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Edited version of your written advice
Authorisation Number: 1051211932972
Date of advice: 11 April 2017
Ruling
Subject: Meaning of the term 'Discretionary Trust' for the purpose of section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997)
Question 1
For the purposes of section 325-125 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), is the Trust a 'Discretionary Trust'?
Answer
No, the trust is not a discretionary trust for the purpose of section 328-125 of the ITAA 1997.
This ruling applies for the following periods:
● Income year ending 30 June 2016
The scheme commences on:
● 1 July 2015
Relevant facts and circumstances
During the period to which this ruling applies, the trust deed (the relevant trust instrument) of the applicant contained certain clauses by which a beneficiary's interest in a share of the income or capital of the Trust may have been defeated or otherwise prevented from vesting.
Relevant legislative provisions
Income Tax Assessment Act 1997: Section 328-125
Reasons for decision
The legislation does not define what a 'Discretionary Trust' is for the purposes of section 328-125 of the ITAA 1997 and therefore this term takes its ordinary meaning. In this regard, the Macquarie dictionary online (5th ed) defines a discretionary trust as 'a trust in which the trustees have absolute discretion as to the application of the trust capital and income'.
Justice Gummow provided the following comments in the case of Federal Cmr Of Taxation v Vegners (1989) 90 ALR 547; 20 ATR 1645 in relation to the meaning of 'Discretionary Trust':
discretionary trust” is a “…species of express trust … where the entitlements of beneficiaries to income, or to corpus, or both, is not immediately ascertainable. Rather, the beneficiaries are selected from a nominated class by the trustee or some other person
The power of selection is a special or hybrid power; a power exercisable in favour of any person including the donee of the power would be a general power and thus would be tantamount to ownership of the property concerned, whilst the objects of a special power would be limited to some class, and the objects of a hybrid power would be such that the donee might appoint to anyone except designated classes or groups.“
The trust will be “purely discretionary” where income and capital may be withheld altogether but this would not be so where the donee of the power of selection had a discretion only as to the time or method of making payments to or for beneficiaries…”
These descriptions are also consistent with TD 2000/27 which states in paragraph 2:
…beneficiaries of a discretionary trust do not have any interest, either individually or collectively, in the property or income of a trust estate. It is for the trustee to determine, firstly, whether such beneficiaries will benefit at all under the terms of the trust and, secondly, to what extent the beneficiaries will benefit. Such beneficiaries have no more than a right to have the trust duly administered. This right does not constitute beneficial ownership.
In Malamit Pty Ltd v WFI Insurance Ltd and Ors [2016] NSWSC 1306, Sackar J said:
…a unit trust may or may not be a discretionary trust and a priori assumption as to the nature of unit trusts under the general law and principles of equity do not assist and are apt to mislead. All depends upon the terms of the particular trust: CPT Custodians Pty Ltd v Cmr of State Revenue of the Victoria (2005) 224 CLR 98 at [15].
In the case of Chief Commissioner of Stamp Duties v Buckle and Others (1998) 151 ALR 1, the High Court held [at 8 to 9]:
[8] In submissions upon the appeal, the term “discretionary trust” was used as an overall description of the trusts for which the deed of settlement provided. The meaning of this term is disclosed by a consideration of usage rather than doctrine, and the usage is descriptive rather than normative.4 Accordingly, a “discretionary trust” is not a component of the doctrinal divisions by which there is determined the formal and essential validity of trusts. For this purpose, divisions are made between express trusts, implied or resulting trusts, and constructive trusts, between purpose trusts and non-purpose trusts, between trust powers and bare powers, and between testamentary trusts and settlements inter vivos. On the other hand, “discretionary trust” has no fixed meaning and is used to describe particular features of certain express trusts.
[9] In the case of the deed of settlement, the identity of those who might receive income or capital, the amounts they might receive, the period or duration of the trusts, the content from time to time of the fund impressed with those trusts, and the very terms of the trusts themselves all depended wholly or significantly upon the exercise of, or the failure to exercise, powers bestowed by the deed of settlement upon the trustee. In such a case, the term “discretionary trust” serves a useful purpose in emphasising the strong position occupied by the trustee and the instability of the interests and prospective interests of those taking under the deed of settlement.
In determining beneficiary's entitlements to the income and capital under a trust instrument, it is necessary to examine the terms of the instrument. The individual terms of the trust instrument must be examined as part of the entirety of the whole instrument, and the effect of each term will thus be a matter of fact and degree.
On review of your trust deed, we consider that, under the terms of the trust each beneficiary's respective entitlement to the income and capital of the trust may be determined by reference to each beneficiary's proportionate unit holdings, such that each beneficiary's respective entitlement to the income and capital of the trust is immediately ascertainable.
Accordingly, the trust will not be a discretionary trust for the purpose of section 328-125 of the ITAA 1997.
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