Edited version of your written advice

Date of Advice

Ruling

Subject: Status of a Liechtenstein Foundation

Question 1:

Is the X Foundation, a Liechtenstein foundation, a trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

Yes

Question 2:

If the answer to Question 1 is in the affirmative, is the X Foundation a resident trust estate pursuant to Subsection 95(2) of the ITAA 1936?

Answer:

Yes. The X Foundation is a resident trust estate pursuant to paragraph 95(2)(b) of the ITAA 1936.

Question 3:

If the answer to Question 1 and Question 2 is in the affirmative, can the trustee of the X Foundation make a family trust election under subdivision 272-D of Schedule 2F of the ITAA 1936?

Answer:

Yes.

Relevant facts:

The X Foundation

The X Foundation is a Liechtenstein foundation known as a Stiftung.

The X Foundation was established under the Liechtenstein Foundation Law contained in Articles 552-570 of the Personen-Und Gesellschaftsrecht, i.e., the Liechtenstein Persons and Companies Act of 20 January 1926.

The X Foundation was established on the instructions of Mr Y, an Australian resident for income tax purposes. The initial capital for the establishment of the foundation was provided by Mr Y.

The document establishing and governing the X Foundation ('declaration of establishment') is executed by two board members of the X Foundation Board appointed by a trustee company based in Liechtenstein ('the trustee company').

The trustee company acting as Founder of the X Foundation is a regulated financial intermediary located in the Principality of Liechtenstein.

The website of the trustee company provides that the entity is an international trust company employing professionals experienced in international trust management and company law. The trustee company's services are stated to include advice and support in relation to the establishment of trusts, private and non-profit foundations and companies in Liechtenstein and abroad. They also take on for their clients, administration and management of companies, trusts and foundations which they represent before authorities in Liechtenstein and abroad.

The translated version of the declaration of establishment provides as follows:

The X Foundation

Pursuant to Article 552 et seq. of the Liechtenstein Person and Company Law a foundation bearing the name X Foundation is established as a separate legal entity for an indefinite period

The Foundation is domiciled in Vaduz and all legal relationships arising from the Foundation's establishment and existence are subject to the laws applicable at the domicile of the Foundation

The Foundation was formed for the purpose of investing, managing and distributing the Foundation's assets for the benefit of one or more beneficiaries at the free discretion of the foundation board

The Foundation may be dissolved by unanimous decision of the foundation board for reasons including the fulfilment of the Foundation's' purpose or inability of fulfilling that purpose

The Foundation Board

The board members of the X Foundation are employees of the trustee company. The responsibilities of the foundation board include:

Managing the foundation's business and representing it without limitations towards third parties, including judicial authorities, from within and outside the country

Delegate management or representation of the Foundation to a third party or a member

Convening a meeting at least once a year at a place specified by the board.

Beneficiaries

At the time of the X Foundation's establishment and thereafter, the foundation board determines the beneficiaries and may allot certain amounts for distributions or as long term provisions for charitable purposes. The foundation board may distribute foundation assets in their entirety or in parts, including capitals gains and profits, at any time and at its free discretion to one or more beneficiaries

The trustee company, as the acting Founder and the foundation board are expressly excluded from receiving any distributions from the Foundation, except for any compensation for professional services to the Foundation

The distribution to one or more designated beneficiaries as well as the timing and the extent of such distribution is left to the discretion of the foundation board

The X Foundation's activities consist solely of buying and selling of investment products.

Founder of the X Foundation

The by-laws of the X Foundation (By-Laws) were passed for implementation through a resolution by the trustee company acting as Founder of the Foundation. The By-Laws are stated to be made pursuant to the declaration establishment.

In essence, the By-Laws provide as follows:

The underlying purpose of the foundation is to invest, manage, administer and distribute the foundation assets for the support and/or benefit of all or any one or more of the beneficiaries of the foundation in such share or shares, upon such conditions and at such times as the foundation board may in its absolute discretion think fit.

The Beneficiaries

The foundation board shall from the date of passing of the By-Laws have the right to allocate beneficial rights to any one or more of the following class of beneficiaries and shall allow for certain amounts to be paid or permanently set aside for charitable purposes.

The appointed beneficiaries are:

Mr Y

The wife of Mr Y

Mr Y's children

Any children of Mr Y's children

Any one of more recognised charitable organisations in any country of the world having as the prime objective the welfare, health, education and improvement of mankind

Mr Y, his wife, and children are residents for Australian income tax purposes.

The foundation board is given full and absolute power and discretion to allocate beneficial rights at any time during the lifetime of the Foundation to any one or more of the class of beneficiaries to the exclusion of the others.

The members of the foundation board and the Founder are excluded from being designated as a beneficiary of the Foundation.

The foundation board is entitled to dissolve the Foundation when its objectives have been achieved or can no longer be achieved.

Letter of Wishes

In addition to the By-Laws, other documents relating to the X Foundation include a copy of a 'Letter of Wishes' prepared by Mr. Y and addressed to the foundation board from time to time.

The letter conveys Mr Y's wishes as to the preferred destination and application of the income and assets of the X Foundation without any intention of modifying in any way the responsibilities and discretions conferred on the foundation board by declaration of establishment and the

By-Laws of the X Foundation.

Although the wishes are not legally binding, the foundation board has always carried out the wishes of Mr Y. Further,

Since its establishment, the foundation board members of the X Foundation have always dealt with investments and entered into transactions for the foundation under the direction or instruction of Mr. Y

The foundation board members of the X Foundation will - within the scope of national laws and professional duties - continue to act upon and comply with Mr Y's directions and instructions in the future with regard to the Foundation's investment transactions; and

According to information held by the board members, Mr Y is the true 'founder' of the X Foundation.

Mr Y is the specified individual for the purposes of subsection 272-80(3) of Schedule F.

Below is a graphical representation of the participants of the X Foundation:

Relevant Legislative Provisions:

Article 552 §§ 1-41 of the Persons and Companies Act Liechtenstein Law Gazette 2008

Division 6 of Part III of the ITAA 1936

Subsection 95(2) of the ITAA 1936?

Subdivision 272-D of Schedule 2F of the ITAA 1936

Section 7(2) of the Foreign Corporations (Application of Laws) Act 1989

Reasons for decision:

Liechtenstein Foundation (Stiftung) Law

Liechtenstein Foundation Law as contained in the Liechtenstein Persons and Companies Act of 20 January 1926 was comprehensively revised by the Law of 26 June 2008 on the Amendment of the Persons and Companies Act ('the PGR'), Liechtenstein Law Gazette 2008 Volume No. 220.

The New Liechtenstein Foundation Law now contained in Article 552, §§ 1-41 of the PGR, came into force on 1 April 2009.

The foundation within the meaning of §1 of Article 552 is:

'a legally and economically independent special-purpose fund which is formed as a legal entity (juristic person) through the unilateral declaration of will of the 'founder'. The founder allocates the specifically designated foundation assets and stipulates the purpose of the foundation, entirely non-serving and specifically designated, and also stipulates the beneficiaries'.

Pursuant to §2, foundation purposes include private-benefit purpose foundations which in turn include mixed family foundations. Mixed family foundations predominantly serve to support family interests but supplementally also serve common-benefits such as charitable purposes.

The participants in the foundation are defined in §3 as the founder, the various classes of 'beneficiaries' and the executive bodies of the foundation, e.g., the foundation council or foundation board.

§4 defines the 'founder' to be one or more natural persons or legal entities. Paragraph 3 of §4 provides that if the foundation is formed by an indirect representative, the principal (authoriser) shall be deemed to be the founder.

Paragraph 1 of §5 provides that a beneficiary is deemed to be a natural person or legal entity that derives or may derive an economic benefit from the foundation (beneficial interest).

Beneficiaries within the meaning of paragraph 1 are:

The entitled beneficiaries

The prospective beneficiaries

The discretionary beneficiaries; and

The ultimate beneficiaries

For the purposes of §7 a 'discretionary beneficiary' is a beneficiary who belongs to the category of beneficiaries specified by the founder and whose possible beneficial interest is placed within the discretion of the foundation council.

'Foundation assets' is defined in §13 as assets contributed to the foundation by the founder up to a minimum of 30,000 Swiss francs and any additional contributions made to the foundation as a subsequent endowment.

Pursuant to §14, the declaration of establishment (foundation deed) should be in written form and bear the signatures of the founders. In the case of indirect representation pursuant to para 3 of §4, the foundation deed shall be signed by the representative.

§16 requires that the Foundation Deed includes:

The name and domicile of the foundation;

The dedication of assets to at least the statutory minimum capital;

The purpose and date of formation of the foundation and its duration;

The nature of powers of the foundation council, and in the case of indirect representation (§4), the name and domicile of the corporate representative; and

A reference to any supplementary foundation deed regulating this deed.

§17 provides for the drawing up of a Supplementary Foundation Deed (By-Laws) by the founder to include integral parts of the declaration of establishment which do not have to be recorded in the foundation deed.

The Foundation Council (foundation board) manages the business of the foundation and represents it. It is responsible for the fulfilment of the purpose of the foundation (§24).

In summary, a Liechtenstein foundation exists to give effect to the stated, non-commercial wishes of its Founder, as set out in a Foundation Deed (the Statutes). The Founder transfers assets to the foundation in the interest of specific beneficiaries. The assets become legally independent from the Founder so that the foundation is endowed with those assets to form a separate legal personality.

The foundation is normally administered by the foundation board which amounts to a board of trustees, in accordance with the declared wishes of its founder.

A foundation may be a family foundation established to provide benefits to members of a designated family, or a charitable or religious foundation.

Nature of the foundation

The Liechtenstein foundation is similar to a corporation in that it can enter into contracts, sue, be sued and hold bank accounts, in its own name. However, unlike the corporation, the foundation itself has no members or shareholders. Similarly, the founder has no ownership rights to the independent assets. The foundation has beneficiaries but they are not owners of the foundation.

The foundation above all constitutes a relationship of trust between persons. In practice, the founder authorises the foundation board to administer his personal assets, or a part thereof, in the interest of one or more beneficiaries.

Question 1

Is the X Foundation a 'trust estate' under Division 6 of Part III of the ITAA 1936?

Division 6 of Part III of the ITAA 1936 provides for the income tax treatment of the net income of trust estates. 'Trust estate' is not defined in the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997) as no definition of a trust seems to have been accepted as comprehensive and exact. French J in Harmer and Ors v Federal Commissioner of Taxation (1989) 20 ATR 1461; 89 ATC 5180 (Harmer Case) stated that a trust is notably 'a definition of a relationship by reference to obligations'. As to what constitutes a 'trust relationship' should therefore be determined in accordance with guidance provided by the Courts.

The 7th edition of Jacobs' Law of Trusts in Australia (Chapter I paragraph 103) defines a trust relationship as:

'...the whole relationship which arises between the parties in respect of the property the subject of the trust, and the obligation of the trustee to the beneficiary, and the interest of the beneficiary in the property may be regarded as results flowing from the existence of that relationship.

Following from the above definition, the four essential elements of a 'trust relationship' are identified in paragraph 104, Chapter I, of the previously stated edition of Jacobs' Law of Trusts in Australia. Those essential elements were quoted with approval in the Harmer Case at 89 ATC 5187, as follows:

The existence of a trustee who holds a legal or equitable interest in the trust property,

The existence of trust property which must be property capable of being held on trust and which includes a chose in action,

The existence of one or more beneficiaries other than the trustee, and

A personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries

ATO Interpretative decision ATO ID 2008/2 considers whether a pension fund constituted as a 'Stichting' under Dutch legal concepts can make a discount capital gain when it disposes of taxable Australian property. ATO ID 2008/2 concludes that the 'Stichting' is a 'trust' as all four of the previously stated essential elements of a trust are present in the relationship between the Stichting and the persons entitled to benefits from the fund. It is therefore eligible to make a

Discount capital gain under section 115-110 of the ITAA 1997.

Further, ATO ID 2008/62 provides that as the Stichting is created under Netherlands law and has a legal personality under Netherlands law, it should be recognised as a legal entity in Australia in accordance with the decision of the High Court in Chaff and Hay Acquisition Committee v Hemphill (1947) 74 CLR 375 (Chaff's Case). This principle is also recognised in the Foreign Corporations (Application of Laws) Act 1989 ('the Act'). Section 7(2) of the Act provides that any question relating to whether a body or person has been validly incorporated in a place outside Australia is to be determined by reference to the law applied by the people in that place.

In regards to the creation of a 'trust' and the role of a trustee', the majority of the High Court in The Registrar of the Accident Compensation Tribunal (Vic) v FC of T 93 ATC 4835 at 4842 clarified that:

'A trust may be created without use of the word “trust”. And, unless there is something in the circumstances of the case to indicate otherwise, a person who has “the custody and administration of property on behalf of others” or who “has received, as and for the beneficial property of another, something which he is to hold, apply or account for specifically for this benefit” is a trustee in the ordinary sense.'

The X Foundation

The X Foundation has been established consistent with Article 552 §§ 1-41 of the PGR as a separate legal entity intended to serve private or personal purposes in accordance with its declaration of establishment.

The By-Laws of the X Foundation provide that it was formed by the trustee company, acting as the Founder. For the purposes of the PGR, the trustee company has the role of an indirect representative giving effect to the declared wishes of Mr. Y as the principal (authoriser). Mr. Y is therefore deemed to be the Founder of the X Foundation.

The underlying purpose of the Foundation, pursuant to the declaration establishment and the By-Laws, is to invest, manage and administer the foundation assets, in the nature of investment products for the support and/or benefit of all or any one or more of the beneficiaries of the Foundation.

The declaration of establishment and the By-Laws authorise the foundation board to determine the beneficiaries and make distributions of the foundation assets to designated beneficiaries in their entirety or in parts at any time and at the free discretion of the foundation board.

In summary, having regard to its declaration of establishment and By-Laws:

The X Foundation has legal ownership and possession of the foundation assets;

The foundation assets are capable of being held on trust;

The foundation board, in the role of a trustee, manages and administers the foundation assets for the benefit of beneficiaries of the Foundation;

The beneficiaries of the Foundation are expressly identified in the By-Laws; and

The terms of the declaration of establishment and the By-Laws impose on the foundation board, a personal obligation to deal with the foundation assets strictly for the benefit of the beneficiaries as the foundation board may in its absolute discretion think fit.

It is considered that, in respect of the X Foundation, all four essential elements identified in the Harmer Case as giving rise to a trust relationship exist between the Foundation, the foundation board and the persons entitled to benefits (the beneficiaries) from the foundation.

In Mulherin v. Commissioner of Taxation 2013 FCAFC 115; 2013 ATC 20-423; (2013) 96 ATR 835 ('the Mulherin Case'), the Full Federal Court found that the AAT had correctly affirmed the Commissioner's decision to assess the taxpayer's income from a Liechtenstein Foundation established by the taxpayer. The premise of the assessments, as determined by the Commissioner and accepted by the taxpayer, was that the income represented the taxpayer's present entitlement in respect of a 'resident trust estate'.

In conclusion, based on the interpretation of the Liechtenstein Foundation Law and the views held by Australian Courts, it is considered that the X Foundation is a 'trust estate' for the purposes of Division 6 of Part III of the ITAA 1936 for the income years covered by this ruling.

Question 2

Is the X Foundation a resident trust estate under subsection 95(2) of the ITAA 1936?

Resident trust estate

Subsection 95(2) of the ITAA 1936 provides that a trust estate shall be taken to be a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936 in relation to an income year if:

(a) A trustee of the trust estate was a resident at any time during the year of income; or

(b) The central management and control of the trust estate was in Australia at any time during the year of income.

As to what constitutes central management and control (CM&C) for the purposes of paragraph (b) of subsection 95(2) can be found in the decision in Fundy Settlement v Canada, 2012 SCC 14, [2012] 1 S.C.R. 520 ('Fundy'), where the Supreme Court of Canada, on appeal from a judgment of the federal court of appeal, held that:

'… As with corporations, the residence of a trust should be determined by the principle that a trust resides for the purposes of the Income Tax Act where its real business is carried on, which is where the central management and control of the trust actually takes place. The residence of the trust is not always that of the trustee. It will be so where the trustee carries out the central management and control of the trust where the trustee is resident. Here, however, the trusts are resident in Canada, since the central management and control of the trusts was exercised by the main beneficiaries in Canada and the trustee's limited role was to provide administrative services and it had little or no responsibility beyond that'.

Draft Taxation Ruling TR 2017/D2 entitled Income tax: Foreign Incorporated Companies: Central Management and Control test of residency (TR 2017/D2), sets out the guidelines for determining the CM&C of a company that is not incorporated in Australia.

At paragraphs 6 and 7 TR 2017/D2 provides that the key element of CM &C is the control and direction of a company's operations involving the making of high-level decisions that set the company's general policies, and determining the direction of its operations and the type of transactions it will enter into. The conduct of the company's day-to-day activities and operations is not an act of CM&C, nor is CM&C the management of those activities under the authority and supervision of higher level managers or controllers.

Further, the nature of a company's activities and business define which acts and decisions are an exercise of the CM and C of that company. Exercising CM &C of a company can involve, among others, setting investment and operational policy, which includes deciding to buy and sell significant assets of the company. For example, where a company is a special purpose vehicle set up to conduct only two transactions - to buy and sell an asset - the decisions to buy and sell will be the only activities relevant to its CM and C: see paragraphs 10 and 12 of TR2017/D2. These principles were illustrated with great authority in Bywater Investments Ltd and Ors v FC of T; Hua Wang Bank Berhad v FC of T 2016 ATC 2-589; [2016] HCA 45 ('Bywater Investments Case').

Each of the four taxpayer companies involved in the Bywater Investments Case made profits from the acquisition and sale of securities in entities listed on the Australian Stock Exchange. Each taxpayer was incorporated overseas and the board meetings were held overseas by foreign resident directors. However, the directors mechanically carried out the directions and wishes of a resident individual in regards to all transactions. The High Court of Australia held that, where a board of directors relinquished its decision-making power in favour of an outsider, effectively doing no more than implementing decisions made by the outsider, there was an usurpation of the functions of the board so that the place of CM &C of each taxpayer company in the Bywater Investments Case' was found to be with the resident individual in Australia.

It is also noted that, the taxpayer in the Mulherin Case had instructed a Liechtenstein entity that provides trustee services, to set up a foundation in Liechtenstein ('the Foundation'). All or most decisions with respect to the investments of the Foundation's funds were made by the taxpayer from Australia. It was common ground between the taxpayer, the Commissioner, and the AAT during the proceedings that the CM&C of the Foundation was in Australia during each of the years of income under review.

In the present circumstances, the X Foundation's activities solely consist of buying and selling shares and other investment products such as currencies, precious metals and financial derivatives either directly or indirectly via investment in vehicles that carry out such activities.

Since its establishment, the board members of the X Foundation appointed by the trustee company have always dealt with investments and entered into transactions for the foundation under the direction or instruction of Mr. Y ('the Principal').

The board members of the X Foundation will - within the scope of national laws and professional duties - continue to act upon and comply with Mr. Y's directions and instructions in the future with regard to the X Foundation's investments and transactions.

Additionally, Mr Y conveys his wishes, from time to time, by way of a 'letter of wishes', as to the preferred destination and application of the income and assets of the X Foundation. In practice, the foundation board always adhered to the provisions of such “letters of wishes” even though they are not under a legal obligation to do so.

Consistent with the decisions in the Fundy and Bywater Investment cases and the rules prescribed in TR 2017/D2 in regards to the determination of the CM&C of an investment business, it is considered that the CM&C of the X Foundation is exercised by Mr Y in Australia and not by the trustee company that conducts the business of the foundation in Liechtenstein in its role as the trustee.

Accordingly, the X Foundation is a resident trust estate for the purposes of subsection 95-2 of the ITAA 1936 by virtue of paragraph (b) of that subsection.

Question 3

Can the X Foundation make a family trust election under subdivision 272-D of Schedule 2F of the ITAA 1936?

Family Trust Election

The trustee of a trust may make a family trust election (FTE) in accordance with section 272-80 of Schedule 2F of the ITAA 1936 that the trust is a 'family trust' for the purposes of Schedule 2F at all times after the beginning of a specified income year.

In order to make a FTE the trustee of a trust must:

(a) Make the election in writing and in the approved form: subsection 272-80(2);and

(b) Specify an individual whose family group is to be taken into account in relation to the election: subsection 272-80(3);

(c) Pass the family control test in section 272-87 at the end of the specified income year: subsection 272-80(4); and

Pursuant to subsection 272-80(4A), the specified income year may be an income year before the one in which the election is made (but not earlier than the 2004/2005 income year) if:

(a) At all times in the period from the beginning of the specified income year until 30 June in the income year before the one during which the election is made, the trust passes the family control test; and

(b) Any conferral of present entitlement or any distributions of income or capital of the trust made by the trustee during the period have been made on or to the individual specified in the election or members of that individual's family group.

As the 'foundation board' of the X Foundation is the 'trustee of a trust estate, it can make a family trust election provided that the previously stated requirements of section 272-80 of Schedule 2F of the ITAA 1936 are met.

For the purposes of subsection 272-80(2) of Schedule 2F it is assumed that the election will be made in the approved form.

Mr Y is the specified individual for the purposes of subsection 272-80(3) of Schedule F.

For the purposes of subsection 272-80(4), the family control tests in subsection 272-87(1) of Schedule 2F is set out as follows:

(1) A trust in respect of which a family trust election or an interposed entity election is proposed to be made, passes the family control test if:

(a) The requirement in any of the paragraphs (a) to (g) of subsection (2) of section 272-87 is satisfied in relation to a group consisting of:

(i) The individual (the primary individual) who is to be specified in the family trust election or, in the case of an interposed entity election, who is specified in the family trust election to which the interposed entity election will relate; or

(ii) One or more members of the primary individual's family (see section 272-95); or

(iii) The primary individual and one or more members of the primary individual's family; or

(b) The requirement in any of paragraphs (a) to (e) of subsection (2) is satisfied in relation to a group consisting of a person or persons covered by subparagraph (a)(i), (ii) or (iii) of this subsection and one or more legal or financial advisers to the primary individual or to a member of the primary individual's family; or

(c) ...

Pursuant to subsection 272-87(2) of Schedule 2F, the requirements for the purposes of subsection 272-87(1) are as follows:

The group has the power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the trust; or

The group is able (directly or indirectly) to control the application of the capital or income of the trust; or

The group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in paragraph (b); or

The trustee of the trust is accustomed, under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the group; or

The group is able to remove or appoint the trustee of the trust; or

The group has more than a 50% stake in the income or capital of the trust; or

Persons in the group are the only persons who, under the terms of the trust, can obtain the beneficial enjoyment of the income and capital of the trust.

Application of subsection 272-80(4)

In the present case:

The group, in paragraph 272-87(1)(a)(i), comprising of Mr. Y as the primary individual (individual specified in the family trust election) will satisfy the requirement in paragraph (b) and (d) of subsection 272-87(2) as follows:

Mr. Y is able to indirectly control the application of the capital or income of the X Foundation as the trustee company complies with his wishes regarding the preferred destination and application of the income and assets of the X Foundation

The foundation board (employees of the trustee company) of the X Foundation has always complied with Mr. Y's directions, instructions or wishes and undertakes to act in accordance with the directions, instructions and wishes of Mr. Y in the future

The X Foundation would pass the family control test in subsection 272-87(1).

Consequently, the X Foundation can lodge a family trust election under subsection 272-

80(1) of Schedule 2F of the ITAA 1936 for a specified income year subject to subsection 272-80(4A).

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