A trading business in a trust

A trading business in a trust

Would the Commissioner seek to narrow the scope of Division 6C to collect more revenue? It seems he would. Adam Gibbs and Vanessa Kasbeka discuss the meaning of the undefined term ‘unit trust’.

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In the recent Full Federal Court case, FCT v ElecNet (Aust) Pty Ltd (Trustee) [2015] FCAFC 178, the Commissioner argued that the trust in question was not taxed under Division 6C but rather taxed under section 99A because the trust was not a ‘unit trust’. The trust was an Electrical Industry Severance Scheme into which employers were required to make contributions to fund payments to workers on termination of their employment due to severance or redundancy.

Of particular interest is the Commissioner’s submission on the meaning of the undefined term ‘unit trust’ – “a type of fixed trust involving a percentage interest in the trust rights, with no trustee discretionary powers”. The difficulty with this meaning, as noted by the court, is that “a unit trust with a single discretionary power to apply income for any purpose, or with a power to add to the list of unitholders, would cease to be a unit trust”.

Under this meaning, where a trustee had the power to vary the nature and proportions of the investments which constituted the trust fund and where the issue price of new units was based upon the net assets divided by the existing units, the trust would not be taxed under Division 6C. This was a rather surprising argument for the Commissioner to be advancing – it would seem to rule out a majority of managed investment trusts from Division 6C and open the way to putting a trading business in flow through public trusts.

The court did not accept the Commissioner’s submission and held that “ultimately, it is neither necessary nor appropriate to attempt a conclusive definition of a ‘unit trust’ in this appeal for the purposes of Division 6C. The text, context, and purpose of Division 6C illustrates that this examination will be assisted by consideration of the core concept of whether persons have (i) a beneficial interest in the income or property of the trust estate, which is (ii) capable of being functionally described as involving units. But even the absence of (i) will not necessarily be determinative.”

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