specified in the choice must be the first day of that year to satisfy paragraph 713-130(b) of the ITAA 1997. | Therefore the first day where both paragraphs 713-130(a) and (b) of the ITAA 1997 are satisfied will be the first day of the Trust's 20YY income year, 1 July 20XX. Consequently, this must be the day specified in the choice to consolidate in order for the choice to be effective.


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