Australian Tax Update - Consultation on Public Trading Trusts

After consultation with industry, the Assistant Treasurer, Chris Bowen, on Wednesday 23 July 2008 released draft legislation to amend Division 6C of the Income Tax Assessment Act (ITAA) 1936.

The Government intends to modernise Division 6C to reflect recent commercial developments in property and related trusts. The legislation should encompass a wider range of property-related investments and financial instruments, but principally focuses on clarifying and prescribing the key concept of 'eligible investment business'. The legislation is to apply from the tax year in which it comes into effect. Clients should note that the public trading trust rules will also be the subject of the broader Board of Taxation Review of Managed Funds.

Treasury is seeking comment on the draft legislation by 14 August 2008. Important changes proposed are:

• Clarifying the scope and meaning of investment in land for the purpose of deriving rent (so that a trust will not be treated as a public trading trust).
• Introducing a 25% safe harbour for non-rent, non-trading income from land.
• Expanding the range of eligible financial instruments.
• A further 2% safe harbour allowance at the whole of trust level for non-trading income.

Land: The legislation will clarify that investing in chattels incidental to renting the land (eg fit out etc) will not disqualify the investment from being an investment in land.

Safe harbour: The draft legislation contains a safe harbour of 25% of non-rental income at the whole of trust level as an annual safe harbour. Accordingly, a public unit trust will be taken to be investing in land for the purpose of deriving rent where:

• Each of the trust's investments is in land that includes a purpose of deriving rent.
• At least 75% of the gross revenue from investment in land is rent (ie the remaining 25% does not include rental from the trust carrying on a trading activity on a commercial basis).

Financial instrument: The types of financial instruments that a public trading trust can invest in will be expanded to include financial instruments that are defined in the ITAA 1997 as proposed under the taxation of financial arrangements (TOFA) regime. Foreign hybrid company shares will also be clearly identified as investments in shares. Certain transactions that would otherwise be picked up under TOFA are excluded from the definition of investment business. These include leasing luxury cars, certain deemed sale and loans, various interests in trusts and partnerships, insurance, various guarantees, indemnities, and superannuation and pension arrangements.

Additional 2% safe harbour: An annual safe harbour will be provided which the Government intends to operate to avoid inadvertent breach of Division 6C rules. However, there are some concerns about its practical application, ie how the distinction between income from an eligible investment business and a trading business will operate in particular structures.

While the definitions of land and financial instruments have been expanded, there are concerns about the specific exclusions from investing in land for the purpose of deriving rent. Many projects involve returns being rent based on profits, net receipts and turnover-based rents. Also, commercial properties may be used for short term, license-based fees such as car parking or for provision of serviced office facilities. These may be excluded under the changes as proposed, and remain drawbacks to efficient land investment.

The draft legislation may be accessed via the following link: http://www.treasury.gov.au/documents/1403/PDF/Division_6C.pdf

DLA Phillips Fox can assist you with any submissions on the legislation. For more information, please contact:

Gerry Bean, Partner
Tel +61 3 9274 5661
gerry.bean@dlaphillipsfox.com

Tom Cantwell, Partner
Tel +61 3 9274 5013
tom.cantwell@dlaphillipsfox.com

Jock McCormack, Partner
Tel +61 2 9286 8253
jock.mccormack@dlaphillipsfox.com