Taxation Determination TD 2015/10
Date of effect: 22 April 2015

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. Ruling 1. No. The fact that a company has issued a debt interest to a listed property trust within the same stapled property group will not of itself be sufficient to form a conclusion under paragraph 974-80(1)(d) [1] that there is a scheme, or a series of schemes, designed to operate so that the returns on the debt interest are used to fund returns on what is in substance equity held by another person (the 'ultimate recipient'). Example 1 2. Property Trust is a listed property trust. It holds Australian commercial properties with a total market value of $500 million. It derives rental income from leasing these properties to third parties. 3. Property Trust is not taxed under Division 6C of Part III to the Income Tax Assessment Act 1936. 4. Y Co is a company. Its activities mainly comprise property development and management of the properties owned by Property Trust. Property Trust pays to Y Co a monthly fee for the management services (at market rate). It is assumed, for the purposes of this example, that Property Trust is a 'connected entity' of Y Co as defined in subsection 995-1(1). 5. Property Trust and Y Co enter into a Stapling Deed. Under the Stapling Deed, each unit in Property Trust is stapled to a share in Y Co and cannot be traded separately. The stapled securities are then offered to the investors by way of a prospectus. 6. A total of $50 million is raised on the issue of stapled securities. The funds raised are allocated to Y Co and Property Trust having regard to the relative net asset value of the two entities - $30 million is contributed to Property Trust and $20 million to Y Co. 7. Property Trust lends its $30 million to Y Co for use in Y Co's business. The loan has a term of 9 years, and is interest bearing. Unpaid interest accrues and is payable together with any principal at the end of the loan term. 8. The loan from Property Trust to Y Co is a debt interest under subsection 974-15(1). The shares in Y Co are equity interests under subsection 974-70(1). The units in Property Trust are neither debt nor equity interests under Division 974 although they are equity interests under section 820-930. 9. In respect of the loan from Property Trust to Y Co: 10. However, paragraph 974-80(1)(d) will not be satisfied. The fact that Y Co has issued a debt interest to Property Trust will not on its own be sufficient to conclude that the scheme or series of schemes is designed to operate so that the interest on the loan is used to fund (directly or indirectly) a return to the stapled security holders. To satisfy paragraph 974-80(1)(d), a stronger connection between the interest on the loan and the trust distributions must be evident from the structure of the scheme or series of schemes, such that it is reasonable to conclude that the Property Trust's distributions to the stapled security holders are indirectly a return from Y Co. Relevant connections could include that Y Co was almost exclusively funded by the loan from Property Trust and/or the return on the loan was designed to pass the vast majority of Y Co's profits to Property Trust. 11. Similarly, paragraph 974-80(1)(d) would not be satisfied if all other facts in this example were the same but Property Trust and Y Co were an existing stapled group, and the stapled securities were issued by way of an additional capital raising for the stapled group. Example 2 12. Assume that instead of issuing new stapled securities and on-lending its share of the funds raised by the issue, Property Trust in Example 1 borrows $50 million from an external financier. The loan has a term of 7 years, and is interest bearing. Unpaid interest accrues and is payable together with any principal at the end of the loan term. Property Trust on-lends the $50 million borrowed to Y Co, at a mark up on the interest rate on the loan from the external financier. 13. As in Example 1, the loan from Property Trust to Y Co is a debt interest under subsection 974-15(1). The shares in Y Co are equity interests under subsection 974-70(1). The units in Property Trust are neither debt nor equity interests under Division 974 although they are equity interests under section 820-930. In respect of the loan from Property Trust to Y Co, paragraphs 974-80(1)(a), 974-80(1)(b), 974-80(1)(c) and 974-80(1)(ca) are satisfied. 14. However, paragraph 974-80(1)(d) will not be satisfied. The fact that Y Co has issued a debt interest to Property Trust will not on its own be sufficient to conclude that the scheme or series of schemes are designed to operate so that the interest on the loan from Property Trust to Y Co is used to fund (directly or indirectly) a return to the stapled security holders. To satisfy paragraph 974-80(1)(d), a stronger connection between the interest on the loan and the trust distributions must be evident from the structure of the scheme or series of schemes, such that it is reasonable to conclude that the Property Trust's distributions to the stapled security holders are indirectly a return from Y Co. Date of effect 15. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). Commissioner of Taxation 22 April 2015



Examples: Example 1: 2. Property Trust is a listed property trust. It holds Australian commercial properties with a total market value of $500 million. It derives rental income from leasing these properties to third parties. 3. Property Trust is not taxed under Division 6C of Part III to the Income Tax Assessment Act 1936. 4. Y Co is a company. Its activities mainly comprise property development and management of the properties owned by Property Trust. Property Trust pays to Y Co a monthly fee for the management services (at market rate). It is assumed, for the purposes of this example, that Property Trust is a 'connected entity' of Y Co as defined in subsection 995-1(1). 5. Property Trust and Y Co enter into a Stapling Deed. Under the Stapling Deed, each unit in Property Trust is stapled to a share in Y Co and cannot be traded separately. The stapled securities are then offered to the investors by way of a prospectus. 6. A total of $50 million is raised on the issue of stapled securities. The funds raised are allocated to Y Co and Property Trust having regard to the relative net asset value of the two entities - $30 million is contributed to Property Trust and $20 million to Y Co. 7. Property Trust lends its $30 million to Y Co for use in Y Co's business. The loan has a term of 9 years, and is interest bearing. Unpaid interest accrues and is payable together with any principal at the end of the loan term. 8. The loan from Property Trust to Y Co is a debt interest under subsection 974-15(1). The shares in Y Co are equity interests under subsection 974-70(1). The units in Property Trust are neither debt nor equity interests under Division 974 although they are equity interests under section 820-930. 9. In respect of the loan from Property Trust to Y Co: 10. However, paragraph 974-80(1)(d) will not be satisfied. The fact that Y Co has issued a debt interest to Property Trust will not on its own be sufficient to conclude that the scheme or series of schemes is designed to operate so that the interest on the loan is used to fund (directly or indirectly) a return to the stapled security holders. To satisfy paragraph 974-80(1)(d), a stronger connection between the interest on the loan and the trust distributions must be evident from the structure of the scheme or series of schemes, such that it is reasonable to conclude that the Property Trust's distributions to the stapled security holders are indirectly a return from Y Co. Relevant connections could include that Y Co was almost exclusively funded by the loan from Property Trust and/or the return on the loan was designed to pass the vast majority of Y Co's profits to Property Trust. 11. Similarly, paragraph 974-80(1)(d) would not be satisfied if all other facts in this example were the same but Property Trust and Y Co were an existing stapled group, and the stapled securities were issued by way of an additional capital raising for the stapled group. | Example 2: 12. Assume that instead of issuing new stapled securities and on-lending its share of the funds raised by the issue, Property Trust in Example 1 borrows $50 million from an external financier. The loan has a term of 7 years, and is interest bearing. Unpaid interest accrues and is payable together with any principal at the end of the loan term. Property Trust on-lends the $50 million borrowed to Y Co, at a mark up on the interest rate on the loan from the external financier. 13. As in Example 1, the loan from Property Trust to Y Co is a debt interest under subsection 974-15(1). The shares in Y Co are equity interests under subsection 974-70(1). The units in Property Trust are neither debt nor equity interests under Division 974 although they are equity interests under section 820-930. In respect of the loan from Property Trust to Y Co, paragraphs 974-80(1)(a), 974-80(1)(b), 974-80(1)(c) and 974-80(1)(ca) are satisfied. 14. However, paragraph 974-80(1)(d) will not be satisfied. The fact that Y Co has issued a debt interest to Property Trust will not on its own be sufficient to conclude that the scheme or series of schemes are designed to operate so that the interest on the loan from Property Trust to Y Co is used to fund (directly or indirectly) a return to the stapled security holders. To satisfy paragraph 974-80(1)(d), a stronger connection between the interest on the loan and the trust distributions must be evident from the structure of the scheme or series of schemes, such that it is reasonable to conclude that the Property Trust's distributions to the stapled security holders are indirectly a return from Y Co. Date of effect 15. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). Commissioner of Taxation 22 April 2015 Explanation 16. A common business structure in the Australian property sector is that of a stapled group (property stapled group). Generally, this business structure combines a listed property trust (LPT) with a property management and development company (PMC). The LPT owns a portfolio of properties while the PMC manages and may also develop the properties. The shares in the PMC are stapled to the units in the LPT. While the securities are on issue they cannot be sold or otherwise dealt with separately. The stapled securities can be traded on the Australian Stock Exchange. 17. The commercial rationale for using a stapled structure in the property sector is that it enables investors to have direct exposure to the passive assets as well as an interest in the income from the management of those assets. The investors receive both dividends (with any franking credits attached) from the company and pre-tax distributions from the LPT. Tax preferences, such as capital allowances, to which the trustee is entitled, flow through to the investors. 18. There may be instances where the LPT uses its surplus funds to acquire a debt interest from the PMC. In such instances, the question arises whether section 974-80 in Division 974 [2] applies to re-characterise the debt interest as an equity interest. 19. Section 974-80 is a specific rule within Division 974 which deals with financing arrangements that grant an investor (the ultimate recipient) an interest which is effectively (in substance but not in form), an equity interest in a company. The provision applies when equity-like returns to the ultimate recipient are funded from otherwise tax deductible payments made by the company. [3] That is, where interposed debt interests are used to create 'de facto' equity interests, the provision reclassifies the interposed debt interests as equity interests. This causes the returns paid in respect of those same interests to be non-deductible. [4] 20. In order for section 974-80 to apply, all the requirements in subsection 974-80(1) must be satisfied. Firstly, there must be an interest that carries a right to a variable or fixed return from the company: paragraph 974-80(1)(a). Secondly, that interest must be held by a connected entity [5] of the company: paragraph 974-80(1)(b). Thirdly, the interest must not otherwise be an equity interest in the company: paragraph 974-80(1)(c). Fourthly, the scheme that gives rise to the interest must be a financing arrangement [6] for the company: paragraph 974-80(1)(ca). Finally paragraph 974-80(1)(d) requires that: 21. It has been argued that the test in paragraph 974-80(1)(d) will be satisfied in all cases where the PMC has issued a debt interest to an LPT within the same stapled group. In other words, it is argued that, in all cases where the PMC pays a return on a debt interest to the LPT within the same stapled group which then makes distributions to the stapled group investors, it must be concluded that there is a scheme, or a series of schemes, designed to operate so that the return on the debt interest is to be used to fund in substance equity returns to the stapled group investors. 22. The Commissioner does not agree with the argument. The Commissioner considers that paragraph 974-80(1)(d) will only be satisfied where it can be established, objectively, that the financing arrangement for a company, either of itself or together with other schemes, has been structured to enable returns to be paid by the company to the ultimate recipient such that it is reasonable to conclude that the ultimate recipient is in-substance receiving equity returns from the company, albeit indirectly. 23. Paragraph 974-80(1)(d) will not be satisfied merely because the arrangement results in the return on the debt interest paid by the PMC to the LPT being a potential source of funds which fund the LPT distributions to the stapled group investors. 24. Absent evidence suggesting otherwise, the return on the debt interest paid by the PMC is merely a source of funds which will potentially be used by the LPT to fund distributions to the stapled group investors. In these circumstances, it would not be reasonable to conclude that the stapled group investor is in-substance receiving equity returns from the PMC and thus there would not be a scheme, or series of schemes, under which returns paid by the PMC to the LPT in the stapled group were designed to fund returns on equity interests held by the stapled group investors. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Previously issued as TD 2014/D20

Appendix: 16. A common business structure in the Australian property sector is that of a stapled group (property stapled group). Generally, this business structure combines a listed property trust (LPT) with a property management and development company (PMC). The LPT owns a portfolio of properties while the PMC manages and may also develop the properties. The shares in the PMC are stapled to the units in the LPT. While the securities are on issue they cannot be sold or otherwise dealt with separately. The stapled securities can be traded on the Australian Stock Exchange. 17. The commercial rationale for using a stapled structure in the property sector is that it enables investors to have direct exposure to the passive assets as well as an interest in the income from the management of those assets. The investors receive both dividends (with any franking credits attached) from the company and pre-tax distributions from the LPT. Tax preferences, such as capital allowances, to which the trustee is entitled, flow through to the investors. 18. There may be instances where the LPT uses its surplus funds to acquire a debt interest from the PMC. In such instances, the question arises whether section 974-80 in Division 974 [2] applies to re-characterise the debt interest as an equity interest. 19. Section 974-80 is a specific rule within Division 974 which deals with financing arrangements that grant an investor (the ultimate recipient) an interest which is effectively (in substance but not in form), an equity interest in a company. The provision applies when equity-like returns to the ultimate recipient are funded from otherwise tax deductible payments made by the company. [3] That is, where interposed debt interests are used to create 'de facto' equity interests, the provision reclassifies the interposed debt interests as equity interests. This causes the returns paid in respect of those same interests to be non-deductible. [4] 20. In order for section 974-80 to apply, all the requirements in subsection 974-80(1) must be satisfied. Firstly, there must be an interest that carries a right to a variable or fixed return from the company: paragraph 974-80(1)(a). Secondly, that interest must be held by a connected entity [5] of the company: paragraph 974-80(1)(b). Thirdly, the interest must not otherwise be an equity interest in the company: paragraph 974-80(1)(c). Fourthly, the scheme that gives rise to the interest must be a financing arrangement [6] for the company: paragraph 974-80(1)(ca). Finally paragraph 974-80(1)(d) requires that: 21. It has been argued that the test in paragraph 974-80(1)(d) will be satisfied in all cases where the PMC has issued a debt interest to an LPT within the same stapled group. In other words, it is argued that, in all cases where the PMC pays a return on a debt interest to the LPT within the same stapled group which then makes distributions to the stapled group investors, it must be concluded that there is a scheme, or a series of schemes, designed to operate so that the return on the debt interest is to be used to fund in substance equity returns to the stapled group investors. 22. The Commissioner does not agree with the argument. The Commissioner considers that paragraph 974-80(1)(d) will only be satisfied where it can be established, objectively, that the financing arrangement for a company, either of itself or together with other schemes, has been structured to enable returns to be paid by the company to the ultimate recipient such that it is reasonable to conclude that the ultimate recipient is in-substance receiving equity returns from the company, albeit indirectly. 23. Paragraph 974-80(1)(d) will not be satisfied merely because the arrangement results in the return on the debt interest paid by the PMC to the LPT being a potential source of funds which fund the LPT distributions to the stapled group investors. 24. Absent evidence suggesting otherwise, the return on the debt interest paid by the PMC is merely a source of funds which will potentially be used by the LPT to fund distributions to the stapled group investors. In these circumstances, it would not be reasonable to conclude that the stapled group investor is in-substance receiving equity returns from the PMC and thus there would not be a scheme, or series of schemes, under which returns paid by the PMC to the LPT in the stapled group were designed to fund returns on equity interests held by the stapled group investors. © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Previously issued as TD 2014/D20


there is a scheme, or a series of schemes, designed to operate so that the return to the connected entity is to be used to fund (directly or indirectly) a return to another person (the ultimate recipient).


Related rulings: TR 2006/10
Legislative references: ITAA 1936 Pt III Div 6C ITAA 1997 ITAA 1997 26-26 ITAA 1997 820-930 ITAA 1997 Div 974 ITAA 1997 974-15(1) ITAA 1997 974-70(1) ITAA 1997 974-80 ITAA 1997 974-80(1) ITAA 1997 974-80(1)(a) ITAA 1997 974-80(1)(b) ITAA 1997 974-80(1)(c) ITAA 1997 974-80(1)(ca) ITAA 1997 974-80(1)(d) ITAA 1997 974-130 ITAA 1997 995-1 ITAA 1997 995-1(1) TAA 1953
Subject references: debt interest equity test stapled companies stapled structure
Other references: Explanatory Memorandum to the New Business Tax System (Debt and Equity) Bill 2001 Supplementary Explanatory Memorandum to the New Business Tax System (Debt and Equity) Bill 2001