Practical Compliance Guidelines

PCG 2016/D16

Fixed trusts

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What this draft Guideline is about

1. This draft Guideline outlines the factors that the Commissioner will consider when deciding whether to exercise the discretion^[1] to treat an entitlement as being a fixed entitlement, which results in a trust being treated as a fixed trust under the trust loss provisions.^[2] The Commissioner must determine whether to exercise this discretion on a case-by-case basis. This draft Guideline provides taxpayers with greater certainty about when the Commissioner will exercise this discretion.

2. Attachment A to this draft Guideline provides a list of provisions affected by the meaning of 'fixed entitlement' in section 272-5.

3. This draft Guideline does not apply for the purposes of the 'non-arm's length income' rules in section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) or the 'special income' rules in the former section 273 of the ITAA 1936. The Commissioner's view of the concept of fixed entitlement in those circumstances is set out in Taxation Ruling TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income.

Date of effect

4. When finalised, this draft Guideline will apply both before and after date of issue.

Fixed entitlements

5. The concept of a 'fixed entitlement' is central to the trust loss provisions. It is used to determine whether a trust is a fixed trust, whether a trust has maintained ownership and control, and for tracing direct and indirect entitlements. In particular, a trust will be a fixed trust if the beneficiaries hold fixed entitlements to all of the income and capital of the trust.^[3]

6. For a beneficiary's interest in a trust to constitute a fixed entitlement to income or capital of the trust, the beneficiary's interest must be vested and indefeasible.^[4]

7. For an interest to be fixed, it must be capable of measurement. Therefore, the mere object of a discretionary trust would not have an interest that the Commissioner would be capable of considering to be a fixed entitlement.^[5]

8. An interest will generally be indefeasible if it cannot be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events.

9. Powers in modern trust instruments which commonly cause a beneficiary's interests to be defeasible may include:

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Powers to amend the trust instrument - the Federal Court has held that a power of the trustee or manager to amend the constitution of the trust results in the beneficiaries' interests being defeasible and, consequently, the trust being a non-fixed trust.^[6]

•

Powers to issue or redeem units - however, the tax law specifically ignores the ability to issue new units or redeem units for an appropriate value, being^[7]:

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(where the units are listed for quotation of an approved stock exchange) - the same price as other units are offered on that exchange at the time of issue, or

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(where the units are not so listed) - a price determined on the basis of the net asset value of the unit trust at the time of issue.

•

Powers to issue units of different classes or a power to reclassify units.

•

Powers to stream income or capital (especially by having a power to issue units of different classes and a power for the trustee to classify receipts as being on income or capital account).

10. In practice, it may be difficult for many trusts to satisfy the definition of 'fixed trust', unless the Commissioner exercises his discretion to treat the beneficiaries' interests as being vested and indefeasible.

11. This draft Guideline provides taxpayers with greater certainty about when the Commissioner will exercise this discretion.

Discretion to treat interest as fixed entitlement

12. In deciding whether or not to exercise this discretion, the Commissioner must consider^[8]:

•

the circumstances in which the interest is capable of not vesting or being defeated

•

the likelihood of the interest not vesting or being defeated, and

•

the nature of the trust.

13. The Commissioner will also consider any other relevant factors.

Circumstances in which the interest is capable of not vesting or being defeated

14. When examining the circumstances in which a beneficiary's interest is capable of not vesting or being defeated, the Commissioner will have regard to any factor that may affect the defeasance of any beneficiary's interest, including:

•

the number of circumstances of potential defeasance

•

the significance of those circumstances, and

•

whether any preconditions or caveats affect those circumstances such that defeasance is unlikely.

15. This includes having regard to:

•

any person who is capable of altering the beneficiary's interest

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the nature of their relationship to the beneficiary, and

•

any limitation on their capability to so alter that interest.

The likelihood of the entitlement not vesting or the defeasance happening

16. When considering the likelihood of the interest not vesting or being defeated, the Commissioner must form a view as to the probability that the contingency or defeasance will happen. Where the likelihood of the contingency or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion.

17. Where the trustee or trust manager has a particular power to defeat a beneficiary's interest, it is relevant to consider how often, if at all, they have exercised that power over a relevant period.

The nature of the trust

18. The nature of the trust refers to its basic legal characteristics and its economic function, both actual and intended. The ability of a trustee or manager of the trust to adversely affect the interests of beneficiaries could be limited where:

•

fiduciary responsibilities are placed on the trustee via legislation, most commonly as a registered managed investment scheme (MIS) in Chapter 5C of the Corporations Act 2001

•

contractual restrictions limit the trust manager's access to trust assets

•

the trust is subject to industry regulations, licensing or registration requirements, which are legally enforceable, such as the Australian Securities Exchange (ASX) Listing Rules which are enforceable against listed entities and their associates^[9]

•

commitments are made in Product Disclosure Statements to exercise powers in a particular (restrictive and/or non-adverse) way, or

•

the trust deed restricts the ability of the trustee to issue and redeem units at anything other than market value or other values approximating net asset value.

Other factors

19. The Commissioner will also consider other relevant factors including the purpose for which the discretion is being considered. For example, having regard to the subject matter, scope and purpose of the trust loss rules, it is relevant for the Commissioner to consider whether the exercise of the discretion would allow a person to obtain a tax benefit from a trust claiming a deduction for a tax loss or debt deduction when the person did not bear the economic loss incurred by the trust.

Summary table

20. The following table contains examples of how the Commissioner is likely to consider relevant circumstances in determining whether to treat a trust as a fixed trust under subsection 272-5(3). These circumstances are not considered in isolation but, rather, in the context of the facts and circumstances of each case.

Attachment A

Commissioner of Taxation
26 October 2016

Your comments

21. You are invited to comment on this draft Practical Compliance Guideline including the proposed date of effect. Please forward your comments to the contact officer by the due date.

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

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Business Line:  PGH

Related Rulings/Determinations:
TR 2006/7

Legislative References:
ITAA 1936
ITAA 1936 273
ITAA 1936 Sch2F
ITAA 1936 272-5
ITAA 1936 272-5(2)
ITAA 1936 272-5(3)
ITAA 1936 272-65
ITAA 1997
ITAA 1997 276-10
ITAA 1997 276-55(a)
ITAA 1997 295-550
Corporations Act 2001
Corporations Act 2001 Chapter 5C
Corporations Act 2001 601FC
Corporations Act 2001 601GC
Corporations Act 2001 793C
Corporations Act 2001 1101B

Case References:
Colonial First State Investments Ltd v. Commissioner of Taxation
[2011] FCA 16
(2011) 192 FCR 298
2011 ATC 20-235
(2011) 81 ATR 772

Gartside v. Inland Revenue Commissioners
[1968] AC 553
[1968] 1 All ER 121
[1968] 2 WLR 277
[1967] TR 309