Fund managers and trustees.
What do you need to do?Assess the investment profile of the fund to ensure Div 6C compliance in light of the proposed changes.
Partner
T +61 2 9296 2193
Ken Lord
Partner
T +61 2 9296 2149
Sydney
Betsy-Ann Howe
Ken Lord
Richard Snowden
Melbourne
Andrew Clements
Michael Clough
Author
Richard Snowden
The release of draft legislation on proposed changes to the operation of the rules for Public Trading Trusts, is likely to cause a widespread review of the investment profile of funds.
The Assistant Treasurer recently released draft legislation covering proposed changes to the operation of the rules for Public Trading Trusts (Div 6C of the Income Tax Assessment Act 1936). The aim of the changes is to reduce compliance costs and increase certainty regarding when Div 6C will apply to cause a trust to lose its flow through status and become taxable as a company. The changes had been previously announced in the May Budget.
The changes include:
- Clarifying the scope and meaning of investing in “land” to include fixtures on land and investments in moveable property related to the land. Thus investing in movable property (chattels) customarily supplied, incidental and relevant to the renting of the land and ancillary to the ownership and use of the land will now taken to be taken to be included as part of the investment in “land”.
- Allowing an annual safe harbour allowance of 25 per cent for non-rental income from investments in land. The proposed 25 per cent non-rental income allowance is to apply at the whole of trust level to the investors aggregate portfolio of investments in land. However the 25 per cent cannot include any revenue from the trust carrying on a “trading activity on a commercial basis on the land” nor any revenue from “excluded rent” (which in essence includes non-arm’s length turnover rent or rent worked out by reference to profits where those profits are transferred via an arrangement to another party).
- The range of financial instruments covered by the eligible investment rules will be expanded to include financial instruments that are defined as “financial arrangements” in the Income Tax Assessment Act 1997. The definition will be based on the definition (as qualified by the various exceptions) in the proposed Division 230 (the Taxation of Financial Arrangements regime). Further, trading in shares now includes shares in a hybrid company.
- An additional 2 per cent safe harbour allowance at the trust level to reduce the scope for inadvertent minor breaches of the Division 6C rules will be allowed such that the trust will be able to earn up to 2 per cent of its revenue from non-trading activities.
Ordinarily the rules will apply to assessments for the income year in which the legislation receives Royal Assent. However under the proposed transitional rules, a trust may elect that the rules not apply in that year (and so will only apply in later years).
The Government has invited comments by 14 August 2008 and expects the legislation to be introduced in the Spring 2008 sittings of Parliament.