Edited version of your written advice

Authorisation Number: 1012963844046

Date of advice: 9 February 2016

Ruling

Subject: Fixed Trust

Question 1

Is Trust one a 'fixed trust' for the purposes of section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) during the test period?

Answer

Yes.

Question 2

Is Trust two a 'fixed trust' for the purposes of section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 during the test period?

Answer

Yes.

Question 3

Is Trust three a 'fixed trust' for the purposes of section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 during the test period?

Answer

Yes.

Question 4

Is Trust four a 'fixed trust' for the purposes of section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 during the test period?

Answer

Yes.

Question 5

Can the non-resident beneficiary disregard a capital gain made from a CGT event happening in respect of their interests in a fixed trust under subsection 855-40(2) of the ITAA 1997?

Answer

Yes.

Question 6

Is the Trustee of a fixed trust liable to pay tax in respect of an amount to the extent that the amount gives rise to a capital gain that is disregarded for a beneficiary under subsection 855-40(2) of the ITAA 1997?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on

1 July 2014

Facts

1. The deceased died on XXXX. The Will of the deceased has been granted probate on XXXX.

2. The Deceased had four relatives at the date of death and all of them are aged over X years.

• A

• B

• C

• D

3. C resides overseas and is a non-resident for taxation purposes.

4. The assets presently held in the Trusts were purchased after 19 September 1985 (post-CGT assets) except for a small portion held in Trust three which are pre-CGT assets.

Trust One

5. Trust one was established on XXXX between Settlor and Joint Trustees. The deceased was the life tenant and the four relatives of the deceased were the remainder beneficiaries. Following the death of the deceased, the trust would vest and the four relatives who attained the age of X years in equal shares as tenants in common.

Trust Two

6. Trust two was established on XXXX between Settlor and Trustee.

7. The deceased was the life tenant.

8. It was provided that following the death of the deceased, the trust fund would be paid to the four relatives in equal shares in line with the 'power of appointment' granted via the Will. The deceased exercised this power of appointment in the Will where they chose to allocate the trust fund to the four relatives equally.

Trust Three

9. Trust three was established on XXXX between Settlor and the trustee to provide for each of the relatives namely: A, B and C.

10. Each child as named above has a separate settlement established. Each settlement provided the deceased as the life tenant. The agreement provided A, B and C as the remainder beneficiaries of their respective settlement.

11. Following the death of the deceased, the trust fund would be paid to the relatives in equal shares where each attained the age of X years.

Trust Four

12. Trust four was established on XXXX between Settlor and the trustee to provide for the relatives.

13. Each relative has a separate settlement established. Each beneficiary's entitlement is the same. The deceased is the life tenant. The relatives are the remainder beneficiaries of their respective Settlement.

14. Following the death of the deceased, the trust fund would be paid to the relatives respectively in equal shares where each attained the age of X years.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Schedule 2F

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

Income Tax Assessment Act 1936 Section 272-65

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Subsection 95A(2)

Income Tax Assessment Act 1997 section 855-40

Income Tax Assessment Act 1997 subsection 855-40(2)

Income Tax Assessment Act 1997 paragraph 855-40(2)(a)

Income Tax Assessment Act 1997 subparagraph 855-40(2)(b)(i)

Income Tax Assessment Act 1997 paragraph 855-40(2)(c)

Income Tax Assessment Act 1997 subparagraph 855-40(2)(c)(i)

Income Tax Assessment Act 1997 subsection 855-40(3)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Fixed trust

15. Section 272-65 of Schedule 2F to the ITAA 1936 provides that a trust is a 'fixed trust' if persons have fixed entitlements to all of the income and capital of the trust. Subsection 995-1(1) of the ITAA 1997 provides that a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust.

16. Subsection 272-5(1) of Schedule 2F to the ITAA 1936 provides that, in relation to the meaning of the term fixed entitlement:

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.

17. It is an essential element of subsection 272-5(1) 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.

18. The fact that a power held by the Trustee has not yet been exercised is not relevant when determining if the power results in an interest being defeasible. The exercise of the power goes to whether an interest has in law been defeased, not to whether it is defeasible, and the real question is whether the power, if exercised would result in a defeasance of some or all of the beneficiary's rights to the income and/or capital of the trust.

19. The meaning of the term 'vested and infeasible' (in the context of the Schedule 2F) has not been judicially considered. However, the term appears in Division 6 in subsection 95A(2) of the ITAA 1936 and in the context of that subsection, the term has been considered by the courts; for example, refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4,525; 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) 91 ATC 5000.

20. 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; and Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

21. The term 'vested and indefeasible' is not defined in the taxation legislation and to date there is no 'ATO view' which defines or clarifies the term. The Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 which introduced the trust loss measures provides the following in relation to the meaning of 'vested and indefeasible' interest:

What is a fixed entitlement to income or capital of a trust?

13.3 A person (the beneficiary) will have a fixed entitlement to either income or capital of a trust (whichever is applicable) where the beneficiary has a vested and indefeasible interest in a share of the income of the trust that the trust derives from time to time (i.e. current and future income), or a share of capital of the trust [subsection 272-5(1)]. The share that the person has an interest in is expressed as a percentage of the total income or capital (whichever is applicable) of the trust.

What is a vested interest?

13.4 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.

13.5 In traditional legal analysis, a person can be said to be either 'vested in possession' or 'vested in interest'. A present interest, i.e. one that is being enjoyed, is said to be 'vested in possession'; a future interest, i.e. one which gives its holder a present right to future enjoyment, is said to be 'vested in interest'. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, 'vested' includes both vested in possession and vested in interest.

13.6 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.

When is a vested interest indefeasible?

13.7 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.

13.8 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.

Vested and indefeasible interests and a deceased estate

22. ATO Interpretative Decision 2006/279 expresses the view that the terms of the Will governing the disposition of the property in the deceased estate confer fixed entitlements to all of the income and capital of the estate upon the residuary beneficiaries. The ATO ID explains that the interest of the residuary beneficiaries in the income and capital of the estate is indefeasible. There is no condition in the trust instrument, the Will, by which any of the residuary beneficiaries could lose their interest in the estate.

23. In relation to vesting, it is considered that for any interest to be 'vested in interest', the following conditions are present (Evans, M Equity & Trusts, Sydney: Butterworths 2003 at 354):

a. The person or persons entitled to the interest must be ascertained;

b. The interest must be ready to take effect in possession immediately upon termination of the prior interest;

c. The gift must not be subject to any contingency; and

d. Where the gift is in favour of a class, every member of the class must be ascertained (that is, identified), and the exact share of each must also be ascertained.

24. With reference to the certainty of their duration, interests are divided into defeasible interests and indefeasible or absolute interests (Fearne, C An Essay on the Learning of Contingent Remainders and Executory Devises, (Colorado: Rothman, 10th ed 1980), Vol. 2, at 30).

A defeasible interest is an interest that is subject to be defeated by the operation of a subsequent or mixed condition;

An indefeasible interest, or an absolute interest as opposed to a defeasible interest, is one that is not subject to any condition.

25. In relation to the term 'defeasance' Fearne provides (at 9):

Defeasances are provisos of the same import and efficacy as proper conditions subsequent, but are contained in a distinct deed, either delivered at the same time with the deed to which the condition relates, or, except in the case of things executory or chattels, delivered after the deed to which the condition relates.

Do vested and indefeasible interests exist in the income and capital?

26. In relation to the income and capital in the present case:

a. The beneficiaries entitled are as follows:

• A

• B

• C

• D

b. The beneficiaries are ready to take possession of their interest in possession after the death of the deceased.

Trust two provides that on the death of the deceased, the trust fund is to be paid to the beneficiaries in equal shares. The deceased exercised the power of appointment in the Will and chose to allocate the trust fund to the beneficiaries in equal shares:

Trust three and Trust four provides that upon the death of the deceased, the trust fund is to be paid to the beneficiaries respectively when each attained the age of X years. Each beneficiairy is over the age of X years when the deceased died. Therefore A, B and C become absolutely entitled to the trust fund of each trust specifically provided for each of them.

Trust one provides that after the death of the deceased the trust vests in the beneficiaries who are all over X years of age in equal shares as tenants in common.

c. No contingencies exist. By the time the deceased died, each of the beneficiaries is aged over X years and all have survived the deceased.

d. Each beneficiary is identified and their exact share in the trust fund is ascertained.

In respect of Trust one and Trust two, each beneficiary would receive equal shares of the trust fund.

In respect of Trust three and Trust four each child would receive 100% of the trust fund of their respective Settlement.

27. In the present case, there are no conditions subsequent in any of the Settlements or any indication that anything external to the Settlements can be, or will be, delivered that will have the effect of a condition subsequent in relation to the capital of the Settlements.

28. In respect of Trust one, the trust vests to the beneficiaries in equal shares as tenants in common following the death. The beneficiaries are over X years of age when the deceased died. As such, the condition that each would have to attain the age of X years is no longer effective.

29. In respect of Trust two, following the death of the deceased the trust fund is to be paid to the beneficiaries in equal shares. The condition that each beneficiary would have to attain the age of X years is no longer effective as the beneficiaries are over X years of age when the deceased died.

30. In respect to Trust three and trust four, following the death of the deceased each beneficiary would receive the trust fund of their respective trust. The condition that each beneficiary would have to attain the age of X years is no longer effective as they are over X years of age when the deceased died.

31. Therefore the remainder beneficiaries have a vested and indefeasible interest in the income and capital of the Settlements.

CGT exemption in section 855-40 of the ITAA 1997

32. Section 855-40 provides a CGT exemption for foreign residents making a capital gain in respect of their interest in a fixed trust (including a managed fund).

33. Relevantly, subsection 855-40(2) provides that a capital gain you make in respect of your interest in a fixed trust is disregarded if:

• you are a foreign resident when you make the gain: paragraph 855-40(2)(a); and

• the gain is attributable to a CGT event happening to a CGT asset of a trust (the CGT event trust) that is the fixed trust: subparagraph 855-40(2)(b)(i); and

• the asset is not taxable Australian property for the CGT event trust at the time of the CGT event: subparagraph 855-40(2)(c )(i).

In the present case, the relevant conditions in subsection 855-40(2) are satisfied in respect of the interests of C (remainder beneficiary) in the trusts. This is because C is a non-resident for taxation purposes when they make the capital gain attributable to the CGT event trust that is a fixed trust; and the interests in the Australian resident trusts fall outside the definition of taxable Australian property in section 855-15 of the ITAA 1997.

Conclusion

34. Given that the interests of the remainder beneficiaries in the income and capital of the Settlements are vested and indefeasible, it is concluded that fixed entitlements exist in accordance with subsection 272-5(1) and the Settlements are fixed trusts in accordance with section 272-65 of Schedule 2F to the ITAA 1936.

35. These decisions are consistent with the ATO view expressed in ATO Interpretative Decision 2006/279.

36. Because the Settlements are considered fixed trusts, C, the non-resident beneficiary can disregard the capital gain made in respect of their interests in the Australian resident trusts under subsection 855-40(2) of the ITAA 1997.

37. Subsection 855-40(3) of the ITAA 1997 provides that a Trustee is not liable to pay tax in respect of an amount to the extent that the amount gives rise to a capital gain that is disregarded for a beneficiary under subsection 855-40(2).

38. As such, to the extent that the amount relates to the capital gain that is disregarded by the non-resident beneficiary under subsection 855-40(2), the Trustee is not liable to pay tax in respect of that amount.

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