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
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
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
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
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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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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