Australian Direct Property Investment Association
Our Ref: JC:RB:ADPIA
27 April 1999
Review of Business Taxation
Department of the Treasury
CANBERRA ACT 2600
Dear Sir / Madam
ADPIA Submission on "Review of Business Taxation - A Platform for Consultation
(Discussion Paper 2)"
The Australian Direct Property Investment Association
("ADPIA") has pleasure in presenting its submission in response to the second
discussion paper - A Platform for Consultation.
ADPIA supports the overall objectives of the Reform process. However,
it views with deep concern the proposal to tax investment vehicles such as property trusts
(which include property syndicates, direct property investment vehicles and joint
acquisitions) as companies. This will significantly disadvantage medium to low income
investors (including retirees) who derive substantial non-tax benefits from the
industrys product offerings and as a consequence, will adversely affect the dynamic
and rapidly growing direct property investment industry.
ADPIA was formed in December 1998 to represent organisations which
offer direct property investments to the public and to institutions. ADPIAs members
include organisations such as Property Syndicators, Joint Acquirers, Macquarie
Direct, etc. which we refer to as "Originators" (and
"Advisors" comprising lawyers, accountants and property consultants who advise
The industry has grown massively in the past few years with over $3
billion worth of properties under management throughout Australia and with more than
10,000 investors. The main catalyst for the industrys growth is that it offers
investors part ownership of professionally managed properties which mirror the performance
and returns of direct property rather than the stock market. These properties, typically,
are too expensive for investors to acquire individually but for the economies of scale
inherent to these collective investments.
An example illustrating the phenomenal rise of this industry is that of
MCS Property Limited, of which I am the Managing Director. Over the past five years, MCS
has grown to the point where it is now amongst the Top 10 Australian Shopping Centre
Owners, ahead of Centro Properties Limited, Stockland Trust Group and Colonial Limited,
and manages 21 shopping centres totalling over 250,000 m2 of retail area.
ADPIA aims include -
- Leadership in the direct property investment (DPI) arena.
- Representing the interests of members to the government, media and public.
- Providing education to members and the public.
- Building consumer awareness and confidence of DPI products.
- Assisting professional growth of its members.
- Producing and distributing relevant research material to members.
- Promoting integrity and Best Practice standards amongst the industry.
Should you have any queries or require further information, please
dont hesitate to contact the writer. In addition, further contacts are listed on the
final page of the submission.
Australian Direct Property Investment Association
Review of Business Taxation
A Platform for Consultation
Discussion Paper 2 -
Building on a Strong Foundation
Taxing Property Trusts and
Direct Property Ownership Vehicles
is not in Australias interest
Submission by the
Direct Property Investment
15 April 1999
1. Executive Summary
1.1 The Australian Direct Property
Investment Association ("ADPIA") represents organisations that offer direct
property investments or "DPIs" (including property syndications and joint
acquisitions) to the public and to institutions. DPIs offered by ADPIA members typically
use trusts structures to hold the properties on behalf of the investors, although
partnership-type structures are also used (joint acquisitions).
1.2 DPIs are one of the only options available which give low and
middle income investors (including pensioners) the opportunity of owning a direct interest
in quality commercial properties that exhibit true property performance.
1.3 ADPIA supports the Governments intention to tax certain trusts as companies where
those trusts carry on an active business. However, where trusts are no more than a bare
trust or unit trust that acts as a conduit which enable investors to pool their
resources to make a productive investment in a managed fund such as property, then APDIA
submits that these trusts should continue to allow a "flow through" of income so
that the income is taxed in the hands of the beneficiaries.
1.4 ADPIA understands that the whole desire to tax trusts was driven out of the desire
to attack the revenue loss and timing delays caused by discretionary trusts and the
obvious desire to make a choice of vehicle not tax dependent. Perhaps the agenda has
become mis-focused and started to settle on unit trusts whereas the correct target is
really the discretion to re-route earnings.
1.5 This submission is a response to A Platform for Consultation and deals
specifically with the issue of taxation of the trust structures outlined above (and
1.6 True property performance is significant because direct property is a separate
asset class which moves in different cycles to other asset classes such as shares, cash or
bonds. Although small to medium income investors have the opportunity of investing in
Listed Property Trusts ("LPTs"), these vehicles exhibit behaviour akin to stocks
and so are exposed to stock market volatility. LPTs are an entirely different asset class
to DPIs and this factor is becoming increasingly important as stockmarkets approach record
highs with a corresponding increased potential for volatility.
1.7 ADPIA opposes the concept of taxing certain trusts as companies for the following
1.7.1 Most investors in DPIs are middle to low income earners (including
pensioners) and would suffer substantially.
- Taxing trusts would reduce cash yields by up to 50% and will especially
hurt small investors who may have to wait up to 9 months to receive an imputation refund
- Many existing investors would suffer significant financial stress because they have
entered into financial arrangements reliant upon receiving the originally forecast
- Smaller investors would be discriminated against by being denied the tax benefits
available to wealthier investors who are able to purchase these properties outright or in
a partnership type structure.
- Investors would lose the benefit of management expertise offered by managers of DPIs.
1.7.2 There will be a depletion of savings due to investors being
deterred by the reduced attractiveness of investing in trusts.
1.7.3 Trusts are fundamentally different to companies because they are required to
distribute 100% of their taxable income and they perform a specific role in investment
markets as a passive pooling mechanism for small investors.
1.7.4 Most of the worlds leading economies only tax public unit trusts in the
hands of investors. Taxing trusts as companies will disadvantage international investors
and place Australia at a disadvantage when competing for international investment funds.
Many investors in DPIs are from outside Australia.
1.7.5 Trusts do not provide a mechanism for tax leakage.
1.7.6 Investors motives when investing in DPIs are not based on tax avoidance or
1.7.7 The new and massively growing DPI industry, with assets of more than $3 billion
under management and which offers so much in terms of new employment and leadership in
financial products, would be very seriously affected and would see the stunting of what
could be a major plank in the Government policy to promote Australia as a global financial
1.7.8 Taxing trusts as companies will introduce significant compliance
costs to change administration systems to accommodate the proposed tax regime.
1.7.9 As a result of the above, investors may revert to investing in
residential properties and this may not be viewed as advancing the Australian economy or
the Australian industry generally.
1.8 ADPIA submits that the definition of a Collective Investment Vehicle
("CIV"), which will allow "flow through" taxation, should include the
investment products that APDIA members offer, i.e. direct property investments
("DPIs"), property syndications and joint acquisitions.
1.8.1 ADPIA would like it to be clear that DPIs are not "active businesses"
(or "trading trusts") because the individual investors investment is
genuinely passive even though the investment is managed by a professional manager.
1.8.2 ADPIA questions why a trust used as a conduit for a passive investment, which is
managed by a professional manager, should be treated differently just because it has, for
example, less than 50 investors. All CIVs that are not trading trusts within the current
definition in Section 102N of the Income Tax Assessment Act 1936 ("the Act")
should be allowed flow through status.
1.8.3 The key principles of a tax system are equity and efficiency. The proposal to tax
passive investment trusts as companies is inequitable as the investment should be seen as
no different to a direct investment.
1.8.4 ADPIA submits that there is no "competitive advantage" of trusts over
companies in respect of DPIs. ADPIA further submits that it would be inequitable on the
basis of competitive neutrality to treat property trusts differently to direct investment
by individuals in property.
1.8.5 ADPIA supports the Treasurers announcement that property trusts should be
included in the definition of a CIV.
1.8.6 The Ralph Report proposes two ways of taxing income from CIVs. ADPIA submits that
a property trust is a CIV and the first option is its preferred option. The two options
- Not taxing tax preferred income. This is ADPIAs preferred option of the two.
However it is clear from the Ralph Report that this is currently not favoured due to
perceived revenue and competitive neutrality concerns. Under this option, there is some
concern that property trusts would be excluded from the definition of a CIV due to
property trusts perceived "active" nature. We disagree with this view and
detail our reasoning in 2.4 of our submission. In addition, due to recent amendments to
the tax law, there would be no revenue cost as tax deferred income (both for depreciation
and building allowances) reduces the cost base of units in the trust.
- Taxing tax preferred income. This option seems to be supported by the Ralph Report. Tax
preferred income distributed by a CIV would be taxed in the same way as entity
distributions, i.e. as a dividend. This would have a similar effect to taxing trusts as
companies leading to the detrimental results as outlined in paragraphs 1.7 and 2.3 of this
submission. This option cuts across the desire to make the CIV regime equivalent to direct
investment in assets and also adds complexity to the distribution process.
1.8.7 If the definition of "widely held" CIV is regarded as necessary for a
CIV to have "flow through" status then ADPIA seeks clarification regarding the
definition of "widely held" especially in relation to whether the definition
will look through to underlying beneficial interests.
2.1 The Australian Direct Property Investment Association
ADPIA represents a fast growing industry comprising organisations which offer direct
property investments (also known as property syndications and joint acquisitions)
to the public and to institutions.
2.2 Direct Property Investment
The direct property investment industry has grown significantly in the past few years
with over $3 billion worth of properties under management throughout Australia and with
more than 10,000 investors (primarily middle-income earners). The main catalyst for the
industrys success is that it provides investments in a structure which delivers
professionally managed properties such as shopping centres and office buildings and which
also delivers the performance and returns of direct property. Often these properties with
their inherent benefits would only be available to wealthy investors but the economies of
scale in these collective investments have allowed middle to low income earners to share
in their benefits.
Most investors in ADPIA members offerings are low to middle income earners.
According to research conducted by ADPIA:-
- 56% of investors invested $20,000 or less;
- 32% invested between $20,001 and $50,000;
- 8% invested between $50,001 and $100,000; and
- only 3% invested more than $100,000.
2.2.1 The Structure of DPIs
The basic principle behind a DPI is that owners pool their resources to purchase a
property (or properties) and then pay a Manager to manage the assets.
Typically, ADPIA members structure their offerings in two ways: as partnerships or
trust vehicles, where a custodian or trustee holds the property or properties on behalf of
the Owners. The Owners can be partners, tenants in common, or trust beneficiaries. The
Owners then pay a Manager, who is often the Responsible Entity, to manage the property.
The property is purchased with Owners subscriptions and loans to the Owners secured
by a mortgage over the property. The loans are typically limited-recourse to the Owners
with the lender having access to the property, assets and income in the vehicle but not
able to go behind the vehicle to the assets of the investor.
The Managed Investments Act 1998 ("MIA") has altered some elements of the
structure and imposed several additional obligations, the primary objectives being
investor protection. Importantly, the MIA doesnt alter the basic premise that
benefits pass through to the investor, but in fact improves the security of the income to
the investor because the single responsible entity is bound, inter alia, to distribute all
Figure 1 below graphically shows a typical structure.
Figure 1 - Typical Structure of a Direct Property Investment
2.2.2 Characteristics of DPIs
The first four elements above differentiate DPIs to LPTs. In an LPT, an
investor can almost never access the underlying NTA. If the underlying NTA cannot be
accessed by an investor, then the asset will not perform in accordance with its underlying
value but rather in accordance with an assessment of future cash flows. DPIs provide
direct property performance because the properties are identified and there is a fixed
time in the near future when access to the underlying NTA is provided to the investor.
2.2.3 The role of Direct Property Investment in reducing risk through diversification
In order to reduce their overall risk, prudent investors will seek to
diversify their assets amongst the major asset classes, cash, bonds, shares and property.
Diversification is increasingly important in todays investment environment with
record low interest rates coupled with record stockmarket levels and high volatility. Low
interest rates have deterred many investors from cash and bonds focussing interest in
shares and property.
Diversification is a key factor in portfolio theory. True diversification entails that
there should be a spread of investments amongst the different asset classes, and
particularly into asset classes that move in different directions.
Direct property is the only major asset class which moves in different cycles to
shares. Figure 2 shows the performance of direct property compared to shares (All
Ordinaries index) over the last 13 years. The graph clearly shows that there is no
correlation between shares and direct property.
Figure 3 below compares direct property with LPTs and shows a negative correlation
between these two asset groups. Clearly, LPTs exhibit the behaviour of shares and
therefore do not deliver the diversification benefit that investment in different asset
classes seeks. (ADPIA is not arguing the merits of DPIs over LPTs, it is merely saying
that they are manifestly different asset classes).
Figure 4 below compares all three indices: The All Ordinaries, the Property Trust Index
and the JLW Composite Property Index.
The graphs above clearly show that direct property is a different
asset class to shares (including LPTs). ADPIA submits that DPIs are a very important
investment vehicle in an investors portfolio as they provide true property
performance and are one of the very few ways that most people can gain the diversification
benefits that direct property ownership brings. There are very few people who can afford
to buy quality property themselves.
2.3 Taxation of Trusts as Companies
ADPIA supports the Governments intention to tax certain trusts as
companies where those trusts carry on an active business. However, where trusts are
no more than a bare trust or conduit which enable investors to pool their resources to
make a productive investment in a managed fund such as property, then APDIA submits that
these trusts should continue to allow a "flow through" of income so that the
benefits are taxed in the hands of the beneficiaries.
ADPIA understands that the whole desire to tax trusts was driven out of the desire to
attack the revenue loss and timing delays caused by discretionary trusts and the obvious
desire to make a choice of vehicle not tax dependent. Perhaps the agenda has become
mis-focused and started to settle on unit trusts whereas the correct target is really the
discretion to re-route earnings.
In addition, ADPIA submits that this flow through status should be allowed to all
managed investment schemes and to managed investment schemes in which the only investors
are registered managed investment schemes or complying regulated superannuation funds.
If these types of trusts are taxed as companies, the following adverse consequences
2.3.1 Disadvantage to low and middle income investors
As mentioned previously, most investors in ADPIA members offerings
are middle to low income earners and retirees. DPIs give ordinary Australians the
opportunity, previously available only to wealthy investors, to own quality commercial
property which delivers true property performance. For example, in a typical investment,
more than 500 investors, most investing less than $50,000, can between them buy a shopping
centre for around $25m, and have it professionally managed and looked after for them.
Taxing trusts at source will reduce cash yields by up to 50% and will especially hurt
small investors who may have to wait up to 9 months to receive an imputation refund
without interest. Many existing investors would suffer significant financial stress
because they have entered into financial arrangements reliant upon receiving the
originally forecast prospectus yield. For example, many retirees who depend on retirement
cashflow provided by trusts would be affected by not having the money up front. In
addition, many retirees would be forced to deal with the complexities of the imputation
system in order for them to receive their benefits. Many do not have this ability and
would typically be unable to afford to pay a tax agent for assistance.
Other detrimental results (tax and otherwise) to investors include:
- a loss of both capital gains tax indexation and averaging for gains earned on disposal
of trust assets;
- taxing distributions which are not currently assessable; and
- large compliance costs to change the administration systems to accommodate the proposed
The potential impact of the proposal to tax trusts as companies was highlighted in The
Australian Financial Review on February 17 1999 (page 34) where Robert Harley noted
that the Property Trust Index had fallen 6% in 30 days. Although no single factor could
explain the shift, the fact that if the proposals are introduced, Robert Harley has
predicted that yields on property trusts would fall from around 7.5% to 5.25% and this
could mean small investors simply abandon trusts in favour of bank deposits. It was also
noted in the same article that a submission made by IFSA showed that the impact of the
proposed changes could result in a fall in prices of property trusts of up to 36%.
Small investors do not deserve to lose so much money or be so disadvantaged as a
result of changes in legislation.
2.3.2 Investors compelled into poorer structures
ADPIA submits that if property trusts were to be taxed as companies,
ADPIA members offerings may have to be restructured in a way that investors that still
allows investors to retain the benefits of investing in direct property, for example, all
investors become tenants in common. This raises massive practical difficulties, for
example, a DPI with 1,000 investors would require that each individual have their name on
the title! Further, approval and/or signatures would be required from each investor when
new transactions, such as loans or leases, are entered into. This also raises an issue of
potential investor liability which could also affect existing investors or deter
ADPIA is at a loss to understand any benefit that might be gained to the revenue or
otherwise that could justify this sort of result.
2.3.3 Depletion of savings
If the attractiveness of investing in trusts is reduced, there would be
a significant depletion in investors savings. Many investors see shares as too
risky, and depositing money in bank accounts as providing unacceptably low returns. These
disincentives would discourage investors from saving. Investors may also revert to
investing in residential properties and this may not be viewed as advancing the Australian
economy or the Australian industry generally.
2.3.4 An impediment for international investors
There are a significant number of foreign investors in DPIs offered by
ADPIA members. These existing foreign investors would be disadvantaged and future foreign
investors would be deterred should all trusts be taxed as companies.
In their respective submissions, the PCA and IFSA point out that most
international companies provide a flow through form of investment where
savings entities, such as mutual funds, allow income and tax benefits to flow into the
hands of the investors at which point they are taxed. As IFSA notes, at least $5 trillion
of the worlds $7 trillion mutual funds assets operate on a flow through entity
If the proposed changes to tax trusts as a company were to proceed, Australia will move
away from a worldwide trend rather than foster a more internationally competitive market
place. International investors will be disadvantaged by the proposed changes as, in many
instances, they will be unable to utilise franking credits they receive. In turn, this
will place Australia at a disadvantage when competing for international investment funds
which are vital for the ongoing vitality of the Australian property market.
2.3.5 Investors motives not based on tax avoidance or tax mischief
DPIs offer tax preferred income primarily due to the ability to
depreciate plant and equipment and to a lesser extent due to the ability to amortise
building costs. These valid deductions would therefore only be available to wealthy
investors who are able to buy the property outright. As Ken Traill states,
"... the current system can hardly be described as tax avoidance. It is a system
that has been with us for many decades and is fairly efficient, allowing tax benefits
provided by the Act to pass through trust structures to the ultimate beneficiaries."
(ICAA Submission, Appendix B).
2.3.6 No leakage to revenue
Public unit trusts including DPIs, property syndications and joint
acquisitions do not provide a mechanism for tax leakage, as every dollar of taxable income
from a public unit trust is taxed either in the hands of the beneficiaries at their
marginal rates or in the hands of the trustee at the top marginal rate. The requirements
of treating all unitholders equally combined with the annual distribution of all trust
income, means that there is no scope for the deferral of tax on income or realised gains.
Further, non-assessable distributions to unitholders are bought to tax on disposal of
units in a trust.
The Ralph Committee seems to imply that there is a cost to revenue where
building depreciation does not form part of the cost base adjustment for units in a unit
trust. Although this may be the case, the Ralph Committee have neglected the proposals put
forward in Tax Laws Amendment Bill (No.2) 1998, which recently became law effective from
13 May 1997, which requires the cost base of a building to be adjusted to claw back
building depreciation on subsequent sale, where a deduction has already been claimed.
Accordingly the net affect of these proposals means that there is actually no cost to
revenue, other than a timing issue. This timing issue also exists with the depreciation
element of non-assessable distributions but is not a new issue so that there is no cost to
In addition, investors must supply tax file numbers ("TFN") to the Manager of
a DPI or if no TFN is supplied, tax at the highest marginal rate must be withheld from
distributions. Accordingly, there is no danger of tax leakage.
2.3.7 May threaten industry
ADPIA submits that the dynamic and rapidly growing DPI industry may be
adversely affected because, as mentioned in paragraph 2.3.1 above, taxing trusts as
companies would reduce the attractiveness of investing in trusts. Investors who currently
invest via trusts would suffer a substantial tax detriment and lose the benefit of
management expertise offered by managers of DPIs. In addition, large compliance costs will
be incurred in the modification of administration systems to accommodate the proposed tax
We are on the doorstep of a massive new financial services industry. The demand for a
securitised direct property product has been shown to have almost limitless potential with
investors funds attributed to this sector escalating rapidly to more than $3 billion today
and potentially many times that in the next few years.
ADPIA recognises and supports the Governments policy initiatives to promote
Australia as a global financial centre. Reference is made to the article in the Australian
Financial Review (by Rogers & Aylmer on 13 April 1999 in page 3) where the chairman of
the Financial Sector Advisory Councils Regional Financial Centre Task Force, Mr Les
Hosking, said, "We want to change the mindset in Canberra away from domestic,
revenue-neutral tax policy changes
to things that will make Australia globally
The Managing Director of Australias largest producer of DPI product, Julius
Colman of MCS Property Limited, estimates that the industry has the potential in the
short-term to grow to more than $30 billion of property under management in Australia.
"The potential for the business is greater than that", he says, " as it
offers huge employment opportunities, and the ability to make Australia a focus in this
part of the world for quality and creative financial products." As an example of the
dynamic nature of the DPI industry, Mr Colman pointed out that MCS has been granted
Federal Government approval to conduct an Exempt Stock Market in its DPIs - the first
Australian property company to be granted this privilege. This market, known as "The
Australian Exempt Property Market", is operated by Austock Management Limited and
allows liquidity for investors of DPI product offered by MCS. "This market",
says Mr Colman, " has the potential to develop into a new and separate Stock
Exchange, or Property Exchange."
Owen Lennie, Managing Director of the York Capital Group Limited which
is an executive member of ADPIA, said "Australia has invented and basically perfected
the property trust in its current form. It is superior in structure and format to the Real
Estate Investment Trust (REIT) and other similar vehicles found in the United Kingdom and
the United States. The proposals to tax property trusts as companies will discriminate
against small investors, hurt the industry and damage Australias high international
regard in this area."
The flow through provisions should not place investors in property
through a managed investment scheme at a disadvantage to direct property investors - the
report contains no justification for any discrimination against this class of investor
and, in particular:
- Depreciation of buildings, plant and equipment and furniture fittings and
equipment is a genuine expense of investment and not "tax preferred income" and,
as a legitimate allowable deduction, should not give rise to a tax liability;
- If the Government believes that allowable rates of depreciation are too
high, the correct course is to reduce the allowable rates, not to try to turn a deduction
into taxable income by legislative legerdemain;
- A key advantage of the current property investment vehicles is the
simplicity of administration - this will be gratuitously destroyed by the proposed
"flow through" arrangements, as tax returns will become more complex and time
consuming for both the entity and the small investors;
- The current tax law discriminates between taxable income and allowable
deductions, on the one hand, and amounts of capital, on the other, in line with generally
accepted accounting principles of long standing. The proposal to introduce the alien
concept of "tax preferred income" will introduce definitional and practical
difficulties, increase compliance costs to investors and give rise to inadvertent
non-compliance due to the complexity of the law and the departure from common sense
- The current position where distributions of a capital nature reduce the
cost base of the investors interests in the investment vehicle is defensible on the
grounds of horizontal equity, proper accounting principles and administrative simplicity
and no reason for complicating the process is set out in the Report.
2.3.9 Choice of taxation status
ADPIA submits that there should be a choice for an entity to elect to be
taxed as a company.
2.4 Collective Investment Vehicles
The Ralph Report has proposed that vehicles within the definition of
Collective Investment Vehicles ("CIVs") will be allowed to have their income
flowing through the CIV and assessed in the hands of the investors. ADPIA submits that
DPIs such as those offered by its members should fall within the definition of CIVs.
ADPIA notes in the Ralph Report that CIVs have been defined as widely held vehicles
undertaking investments that are not of an active business nature and not involving
control of business operations which deliver a full flow-through of annual profits to
2.4.1 DPIs are not "active businesses" or "trading trusts"
ADPIA submits that DPIs are not "active businesses" because the individual
investors investment is genuinely passive. ADPIA recognises and supports the
Governments concern that certain trusts that "carry on a business" should
rightfully be taxed as companies.
However, investors in DPIs merely subscribe their funds and receive a return, not
unlike cash management trusts, listed property trusts and the numerous other managed
equity funds provided by other financial institutions. Like these vehicles, the Manager of
a DPI fund applies its expertise to secure and improve returns to investors. Therefore,
DPIs have similar characteristics and functions to other managed funds and it submits that
it would be anomalous and inconsistent to classify DPIs as "active businesses"
when clearly the investment is passive from the investors point of view.
Indeed, current tax law supports the view that a property trust such as those used by
many ADPIA members are not active businesses in the definition of trading trusts in the
Act. This position that these property investment vehicles are not trading entities has
also long been accepted by both the Commissioner of Taxation and the Australian Prudential
Section 102N of the Act states that a unit trust is a trading trust if the trustee
carries on a trading business or is able to control (directly or indirectly) a trading
business carried on by another person. Trading business is defined in Section 102N of the
Act to mean a business that does not consist wholly of the eligible investment business.
The definition of eligible investment business includes investing in land for the purpose
(or primarily for the purpose) of deriving rent.
Reference is made to paragraph 16.24 of the Ralph Report, and ADPIA submits there is no
"competitive advantage" by trusts over companies because, to the knowledge of
the writer, properties such as shopping centres or office buildings are almost never
held as a company and therefore a comparison relating to advantage cannot be made. In
addition, ADPIA submits that the question is not whether DPIs offer a competitive
advantage over other entities, it is whether, by not allowing these advantages, only
wealthier investors are the ones allowed to benefit from the deductions and other
allowances provided by taxation law.
2.4.2 DPIs are generally "widely held"
ADPIA submits that if the trust meets the requirements as currently set
out in the Act that it is not a trading trust, i.e. it is merely a conduit for a passive
investment, that trust should not be taxed as the company.
For example, ADPIA questions why such a trust used as a conduit for passive investment
should be treated differently just because it has, for example, less than 50 investors. It
is concerned that the trust which at one point in time has more than 50 investors and
suffers a minimal change in investor numbers but moves to say 49 investors is treated
differently from a tax point of view when in fact this trust is no different to a trust
with 51 investors or 5001 investors.
However, should it be considered that CIVs are including property trusts need to be
considered "widely held", ADPIA submits that the definition of "widely
held" should be the current public unit trust definition set out in Section 102G of
the Act. This definition includes listed entities, entities offered to the public or any
entity with 50 or more investors.
ADPIA is concerned that the overriding "75/20" test can be unduly harsh in
terms of their members, particularly if beneficial interests are not taken into account.
This point was not specifically addressed in the Ralph Report. It therefore submits that
the definition of "widely held" should look to underlying beneficial interests
not just those with a direct interest in trusts.
Furthermore, ADPIA submits that tracing rules should be incorporated in the
"widely held" definition to exclude sub-trusts from the entity taxation regime
where they are "widely held" or indirectly "widely held".
2.4.3 Tax Preferred/Advantaged Income
The Ralph Report proposes two options for dealing with tax preferred
income from CIVs. ADPIA submits that a property trust is a CIV and the first option is its
220.127.116.11 Not taxing tax preferred income
Under this option distributed tax preferred income would be non-assessable income for
investors. There is some concern under this option that property trusts would be excluded
from the definition of CIV due to their supposed "active" nature. In addition,
the Ralph Report implies there is a cost to revenue under this option. Currently, the cost
base of units in a trust are reduced where tax preferred income which comprise
depreciation allowances is distributed meaning there would be no revenue cost plus the Tax
Laws Amendment Bill (No.2) 1998, which recently became law effective from 13 May 1997,
requires an adjustment by way of a "claw back" to the cost base of a building
where deductions have already been claimed.
Accordingly, there is no cost to the revenue in terms of not taxing tax preferred
income as the tax preferred element of the trust distribution is taxed when units in the
trust are sold. At worst, there is a timing issue which presently exists under current
18.104.22.168 Taxing tax preferred income
This option advocates tax preferred income distributed by CIVs being
taxed in an equivalent manner to distributions by companies, i.e. as dividends. ADPIA
submits that this option is similar to taxing trusts as companies and therefore has
corresponding detrimental effects (see paragraph 2.3).
This option of taxing tax preferred income cuts across the desire to
make the CIV regime equivalent to direct investment in assets. Clearly direct investment
benefit from tax preferred income. In addition, it seems to make the distribution
administration for CIVs even more complex than currently is the case. The CIV, as well as
making ordinary trust/flow through distributions, will also be paying a dividend equal to
the tax preferred amount.
2.4.4 Flow Through of Tax Preferences
ADPIA submits that property trusts should be included in the CIV regime
and distributions of tax preferred income for property trusts should continue to flow
through to property trust investors. The maintenance of flow through treatment would:
- ensure competitive neutrality between individual investment in property by wealthy
Australians and that of low to medium income investors in property trusts who do not have
the capacity to invest in large commercial properties individually;
- be consistent with international practice and maintain the competitiveness of
Australias property trust industry;
- avert the potential adverse impact on the DPI industry and the potential decrease in
value predicted to occur in the Australian property trust sector; and
- avoid the imposition of large compliance costs to change the administration systems to
accommodate a change to the income tax system.
ADPIA supports the Governments intention to tax certain trusts as companies where
those trusts carry on an active business. However, ADPIA urges the Government to continue
with the well established principle that where trusts are no more than a bare trust or
conduit which enable investors to pool their resources to make a productive investment in
a managed fund, such as a DPI, then APDIA submits that these trusts should continued to
allow a "flow through" of income so that the benefits are taxed in the hands of
Taxing property trusts in a similar manner to companies would have a major negative
impact on the returns to investors in DPIs and on the burgeoning financial services DPI
industry. Both effects would be contrary to Government policy: the former would deter many
people from saving and the latter would affect Australias potential to be a global
Most investors in DPI products are medium to low income earners and DPIs give ordinary
Australians the opportunity, previously only available to wealthy investors, to own
professionally managed quality commercial property that exhibits true property
4. Supporting Submissions
ADPIA endorses the following submissions in respect of their
position regarding taxation of trusts which are merely passive investment vehicles such as
those provided by ADPIA members:Property Council of Australia (PCA), Submission to the
Business Tax Review, December 1998
Property Council of Australia, Taxing Property Trusts as Companies - It will hurt the
battlers, October 1998.
Investment & Financial Services Association Ltd (IFSA), Response to A Strong
Foundation, 22 December 1998.
Institute of Chartered Accountants in Australia (ICAA) - Submission on A Strong
Foundation (especially Annexure B - Taxing Trusts as Companies - Why?).
Financial Planning Association of Australia (FPA) - Submission on A Strong
Foundation, 15 January 1999.
Lend Lease - Submission on A Strong Foundation, 17 December 1998.
ADPIA wish to thank the following people for their assistance in
preparing this submission:-
- Julius Colman, Managing Director of MCS Property Limited
- Mark OReilly, Partner at PricewaterhouseCoopers
- Owen Lennie, Managing Director of York Capital Group
- Solomon Gerber, Barrister-at-law, Member of the Victorian and New South Wales Bars
- Ryan Bass of MCS Property Limited
Should further information or discussion be required, the following persons will be
available for consultation:
- Julius Colman (President of ADPIA) and Ryan Bass, MCS Property Limited, Tel: 03 9639
4511, Fax: 03 9639 4501
- Simon Van Assche (Committee Member of ADPIA) and Owen Lennie, York Capital, Tel: 03 9654
0305, Fax: 03 9654 0306
- Mark OReilly (Consultant to ADPIA), PricewaterhouseCoopers, Tel: 02 8266 2979,
Fax: 02 8266 8906
- Chris Morton (Committee Member of ADPIA), Property Funds Australia, Tel: 07 3221 7170,
Fax: 07 3221 6729
- Greg McMahon (Committee Member of ADPIA), CTM Property, Tel: 07 3831 1000, Fax: 07 3831
- David Davies (Committee Member of ADPIA), Austgrowth Property Syndicates, Tel: 02 9437
4450, Fax: 02 9437 4884