Edited version of your written advice

Authorisation Number: 1013078836684

Date of advice: 26 August 2016

Ruling

Subject: Fixed Trust and capital gains tax - trust resettlement

Question 1:

Will the proposed Deed of Amendment to the Trust terminate the Trust or create a new trust for income tax purposes and result in a capital gains tax event occurring for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 2:

Will the unitholders of the Trust be taken to have a capital gains tax event happen in respect of the units held by them in the Trust for the purposes of Part 3-1 of the ITAA 1997 as a result of the adoption of the proposed Deed of Amendment to the Trust?

Answer:

No

Question 3:

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

Answer:

No

Question 4:

Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the beneficiaries of the Trust as having fixed entitlements to all of the income and capital of Trust?

Answer:

Yes

Questions 5:

Will the beneficiaries of the Trust have a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the ITAA 1936?

Answer:

No

Question 6:

Will the Commissioner exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the beneficiaries of the Trust as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding?

Answer:

Yes

This ruling applies for the following periods:

Year ended 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Trust was established by Deed a number of years ago between Entity A (the Trustee) and entity B (the Initial Unitholder).

The Trust had initial units of XX A class units and XX B class units at $X each which constitute the initial sum of $X.

Currently, the Trust has a total of XXX,XXX units on issue comprising of:

• XXX,XXX A class units; and

• XX,XXX B class units

The trust has provided a copy of the trust deed.

Based on the terms of the Deed, the A class unitholders have certain additional voting rights which are not afforded to the B class unitholders.

The Trustee may repurchase or redeem Units at a price calculated in accordance with Clause XX.X of the Deed.

The terms of the Trust, as were originally created, no longer suits the current function of the Trust. Over time the Trust's marketing activity has ceased. It's been replaced by a passive investment in a public company which operates a business. As such the Trust acts as an investment entity for third party investors. The Trustee therefore is of the view that the terms of the Trusts have to be changed.

Proposed Amendments

The purpose of the proposed amendments is to fix entitlements to income and capital such that it continues as a more suitable entity in which to hold an investment for a collection of third party unitholders.

The Trustee has power to amend the deed.

The Trustee proposes certain amendments to the Deed as contained in the Draft Deed of Amendments which was provided by the trustee.

• Clause X.X is to be deleted so the Trustee can no longer issue further units and determine the issue price of the units to be issued;

• In relation to the Income of the Trust Fund and Distribution, Clauses XX.X to XX.X are to be deleted and the following inserted:

• XX.X The Trustee shall in each account period until the termination of this Trust pay, apply or set aside the net income of the Trust Fund of that accounting period determined by the Trustee to be distributed amongst the unitholders in proportion to the number of Units held by them as at the close of the final day of the accounting period.

• 13.4 Not applicable.

• 13.5 Not applicable.

• 13.6 Not applicable.

• Clauses XX. XX and XX.XX are to be deleted. Clause XX.XX refers to the Trustee's discretion to determine amount to be set aside to 'contingency reserve account'. Clause XX.XX refers to the Trustee's ability to deal with cases where the trust income for 'tax law' purposes is more than the trust income for 'trust law' purposes.

Other amendments proposed relate to administrative changes to bring the Deed into line with current legislation and commercial practices. This is to improve the procedural requirements and administration of the Trust.

The effect of the amendments is that the Trustee can no longer issue further units and determine the issue price of the units to be issued, it no longer has discretion to determine the allocation of trust income and to retain any income and the Trustee is directed to distribute income to unitholders based on their unit holding; however the Trustee will still have to determine the net income of the Trust under the proposed new Clause XX.XX.

The A Class and the B Class units are to remain as separate classes of units under the Draft Deed of Amendment.

The Amendments to the Trust Deed

The purpose of the amendments contained in the Deed of Variation was to:

n enable earnings to be retained within an entity as a B class shareholder; and

n allow the Trust to distribute profits to a corporate unitholder(which all unitholders also owned) so that instead of having to distribute profits and cash, they could retain the cash in order to purchase the additional quota.

At the time the Trustee considered purchasing a quota which is a system that quantifies the amount that stock. By owning a quota they would have more certainty on product supply.

Other relevant information

There will be no further amendments to the terms of the Trust other than those proposed in the Draft Deed of Amendment.

There are two classes of Units on issue since the establishment of the Trust (A class units and B class units. It is not proposed to issue Units of other different classes prior to XXXX.

There has not been redemption of units since the Trust was established.

There is no intention to redeem units.

The proposed amendment is intended to remove any discretion by the Trustee relating to the distribution of trust income to the A class and B class Unitholders.

The Trustee has no discretion as to the distribution of capital under the current terms of the Deed.

It is not possible to stream income or capital to different Unitholders under the Trust Deed. The Trustee does not have any power under the Deed to classify different classes of income or capital, or to stream different classes of income or capital to different unitholders.

The Trust receives franked dividend income from its shareholding in the company.

The Trust wishes to distribute the franked dividends to the Unitholders.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F

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

Income Tax Assessment Act 1936 Subsection 272-5(3) of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 272-5(3)(a) of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 272-5(3)(b) of Schedule 2F

Income Tax Assessment Act 1936 Subparagraph 272-5(3)(b)(i) of Schedule 2F

Income Tax Assessment Act 1936 Subparagraph 272-5(3)(b)(ii) of Schedule 2F

Income Tax Assessment Act 1936 Subparagraph 272-5(3)(b)(iii) of Schedule 2F

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

Income Tax Assessment Act 1936 Section 160APA

Income Tax Assessment Act 1936 Section 160APHD

Income Tax Assessment Act 1936 Section 160APHL

Income Tax Assessment Act 1936 Subsection 160APHL(7)

Income Tax Assessment Act 1936 Subsection 160APHL(10)

Income Tax Assessment Act 1936 Subsection 160APHL(11)

Income Tax Assessment Act 1936 Subsection 160APHL(14)

Income Tax Assessment Act 1936 Paragraph 160APHL(14)(a)

Income Tax Assessment Act 1936 Paragraph 160APHL(14)(b)
Income Tax Assessment Act 1936 Paragraph 160APHL(14)(c)

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 207-145

Income Tax Assessment Act 1997 Paragraph 207-145(1)(a)

Income Tax Assessment Act 1997 Section 207-150

Income Tax Assessment Act 1997 Paragraph 207-150(1)(a)

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

Capital gains tax (CGT) Trust resettlement

Taxation Determination TD 2012/21 expresses the view that neither CGT event E1 nor CGT event E2 will happen if the terms of a trust are changed pursuant to a valid exercise of the trustee's powers under the deed or varied with the approval of a court unless:

• the amendment causes the trust to terminate and a new trust to arise for trust law purposes, or

• the effect of the amendments is to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset has been settled on terms of a different trust.

TD 2012/21 explains (at paragraph 24):

… the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.

Where an asset is instead transferred to an existing trust, CGT event E2 will be the relevant event - subsection 104-60(1).

TD 2012/21 explains (at paragraphs 26 and 27):

26. Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective.

27. Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.

In your case, Clause XX of Trust Deed provides the Trustee's power to amend the Trust where it states:

23.1 Subject to any approval required by law the Trustee may make by Deed supplemental to this Deed any alteration, modification, addition or cancellation to this Deed (including this Clause) or any Deed supplemental hereto if such alteration, modification, addition or cancellation - …

23.1.6 as approved by a Special Resolution of Unitholders.

The Proposed Deed of Amendment provides:

• The Trustee has determined that the terms and conditions of the Deed ought to be amended to enable it to more effectively carry out the business of the Trust.

• The Trustee has determined that the proposed amendments of the Deed do not prejudicially affect the rights of any holders of units in the Trust or any income previously set aside for them or held for their benefit.

• The proposed amendments would have to be approved by special resolution of the holders of the 'A' and "B" class units of the Trust.

The effect of the proposed amendments will be that the Trustee's discretionary powers are reduced such that:

• The Trustee can no longer issue further units for sale at a price determined by the Trustee;

• The Trustee no longer has discretion in the allocation of trust income and to retain any trust income; and

• The Trustee is directed to distribute income to unitholders based on their unit holding.

Following a review of the proposed amendments to the Deed, it is considered that the amendments are within the powers of the Trustee under Clause XX of the Trust Deed.

Therefore, the continuity of the Trust is maintained for trust law purposes because the proposed amendments are, in effect, within the Trustee's powers contained in the trust instrument. As such the proposed amendments to the terms of the Trust will not trigger the happening of CGT event E1 or CGT event E2 in section 104-55 or section 104-60 of the ITAA 1997 in accordance with
TD 2012/21.

Accordingly, the unit holders will not be taken to have a CGT event in respect of their unit holding in the Trust for the purposes of Part 3-1 of the ITAA 1997 as a result of the adoption of the proposed Deed of Amendment.

Question 3

Fixed Trust

Generally

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

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.

The definition of 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that '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 of Schedule 2F to the ITAA 1936.'

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

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 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.

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 for example Gartside v Inland Revenue Commissioner [1968] AC 553 at 602-603 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 (Vic) (2005) 224 CLR 98).

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 to the ITAA 1936, 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 Commissioners, the right must have 'the necessary quality of definable extent'.

The term 'vested and indefeasible' is also not defined in the taxation legislation and to date there is no 'ATO view' which defines or clarifies the term. 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.

The meaning of the term 'vested and indefeasible' (in the context of Schedule 2F to the ITAA 1936) has not been judicially considered, other than a discussion in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 in the limited context of amending the constitution of a registered managed investment scheme under section 601GC of the Corporations Act 2001.

However, the term 'vested and indefeasible' does appear 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 Federal Commissioner of Taxation (1991) 173 CLR 264; 91 ATC 5000. Further 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.

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'. As such, 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 assumption 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 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.

Specifically

Vested interests

For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument consists of the Trust Deed and a Deed of Variation.

It is accepted that the Deed provides beneficiaries with a vested interest in the income and capital of the Trust in respect of income and capital.

Defeasible power in the Trust Deed

Under subsection 272-5(1) of Schedule 2F to the ITAA 1936 a person will be taken to have a fixed entitlement to a share of the income or capital of a trust if they have a vested and indefeasible interest under the trust instrument.

For the purposes of the 'vested and indefeasible' definition in subsection 272-5(1) of Schedule 2F to the ITAA 1936, 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 is relevant in determining whether an interest has in law been defeased, not to whether the interest is defeasible. The key question is whether the power, if exercised, would result in a defeasance of some or all of a beneficiary's rights to the income and/or capital of the trust.

The Trust Deed contains certain clauses by which a Unit Holder's interest in a share of the income or capital of the trust may be defeased.

Therefore, it is concluded that for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936 the beneficiaries (Unit Holders) of the Trust do not have fixed entitlements to all of the income and capital of the Trust.

Question 4

Commissioner's discretion

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 Tax Act, treat such beneficiaries as having a fixed entitlement, having regard to the factors prescribed in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936.

These factors are:

(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 view of the conclusion above that the beneficiaries (Unit Holders) of the Trust do not have a vested and indefeasible interest in the income and capital of the Trust, and hence do not have a fixed entitlement pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, the only way that the beneficiaries can have a fixed entitlement is if the Commissioner exercises the discretion in subsection 272-5(3).

The interpretation of section 272-5 of Schedule 2F to the ITAA 1936 (the meaning of vested and indefeasible) was raised at the March 2006 meeting of the NTLG, then referred to the Trust Consultation Sub-group for discussion at their meeting on 28 November 2006, where the ATO advised that:

In applying the discretion, the ATO would have regard to what the Office understands was the policy that underlay the provisions at the time they were enacted. The Commissioner would also have to apply the statutory tests having regard to the terms of the particular trust deeds and all the surrounding circumstances.

(see Minutes of NTLG meeting - 7 December 2006)

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 registered managed investment schemes, it is also appropriate that consideration is given to any potential impacts that the Corporations Act (as noted above), the regulatory powers of the Australian Securities and Investments Commission (ASIC), and the actions of the Australian Stock Exchange may have on the administration of the trust and the entitlements of beneficiaries.

Considering the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936

The beneficiaries (Unit Holders) of the Trust have a vested interest in the income and capital of the Trust under the Trust Deed as noted above. As such the condition in paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 is satisfied.

Further having regard to the requirements of paragraph 272-5(3)(b) and subparagraphs 272-5(3)(b)(i), (ii) and (iii) of Schedule 2F to the ITAA 1936 and the information provided, the Commissioner considers it reasonable to exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the interests of the beneficiaries (Unitholders) in the income and capital of the Trust as being fixed entitlements.

Question 5

Qualified Person

A taxpayer must be a 'qualified person' to be entitled to a franking credit in respect of a dividend. Broadly, to be a qualified person in relation to a dividend, a taxpayer must satisfy the holding period rule and the related payments rule as set out in Division 1A of former Part IIIAA of the ITAA 1936. Despite the repeal of Division 1A of the ITAA 1936, the repealed provisions have ongoing application as they were imported into the ITAA 1997 via the express terms of sections 207-145 and 207-150 of the ITAA 1997.

Taxation Determination TD 2007/11 expresses the view that it is necessary to have regard to the rules in Division 1A of former Part IIIAA of the ITAA 1936, as in force at 30 June 2002, in determining whether an entity is a qualified person for the purposes of paragraphs 207-145(1)(a) and 207-150(1)(a) of the ITAA 1997 in respect of a franked distribution made directly or indirectly to the entity after 30 June 2002.

In the case of a trust distribution consisting wholly or partly of dividend income, generally the trustee must be a qualified person and the beneficiary must be at risk for a prescribed period during the qualification period in respect of the taxpayer's interest in the membership interest from which the dividend income is derived (former section 160APHL of the ITAA 1936).

The effect of deemed long and short positions under former subsections 160APHL(7) and (10) relating to shares held is that a beneficiary in a non-widely held trust will typically have a net position of zero effectively making the beneficiary insufficiently at risk such that the franking credits will not pass through the trust ( refer to ATO ID 2002/122).

That would be the case unless the beneficiary has a fixed interest constituted by a vested and indefeasible interest in the capital of the trust or an exception applies as set out in former subsection 160APHL(10) of the ITAA 1936 (refer to ATO ID 2005/172).

Practice Statement PS LA 2002/11: 'Issues concerning fixed entitlements to a share of the income or capital of a trust' has application to former sections 160APA and 160APHD of the ITAA 1936 but not directly to former section 160APHL of the ITAA 1936 (it has only indirect application via the definition of 'widely held trust' which, in part, relies upon the definition of 'fixed trust' in Schedule 2F to the ITAA 1936).

For the purposes of former section 160APHL of the ITAA 1936 the Trust is in the category of 'all other non-widely held trusts' apart from family trusts, deceased estates and employee share scheme trusts.

A 'fixed interest' in the trust holding is defined in former subsection 160APHL(11) of the ITAA 1936 as a 'vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.'

It is noted the terms 'corpus' and 'capital' are considered to be synonymous for the purposes of this advice.

Is there an 'interest in so much of the corpus of the trust as is comprised by the trust holding'?

Former section 160APHL of the ITAA 1936 provides that in calculating the extent of a beneficiary's interest, it is necessary to distinguish between the interest of a beneficiary in shares held by a widely-held trust and the interest of a beneficiary in shares held by other trusts.

In this case, the Trust is not a 'widely held trust' for the purposes of former section 160APHD of the ITAA 1936.

This necessitates that a 'look through' approach is required to determine the interest that a beneficiary has in each of the underlying shares in the Trust (paragraphs 4.26, 4.77 and 4.88 of the Explanatory Memorandum which accompanied the Taxation Laws Amendment Bill (No. 2) 1999).

Although the method of calculating the interest that a beneficiary has in the trust holding differs as between widely-held trusts and trusts other than widely-held trusts, the beneficiaries of both types of trusts do have an interest in the trust holding.

No vested and indefeasible interest

It has already been determined, in relation to Question 1, that the beneficiaries of the Trust do have a vested interest in a share of the capital of the Trust but not an indefeasible interest in a share of the capital of the trust.

Therefore, it follows that the beneficiaries of the Trust do not have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding.

Question 6

Commissioner's discretion

In view of the conclusion above that the beneficiaries of the Trust do not have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding (being the Trustee's ownership of shares) pursuant to former subsection 160APHL(11) of the ITAA 1936, the only way that the beneficiaries can have such a vested and indefeasible interest is if the Commissioner exercises the discretion in former subsection 160APHL(14) of the ITAA 1936 where in the Commissioner may determine that the interest is to be treated as 'vested and indefeasible'.

The requirements to be satisfied in respect of the discretion are contained in former paragraphs 160APHL(14)(a), (b) and (c) of the ITAA 1936.

In terms of former paragraph 160APHL(14)(a) of the ITAA 1936

The taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding:

As discussed above, the beneficiaries in the Trust will have an interest in so much of the corpus of the trust as is comprised by the trust holding.

In terms of former paragraph 160APHL(14)(b) of the ITAA 1936

Apart from this subsection, the interest would not be a vested or indefeasible interest:

As discussed above, although a beneficiary's interest in the capital of the Trust is vested, the Trust Deed contains certain clauses by which a beneficiary's interest in a share of the capital of the Trust may be defeased.

In terms of former paragraph 160APHL(14)(c) of the ITAA 1936

Having regard to the factors prescribed in former paragraph 160APHL(14)(c):

These factors are:

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

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

(iii) the nature of the trust; and

(iv) any other matter the Commissioner thinks relevant.

It has been determined, in relation to Question 4, that the Commissioner would exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the beneficiaries of the Trust would be treated as having a fixed entitlement to (being a vested and indefeasible interest in) all of the capital of the Trust.

The factors in former paragraph 160APHL(14)(c) are identical, mutatis mutandis, to the factors in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, except for an additional factor in subparagraph (iv) of that provision.

The saving rule in former subsection 160APHL(13) of the ITAA 1936 is identical, mutatis mutandis, to the saving rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936.

Therefore, for the reasoning given in relation to Question 4, the Commissioner will exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the beneficiaries of the Trust as having a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding (being the Trustee's ownership of shares).

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