When do you treat trusts as companies? When is a trust not a trust for tax purposes?
Trusts As Companies
Corporate unit trusts and public trading trusts are trusts in a legal sense. But for tax purposes they are treated as companies.
Corporate Unit Trusts
You treat a trust as a company, when it is a corporate unit trust per ss102D to 102L in Division 6B in Part III of ITAA36. To qualify as a corporate unit trust, the trust must meet four basic tests.
# 1 Arrangement
There must be an arrangement under which a shareholder in a company by reason of being a shareholder in that company receives a right to acquire units in a unit trust; s102 E (1).
The remaining subsections of s 102E ensure that the division has a broad application so that, for example, it may apply where a subsequent unit trust succeeds a previous unit trust.
# 2 Property Transfer
There is a transfer of property by the company (or an associate) to the unit trust (or an associate of the unit trust) or the unit trust carries on a business previously carried on by the company (or an associate): s 102F(1).
The remaining subsections capture equivalent arrangements where a subsequent unit trust succeeds a previous unit trust.
# 3 Public Unit Trust
The unit must be a public unit trust. This means that either
(a) any of the units have an offical listing on a stock exchange; or
(b) any of the units were offered to the public; or
(c) the units were held by not less that 50 persons (see 102G(1)).
There are a number of additional provisions in s 102G clarifying the operation of tests (a), (b) and (c).
# 4 Resident Unit Trust
The unit trust has been a resident unit trust in the year of income or a previous year: s 102J. Section 102H sets out the tests to determine whether a unit trust is resident for the purposes of the division.
Public Trading Trusts
The second type of trusts treated as companies for tax purposes are public trading trusts. These pay tax as if they were companies. Their distributions paid to unit holders are treated like dividends paid to shareholders.
Division 6C in Part III of ITAA36 (ss 102M to 102T) applies to public trading trusts. In order for a unit trust to be a public trading trust, the unit trust must be a i) resident for tax purposes, ii) trading trust (the definition of trading excludes certain types of investment activities), iii) public unit trust and iv) NOT a corporate unit trust within Div 6B.
The trustee of a public trading trust pays tax on the net income of the public trading trust at the company tax rate. So in this scenario you treat public trading trusts like companies. Units in public unit trusts like shares in a company. And distributions by a public trading trust like dividends.
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