Edited version of your written advice

Authorisation Number: 1051246901287

Date of advice: 5 July 2017

Ruling

Subject: Clearly defined rights

Question

If only ordinary units are issued in the Trust, are the rights to income and capital arising from each of the membership interests in the Trust the same for the purpose of paragraph 276-15(1)(b) of the ITAA 1997?

This ruling applies for the following periods:

1 July 2016 to 30 June 2021

The scheme commences on:

The scheme has already commenced.

Relevant facts and circumstances

The Applicant is the sole unitholder in a trust. The Unit Trust Deed of the trust (the Deed) has been executed and stamped.

The Deed, or relevant parts of the Deed, form part of, and are to be read with, the relevant facts and circumstances in this Ruling.

The Applicant holds X ordinary units in the trust.

Apart from ordinary units, no other units were issued by the trust.

Relevant legislative provisions

Section 276-10 of the Income Tax Assessment Act 1997 (ITAA 1997)

Section 276-15 of the ITAA 1997.

Section 995-1of the ITAA 1997.

Section 14B of the Trustee Act 1925 (NSW)

Reasons for decision

The attribution managed investment trust (AMIT) regime is contained in Division 276 of the ITAA 1997.

The conditions required for a trust to qualify as an AMIT are specified in section 276-10. Subsection 276-10(1) provides:

276-10(1)

A trust is an attribution managed investment trust (or AMIT) for an income year if:

(a) the trust is a managed investment trust in relation to the income year; and

(b) the rights to income and capital arising from each of the membership interests in the trust are clearly defined (see section 276-15) at all times when the trust is in existence in the income year; and

(c) if the trust is a managed investment trust in relation to the income year solely because of paragraph 275-10(1)(b) - the only members of the trust are managed investment trusts in relation to the income year; and

(d) if the regulations specify criteria for the purposes of this paragraph - those criteria are satisfied in relation to the trust; and

(e) either:

(i) the trustee of the trust has made a choice for the purposes of this subparagraph in respect of that income year; or

(ii) the trust was an AMIT for an earlier income year.

The issue to which this Ruling pertains is whether the requirement in paragraph 276-10(1)(b) would be satisfied in the circumstances of this case, taking into consideration:

● the terms of the trust; and

● the fact that only one class of units has been issued by the trust.

'Clearly defined’

The condition in paragraph 276-10(1)(b) is that the rights to income and capital from the interests in the trust are 'clearly defined’ in the income year. In considering this, subsection 276-15(1) provides a safe harbour test as follows:

276-15(1)

Without limiting the circumstances in which the rights to income and capital arising from the *membership interests in a trust are clearly defined for the purposes of paragraph 276-10(1)(b), treat such rights as being clearly defined at a particular time for those purposes if any of the following conditions are satisfied at that time:

(a) the trust is registered under section 601EB of the Corporations Act 2001;

(b) the rights to income and capital arising from each of the membership interests in the trust are the same.

LCG 2015/4 is a public ruling issued by the Commissioner that explains the meaning of 'clearly defined’ membership rights to income and capital as that expression is used in Division 276.

The first step prescribed in the ruling is to consider the application of the safe harbour rules contained in section 276-15. Relevantly, in explaining the provision in paragraph 276-15(1)(b), paragraph 6 of the ruling states that:

'…The rights to income and capital arising from the membership interests of all members in a MIT will be taken to be clearly defined if the MIT falls within one of the following categories….

● …Single class: There is one class of membership interests (typically units) in the trust, that is, the rights to income and capital arising from those membership interests are the same’.

As per Schedule 1 of the Deed, only one 'class’ of ordinary units has been issued at $1.00 per unit. The Applicant is currently the sole unitholder, owning X units in the trust.

However the determination of whether an AMIT has one, or more than one, class of membership interests is dependent on the facts of the case as a whole and not merely by its description in the relevant deed.

Subsection 995-1(1) of the ITAA 1997 defines 'class’ as it pertains to membership interests in a company or trust in the following manner:

Membership interests in a company or trust form a class if the interests have the same, or substantially the same, rights.

The explanatory memorandum to the Income Tax (Attribution Managed Investment Trusts – Offsets) Act 2016 states:

2.30 The question as to whether an attribution MIT has more than one class of membership interests is one of fact. In this regard, the membership interests in a trust will form a class if they have the same, or substantially the same, rights.

In short, the use of the term 'class’ in paragraph 6 of LCG 2015/4 refers to the term as defined in subsection 995-1 and not necessarily by what is described under the terms of a trust deed.

The question ultimately turns on whether the condition in paragraph 276-15(1)(b) that 'the rights to income and capital arising from each of the membership interests in the trust are the same’ is satisfied in this case.

Determination

It is determined that the rights to income and capital arising from each of the membership interests in this trust, being those arising from the ordinary units issued, are the same. Consequently the safe harbour test in paragraph 276-15(1)(b) is satisfied and it is not necessary to go further in applying the more general test for 'clearly defined’ rights.

The reasons for this view are as follows:

● The provisions of the Deed as they apply to the unitholders of ordinary units, being the only type of units that have been issued by the trust, apply equally to all such unitholders. In other words, there is only one class of membership interests in the trust.

● There is no segregation of assets in the trust to which different unitholders are entitled, and no difference in the rights between unitholders to trust assets.

● The unitholders have the same rights in respect of income. Under the Deed, unitholders have a proportionate entitlement to the income of the trust based on the number of units they hold.

● Distributions of distributable Income are also to be made to all unitholders on a pro-rata basis based on the number of units they hold, under the terms of the Deed.

● It is noted that the unitholder entitlements are expressed to be subject to the terms of issue of all classes of Units. This leaves open the possibility that other, different classes of Units may be issued with different terms of issue, which may affect the question of whether rights to income and capital arising from each of the membership interests in the trust are the same.

● However, for the purposes of this Ruling it is taken that only one 'class’ (as defined in the Deed) of unit has been issued, being that which is described in the Deed as 'ordinary’ units. Consequently the qualification above does not apply in this case at the time of the Application.

● While the trustee is conferred broad powers under the Deed, it is recognised that the trustee has a duty under common law and statute to act impartially towards beneficiaries. Specifically, section 14B of the Trustee Act 1925 (NSW) provides that a trustee has the duty 'to act impartially towards beneficiaries and between different classes of beneficiaries’.

● It is noted that this factor may not be significant in respect of the test in paragraph 276-10(1)(b) where there are different classes of beneficiaries, given that the duty to act impartially between different classes does not necessarily assist a finding that the rights of the beneficiaries throughout the various classes are 'the same’.

● However, the general duty to act impartially towards beneficiaries in the context where only a single type (or 'class’ as described in the Deed) of units are issued reinforces an expectation that the beneficiaries have the same rights to income and capital from their membership interests, as the duty is one of impartiality for beneficiaries within that class.

For the reasons above, the safe harbour rule in paragraph 276-15(1)(b) applies in this case. Consequently the rights to income and capital arising from each of the membership interests in the trust are 'clearly defined’ for the purposes of paragraph 276-10(1)(b).

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