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Ruling

Subject: Fixed entitlements - trusts

Question 1

Do the beneficiaries of Fund A have fixed entitlements to all the income and capital of the trust as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No.

Question 2

Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the beneficiaries of the trust as having fixed entitlements?

Answer:

Yes

Question 3

Is the Trust a 'widely held unit trust' under section 272-105 of Schedule 2F of the ITAA 1936?

Answer:

Yes

Question 4

Is the Trust eligible to satisfy the '50% stake test' in Division 269-C Schedule 2F of the ITAA 1936 for the period from the loss time 1 July 2007 until the first year of recoupment in 30 June 2011 by applying section 269-55(2) of the ITAA 1936

Answer:

Decline to rule

This determination applies for the following period:

Financial year ended 30 June 2008

Financial year ended 30 June 2009

Financial year ended 30 June 2010

Financial year ended 30 June 2011

The scheme commenced on:

On or after 1 January18 October 2004

Relevant facts and circumstances

The Fund is an Australian Registered Managed Investment Scheme.

This ruling is based on the Constitution of the Fund and all Supplemental Deeds attached.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 269-55(2)

Income Tax Assessment Act 1936 Section 272-5

Income Tax Assessment Act 1936 Subsection 272-5(1)

Income Tax Assessment Act 1936 Subsection 272-5(2)

Income Tax Assessment Act 1936 Subsection 272-5(3)

Income Tax Assessment Act 1936 Section 272-25

Income Tax Assessment Act 1936 Section 272-105

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

A 'fixed trust' is defined in similar terms in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936. The latter definition provides that:

A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust.

The definition of 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides:

…an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.'

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement in a trust:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

In addition, subsection 272-5(2) of the ITAA 1936 states that:

If:

(a) a person holds units in a unit trust; and

(b) the units are redeemable or further units are able to be issued; and

(c) if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and

(d) if the units are not listed as mentioned in paragraph (c) - the units held bythe person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a unit holder, in the income or capital of the unit trust is defeasible.

The word 'interest' is a word that is capable of many meanings. In the absence of a definition one must infer its meaning from the context in which it is found (see Gartside v Inland Revenue Commissioner [1968] AC 553 at 602-602 and 617-618 Commissioner of Stamp Duties (Queensland) v Livingston (1964) 112 CLR 12 at 28-29; and CPT Custodian Pty Ltd v Commissioner of State Revenue 2005 HCA 53).

There may be circumstances in which the word 'interest' could be interpreted broadly to include any right or advantage that a person might be able to claim with respect to the income or capital of the trust and/or in respect of the trustee, whether present or future, ascertained or potential. In the context of Schedule 2F, however, it is clear that for an interest to be recognised as a fixed interest it must be a right with respect to a share of the income or of the capital of the trust that is susceptible to measurement. To adopt the words of Lord Wilberforce in Gartside v Inland Revenue the right must have 'the necessary quality of definable extent'.

The term 'vested and indefeasible' is not defined in the taxation legislation and to date there is no precedential 'ATO view' which defines or clarifies the term. However the Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 does discuss its ordinary meaning at some length, at paragraphs 13.4 to 13.9.

In Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16 Stone J stated at [97] that in the absence of a definition, and subject to qualification in subsection 272-5(2) of Schedule 2F of the ITAA 1936, the term 'indefeasible' bears its ordinary meaning when applied to an interest, that is that 'the interest cannot be terminated, invalidated or annulled'. The meaning of the term 'vested and indefeasible' (in the context of Schedule 2F to the ITAA 1936) also appears in subsection 95A(2) of the ITAA 1936 and has been considered in that context by the courts - refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 173 CLR 264; 91 ATC 5000.

Also relevant are MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v Commissioner of Stamp Duties (1952) 88 CLR 54; Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest 'under a trust instrument'. In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

The first step in determining whether a beneficiary has a vested and indefeasible interest in a share of the income or capital of a trust is to ascertain the terms of the trust upon which the relevant trust property is held. As the High Court recently stated in CPT Custodians Pty Ltd v Commissioner of State Revenue (Vic); Commissioner of State Revenue (Vic) v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [15], in taking this step:

'…a priori assumptions as to the nature of unit trusts under the general law and principles of equity [will] not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2), upon the terms of the particular trust. The term "unit trust" is the subject of much exegesis by commentators. However, "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which dictate the application to particular facts of the [relevant statutory definition]…'

There will be some circumstances in which a trust instrument must be read subject to the operation of a particular legal rule, whether by common law, statute or statutes. See, for example, the provisions of Chapter 5C of the Corporations Act 2001 which, if inconsistent with the constitution of a registered managed investment scheme, can have the effect of altering or modifying the scheme's constitution. It is possible for a constitution to be altered or modified by operation of law irrespective of whether the trust instrument itself expressly recognises the relevant common law rule or statute, and the entitlements of a beneficiary under the trust instrument are those as so altered or modified by operation of law.

The important question is whether the vested and indefeasible interests represent 100% of the income and 100% of the capital of the trust. The fact that a power held by the trustee or manager has not yet been exercised is not relevant when determining if the power results in an interest being defeasible. The exercise of the power determines if an interest has in law been defeased, not if it is defeasible. The real question is whether the power, if exercised, would result in a defeasance of some or all of the unit holder's rights to the income and/or capital of the trust.

It is considered reasonable to conclude, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, that all unit holders (or beneficiaries) do not have fixed entitlements to all of the income and capital of the Fund.

Question 2

Subsection 272-5(3) of Schedule 2F to the ITAA 1936 contains a discretion whereby, in cases where beneficiaries do not have a fixed entitlement, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed entitlement where it is reasonable to do so based upon the factors prescribed in paragraph 272-5(3)(b) of the ITAA 1936. Paragraph 272-5(3)(b) of the ITAA 1936 stipulates that the Commissioner may treat a beneficiary as having a fixed entitlement (in cases where in fact beneficiaries do not have a fixed entitlement) having regard to:

(i) the circumstances in which the entitlement is capable of not vesting or the defeasance can happen; and

(ii) the likelihood of the entitlement not vesting or the defeasance happening; and

(iii) the nature of the trust.

In the absence of any precedential guidelines, taxpayers seeking access to the Commissioner's discretion will be dealt with according to the relevant facts on a case by case basis. In the case of trusts which are managed investment schemes, it is also appropriate that consideration is given to any potential impacts that the Corporations Act 2001 (as noted above), the regulatory powers of the Australian Securities and Investments Commission (ASIC) and the actions of the Australian Securities Exchange (ASX) may have on the administration of the trust and the entitlements of beneficiaries.

After having regard to the factors in subparagraphs 272-5(3)(b)(i), (ii) and (iii) and the submissions of the Applicant, it is considered that the facts of the current case do warrant the exercising of the Commissioner's discretion to deem fixed entitlements.

Question 3

To be a widely held unit trust section 272-105 of the ITAA 1936 requires that the Fund must be a:

· unit trust

· fixed trust

· trust which is not closely held

It is accepted that the Fund is a widely held unit trust.

Question 4

Under certain circumstances the Commissioner may decline to make a private ruling. In your case, he will decline to rule for the following reasons.

Subsection 357-110(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) states that:

If the Commissioner considers that the correctness of a private ruling or an oral ruling would depend on which assumptions were made about a future event or other matter, the Commissioner may:

(a) decline to make the ruling; or

(b) make such of the assumptions as the Commissioner considers to be most appropriate.

It is quite clear that while subsection 357-110(1) of Schedule 1 to the TAA gives the Commissioner a power to make assumptions, the Commissioner is not obliged to make these assumptions. If the Commissioner considers that the correctness of a private ruling would rely on assumptions he must make about a future event or other matter, he may decline to make the ruling.

It is not possible for the Commissioner to determine if it is reasonable to make that assumption based on the information supplied. Accordingly the Commissioner declines to make a private ruling, in accordance with paragraph 357-110(1)(a) of Schedule 1 to the TAA.

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