Taxpayer Alert TA 2017/1
This far reaching Taxpayer Alert is relevant to many groups that have adopted, or are planning to adopt, stapled or split trust structures. It is particularly relevant to the less traditional emerging applications of these structures.
At its simplest, a stapled or split trust structure typically involves the use of a flow-through trust to hold certain passive investments, such as land, leases, and improvements to land, and the leasing of these assets to a company (or taxable trust) that uses those assets.
The company is subject to corporate income tax, however, its income is reduced by deductions claimed for the rent paid to the trust. Due to the flow-through nature of the trust, that rental income certain investors receive through the trust may be subject to a lower tax rate than it would have been in the company.
The main target of the Alert is an emerging trend of applying stapled structures more broadly, to separate out the land, improvements and certain other assets that a business uses (whether through restructure or at the outset) from the remainder of the business assets.
A key test set out in the Alert is whether, due to the nature of the business, the transactions that divide the business in this manner are not transactions that third parties acting at arm’s length would usually enter into, or where the business is not one capable of division in any commercially meaningful way. What this means is that, while staples are still a meaningful option going forward, the need to robustly check all aspects of a structure to ensure they can be justified - both in terms of the commercial rationale and pricing - has become even more important. With that said, the use of the Commissioner’s “Tax Alerts” framework to release this information is odd. Tax Alerts are - as specifically noted by the Commissioner - meant to be limited to “new or emerging” arrangements. The ATO has been aware of staples for an extended period of time (as noted in the Alert). What is not clear from the Alert is the precise nature of these new arrangements that the ATO claims are emerging which justify the release of TA 2017/1. Hopefully, this will be clarified over time.
Apart from rental payments to the trust, the Alert also flags concerns with interest payments on funds borrowed from the trust, profit or turnover equivalent payments and payments of royalties to the trust for the use of intellectual property, mining tenements or industrial equipment.
The Alert flags a number of approaches the ATO may take with these structures, including:
- seeking to tax the trust as a company on the basis that it should not meet the requirements for flow-through treatment;
- seeking to characterise debt instruments as equity interests; and
- seeking to apply the general anti-avoidance provisions, on the basis that the arrangement was entered into or carried out for the dominant purpose of obtaining a tax benefit.
The Alert does not generally apply to:
- real estate investment trusts (A-REITs);
- leases of buildings of a traditional real estate nature to a company that makes the building available for use (typically as a dwelling) to independent end-users (e.g. a temporary licence to occupy); or
- privatisations of businesses that are effectively land and improvements to land.
Although the Alert is not focused on these structures, it will need to be kept in mind to the extent that these structures involve the other types of cross staple transactions discussed.
The full ATO Taxpayer Alert can be found here.