Edited version of your written advice

Authorisation Number: 1051408737305

Date of advice: 14 August 2018

Ruling

Subject: Fixed trust and 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 Beneficiaries of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the ITAA 1997 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 Beneficiaries 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 Beneficiaries of the Trust in the trust holding be fixed interests under former subsection 160APHL(10) of the ITAA 1936?

Question 3

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

No

Question 4

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

1 July 20XX to 30 June XX

The scheme commences on:

1 July 20XX

Facts

The Trust

The Trust was established pursuant to a Constitution. There were XX units originally issued at $1.00 per unit held by ABC Pty Ltd as Trustee for the ABC Family Trust.

The purpose of the Trust is to allow the Unit Holder/s to undertake commercial transactions and investment.

Units in the Trust are not listed on any Stock Exchange and it is not intended to list the Units during the Ruling Period.

Since the establishment of the Trust, there had been no redemption of Units.

The Trust is not registered as a managed investment scheme (MIS) under Chapter 5C of the Corporations Act. It is not intended for the Trust to become an MIS during the Ruling Period.

The Trustee

The Trustee is a resident for tax purposes. It is a registered proprietary company limited by shares.

The Trustee is not a holder of an Australian Financial Services Licence for the purposes of Part 7.6 of the Corporations Act.

The Trustee is not a trustee of any other trust.

The Trustee is not prevented from owning Units in the Trust.

As at the date of this ruling application, the Trustee does not hold any Units in the Trust.

The terms of the Trust based on the Constitution

Only one class of Units may be issued and at any time all Units are of equal value and have the same rights.

The Trustee must only issue fully paid Units.

Units may only be issued or redeemed for a price determined on the basis of the net asset value (according to Australian accounting principles) of the Trust at the time of issue or redemption.

The Trustee has discretion to terminate the Trust.

The Unit Holders will be entitled to the income and capital of the Trust in proportion to their unitholding.

The Trustee may amend the Constitution by deed with the consent of all the Unit Holders.

Units issued against uncleared funds which do not subsequently clear are void ab initio.

Other relevant information

There will be Unit issues and/ or transfers prior to the end of the ruling period.

It is not possible to re-classify Units of a particular class to a different class. It is also not possible to stream income or capital between unitholders of different class.

It is not proposed to redeem Units during the Ruling Period.

The Trustee does not have the power to compulsorily redeem Units.

No amendments to the Constitution have been made since the establishment of the Trust. It is not proposed to amend the Constitution during the Ruling period.

The legislative context for the Trust to be treated as a fixed trust is the trust loss rules in Schedule 2F to the ITAA 1936 so the Trustee is able to recoup any future tax losses to be carried forward and reducing compliance costs.

The Trustee will be receiving franked distributions for the Trust. The Trustee wishes to pass on the franking credits to the beneficiaries of the Trust.

The Trust satisfied the safe harbour conditions applying to category 6 ‘Other trusts’ in paragraph 54 of PCG 2016/16.

Assumption

No amendments will be made to the Constitution during the Ruling Period.

Relevant legislative provisions

Income Tax Assessment Act 1936

Schedule 2F

Section 272-5

Subsection 272-5(1)

Subsection 272-5(2)

Subsection 272-5(3)

Section 272-65

Former section 160APHL

Former section 160APHD

Former subsection 160APHL(7)

Former subsection 160APHL(10)

Former subsection 160APHL(11)

Former subsection 160APHL(13)

Former subsection 160APHL(14)

Income Tax Assessment Act 1997

Subsection 995-1(1)

Paragraph 207-145(1)(a)

Reasons for decision

Issue 1 Question 1

Summary

The Beneficiaries 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 section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 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 ITAA 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 Constitution of the Trust.

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

Defeasible powers in the Constitution

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 Constitution of the Trust, the beneficiaries of the Trust may not be considered to have a vested and indefeasible interest in all of the income and capital of the Trust because the Constitution provides the Trustee a defeasible power referring to Amendments to Constitution, where it states:

‘Subject to the Law, the Trustee may amend this Constitution (including this clause) by deed with the consent of all the Unit holders.’

Despite the amendments require unanimous approval by all of the Unit Holders, the mere existence of a power to amend the trust instrument constitutes a defeasible power (Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 at [106]).

Where unanimous approval by all Unit Holders is required before amendments are made, this will only be relevant to the considerations of the Commissioner for the purposes of determining the likelihood of a defeasance occurring for the purposes of subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936.

Therefore, the Beneficiaries of the Trust do not have a fixed entitlement to a share of the income or capital of the Trust for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Issue 1 Question 2

In view of the conclusion above that the Beneficiaries of 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 Beneficiaries 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) of Schedule 2F to the ITAA 1936 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 (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 Constitution provides the Beneficiaries 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. The Beneficiaries, however, do not have a fixed entitlement to the share of income and capital of 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 Trustee is allowed to issue additional Units. The Trustee hasn’t issued any additional Units as at the date of this ruling application. However, the applicant advised that there might be issue or transfer of Units during the Ruling Period. If that happens, Units are only issued or transferred for a price determined on the basis of the net asset value (according to Australian accounting principles) of the Trust at the time of issue or transfer. As such the saving rule in paragraph 272-5(2)(d) would be satisfied.

● Redemption (Withdrawal) of Units – The Trustee is not allowed to compulsorily redeem Units. Any Unit Holder may request that their Units be redeemed. If the Trustee accepts the request, the redemption price is determined on the basis of the net asset value (according to Australian accounting principles) of the Trust at the time of redemption. As such the saving rule in paragraph 272-5(2)(d) would be satisfied.

● Amendments to the Constitution – The Trustee may amend the Constitution by deed with the consent of all the Unit Holders. As at the date of this ruling application, the Trustee hasn’t made any amendments or variations to the Constitution since the establishment of the Trust. The applicant advised it is not proposed to amend the Constitution during the Ruling period.

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 behaviour of the Trustee for the Trust from the time the Trust was established to the date of this ruling application is relevant. It is noted that the Trustee applied for a private ruling immediately after the Trust was established. As such in respect of past events, the defeasible powers contained in the Constitution have not been exercised to defeat any of the requisite interests of the Beneficiaries.

● In respect of the Ruling Period ending 30 June XX, the Trustee may exercise its powers under the Constitution, such that:

● Only one class of Units will be issued and at any time all Units are of equal value and have the same rights;

● Only fully paid Units are issued and the price is determined on the basis of net asset value of the Trust at the time of issue;

● Units issued against uncleared funds which do not subsequently clear are void ab initio;

● No Units will be reclassified;

● No streaming of income or capital will happen;

● No proposal to amend the Constitution during the Ruling Period.

● The Trustee has discretion to terminate the Trust. However, the Unit Holders will be entitled to the income and capital of the Trust in proportion to their unitholding.

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, the Units are not publicly listed on an approved security exchange and the Trust is not a managed investment scheme. As such the circumstances and likelihood in which each Beneficiary’s entitlement is capable of not vesting or the defeasance happening is not reduced in this Trust.

● The Trust has only been established recently for the purpose of undertaking commercial transactions and investment. At the date of the ruling application, the Trust has only one Unit Holder.

● Based on self-assessment the Trust has met the safe harbour conditions applying to category 6 ‘Other trusts’ in paragraph 54 of PCG 2016/16.

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 this regard the Trustee of the Trust, at the date of the ruling application, has not determined yet if the Trust has any tax losses given the Trust has only been recently established and the accounts of the Trust are not available yet.

In relation to the circumstances which pertain to the existence of a tax loss of the Trust, it is noted that:

● At the date of the ruling application, the Trustee does not forecast a tax loss for the Trust.

● If the activities of the Trust will result to tax losses, the Trustee intends to recoup any future tax losses to be carried forward and that’s the reason why they have asked for a ‘fixed trust’ determination.

● There appears to be no arrangements that would give or can give any benefits of tax losses to any of the Beneficiaries.

● While there may be Units issued or transferred and/ or redeemed, the Trustee will do so satisfying the saving rule in paragraph 272-5(2)(b) of Schedule 2F to the ITAA 1936.

● No streaming of income or capital will happen and no Units will be reclassified.

● It is not proposed that the Trustee will amend the Constitution during the Ruling period.

Conclusion/ Recommendation

As per paragraph 272-5(3)(b) it is considered that the Beneficiaries of 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;

● the ‘nature of the trust’ is of one conducting investment activities; 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 the Beneficiaries 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 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

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 ATO stated (somewhat belatedly) 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 membership 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) relating to shares held is that unless a beneficiary has a fixed interest constituted by a vested and indefeasible interest in the corpus (capital) 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).

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 beneficiary’s 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 beneficiary has in each of the underlying shares in the Trust (refer to paragraphs 4.26, 4.77 and 4.88 of the EM with accompanied the Taxation Laws Amendment Bill (No. 2) 1999).

Although the method of calculating the interest that a beneficiary 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 Beneficiaries of the Trust do have a vested interest in a share of the capital of the Trust but that ‘vested interest’ is 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 Beneficiaries 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.

Issue 2 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 Beneficiaries 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 Beneficiaries 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 Beneficiaries 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 paragraphs 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 Beneficiaries of the Trust do 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 beneficiary’s interest in the capital of the Trust is vested, the Constitution of the Trust contains certain clauses by which a beneficiary’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 exercises the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the Beneficiaries 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) 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.

Therefore, for the reasons given in relation to Issue 1, the Commissioner will exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Beneficiaries 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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