Thinking | 29 July 2018
Talking Tax – Issue 127
VIC transfer duty: exemption for property passing to unitholders unavailable
In Lincara Pty Ltd v Commissioner of State Revenue  VCAT 1060, the Taxpayer sought review of a decision of the Commissioner to impose duty of $412,500 on the transfer of three rural properties (Properties) from a unit trust (Unit Trust) to the Taxpayer in its capacity as trustee of a superannuation fund (Super Fund).
The Taxpayer claimed that the transfer was exempt from duty under section 36B of the Duties Act 2000 (Vic) (Duties Act), which applies to property passing from a unit trust to a unitholder. The Taxpayer argued that the transfer was exempt from duty on the basis that, at the time of the transfer of the Properties, the Taxpayer as trustee of the Super Fund owned all of the units in the Unit Trust.
This case considered the meaning of the words ‘the relevant time’ within the context of section 36B of the Duties Act. The Taxpayer contended that ‘the relevant time’ is when the unitholder acquired their units in the Unit Trust. The Tribunal ultimately confirmed the Commissioner’s view that, on the proper construction, ‘the relevant time’ is when the trustee of the Unit Trust acquired the Properties.
The Properties were acquired by the trustee of the Unit Trust between 1985 and 1996 and the Super Fund was established in 1995. All of the units in the Unit Trust were transferred to the Taxpayer as trustee of the Super Fund in two lots (first, a 25% interest in the Unit Trust was acquired on 29 June 2007 and the remaining units were acquired on 21 September 2007). In 2016, the trustee of the Unit Trust transferred the Properties to the Taxpayer.
The Taxpayer argued that the transfer was exempt from duty under section 36B of the Duties Act, as follows:
- the Properties were subject to a unit trust scheme in respect of which duty had already been paid (on the acquisition of the units in the Unit Trust by the Taxpayer)
- the transferee was a unitholder of the Unit Trust at ‘the relevant time’ (the Taxpayer maintained that the ‘relevant time’ was when the remaining units in the trust were transferred to the Taxpayer) and
- the Taxpayer accepted the transfer in its capacity as trustee of the Super Fund and all of the beneficiaries of the Super Fund at the time of the transfer were beneficiaries of the Super Fund at the ‘relevant time’.
As mentioned above, the primary point of contention was around what constituted ‘the relevant time’. This is defined in section 36B of the Duties Act to mean “the time at which the property first became subject to the principal scheme”. Accordingly, the Taxpayer relied on the broad definition of a unit trust scheme – being “any arrangements for investors to participate in the revenue generated from acquiring, holding and disposing of any property that is subject to the trust” – in arguing that its acquisition of the units in the Unit Trust constituted such an ‘arrangement’, and therefore, the ‘relevant time’ was the time of this transaction.
The Commissioner’s position was that the Taxpayer would only be entitled to the exemption under section 36B of the Duties Act if it had been a unitholder in the Unit Trust at the time each of the Properties came to be held within the trust. However, as the Taxpayer did not become a unitholder until 2007 (after the time each of the Properties had been acquired by the Trustee) the exemption cannot apply.
Further, the Commissioner submitted that the requirements of section 36B of the Duties Act could not be satisfied because two of the Properties were acquired by the Unit Trust before the Super Fund was even established, and in respect of the third Property, there was no evidence of the identities of the beneficiaries of the Super Fund in 1996.
Ultimately, the Tribunal held that that ‘the relevant time’ should be interpreted in accordance with its plain and ordinary meaning and that, as the Taxpayer did not hold units in the Unit Trust when the Properties were acquired, the decision of the Commissioner must be confirmed.
TD 2018/D3: Will a trust split cause a resettlement of your trust?
On 11 July 2018, the ATO released Draft Taxation Determination TD 2018/D3 (Draft Determination) outlining the Commissioner’s preliminary view on when a ‘trust split’ arrangement will result in the settlement of a new trust over some (but not all) of the assets of the original trust, giving rise to Capital Gains Tax (CGT) event E1 under subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997).
There are many forms of arrangements and manoeuvres that may be described as a trust split. For the purposes of the Draft Determination, ‘trust split’ refers to an arrangement whereby the parties to an existing trust decide to split the operation of the trust, so that some trust assets are controlled by and held for one class of beneficiaries, while the remaining trust assets are controlled and held for the benefit of others.
This often involves a discretionary trust of which a family group are beneficiaries and is generally undertaken for the purpose of allowing different parts of the family group to gain autonomous control over their own part of the trust fund.
Broadly, the Draft Determination clarifies the Commissioner’s view that a trust split of the type outlined above will result in the creation of a new trust by declaration or settlement (as the case may be). The Commissioner takes this view on the basis that the trustee has taken on new personal obligations, while new rights have been simultaneously annexed to property, causing the occurrence of CGT event E1 at the time of the trust split.
While there is no case law dealing directly with the tax implications of such an arrangement, the Draft Determination states that such a trust split will ordinarily exhibit all or most of the features below:
- The trustee of an existing trust is removed as trustee of part/some of the trust assets and a new trustee is appointed to hold those assets.
- Control of the original trustee is changed such that control passes to a subset of the beneficiaries of the original trust. The new trustee is controlled by a different subset of beneficiaries.
- Different appointors are appointed for each trustee.
- The rights of indemnity of the trustees are segregated such that each trustee can only be indemnified out of the assets held by that trustee.
- The expectation is that the new trustee will exercise its powers in respect of the assets it holds independently of the original trustee to benefit the subset to the exclusion of others. The original trustee will also exercise its powers in respect of the assets held by it independently of the new trustee to benefit a different subset again to the exclusion of others. This is so whether the range of beneficiaries that can benefit from particular assets is expressly limited.
- The rights, obligations and powers of the trustees and beneficiaries remain governed by one deed.
- The original trustee and new trustee keep separate books of account.
The Draft Determination is proposed to have retrospective application (but not to the extent that that this conflicts with the terms of settlement of a dispute agreed to prior to the date of the Determination). The Commissioner has asked that comments on the Draft Determination be submitted by 10 August 2018.
It is unclear if the ATO will take the same view in cases where a trust split is performed to “ring fence” risky assets from other assets in circumstances where control of the trustees does not change.
Draft ruling: fringe benefits tax exemption for benefits provided to religious practitioners
On 11 July 2018, the ATO released Draft Taxation Ruling TR 2018/D2 (Draft Ruling), which outlines the circumstances in which benefits provided to religious practitioners by registered religious institutions are exempt from Fringe Benefits Tax (FBT). The Draft Ruling is open for comment until 24 August 2018 and is intended to replace the ATO’s previous ruling on this topic, TR 92/17.
The Draft Ruling:
- confirms that an institution can be a provider of exempt fringe benefits to religious practitioners if it is registered with the Australian Charities and Not-for-profits Commission (ACNC) with the subtype ‘advancing religion’
- takes into account the changes in the nature of contemporary religious practice which have taken place since the previous ruling TR 92/17 was issued and
- provides several examples to assist taxpayers in understanding the situations in which fringe benefits provided will be exempt from FBT.
Broadly, under section 57 of the Fringe Benefits Tax Assessment Act 1986 (Cth), such a benefit will be exempt from FBT where it is provided by a religious institution that is registered with the ACNC to an employee, who is a religious practitioner, or to that employee’s spouse or child, where that benefit is provided in respect of the practitioner’s pastoral duties or directly related religious activities.
‘Pastoral duties’ are broadly those associated with the spiritual care of people, for instance, the communication of religious beliefs through an in-service seminar or meeting with adherents or those in need of spiritual support or providing supervision to those engaged in pastoral duties.
Similarly, ‘directly related’ religious activities indicate that there must be a close nexus between the activities and the practice, study, teaching or propagation of religious beliefs, including secular activities such as leadership training.
However, it is somewhat of a fine line, as the Draft Ruling indicates that commercial activities that have a mere causative relationship to the practice of religious activities, for instance, the conduct of market research to discover an adherent’s preferred style of worship, will not be ‘directly connected’ religious activities for the purposes of the FBT exemption.
Religious institutions who provide benefits to an employee religious practitioner should take care to consider the nature of the benefit provided and why it is being provided, to determine whether or not the benefits are truly provided in connection with the carrying out of pastoral duties or directly related religious activities, to ensure that the exemption is correctly applied.
Legislation and government policy
Draft legislation released to amend the definition of Significant Global Entity
On 20 July 2018, Treasury released draft legislation proposing to extend the definition of a Significant Global Entity (SGE) to include members of large business groups headed by proprietary companies, trusts, partnerships and investment entities.
The measure was announced in the 2018-19 Federal Budget, as discussed in detail in our 2018 Australian Federal Budget insight. Responses to the draft legislation are required by 17 August 2018.
Currently, an SGE is an entity that has annual global income of AUD$1 billion or more, or one that is a member of a group of entities that are consolidated for accounting purposes as a single group, where the global parent entity of the group has annual global income of AUD$1 billion or more.
The draft legislation proposes to expand the definition of SGE in the ITAA 1997 so that it:
- applies to groups of entities headed by an entity other than a listed company, in the same way as it applies to groups headed by a listed company
- is not affected by the exceptions to requirements applying to consolidation or materiality rules in the applicable accounting rules and
modifies the rules for entities that must undertake country-by-country reporting under Subdivision 815-E so that these rules apply to country-by-country reporting entities rather than SGEs more generally, in doing so ensuring that these rules are aligned with Australia’s international commitments.
Second tranche of CCIV legislation released
As many readers will be aware, the Federal Government is currently legislating to create the Corporate Collective Investment Vehicle (CCIV) that will serve as an internationally recognisable investment vehicle which can be readily marketed to foreign investors, including through the Asia Region Funds Passport. This will be targeted specifically at nations who are not familiar with investment arrangements involving trusts and may, therefore, be hesitant to invest in Australia via a managed investment trust.
Following the release of the first tranche of legislation, discussed in detail in our earlier publication, on 19 July 2019 the Federal Government released the second tranche of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 (CCIV Bill) for public consultation.
With submissions closing on 10 August 2018, the second tranche of the CCIV Bill covers:
- external administration of a CCIV in a winding up situation
- the application of the Chapter 7 financial services regime to CCIVs and
- the penalties framework and the liability of the corporate director of a CCIV for contraventions of the law by the CCIV.
The explanatory materials also discuss the proposed approach to takeovers, compulsory acquisitions and buy-outs of CCIVs, as well as the proposed penalties framework that are currently under development and will presumably be released in future tranches.
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