On 25 September 2008 the Tax Laws Amendment (2008 Measures No. 5) Bill 2008 was introduced into Parliament. This Bill contains the long awaited reforms of the public trading trust rules in Division 6C of Part III of the Income Tax Assessment Act 1936. Amongst other things, the reforms seek to ensure that public unit trusts that invest in property are not inadvertently taxed as companies where a relatively small part of their income is not rent.

The Bill follows the release by the Treasury in February this year of an Industry Consultation paper (see our legal update of February 2008) and the release of draft legislation in July (see our legal update of July 2008). Our earlier legal updates provide background to the reforms.

The changes to Division 6C proposed in the Bill address a number of potential problems that were identified in the earlier draft legislation.

The reforms to Division 6C will, if the Bill is passed by Parliament, apply from the income year of Royal Assent. Certain changes, such as the safe harbours described below, will not apply if the trustee of a trust affected by the changes chooses that those provisions are not to apply to that income year.

Trusts investing in land

A trust which is a "public unit trust" must, under Division 6C, carry on an "eligible investment business" to avoid being taxed in the same way as a company. The investment in land by such trust for the purpose, or primarily for the purpose, of deriving rent is an "eligible investment business". The Bill seeks to provide some greater clarity as to whether an investment in land by a public unit trust will satisfy this test.

A safe harbour allowance will be provided so that the test will be satisfied if at least 75% of the gross revenue is rent (as long as it is not "excluded rent") and none of the remaining non-rental gross income is "excluded rent" or is from carrying on a business that is not incidental and relevant to the renting of land. "Excluded rent" is rent based on profits or receipts under an arrangement designed to result in all (or substantially all) of what would otherwise be profits being transferred to another party to the arrangement.

When income which is not rent (or excluded rent) will be treated as being from the carrying on of a business that is incidental and relevant to the renting of land, is the subject of some examples in the Explanatory Memorandum to the Bill. An example is provided of a shopping centre with a car park. If long-stay users of the car park are charged fees and those fees are intended to deter the use of the car park by persons who are not shopping centre customers, the car park fee revenue would be considered to be from the carrying on a business incidental and relevant to the renting of the land.

Another example concerned the acquisition of a tenanted office building with parking for tenants. If the trust did not make the car park available primarily for tenants but instead ran a car parking operation, the income from that activity would not fall within the 25% safe harbour. The revenue is considered to be income from carrying on a business that is not incidental and relevant to the renting of the office building.

For the purposes of the 25% safe harbour referred to above, payments for the provision of services that are incidental and relevant to the renting of land and ancillary to the ownership and use of the land are treated as rent derived from the land. Capital gains and capital losses from disposals of the land are disregarded in working out gross income for the purposes of the safe harbour.

Trusts investing in financial investments

The definition of "eligible investment business" in Division 6C includes a range of financial instruments. The Bill expands the list of financial instruments to include those that arise under "financial arrangements" as defined in the tax legislation – other than certain excepted arrangements.

Additional safe harbour

In order to prevent inadvertent minor breaches of the "eligible investment business" rules, the Bill provides an additional safe harbour. The trust may derive no more than 2% of its gross income from activities that are not "eligible investment business" as long as the revenue is from the carrying on of a business incidental and relevant to the eligible investment business.

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.