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

The “control test “ is a very broad test. It generally applies wherea group (meaning a person and/or his or her associates) eitheralone or together “begins to control “ the trust directly orindirectly.This means that changes in the ownership or control of thetrustees of a non-fixed trust could cause the non-fixed trust tofail the “control test” and hence the underlying fixed trust will beunable to claim deductions for losses and bad debts. This issue isparticularly important where it is intended that a securitisationtrust will have a charitable or discretionary trust as itsbeneficiary. Changes of control of the beneficiary, and the trusteeof the beneficiary, can affect the tax treatment of thesecuritisation trust itself.Taxation of trusts: Ultimate beneficiary non-disclosure taxDivision 6D of Part III of the 1936 Tax Act contains the provisionson ultimate beneficiary non-disclosure tax. The object of theseprovisions is to enable the Commissioner to check whether theassessable income of the ultimate beneficiaries correctly includesany required share of the relevant net trust income, and whetherthe net assets of the ultimate beneficiaries reflect the receipt ofcertain tax-preferred amounts. Where the provisions apply, andthe trustee fails to correctly identify the ultimate beneficiaries,the trustee incurs a tax liability at the rate of 48.5 percent andmay commit an offence under the Taxation Administration Act1953.The Commissioner has released Practice Statement PS 2001/12with effect from 5 September 2001 dealing with therequirements of trustees to provide ultimate beneficiarystatements in specified circumstances. Practice Statements arenot legally binding on the Commissioner, however they aretreated as “administratively binding”.5.2.5 Timing of interest receipts from underlying assetInterest paid to a securitisation vehicle on its underlying assetswill normally be assessable when received. However, if itsactivities can be characterised as akin to that of a “financialinstitution”, then interest income may be recognised on a fullaccruals basis for tax accounting purposes. Taxation Ruling TR93/27 outlines the Commissioner’s views as to what is meant bya financial institution. Broadly, the Commissioner believes that a“financial institution” is “any institution, one of whose principalactivities is to take deposits and borrow, with the object oflending and investing”.The Commissioner accepts that most securitisation vehicles areakin to financial institutions and can recognise interest income ona full accrual basis.5.2.6 Timing of interest expensesThe decision in FC of T v Australian Guarantee Corporation 84ATC 4642 confirms that interest deductions for a taxpayer accruefrom day to day and thus are deductible on that basis, evenwhere interest is not payable until the end of the relevantcalculation period. This rule extends to all payments of interestby business taxpayers, and, therefore, applies generally to allsecuritisation vehicles.5.2.7 Timing of swap transaction payments and receiptsThe tax treatment of any swap transaction entered into by asecuritisation vehicle will be determined in accordance withIncome Tax Ruling IT 2682 (as modified by the Draft TaxationRuling TR 1999/D13). This provides that for bona fide swaps,payments in arrears in respect of defined periods are to beaccounted for on an accruals basis, whilst payments in advanceare to be deducted on a paid basis. A consistent approach is alsoto be adopted for receipts under swaps.5.2.8 Timing of gains and losses in respect of underlyingassetsDifferent types of investments and assets held by a securitisationvehicle may give rise to the recognition of assessable income anddeductions at different times. For example, gains in respect ofsome securities with deferred yields must be recognised on a fullaccruals basis, whereas gains and losses in respect of securitieswhich qualify as traditional securities are not recognised until theyear of income in which such securities are disposed of orredeemed. Accordingly, investments and assets held by asecuritisation vehicle should be selected and managed carefullyin order to ensure that tax symmetry arises where possible.5.2.9 The taxation treatment of management feesIf the management fees payable by a securitisation vehicle havebeen calculated on an arm’s length basis, they should bedeductible according to ordinary principles under section 8-1.However, if they are commercially unrealistic or can be construedas being a payment designed to represent a distribution of profitrather than an expense incurred in deriving income, there is a riskthat the fees will not be deductible. This in turn could affect thetax neutrality of the securitisation vehicle.Of particular interest in this regard is the decision in UnitedEnergy Limited v FC of T 97 ATC 4796. The Full Federal Courtconsidered that franchise fees payable by certain companies thatwere calculated by reference to a reasonable estimation of theamount by which the income of those companies was likely toexceed a particular level were, in reality, akin to payments of a31