Edited version of your written advice

Authorisation Number: 1051264919541

Date of advice: 10 August 2017

Ruling

Subject: Fixed entitlements

Issue 1

Will the Trust be a 'fixed trust’ under section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) and section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Question 1

Will the Unitholders of the Trust have fixed entitlements to all of the income and capital of Trust as defined in subsection 995-1(1) of the ITAA1997 and subsection 272-5(1) of Schedule 2F to the ITAA 1936?

Answer

No

Question 2

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

Answer

Yes

Issue 2

Will the interests of the Unitholders of the Trust in the trust holding be fixed interests under former subsection 160APHL(10) of the ITAA 1936?

Question 3

Will the Unitholders 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 4

Will the Commissioner exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders 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:

1 July 2016 to 30 June 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Trust was established by the Trust Deed as an Australian unit trust and had two Original Unitholders, both of which are Australian family trusts.

On establishment of the Trust, the Original Unitholders held a 70% and 30% beneficial interest in the Trust respectively.

The Units in the Trust are not listed on any stock exchange and are not anticipated to be in the foreseeable future.

The Trust is not a Managed Investment Scheme (“MIS”) under Chapter 5C of the Corporations Act 2001 (Cth) (“Corporations Act”) and is not a widely-held unit trust.

The Trustee is not the holder of an Australian Financial Services License (“AFSL”) for the purpose of Part 7.6 of the Corporations Act.

The Unitholders made their investments by subscribing for units in the Trust.

Issue of Units

The Constitution provides the Trustee with the power to issue new Units of any class.

While the Units are not officially quoted, Units must only be issued with an application price calculated based on the NAV of the Trust at the time of the issue as determined by Australian accounting principles or as approved by a Special Resolution, or if the Units are divided into more than one class, by a separate Special Resolution of the Unitholders of each class.

A Special Resolution requires the approval of 100% of the Unit Holders.

There has only ever been a single class of Units on issue during the existence of the Trust.

There have been no transfers or redemptions of Units during the existence of the Trust.

The Trustee does not intend to issue Units of a separate class in the foreseeable future.

There is no intention to redeem Units in the foreseeable future.

Other relevant information

It is not possible to stream income or capital to different Unitholders under the Constitution.

The Trustee had a balance of carry forward tax losses of $1000 as at 30 June 2016.

The Trust has not forecasted a tax loss in respect of any of the years of income ended 30 June 2017, 2018, 2019, 2020 or 2021.

The Trust has not forecasted any deduction amount to be claimed (or provision made) for bad debts or debt/equity swap losses for any of the years of income ended 30 June 2017, 2018, 2019, 2020 or 2021.

The Trustee may vary the Trust via a Special Resolution.

Broadly, the terms of the Units confer upon Unitholders an entitlement comprised of:

● An income entitlement equal to the share of the net income of the Fund that is proportionate to Units held by the Unitholders; and

● A capital entitlement (subject to a Special Resolution) that is proportionate to Units held by the Unit Holders.

The Trustee is seeking the Commissioner of Taxation to exercise his discretion pursuant to subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the Trust to be a “fixed trust” to enable the carrying forward and utilisation of tax losses.

The Trustee holds investments in Investee Companies in the form of ordinary shares. The Trustee expects the Trust to receive franked dividends from the Investee Companies and intends to distribute the franked dividends to its Unit Holders.

The Unitholders are completely unrelated parties and have not and do not anticipate to act in concert in achieving any tax related benefits as result of investing into the Trust.

Assumption(s)

1. The issue price or redemption price of units in the Trust will only be determined on the basis of the net asset value of the Trust at the time of the issue or redemption, as determined by Australian accounting principles (such that subsection 272-5(2) of Schedule 2F to the ITAA 1936 would be satisfied).

2. The unit holders will be sufficiently exposed to the risk of loss or opportunity for gain in respect of the shares in the Trust as explained by ATO Interpretative Decision ATO ID 2014/10.

Relevant legislative provisions

Income Tax Assessment Act 1936

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 160APHL

former subsection 160APHL(10)

former subsection 160APHL(11)

former subsection 160APHL(14)

Income Tax Assessment Act 1997

Subsection 995-1(1)

Corporations Act 2001

Chapter 5C

Section 601GC

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general’ in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax’.

Reasons for decision

Issue 1

Question 1

Summary

The Unitholders of the Trust do not 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.

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 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 FC of T (1991) 173 CLR 264; 91 ATC 5000.

Also 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’. 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 assumptions 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

Vested interests

For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument consists of the unit trust deed of the Trust.

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

Defeasible powers in the Trust Deed

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.

Under the Trust Deed, the Unitholders in the Trust may not be considered to have a vested and indefeasible interest in all of the income and capital of the Trust as the Trust Deed provides defeasible powers:

● Issue of Units – The clause effectively provide the Trustee with an ability to issue Units, subject to 100% Unitholder approval.

● Variation of Trusts – This clause effectively provides that the Trust deed may be revoked, added to or varied subject to 100% Unitholder approval.

Question 2

In view of the conclusion above that Unitholders in the Trust do not have vested and indefeasible interests, pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, subsection 272-5(3) may be considered.

Summary

The Commissioner considers that it is reasonable to exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the Unitholders of the Trust as having fixed entitlements to all of the income and capital of the Trust.

Detailed reasoning

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 Act, treat such beneficiaries as having a fixed entitlement where it is reasonable to do so based upon the factors prescribed in paragraph 272-5(3)(b). Paragraph 272-5(3)(b) stipulates that the Commissioner may treat a beneficiary as having a fixed entitlement (in cases where in fact beneficiaries do not have a fixed entitlement) having regard to:

(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.

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, and referred to the newly formed Trust Consultation Sub-group for discussion; at their meeting on 28 November 2006, 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 managed investment schemes, it is also appropriate that consideration is given to any potential impacts that the Corporations Act 2001 (as noted above), the regulatory powers of the Australian Securities and Investments Commission (ASIC), and the actions of the Australian Securities Exchange (ASX) may have on the administration of the trust and the entitlements of beneficiaries.

Paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936:

The Trust Deed provides the Unitholders of the Trust with vested interests in a share of the income that the Trust derives from time to time and a share of the capital of the Trust as noted above.

Each Member of the Trust does not, however, have a fixed entitlement to the share of income and capital in the trust.

As a result, paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 is satisfied.

Subparagraph 272-5(3)(b)(i) of Schedule 2F to the ITAA 1936:

In relation to the circumstances in which the entitlement is capable of not vesting or the defeasance happening, the following comments are made:

● Issue of Units The Trust has an open class of beneficiaries, via the ability to issue additional units. Further Units have been issued, on a net asset backed value basis. The saving rule in paragraph 272-5(2)(d) of Schedule 2F to the ITAA 1936 provides that where units held by a person in a unlisted unit trust are redeemable or further units are able to be issued, the units 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 saving rule in paragraph 272-5(2)(d) applies in respect of the ability to issue Units;

● Variation of Trusts: 100% Unitholder approval is required for a variation.

Subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936:

In relation to the likelihood of the entitlement not vesting, or the defeasance happening, the following comments are made:

● The Trustee's behaviour as the Trustee of the Trust from the settlement of the Trust to 30 June 2016 is relevant. In respect of past events the defeasible powers contained in the Trust Deed have not been exercised to defease any of the requisite interests of the Unitholders;

● In respect of the period ending 30 June 2021 the Trustee of the Trust will exercise its powers under the Trust Deed such that:

● only a single class of Units will remain on issue;

● no fully or partly paid Units will be issued;

● no Units will be redeemed;

● no Units will be transferred;

● no Units will be reclassified;

● no streaming of income or capital will occur;

● no amendments will be made to the Trust Deed.

Therefore, it is considered that the likelihood of defeasance happening is low.

Subparagraph 272-5(3)(b)(iii) of Schedule 2F to the ITAA 1936:

In relation to the nature of the trust the following comments are made:

● The Trust is a unitised trust, however, its units are not publicly listed on an approved stock exchange nor is it a MIS. Therefore the circumstances and likelihood in which each Member’s entitlement is capable of not vesting or the defeasance happening is not reduced in this trust;

Schedule 2F to the ITAA 1936 and tax losses

The concept of a 'fixed entitlement' was originally introduced in the context of the trust loss measures and should primarily be interpreted in that context. The trust loss measures are an important integrity measure, removing a structural flaw in the tax system. The concept of a 'fixed entitlement' is fundamental to the structure and effectiveness of the trust loss measures.

The EM to the trust loss measures states (at paragraph 13.13) in respect of the Commissioner's power in subsection 272-5(3) of Schedule 2F to the ITAA 1936 that:

This provision is to provide for special circumstances where there is a low likelihood of a beneficiary's vested interest being taken away or defeased and, having regard to the scheme of the trusts loss provisions to prevent the transfer of the tax benefit of the losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement.

This passage seems to indicate that when looking at the facts of a case in the context of the criteria listed in subsection 272-5(3) of Schedule 2F to the ITAA 1936 regard should always be had to whether a fixed entitlement in these circumstances could result in the transfer of the benefit of the tax loss.

In relation to the circumstances pertaining to the existence of a tax loss of the Trustee is noted that:

● The Trustee had a balance of carry forward tax losses of $1000 as at 30 June 2016.

● The Trust has not forecasted a tax loss in respect of any of the years of income ended 30 June 2017, 2018, 2019, 2020 or 2021.

● The Trust has not forecasted any deduction amount to be claimed (or provision made) for bad debts or debt/equity swap losses for any of the years of income ended 30 June 2017, 2018, 2019, 2020 or 2021.

● Throughout the ruling period no further Units will be issued, no Units will be redeemed, no Units will be transferred, no streaming of income or capital will occur, no Units will be reclassified and the Trust Deed will not be amended.

Recommendation

As per paragraph 272-5(3)(b) it is considered that the Unitholders in the Trust may be treated as having fixed entitlements to all the income and capital of the Trust for the period of the scheme that is the subject of this private ruling application. This treatment is considered to be appropriate after having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) as discussed above.

In summary, it is submitted that as:

● the circumstances in which the entitlement is capable of not vesting or a defeasance happening are limited;

● the likelihood of the entitlement not vesting or a defeasance happening are remote; and

● the opportunity to traffic any tax loss will be limited;

there is a reasonable case for the Commissioner to exercise the discretion pursuant to subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the interests of Unitholders in the income and capital of the Trust as fixed entitlements.

Issue 2

Question 3

Summary

The terms of the trust instrument do not provide the Unitholders 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

A taxpayer must be a "qualified person" to be entitled to a franking credit in respect of a dividend. To be a qualified person, a taxpayer must satisfy the 45-day holding period rule. Although the related payments rule is applied by reference to the repealed provisions of the ITAA 1936, the Tax Office stated in Taxation Determination TD 2007/11 that the ITAA 1936 rules have ongoing application as a result of being "imported" into the ITAA 1997 regime via the anti-manipulation rule in paragraph 207-145(1)(a) of the ITAA 1997.

In the case of a trust distribution consisting wholly or partly of dividend income, generally the trustee must be a qualified person and, in addition, the beneficiary must be at risk for a prescribed period during the qualification period in respect of the taxpayer's interest in the Unitholdership 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) of the ITAA 1936 relating to shares held is that unless a beneficiary has a fixed interest constituted by a vested and indefeasible interest in the corpus of the trust or an exception applies, a beneficiary in a non-widely held trust will typically have a net position of zero, i.e., not be sufficiently at risk, meaning that franking credits will not pass through the trust (e.g. see ATO ID 2002/122 ).

Law Administration 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 (only indirectly 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." [emphasis added]

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

Former section 160APHL provides that in calculating the extent of a beneficiaries interest, it is necessary to distinguish between the interest of a beneficiary in shares held by a widely-held trust (as defined below), and the interest of a beneficiary in shares held by other trusts.

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 will be required to determine the interest that a Member has in each of the underlying shares in the Trust [refer to paragraphs 4.26, 4.77 and 4.88 of the EM which accompanied the Taxation Laws Amendment Bill (No. 2) 1999.]

Although the method of calculating the interest that a Member 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 Unitholders 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, 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.)

Therefore, it follows that the Unitholders 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 4

Summary

The Commissioner considers that it is reasonable to exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders 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.

Detailed reasoning

In view of the conclusion above that the Unitholders 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 Unitholders can have such a vested and indefeasible interest is if the Commissioner exercises the discretion in former subsection 160APHL(14).

Former subsection 160APHL(14) of the ITAA 1936 contains a discretion, whereby in cases where beneficiaries do not have a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding, the Commissioner may determine that the interest is to be taken to be vested and indefeasible.

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

In terms of former paragraph 160APHL(14)(a) –

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 Unitholders 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) –

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

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

In terms of former paragraph 160APHL(14)(c) –

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 already been determined, in relation to Issue 1 Question 2, that the Commissioner should exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the Unitholders of the Trust will 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) of the ITAA 1936 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 former paragraph 160APHL(14)(c).

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.

Former section 160APHL of the ITAA 1936 relates to the holding period rule which is an integrity measure in relation to the franking credit system. As such, it is appropriate for the Commissioner to ensure that in exercising the discretion in former subsection 160APHL(14) this integrity purpose is not undermined. To this end an assumption is included that throughout the ruling period: 'The unit holders will be sufficiently exposed to the risk of loss or opportunity for gain in respect of the shares in the Trust as explained by ATO Interpretative Decision ATO ID 2014/10.’

Therefore, for the reasons given in relation to Issue 1, as augmented by the assumption mentioned immediately above, the Commissioner will exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders 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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