Update: Staples Legislation - ATO releases Draft Law Companion Ruling

26 June 2019

With three business days before 30 June 2019, being the last day for entities subject to a cross staple arrangement to make a choice that transitional relief applies (Transitional Relief Choice), the ATO has released draft Law Companion Ruling LCR 2019/D2 in relation to ‘Non concessional MIT income’ (NCMI), to assist taxpayers in navigating the staples legislation enacted on 5 April 2019 (Staples Legislation).

Comments on the draft LCR are due by 9 August 2019 – after Transitional Relief Choices must be made, but before the 60 day period by which they are required to be lodged with the ATO.

The draft LCR is limited to the NCMI rules and does not address the changes to thin capitalisation, sovereign immunity or the foreign pension fund concessions included in the Staples Legislation. However, it does make some comments that are relevant to the overall operation of Division 6C.

Despite the Staples Legislation not disturbing the definition of a MIT and in turn the requirement that the trust must not be a ‘trading trust’, the ATO dedicates the first section of the LCR to the concept of a ‘trading trust’ and in particular the meaning of ‘investing in land for the purpose, or primarily for the purpose, of deriving rent’. This suggests to us that what constitutes a ‘trading trust’ is clearly on the ATO radar more generally. In particular the ATO:

- outlines the factors that are relevant in determining whether land is acquired primarily for the purposes of deriving rent;

- notes that receipts which are described as ‘rent’ but that exceed what might be the arm’s length price (e.g., profit based amounts) may not be rent for the purposes of Division 6C; and

- notes that turnover based rent may be acceptable if it is an “incidental component” of total rent.

The ATO also expresses its views in relation to a number of aspects of the operation of the NCMI rules contained in the Staples Legislation. In our view, the key issues arising from the draft LCR are:

- The ‘third party rent’ exception will not apply to a licence of land (as compared to a lease) to a third party. The draft LCR also explains the meaning of a lease and payment for the use of land.

- The ATO may consider the application of Part IVA to schemes which structure an arrangement to avoid the 80% common participation test or one or more of the specific exemptions.

- The Staples Legislation provides limited protection from the ATO’s ability to apply Part IVA in respect of staples structures in that it only protects tax benefits comprising deductions for cross staple rent payments.

- The draft LCR also addresses several matters associated with application of the transitional rules. In particular, the draft LCR:

- provides details as to what the ATO considers to be is a ‘facility’ including whether expansion or enhancements is part of the same ‘facility’ and provides a number of examples. Unhelpfully, of the 5 examples of possible enhancements or extensions only one (repurposing a freight port into a cruise shop port with no significant changes to existing structures and surfaces) does not result in the creation of a new ‘facility’. The ATO notes that a ‘facility’ must form part of the land on which the ‘facility’ is built (i.e. excludes movable property) and goes on to say that taxpayers should bear in mind that what might fall within the meaning of the term ‘facility’ will not necessarily align with the use of the assets that will satisfy the eligible investment business requirements in Division 6C - the effect of which is that a portion of rent paid by a Project Entity to an Asset Entity might not qualify for the 15% transitional withholding rate;

- provides further guidance on ‘economic infrastructure facilities’ (which attract a longer transitional period in addition to being relevant to the application of the ‘approved economic infrastructure exemption’). However in defining an ‘economic infrastructure facility’ the ATO arguably adopts a narrower definition than an ordinary facility in providing that the ancillary or supplementary facilities, such as car parking beyond the airport itself, will not be economic infrastructure facilities either by being part of the airport, or in their own right, being complementary to the airport;

- notes that the cross staple income derived by the Asset Entity must relate to the facility and provides that a lease premium or something other than rent from land investment (e.g. licence income) would not qualify for transitional relief. In addition, the ATO expresses a view that the ‘facility’ must be in existence and complete before rent can be said to be rent from land investment which relates to the ‘facility’;

- describes when the asset is first put to use which is relevant to the start time for the 7 year or 15 year transitional period in some circumstances;

- describes circumstances in which an investment might cease to qualify for concessional treatment under the transitional rules (for example where there is a change in ownership causing a failure of the common ownership test, or where augmentation of an existing facility is so dramatic that a new facility is identified); and

- describes subsequent changes to cross staple arrangements which may or may not give rise to a new arrangement (where the introduction of assets and facilities not part of the existing ‘facility’ which dramatically augment the earlier ‘facility’, or altering the lease from a year on year lease to a long-term lease, may be sufficient to cause a new arrangement – the implication being that the transitional rules would cease to apply). It would appear that the ATO is utilising the cross staple arrangement concept to limit ongoing access to transitional relief, in addition to the concept of what is a new facility. Care must be taken in amending any cross staple arrangements during the transitional period, and any amendments made since 27 March 2018 should be considered.

- The application of the integrity rules comprising the various cross staple rental caps (depending upon whether there is an existing lease) and associated evidence requirements.

- The meaning of MIT residential housing income.

- Whether Australian agricultural land is used, or could be used, for carrying on a primary production business.

The draft LCR does not go into any detail in discussing the ‘approved economic infrastructure exemption’ for new economic infrastructure.








Aldrin De Zilva

Director, Head of Projects & Infrastructure


Julian Pinson



Chris Colley



Ryan Leslie

Senior Associate


Nicholas Rouse

Special Counsel