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Edited version of your written advice
Authorisation Number: 1051255555864
Date of advice: 24 July 2017
Ruling
Subject: Vested and indefeasible interests
Question 1
Will the Beneficiaries of the Trust have fixed entitlements to all of the income and capital of Trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
Yes
Question 2
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
Yes
This ruling applies for the following periods:
The date of the execution of the Proposed Amendments to the Trust Deed to 30 June 20YY.
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
Background of the Trust
The Trust was settled on 1 July 20XX.
An amount of Units were issued at this time.
No further Units have been issued or redeemed in the Trust since it was created.
Under the Trust Deed
● Only Ordinary class Units can be issued;
● Issues or redemptions of Units must satisfy subsection 272-5(2) of Schedule 2F to the ITAA 1936;
● Income and capital entitlements are vested in the Unitholders and distributions must occur in proportion to Unitholdings;
● A power to amend exists but with a restriction on the power such that an amendment:
● shall not cause any Unitholder to cease to have Fixed Entitlements (as defined in section 272-5 of Schedule 2F to the Income Tax Assessment Act 1936 as reenacted, amended or substituted at any time) to all the income and capital of the Trust Fund in proportion to the number of units held by that Unitholder from time to time; and
● shall not cause any Unitholder to cease to have a Fixed Interest (as defined in former section 160APHL of the Act) in so much of the corpus of the Trust as is comprised by the Trust holding.”
The Trustee does not have any carried forward tax losses as at 1 July 2017.
During the Ruling Period:
● No tax losses are forecast to occur;
● It will not be possible to stream income or capital to different Unitholders;
● Units of different classes cannot be issued;
● It will not be possible to re-classify a Unit of a particular class to a different class under the Trust Deed.
Relevant legislative provisions
Income Tax Assessment Act 1936
Division 272 of Schedule 2F
Section 272-5 of Schedule 2F
Subsection 272-5(1) of Schedule 2F
Subsection 272-5(2) of Schedule 2F
Subsection 272-5(3) of Schedule 2F
Section 272-65 of Schedule 2F
Former section 160APA
Former section 160APHD
Former section 160APHL
Former subsection 160APHL(10)
Former subsection 160APHL(11)
Former subsection 160APHL(13)
Former subsection 160APHL(14)
Income Tax Assessment Act 1997
Paragraph 207-145(1)(a)
Subsection 995-1(1)
Corporations Act 2001
Chapter 5C
Reasons for decision
Question 1
Summary
The Beneficiaries of the Trust have fixed entitlements to all of the income and capital of Trust as defined in subsection 995-1(1) of the ITAA 1997 and subsection 272-5(1) of Schedule 2F to the ITAA 1936.
Detailed reasoning
The term 'fixed trust’ is defined in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936 to mean a trust in which entities or persons (respectively):
… have fixed entitlements to all of the income and capital of the trust.
The definition of the term '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 in Schedule 2F to the Income Tax Assessment Act 1936.’
Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a 'fixed entitlement’ in a trust:
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) 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.
Vested interests
For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, it is accepted that the Trust Deed provides Beneficiaries with a vested interest in the income and capital of the Trust.
Defeasible power in the Trust Deed overcome by the savings rule in subsection 272-5(2)
Under subsection 272-5(1) in 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.
Units will be required to be issued or redeemed on the basis of the Trust’s net asset backed value according to Australian accounting principles at the time of the issue or redemption. As such, the requirements of the savings rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 will be satisfied such that the ability to issue or redeem Units under the Trust Deed will not constitute a defeasible power.
Power to amend not a defeasible power
In the case of Colonial First State Investments Ltd v Commissioner of Taxation ([2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235) it was found that a power to amend in a trust deed will constitute a defeasible power where insufficient restrictions as to the exercise that power are included.
In the current case, a restriction of the power to amend exists such that an amendment may not cause a fixed entitlement in section 272-5 of Schedule 2F to the ITAA 1936 to cease or a fixed interest in former section 160APHL of the ITAA 1936 to cease.
As such the power to amend does not constitute a defeasible power.
As such Beneficiaries do have a fixed entitlement to a share of the income and capital of the Trust for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936.
Question 2
Summary
The terms of the trust instrument do provide the Beneficiaries with 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.
Detailed reasoning
Vested and indefeasible interest
It has already been determined, in relation to Question 1, that the Beneficiaries of the Trust do have a vested and indefeasible interest in a share of the capital of the Trust, i.e. an interest in a share (or proportion) of all of the capital of the trust. (Note: The terms 'corpus' and 'capital' are considered to be synonymous for current purposes.)
Additionally, former subsection 160APHL(13) (a 'savings rule with similar operation to subsection 272-5(2) of Schedule 2F to the ITAA 1936) will operate to ensure that the power to issue or redeem units of the Trust Deed will not constitute a defeasible power.
Therefore, it follows that the Beneficiaries of the Trust do have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding for the purposes of former subsection 160APHL(11) of the ITAA 1936.
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