Tax Laws Amendment (2008 Measures No 5) Bill
2008 was introduced into Parliament on 25 September
2008, it included changes that were intended to make it easier for
managed funds to comply with the law by reducing the scope for
them to inadvertently breach Division 6C (i.e. the public trading
trust rules that can tax a trust as a company). Whilst we are
pleased that the meaning of "investing in land"
has been broadened, it is unfortunate that the Bill falls
short of providing greater certainty for most property trusts,
as the proposed safe harbours included in the amendments do not
provide any greater certainty than the current law and
property trusts will largely be required to rely upon the existing
rules when determining what is incidental income.
Key changes include:
Clarifying the scope and meaning of investing in land
- The meaning of "investing in land" for
the purpose of deriving rent is broadened to include investing
in fixtures and moveable property (i.e. chattels) which is
customarily supplied, incidental and relevant to the renting of the
land and ancillary to the ownership and use of the land.
Introducing a 25% safe harbour for other non-rental,
non-trading income from investments in land - A safe
harbour will be introduced where 75% of the gross revenue is rent
and none of the (25%) balance of gross income is
"excluded rent" or from the carrying on of a business
that is not incidental and relevant to the renting of the
Excluded rent will now only include rent worked out by reference
to profits under an arrangement designed to result in a shift
of substantially all of the profits to another party. Mercifully,
turn-over rent which was previously included in the definition
of "excluded rent" in the draft bill is not included in
A potential uncertainty for trusts will be determining what
income is incidental to rent. The explanatory memorandum (the
"EM") notes a car park for customers of a shopping centre
where fees are charged for long stays would be regarded as
incidental. However, income for a car park as part of an
office building that is opened to the public as a separate
operation (and not primarily for the tenants) would not be
regarded as incidental and so would fail the 25% test.
The safe harbor is meant to allow trusts to more easily
demonstrate that it is investing in land for the primary
purpose of deriving rent. However, in so doing the EM gives a
clearer indication of what is rent and more importantly what
is not. For some property trusts this has the potential to unsettle
some "reasonably arguably" positions, especially in
relation to certain infrastructure investments.
Expanding the range of Financial Instruments
– The range of financial instruments under
the eligible investment business rules will be expanded to the
broader class that is defined as
'financial arrangements' in ITAA 1997. Certain
"excepted arrangements" such as luxury car leases,
guarantees and insurance policies will be specifically
excluded from qualifying as financial arrangements.
2% safe harbour at whole of trust level for non-trading
income – Up to 2 % of the gross revenue of
the trust can be from non-eligible investment business before the
trust is treated as carrying on a trading business. However,
income from other trading activities (from carrying on a business
that is not incidental to an eligible investment business) is
not included in the 2% amount. As such, the 2% safe harbour is
of fairly limited value for most property trusts as it is arguable
that incidental income is allowed under the existing rules and
it is not limited to 2%.
The explanatory memorandum does explain that the 2% concession
will apply to revenues such as:
certain option or guarantee fees; and
investment income from non-financial arrangements.
These changes will apply in the income year in which the Bill
receives Royal Assent. However, a trust that chooses to remain
a trading trust may elect that the safe harbours do not apply so
that they continue to be taxed like a company.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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