Income tax: can subsection 36A(2) of the Income Tax Assessment Act 1936 apply if partners of a partnership who own trading assets transfer the assets to a trustee of a unit trust in which one former partner holds at least 25% of the units?

Yes, if the unit trust is one in which each unit holder has a proprietary interest in the underlying assets the subject of the trust deed: see Charles v . FC of T (1954) 90 CLR 598.

Subsection 36A(2) applies if each unit holder has a proprietary interest in the underlying assets because: • (a) a change has occurred in the ownership of, or in the interests of each partner in, the trading assets; • (b) the partners owned the trading assets before the change; and • (c) the former partner who now holds at least 25% of the units in the unit trust has an interest (being an undivided fractional interest) in the trading assets after the change.

We accept in a unit trust in which each unit holder has a proprietary interest in the underlying assets that a unit holder has at least a beneficial interest in the assets held by the trustee of the unit trust. This form of unit trust is the most common form.

However, unit trusts can have various hybrid forms and some confer on unit holders no proprietary interest in the underlying assets but only a right to receive a sum or sums of money calculated by reference to the value of the underlying assets. Unless the unit trust is one in which each unit holder has a proprietary interest in the underlying assets, section 36A will not apply.