Private ruling: Lease extension payments
Date of advice: 28 October 2016
Published: February 2017
Ruling period: 1 July 20XX to 30 June 20XX

Ruling: Q1: Will Entity X carry on a trading business for the purposes of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936) as a result of making one or more lease extension payments. | A1: No

Relevant facts and circumstances: Entity X is a public unit trust which was granted a lease by Entity M over land owned by Entity M. Entity X granted a sub-lease over the land to Entity N which Entity N uses in operating its business. Entities X, M and N planned to further develop the land using a third party developer. The lease between Entities X and M will be extended for a number of years. Entities X and N will correspondingly extend the sub-lease. Entity X receives sub-lease rental payments from Entity N. Entity X will make the lease extension payments to Entity M in cash and / or by funding Entity M's share of the third party developer's costs.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 102M | Income Tax Assessment Act 1936 section 102MB | Income Tax Assessment Act 1936 paragraph 102N(1)(a)

Reasons for decision: Summary: The issue for consideration is whether Entity X will carry on a 'trading business' in fulfilling its role in further developing the land. Where a public unit trust is engaged in activities that constitute a 'trading business', that trust is a 'trading trust' and in turn is a 'public trading trust' under Division 6C, with the effect being, that it is treated as a company for Australian income tax purposes. Trading business 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. Section 102M of the ITAA 1936 defines 'trading business' to mean: … a business that does not consist wholly of eligible investment business. Section 102M of the ITAA 1936 also defines 'eligible investment business' to mean 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) secured or unsecured loans …; (ii) bonds, debentures, stock or other securities; (iii) shares in a company, …; … Entity X currently derives rental income under the sub-lease. In further developing the land, Entity X will make an additional investment in 'land' by making the lease payments in cash and / or by funding Entity M's share of the third party developer's costs. Investing in land to derive rental income Entity X will make the above lease payments as consideration for Entity M extending the existing lease. The lease extension will enable Entity X to extend the current sub-lease with Entity N for the same period. Entity X will continue to receive rental payments from Entity N in accordance with the sub-lease. Entity X has and will continue to have an interest in land under the lease. Relevantly, 'land' is defined in section 102M of the ITAA 1936 to include 'an interest in land' where a lease of land constitutes an interest in land. Therefore, the payments that Entity X will make to Entity M, will satisfy the requirement of investing in the land for the requisite purpose of deriving rent, or primarily so.