In determining if a trust is a fixed trust, we will consider PCG 2016/16. PCG 2016/16 provides assistance as to when the Commissioner will exercise his discretion and circumstances where a safe harbour applies to treat a trust as a fixed trust, as if the Commissioner had exercised his discretion.

PCG 2016/16 has application for the meaning of fixed entitlements and fixed trusts as outlined in Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 36).

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 1997does 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.

A trust is a fixed trust if persons have fixed entitlements to all the income and capital of the trust. A beneficiary will be considered to have fixed entitlements to income or capital of a trust, if their interest is vested and indefeasible. It confirms that the mere object of a discretionary trust does not have a vested interest in, and therefore does not have a fixed entitlement to, either the income or capital of the trust. The entitlement to income or capital by a beneficiary of a discretionary trust does not arise under a trust instrument, but pursuant to an exercise of the power of the trustee of that trust.

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 members in the Trust may not be considered to have a vested and indefeasible interest in all of the income and capital of the Trust.

However, the mere existence of a power to amend the Trust Deed 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 agreement of the members is required prior to an amendment 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.

As such members 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.

In regard to what constitutes a vested interest, PCG 2016/16 asserts that:

"...an interest is 'vested' if it is vested in interest or vested in possession'. An interest is vested in possession when it gives its holder a right of present enjoyment, whereas an interest is vested in interest if it gives its holder a present right to future enjoyment"

PCG 2016/16 also includes the Commissioner's view on the concept of 'indefeasible interests' as being an interest that "can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events."

It lists the following as powers which cause a beneficiary's interest to be defeasible:

·   power to amend the trust deed;

·   power to issue or redeem units;

·   power to issue units of different classes or to reclassify units

·   power to classify receipts as being on income or capital account where the units that have been issued do not all have equal rights to receive the income and capital of the trust;

·   power to appoint a beneficiary's interest in the income or capital of the trust to another beneficiary;

·   power to settle or appoint any part of the corpus of the trust to a new trust with different beneficiaries; and

·   power to enforce the forfeiture or cancellation of partly paid units due to the non-payment of a call except where such partly paid units would be void ab initio.

Attachment B to PCG 2016/16 outlines the conditions that must be satisfied in order to qualify for access to a safe harbour.

PCG 2016/16 asserts that where the beneficiaries' interests in the trust are not fixed entitlements, and the trust does not satisfy the requirements for a 'safe harbour', the trustee may request that the Commissioner exercise his discretion to treat beneficiaries' interests as being vested and indefeasible.

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.

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, 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.

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

The Trust Deed provides the members 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. 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.

Furthermore, as per paragraph 272-5(3)(b) it is considered that the members 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;

·   the "nature of the trust" is of one involved in a commercial going concern in the property development sector; 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 members in the income and capital of the Trust as fixed entitlements.

In view of the conclusion above that the members 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 members can have such a vested and indefeasible interest is if the Commissioner exercises the discretion in subsection 160APHL(14) of the ITAA36.

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 subsections 160APHL(14)(a), (b) and (c) of the ITAA 1936.

In terms of paragraph 160APHL(14)(a) of the ITAA36 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 members 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 Trust Deed 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 is therefore acknowledged that the Commissioner should exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the members 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.