A Guide to the Law of Securitisation in Australia - Clayton Utz

More documents

Recommendations

Info

5 Taxation issues relevant to securitisation5.1 IntroductionThis section deals principally with four issues:• section 5.2 describes the general principles ofCommonwealth income taxation and their application tosecuritisation programs;• section 5.3 analyses the interest withholding tax rules andthe requirements that need to be complied with where anAustralian securitisation program seeks to issue securities toforeign investors;• section 5.8 describes the GST regime and highlights some ofthe major areas for concern to securitisation programs; and• section 5.9 provides a summary of changes to the Australiantax regime which have been foreshadowed as at the date ofthis publication.5.2 Income tax issues for securitisation programs5.2.1 OverviewIncome tax in Australia is currently levied under two Acts – theIncome Tax Assessment Act 1936 (the 1936 Tax Act) and theIncome Tax Assessment Act 1997 (the 1997 Tax Act). The 1997Tax Act is being progressively enacted and is essentially a rewriteof the 1936 Tax Act. The intention is that the provisions of the1997 Tax Act express the same law as in the 1936 Tax Act but ina clearer style.One of the key concerns during the structuring phase of asecuritisation program is to ensure the tax neutrality of thesecuritisation vehicle (whether it is a corporation or a trust).5.2.2 Taxation issues relating to corporationsGeneral principlesWhere a special purpose corporation is used as a securitisationvehicle, the corporation is subject to the normal tax rulesapplying to corporations.Deductions for losses and bad debtsAn issue which sometimes needs to be considered is the abilityof a special purpose corporation to claim deductions for priorand/or current year losses and bad debts. This is particularlyimportant where the tax neutrality of the corporation dependsupon the availability of such deductions. Generally, the ability toclaim such deductions depends upon the corporation passing a“continuity of ownership test” or, in certain circumstances, a“continuity of business test”. The “continuity of ownership test”requires the tracing of controlling interests in the corporationthrough interposed entities and the application of the test canbecome a particularly complex task if shares are held (directly orindirectly) in a corporation by discretionary or charitable trusts(which is often the case in securitisations).5.2.3 Taxation issues relating to trustsGeneral principlesTax will only be levied on the trustee of a trust where anAustralian resident beneficiary is not presently entitled to the netincome of the trust for tax purposes or where the trustee is taxedas a company for the purposes of Divisions 6B or 6C of the 1936Tax Act. Securitisation trusts are usually structured so that abeneficiary is entitled to any income derived by the trust, withthe intended effect that the trustee will not be personally liablefor tax in respect of any income derived by the trust.Where a securitised instrument is equity (ie. a unit in a unittrust), the taxation of any payments made will depend onwhether these constitute redemptions of capital (which are notassessable) or distributions of income (which are assessable).Also, in certain circumstances, the trustee can be required todeduct tax from trust distributions to non-resident unit holdersand remit this directly to the Commissioner of Taxation.Taxation of trusteesOrdinarily, the accounting income of a securitisation trust will bethe same as the net income of the trust for taxation purposes.However, in certain circumstances, it is possible that the“netincome” of a trust for taxation purposes for an income year mayexceed its accounting net income, for example, where theaccounting income of a trust includes non-deductibleexpenditure. There are, basically, two conflicting views as to howthe excess over the accounting “net income” is assessed.Under the quantum approach, the beneficiary could only beentitled to such amount of income as he is entitled to receiveand, if the net income of the trust exceeds the amount which heis entitled to receive, that excess is not income to which thebeneficiary is presently entitled and is assessable to the trustee.The proportionate approach regards the beneficiary’s share ofaccounting income as only being relevant to determining thatbeneficiary’s share of the net income of the trust for taxpurposes. The operation of the proportionate method may requireat least some income to have been derived by the trust in theyear of income that is capable of being distributed to abeneficiary.29
Despite the absence of an express approval by a Full FederalCourt, the better view is that section 97 of the 1936 Tax Actshould be interpreted using the proportionate approach. This isalso generally the current position of the Australian Tax Office.Taxation of trusts as companiesAs indicated above, it is possible under Divisions 6B and 6C ofthe 1936 Tax Act for some trusts to be regarded as companiesand for tax to be levied on the trustee (rather than thebeneficiaries).Division 6B is unlikely to be relevant for securitisation trusts (itusually only applies where, as part of a corporate reorganisation,the property of a company is transferred to a public unit trust andshareholders in the company become entitled to take up units inthe trust).On the other hand, Division 6C can, in some circumstances, applyto securitisation trusts. Under section 102S, the trustee of apublic trading trust is taxable on the net income of the trust.Section 102N provides that a unit trust is a trading trust if(among other things), it “carries on a trading business or, in theyear of income, it controlled or was able to control, the affairs oroperations of another person in respect of the carrying on by thatperson of a trading business.”A “trading business” is defined in section 102M to mean abusiness “that does not consist wholly of eligible investmentbusiness”, which in turn includes:“(a) investing or trading in any or all of the following:(i) secured and unsecured loans (including deposits with abank, building society or other financial institution);(ii) bonds, debentures, stock or other securities ...”As can be seen, an eligible investment business specificallyrefers to the making of both secured and unsecured loans.5.2.4 Trust loss provisionsBackgroundIn some circumstances a securitisation vehicle may incur losses orbad debts which it wishes to claim as a deduction. In ascertainingwhether a trust can claim a deduction for losses or bad debts,different tests apply depending upon whether the trust is a fixedtrust (where all the income and capital of the trust are thesubject of fixed entitlements) or a non-fixed trust (all trusts otherthan fixed trusts).The tests which must be passed by a non-fixed trust in order toclaim deductions for prior and current year losses and bad debtsare generally more difficult to pass than those applicable to fixedtrusts. For that reason, and because of the issues discussedabove relating to the taxation of the trustees, it is usual, so far aspossible, that trust securitisation vehicles are structured as fixedtrusts.Different types of trustsFor fixed trusts, deductions will be denied for tax losses and baddebts if there is no longer a continuity of the majority (ie. morethan 50 percent) of the beneficial ownership of the trust (the 50percent stake test). Ordinary fixed trusts have to apply the 50percent stake test whenever they wish to claim deductions fortax losses and/or bad debts.Different rules apply in respect of certain unit trusts. Widely heldunit trusts have to test ownership when there is any abnormaltrading in the units of the trust or, in some cases, at the end of anincome year. Listed widely held unit trusts can avoid theconsequences of failing the ownership test if they pass the samebusiness test.In respect of non-fixed trusts, deductions for losses and/or baddebts will be denied if the 50 percent stake test is failed or ifcontrol (broadly defined) of the non-fixed trust changes or, insome circumstances, if there is a 50 percent or greater change inthe pattern of distributions of the income or capital of the trust.The trust loss provisions do not apply to “excepted trusts” whichare defined to include fixed unit trusts where the beneficiariesare all persons whose income is exempt from tax under section23 of the 1936 Tax Act or Division 50 of the 1997 Tax Act.Fixed trusts with non-fixed trust beneficiariesThe relevant tests are more stringent for fixed trusts where thebeneficiaries who are entitled to more than 50 percent of thetrust income or capital are, in turn, non-fixed trusts (such ascharitable trusts or discretionary trusts). In these circumstances,the non-fixed trust beneficiaries must have held fixedentitlements to a 50 percent or greater share of the income orcapital of the fixed trust during the whole of the relevant testperiod and must pass a “pattern of distributions test “ and a“control test”.Briefly, the “pattern of distributions test “requires that 50percent or more of the distributions made by the non-fixed trusthave been to the same individuals (meaning natural persons) fortheir own benefit during the six year period prior to the year ofincome in question.30
Page 6: 12.7.3 Euroentitlements............
Page 9 and 10: 1 General overview of the nature of
Page 12: An interest in a managed investment
Page 15 and 16: 142.3.4 Provision of a financial se
Page 17 and 18: 3 The disclosure and civil liabilit
Page 19 and 20: 18The statutory source for this ste
Page 21 and 22: The implication of this approach in
Page 23 and 24: Interestingly, the majority then we
Page 25 and 26: 4 Stamp duty and securitisation244.
Page 27 and 28: 264.8 Relief for mortgage-backed se
Page 29: 4.10 ConclusionStamp duty is a very
Page 33 and 34: 32share of the profits of the compa
Page 35 and 36: (d) before the issue:(i) the compan
Page 37 and 38: 365.4 Debt/equity rulesDivision 974
Page 39 and 40: Entities that make GST-free supplie
Page 41 and 42: • “ enterprise” is defined in
Page 43 and 44: 6 The Consumer Credit Code andsecur
Page 45 and 46: 7 The regulation of the participati
Page 47 and 48: inclusion within the ELE depends on
Page 49 and 50: 8 Set-off and securitisation8.1 Int
Page 51 and 52: 50However, this result and the prin
Page 53 and 54: 9 Insolvency and securitisation529.
Page 55 and 56: 54• if the trustee has not limite
Page 57 and 58: Section 588FG provides a measure of
Page 59 and 60: 10 Issues relating to debt securiti
Page 61 and 62: 60indemnity existed) and had no han
Page 63 and 64: The effect of the decision has been
Page 65 and 66: the ASX has discretion to ask the e
Page 67 and 68: • Public Trustee Members - for pr
Page 69 and 70: When Austraclear receives notificat
Page 71 and 72: have been completed in relation to
Page 73 and 74: Some CMBS transactions allow the is
Page 75 and 76: 14.3 GamingIn the past, another con
Page 77 and 78: 16 Clayton UtzOur securitisation te

A Guide to the Law of Securitisation in Australia - Clayton Utz

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?