The Australian Taxation Office (ATO) released a controversial
Taxpayer Alert, TA 2017/1 on 31 January 2017. The Taxpayer
Alert relates to structures involving both a company (taxed at the
corporate rate) and a trust (taxed as a flow through vehicle). The
ATO has particularly highlighted structures involving a managed
investment trust (MIT) with overseas
The Taxpayer Alert is likely to affect investors in numerous
asset classes, including infrastructure and renewables.
Investors need to carefully consider whether their investments
are likely to fall within the (very broad) parameters identified by
the ATO and should develop a strategy for engaging with the
Which structures are the ATO concerned about?
The ATO is concerned about "rental staples" (and
similar structures where the entities are not stapled). This
structure involves the following:
The trust owns land or a fixture on land.
The company enters into one or more agreements with a trust to
lease or otherwise access the selected assets to enable the company
to operate its business. The company claims a tax deduction for
rental payments to the trust.
The nature of the business is such that the transactions to
divide the business in this manner are not transactions that third
parties acting at arm's length would usually enter into, and it
is often also the case that the business is not one capable of
division in any commercially meaningful way.
Further, the ATO has also identified these structures as being
Finance staples: Broadly, where the company
has the operating business, carries less than the normal expected
level of equity, and borrows from the trust. The trust funds the
loan through capital invested in the trust by the beneficiaries.
The company claims a deduction for interest payments and the
interest income is distributed by the trust to investors.
Synthetic equity staples: The company pays
profit or turnover equivalent amounts to the trust and claims a
deduction. The trust is usually an MIT and distributes the income
at concessional tax rates to overseas investors.
Royalty staples: The trust holds assets such
as intellectual property, mining tenements, industrial equipment,
or other assets of a business that produce a royalty. The company
pays a royalty to the trust and claims a deduction. The
distributions from trust to non-resident investors are subject to
royalty withholding tax (usually at a rate capped under a double
How will the ATO challenge them?
The ATO may challenge the structures under one or more of the
Questioning whether the trust is actually a flow through
vehicle or MIT. (That is, seeking to tax the trust as a company
under Division 6C of the Income Tax Assessment Act 1936.)
Seeking to characterise debt instruments as equity interests
under the debt/equity rules.
Seeking to apply the anti-avoidance provisions in Part IVA of
the 1936 Act.
Which structures should still be OK?
Real estate investment trusts, where the trust rents a building
to third parties and the company provides operational
Real estate transactions, where the trust rents a building to
the company, which licences the land to third parties.
Privatised assets, where the business are "effectively
land (and land improvement) based or heavily reliant on particular
land holdings and related improvements" (However, the ATO will
indicate guidance on these transactions and will also provide
further detail on a transaction by transaction basis).
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