Edited version of your written advice

Authorisation Number: 1051283961627

Date of advice: 18 September 2017

Ruling

Subject: Capital gains tax – deceased estate – fixed trust – residuary beneficiaries

Question:

Is the Deceased’s estate (the Trust) a ‘fixed trust’ for the purposes of section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following period

Income year ending 30 June 2017.

The scheme commences on

1 July 2016.

Relevant facts and circumstances

Prior to 20 September 1985, the Deceased passed away.

The Deceased’s will provided for the appointment of the Trustees of the Deceased’s estate (the Trust), and the following conditions:

● After the death of the Deceased’s spouse, the residuary estate to be held on trust with the income from the Deceased’s estate to be paid to the Deceased’s spouse during their lifetime;

● After the death of the Deceased’s spouse, the income from the Deceased’s Estate was to be distributed equally between the Deceased’s children during their lives, with the surviving children receiving the income during their lives; and

● upon the death of the last surviving child of the Deceased, the income and capital was to be distributed equally between the Deceased’s grandchildren when they reached the age of twenty-one.

Probate on the Deceased’s estate was granted a number of months after the Deceased had passed away.

The Deceased’s spouse passed away and Persons A and Person B became beneficiaries with life interests in the Deceased’s estate.

A number of years later, Person A passed away and Person B became the sole beneficiary with a life interest in the Deceased’s estate.

After a period of time Person B passed away and Persons C and D became the residuary beneficiaries of the Deceased’s estate.

The assets of the Deceased estate consist of non-taxable Australian Real Property.

There is no condition in the Deceased’s will by which any of the remainder beneficiaries could forfeit their interest in the Deceased estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

Given that the interests of the residuary beneficiaries in the income and capital of the Trust are vested and indefeasible, it is concluded that fixed entitlements exist in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. As such the Trust is a fixed trust in accordance with section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

Fixed Trust

Section 272-65 of Schedule 2F to the ITAA 1936 provides that a trust is a 'fixed trust' if persons have fixed entitlements to all of the income and capital of the trust.

Subsection 995-1(1) of the ITAA 1997 provides that a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 provides that, in relation to the meaning of the term fixed entitlement:

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.

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 meaning of the term 'vested and infeasible' (in the context of the Schedule 2F) has not been judicially considered. However, the term appears in Division 6 in subsection 95A(2) of the ITAA 1936 and in the context of that subsection, the term has been considered by the courts; for example, refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4,525; 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) 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.

The term 'vested and indefeasible' is 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 which introduced the trust loss measures gives an explanation in relation to the meaning of ‘vested and indefeasible’ interest in paragraphs 13.3 to 13.9.

What is a vested interest?

The EM states:

13.4 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring.

13.5 In traditional legal analysis, a person can be said to be either 'vested in possession' or 'vested in interest'. A present interest, i.e. one that is being enjoyed, is said to be 'vested in possession'; a future interest, i.e. one which gives its holder a present right to future enjoyment, is said to be 'vested in interest'. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, 'vested' includes both vested in possession and vested in interest.

13.6 Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until sometime in the future.

When is a vested interest indefeasible?

The EM states:

13.7 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

13.8 Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated.

Application to your situation

In this situation the residuary beneficiaries, being Persons C and D, are able to take possession of their interests in the income and capital of the Trust after the death of Person B as provided in the Deceased’s will.

There is no condition in the Trust instrument, or the Deceased’s will, by which any of the residuary beneficiaries could lose their interest in the Deceased’s estate. Therefore the remainder beneficiaries have a vested and indefeasible interest in the income and capital of the Trust.

Given that the interests of Persons C and D in the income and capital of the Trust are vested and indefeasible, it is concluded that fixed entitlements exist in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. As such the Trust is a fixed trust in accordance with section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997.

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