Robert Ignjatic, Corporate Tax Specialist, analyses the recent High Court decision regarding unit trusts in the ElecNet case.
The concept ‘unit trust’ is used in a number of different contexts in the income tax law, for example, provisions dealing with capital gains tax events and rollovers.
The High Court in ElecNet (Aust) Pty Ltd v Commissioner of Taxation (‘ElecNet’)  HCA 51 recently considered the meaning of the term in the context of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936) and, in doing so, confirmed that the ordinary meaning should be attributed to the term. This was so notwithstanding that Division 6C of the ITAA 1936 defines the term ‘unit’ broadly and inclusively as "a beneficial interest, however described, in any of the income or property of the trust estate".
In the view of the High Court, the inclusive definition of 'unit' did not serve to broaden the definition of unit trust in Division 6 of the ITAA 1936 but merely served to ensure that a beneficial interest was a 'unit' in the trust. In other words, the definition of 'unit' was only relevant once it was determined that a trust was a prescribed trust estate (a public trading trust at any time during the income year) and until this was determined the concept 'unit' had no role to play (at para. 55).
The meaning of unit trust should, in the view of the High Court, therefore be understood according to the ordinary meaning of that term, and in this sense the decision of the High Court is relevant not only for Division 6C of the ITAA 1936 but other provisions in the income tax law that use the term.
In the view of the plurality (Kiefel, Gagelar, Keane and Gordon JJ) this ordinary meaning required that the beneficial interest in the trust fund be “divided into units, which when created or issued are to be held by the persons for whom the trustee maintains and administers the trust estate” (at para. 56). In other words, 'unit' could be understood as “discrete parcels of rights which might be dealt with as items of commerce analogously with shares in a company” (see also para. 62).
This was especially so after considering the purpose of Division 6C of the ITAA 1936 which was to prevent erosion of the classical system of company taxation through the use of trading trusts by public companies (see paras. 58 to 62).