- Jan, 12, 2012
Certain forms of unit trust, known as public trading trusts, are treated differently for income tax purposes. This article deals with a recent ATO Interpretative Decision that dealt with whether a particular unit trust constituted a public trading trust.
Public trading trusts
Public trading trusts are public unit trusts which are treated for tax purposes as if they were companies. For example
A “public unit trust” is a unit trust which, inter alia:
has its units quoted on a stock exchange;
has offered its units to the public;
has more than 50 unit-holders; or
is tax exempt.
(Other special rules apply that are not dealt with here).
A “trading trust” is one that:
The ATO Decision deals with the last situation.
The Decision was in respect of a situation where a public unit trust and three other entities incorporated a private company and held 25% each of the shares and voting rights in X Co.
The company carried on an active trading business after incorporation. Under an agreement, the Board of the company were prevented from taking any action relating to the structure, scope and management of the company’s business, unless 80% of the members approved.
The unit trust’s 25% shareholding and voting rights allowed it to block any decision of this sort of which it disapproved, since the remaining shareholders had less than 80% shareholdings.
The ATO remarked that the definition of “control” in this situation takes on its common law meaning. The problem is that, the unit trust in this case has a relatively small shareholding in the company. Can this constitute “control”?
The ATO states that common law principles favour defining “control” to include a kind of “negative control” in which one entity can restrain another from taking an action.
In this situation the public unit trust has a power to veto any company decision regarding its affairs and operations. Therefore the trust is a public trading trust and is taxed as such.
(Note that this decision could have implications for other areas of tax law where “control” is at issue, such as controlled foreign companies).
If you have concerns about public trading trusts, call LAC Lawyers and we can provide advice and assistance.