John Bardsley and Robert Ignjatic, Corporate Tax Specialists, discuss the need to watch out for Division 6C in regards to development opportunities.
Where a passive trust owns a property and a development opportunity arises, it is very important to consider whether the activities of the trust continue to be ‘eligible investment business’ within Division 6C. In certain circumstances, Division 6C can apply to tax a trust as though it is a company for income tax purposes and can also mean, for example, the loss of managed investment trust status.
Where the trust is in a stapled group consisting of a passive trust and active development company, and the stapled group wants to develop a property for sale to capture enhanced profits, we must consider the steps in the process of developing the property that can be undertaken by the trust. This might result in a decision to transfer the property from the trust to the corporate side of the stapled group. The development would have a number of steps, such as rezoning, drafting plans and so on. The question will arise as to when to transfer the property across the staple?
Where there is a property trust that is not part of a staple, the decision as to the steps that can be taken by the trust to enhance the value of the property prior to any sale also is critical.
The "right time" to do the transfer will depend on a range of facts (e.g. how long has the property been held for rental purposes, was a rezoning initiated by the property trust etc) which means that Division 6C can be difficult to apply in practice. However, if there is a breach of Division 6C, then there can be significant adverse tax outcomes for a trust and investors.
It is therefore important to carefully consider the implications of any development proposals on the ability to satisfy the ‘eligible investment business’ test from a very early stage and ensure that governance processes are in place to appropriately capture risks.