Public Unit Trust: Commissioner's discretion

In the fact situation described below will the Commissioner exercise the discretion under subsection 102G(4) of the Income Tax Assessment Act 1936 (ITAA 1936) to deem a trust which is closely held for a preliminary period to be a public unit trust for the purposes of section 128FA of the ITAA 1936?

Yes. Notwithstanding the trust is not initially a public unit trust under section 128FA of the ITAA 1936, the Commissioner will exercise the discretion under subsection 102G(4) of the ITAA 1936, to treat it as a public unit trust.

A trust was set up for the purpose of raising debt and equity funding via an initial public offering (IPO). For a preliminary period of approximately two months, the trust was established with nominal units held by less than 20 unit-holders. During this time, the trust prepared for the IPO and did not carry on any business and held nominal assets. The initial nominal unit-holders were not exposed to any material economic risk or benefit from their unit-holding.

As part of the IPO process, an offer was made to the public to subscribe for or purchase units in the trust. The trustee of the trust then issued investors with units, loan notes and/ or instalment receipts. Under the terms of the loan notes, investors were paid interest. Some of these investors were non residents.

Once the instruments were listed on the Australian Stock Exchange (ASX), they were widely held. That is, after the initial two month period, the units were held by a minimum of 50 people. Under the terms of the trust, the trustee could not distribute 75% or more of trust moneys to 20 people or less. In addition, the trustee could not vary the rights of the unit holders such that 75% or more of trust moneys could be distributed to 20 people or less.

To obtain a withholding tax exemption under section 128FA of the ITAA 1936, the interest paid in relation to a debenture or debt interest must be paid to a non resident by the trustee of an 'eligible unit trust'. Under subsection 128FA(8) of the ITAA 1936, an 'eligible unit trust' includes a 'public unit trust'. The requirements for a unit trust to be considered a public unit trust are set out in section 102G of the ITAA 1936.

Upon completion of its preparatory activities and commencement of the IPO process, the trust satisfied the relevant conditions of being a 'public unit trust' in subsection 102G(1) of the ITAA 1936. That is, the units were listed on the ASX, they were offered to the public and they were held by at least 50 people.

However, prior to the IPO, the trust was closely held for approximately two months.

Subsection 102G(3) of the ITAA 1936 provides that a unit trust that would be a public unit trust in relation to a year of income shall be deemed not to be a public unit trust, if the following occurred: at any time during the income year, 20 people or less held or had the right to acquire a unit / units in the unit trust and this entitled the holder(s) thereof to at least 75% of the beneficial interests in the income or the property of the unit trust.

Thus under subsection 102G(3) of the ITAA 1936, the trust would not be considered a public unit trust. However, subsection 102G(3) is subject to the overriding provisions of subsections 102G(4) and 102G(6) of the ITAA 1936.

Subsection 102G(4) of the ITAA 1936 contains a discretion that enables the Commissioner to treat a unit trust as a public unit trust. Where the unit trust has the real character of a public unit trust, but was closely held for a short time during the income year, the Commissioner needs to consider the length of time that the trust was closely held as well as any other matters which he determines are relevant, before deeming the trust a public unit trust.

In this situation, the trust did have the character of a public unit trust, because: • the trust was closely held for only a short period of approximately two months during the relevant income year • the units in the trust were only closely held during the initial period in order for the trustee to undertake the prerequisites for the IPO and the trust will never again be closely held • during the period that the units in the trust were closely held, the trust had nominal assets, did not carry on any business and did not issue any loan notes. As such the initial nominal unit-holders were not exposed to any material economic risk or benefit from their unit-holding, and • upon completion of the said series of actions, an offer was made to the public to subscribe for or purchase units in the trust. After the IPO, the units in the trust were held by at least 50 people.

Subsection 102G(6) of the ITAA 1936 deems a unit trust not to be a public unit trust where at least 75% of the income or property of the trust is paid or credited to, or is able to be paid or credited to, 20 people or less, notwithstanding that those people might not hold 75% or more of the units in the trust.

As the trust could not distribute more than 75% of moneys to 20 people or less, and the trust could not vary the rights of the unit-holders to distribute 75% of moneys or trust property to 20 people or less, subsection 102G(6) of the ITAA 1936 did not apply.

In these circumstances, it is deemed reasonable by the Commissioner to treat the trust as a public unit trust under the provisions of subsection 102G(4) of the ITAA 1936. As such, the trust is deemed to be a public unit trust in relation to the relevant year of income and would fall for consideration as such for the purposes of section 128FA of the ITAA 1936. Thus interest paid or credited to non resident unit holders will be exempt from withholding tax.