Issue
Are the distributions made from a related unit trust to the superannuation fund special income under section 273 of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The distributions received from a related unit trust by the superannuation fund are special income under section 273 of ITAA 1936.
Facts
A business is conducted through a partnership arrangement.
The partners are trustees of a superannuation fund.
A related discretionary trust began operating the business formerly run by the partnership.
No financial transactions were entered into, for the transfer or purchase of, nor any lease for, plant and equipment used in the running of the business.
Business income derived by the discretionary trust was distributed to a related unit trust, in which the superannuation fund held 100% of the units.
Distributions were received by the fund from the unit trust over two financial years.
The superannuation fund, discretionary trust and unit trust were all established on the same day.
The business conducted by the discretionary trust was sold and the proceeds of the sale were brought to account in the financial statements of the partnership.
The distributions were made after subsections 273(7) and (8) of the ITAA 1936 came into effect.
Reasons for Decision
Pursuant to subsection 273(7) of the ITAA 1936, in order to assess the income as special income of the fund, it would be necessary to show that the unit trust distributions were acquired under an 'arrangement', and were greater than they would have been had they been derived by the fund if the parties had been dealing with each other at arm's length.
An 'arrangement' is defined under subsection 273(8) of the ITAA 1936 as 'any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct'.
It is clear that there is an 'arrangement' under subsection 273(8) of the ITAA 1936, as a restructure of the business was organised which involved the establishment of three new entities on the same day; a discretionary trust, a unit trust and a superannuation fund; and income from the business proceeded to flow through these entities resulting in income being received by the fund.
The Explanatory Memorandum to the Superannuation Legislation Amendment Act (No. 2) 1999 , which inserted subsections 273(7) and (8) into the ITAA 1936, contemplates situations where there may be distributions from a discretionary trust to a unit trust in which a fund holds a fixed entitlement. Where it can be shown that the unit trust distribution derived by the superannuation fund from the arrangement is greater than what might have been expected to have been derived by the fund if the parties had been dealing with each other at arm's length, the income is special income of the fund.
The business was subsequently sold by the discretionary trust's corporate trustee and the income received from the sale of plant and equipment was brought to account in the financial statements of the partnership. The facts indicate that the discretionary trust's distribution to the unit trust was higher than it would have been had the parties been dealing with each other at arm's length, due to the fact that neither consideration nor lease payments were made by the discretionary trust for the use of the plant and equipment. Therefore the unit trust distributions are special income of the fund.