Application of Division 6C: Public trading trust - unit trust

Is the taxpayer, the trustee of a property development fund (the Fund) taxed as if the Fund was a public trading trust for the purposes of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The taxpayer, the trustee of the Fund is not taxed as if the Fund was a public trading trust for the purposes of Division 6C of the ITAA 1936 as it is not a unit trust.

The Fund was established to develop residential and retirement properties which are to be developed and sold on completion as part of a profit making undertaking, and will not be held for investment purposes.

The Fund is registered as a managed investment scheme.

There is a termination date on the trust deed three years after establishment.

The members of the Fund obtain a beneficial interest in the income and capital of the Fund in proportion to their investment in the Fund. This is termed the Member's Beneficial Entitlement.

The trust deed precludes the trustee from accepting additional members onto the Register of Members after the closing date of the prospectus.

A clause in the trust deed states that members do not have the right to withdraw from the Fund, and the manager cannot purchase, repurchase or redeem the beneficial entitlement of any member.

The Fund currently has in excess of 50 members holding beneficial interests in its capital and income.

Division 6C of the ITAA 1936 considers the liability to taxation of certain public trading trusts.

Subsection 102R(1) of the ITAA 1936 provides that for a trust to be considered to be a public trading trust, it must be (a) a unit trust, (b) a public trust, (c) a trading trust and (d) a resident unit trust and it must also not be considered to be a corporate unit trust under Division 6B of the ITAA 1936.

There is no definition of a unit trust for the purposes of Division 6C of the ITAA 1936.

Jacobs' Law of Trusts in Australia, 1986 , 5th ed, Butterworths, Sydney, notes, at paragraph 314, p 59, that a unit trust 'may take as many forms as human ingenuity can devise.' It continues: '.....basically what happens is that a manager (usually a private company) will purchase property and vest it in a trustee (usually a professional trustee company) initially on trust for the manager on the terms of a trust deed, which divides the trust property into a large number of shares (or units). The manager then sells the units to the public at a price based on their market value plus a service charge to cover the expenses involved, the trustee's remuneration and a profit to the manager. The manager then creates a market in the units by undertaking to repurchase and resell the units on demand; additionally, the units may be sold to the public on the open market, where they may or may not be listed on a stock exchange. Additional units may be created in the future, if further property is acquired by the trust.'

Stamp Duty Aspects of Trusts, Settlements and Gifts in Australia, 1984 , Wallace, E.W. and Zipfinger, F.P., Butterworths, Sydney, at paragraph 30-02, it states: '......A unit trust is constituted by the vesting of property in a trustee who is bound by a trust deed to deal with it as directed by managers. The trust property is held for the benefit of persons known as unit holders whose participation in the trust is evidenced by the issue of unit certificates. The common form of unit trust is one where assets are transferred to trustees who hold them on the terms of the trust deed. The trust deed would provide for managers to manage the trust and divide the trust into units (which in turn are sometimes divided into sub-units). The units (and sub-units) first belong to the person who provided the assets but are then made available to others. Any member who acquires units acquires a rateable part of every investment in the fund. This enables him to spread his investment risk. The trust deed would usually set out a price at which the managers will buy back units from the unit holders. There may be provision for the redemption by the trustee of existing units and/or for the issue of new units.'

The Laws of Australia , Law Book Co, volume 15 at paragraph 15.148 reinforces this position when it states: '......A feature which distinguishes unit trusts from other trusts is the right conferred on unit holders to call on the manager to redeem or repurchase their units at a value determined by a formula prescribed in the trust instrument.'

On the basis of the above, it is not considered that the Fund is a unit trust. There is no provision in the trust deed to allow for the purchase, repurchase or redemption of a Member's Beneficial Entitlement. The trust deed also precludes the trustee from accepting additional members onto the Register of Members after the closing date of the prospectus. Therefore there is no ability available to the trustee to create or issue additional 'units'.

As the Fund is not considered to be a unit trust, it is not possible for it to be a public trading trust for the purposes of Division 6C of the ITAA 1936. Therefore the trustee of the Fund is not taxed under the provisions of Division 6C of the ITAA 1936.