The Labor Government has released an Industry Consultation Paper which requests comment on proposed changes to Division 6C. The main proposal is to introduce a "25% safe harbour" to allow 25% of Australian Real Estate Investment Trusts' ("AREITs") income to be classified non-rental income without the AREIT being taxed as a company. It is hoped that the easing of the restrictions in Division 6C will allow AREITs to operate more easily in the global market.

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Public unit trusts conducting trading businesses will be taxed as a corporate entity pursuant to Division 6C.

The current wording of Division 6C has several ambiguities which has caused concern among the industry.

In particular, the current provisions provide that an eligible investment business (a business that will not trigger Division 6C) includes an investment in land for the purpose, or primarily for the purpose of deriving rent. Currently, there are no guidelines to explain what will constitute as "primarily". Hence, the paper outlines a proposal to replace the "primary purpose test" with a safe harbour test. The safe harbour test would allow public unit trusts an allowance of up to 25% for gross non-rental income (excluding capital gains) per annum.

Another area which has caused concern to the industry in the current application of Division 6C is the definition of rent. The paper states that it would be appropriate to clarify that the concept of rent covers only rental and similar payments payable as a passive investment return for the right to use the land. In our opinion the paper has not adequately dealt with the issue of what constitutes 'rent' and we will be seeking further clarification regarding this.

Finally, the Government proposes to expand the range of financial securities that can be invested in without triggering Division 6C. The definition of financial arrangements provided in Tax Law Amendment (Taxation of Financial Arrangement) Bill 2007 (which has now lapsed) will be used as a basis to determine which investments will be within the range of financial securities for the purpose of Division 6C.

A full copy of the consultation paper can be found at:

http://www.treasury.gov.au/contentitem.asp?Navld=&ContentID=1347

The review by the Board of Taxation s still in progress and the Treasury has encouraged members of industry to comment on the consultation paper by 17 March 2008. Moore Stephens will be providing comments to the Treasury and do encourage others to do so.

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