Edited version of your written advice

Authorisation Number: 1012728354703

Ruling

Subject: Fixed entitlements

Question 1

Does the unit holder of the Trust have a fixed entitlement to all the income and capital of the trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and sections 272-5 and 272-65 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 of the ITAA 1936 to deem the unit holder of the Trust as having a fixed entitlement?

Answer

Yes

This ruling applies for the following periods

1 July 2014 - 30 June 2016

The scheme commences on

1 July 2014

Relevant facts and circumstances

The Trust is a unit trust, the terms of which are set out in a Trust Deed. A copy of the Trust Deed was provided and forms part of the facts of the Ruling.

The trustee of the Trust is a wholly owned entity in a tax consolidated group.

There is one unit holder of the Trust who holds units of Ordinary class. The unit holder is also a wholly owned entity of the group.

The units of the Trust will not be listed for quotation on the official list of an approved stock exchange.

There is no current intention to issue further units in the Trust.

Relevant legislative provisions

Section 272-5 of Schedule 2F of the Income Tax Assessment Act 1936

Section 272-65 of Schedule 2F of the Income Tax Assessment Act 1936

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Reasons for decision

Subsection 995-1(1) of the ITAA 1997 provides that a trust is a fixed trust where entities have fixed entitlements to all of the income and capital of the trust.

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 of the ITAA 1936.

Section 272-5 of Schedule 2F of the ITAA 1936 states:

(1) 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.

(2) 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 by the 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.

(3) If;

(a) a beneficiary with an interest in a share of income that the trust derives from time to time, or of the capital of a trust, does not have a fixed entitlement to the share; and

(b) the Commissioner considers that the beneficiary should be treated as having the 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;

the beneficiary has the fixed entitlement.

The explanatory memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 in relation to the fixed entitlement to income or capital of a trust explains that:

A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest, which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring.

Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until sometime in the future.

A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated.

After examination of the Trust Deed provided, it is considered that some clauses could potentially enable a unit holder's entitlements to be defeased. In light of this, a true fixed entitlement cannot be said to exist.

However, whilst the Trust Deed contains clauses under which a unit holder's interest in a share of income or capital of the Trust may be rendered defeasible, considering the scheme described in the ruling and the submissions from the applicant, there is a reasonable case to treat the unit holder as having fixed entitlements to all of the income and capital, such that the Trust is a fixed trust for the income years ended 30 June 2015 and 2016.

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