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Edited version of private advice
Authorisation Number: 1051672778550
Date of advice: 8 May 2020
Ruling
Subject: Fixed entitlement discretion
Question
Will the Commissioner exercise the discretion under subsection 272-5(3) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) to treat the beneficiaries' interests in the income and capital of the trust as being fixed entitlements?
Answer
Yes.
Having regard to the factors set out in subsection 272-5(3) of Schedule 2F to the ITAA 1936 and Practical Compliance Guidelines PCG 2016/16 Fixed entitlements and fixed trusts, we consider that in the circumstances it is appropriate to exercise the discretion for the period ruled for.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commenced on
1 July 20XX
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
· the Unit Trust Deed of the Trust, and
· the Supplement Deed to the Unit Trust Deed of the Trust.
Background
The Trust was established on xx/xx/20XX. The Trust is an Australian unit trust.
The main activity of the Trust is to develop and own an apartment building for rental purposes.
The corporate trustee of the Trust (the Trustee) is also the trustee of several other similar unit trusts.
From establishment until xx/xx/20XX the units in the Trust were held by two sophisticated wholesale client entities being Entity A and Entity B.
On xx/xx/20XX the unit holders exchanged their units in the Trust for units in Y Unit Trust and intend to utilise a scrip for scrip roll-over under section 124-781 of the Income Tax Assessment Act 1997.
A condition of the roll-over is that the original interest holders had fixed entitlements to all of the income and capital of the original entity immediately before, during and immediately after the exchange of units.
The Trust was not technically a fixed trust as the original Unit Trust Deed allowed for the issue of a class of Special Units in addition to the Ordinary Units.
Consequently, the Trustee has requested the Commissioner exercise the discretion to treat the unit holders' interests in the income and capital of the Trust at the relevant time as being fixed entitlements.
Other facts
Under the original Unit Trust Deed a unanimous resolution of Ordinary Unit Holders was required in order for the Trustee to issue Special Units.
On xx/xx/20XX the Unit Trust Deed was modified through a Supplemental Deed to remove the capacity to issue Special Units such that the Trust only allows for a single class of units.
From establishment, the Trust has only had one class of units on issue. That is, no Special Units were ever issued.
Where the Trust issues further units, the issue price is in accordance with subsection 272-5(2) of Schedule 2F to the ITAA 1936.
No units have ever been issued at a discount.
The Trustee has never exercised any power capable of defeating a unit holders' interests in the income or capital of the Trust and as there is only one class of units, all unit holders have the same rights to receive the income and capital of the Trust.
The Trust currently has one unit holder being Y Unit Trust.
The market capitalisation of the trust as at the time of the exchange of units was approximately $15m.
The Trust's losses carried forward amounted to less than $XXX as at the end of the income year preceding the exchange of units.
Relevant legislative provisions
Income Tax Assessment Act 1936 Subsection 272-5(3) of Schedule 2F
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