Edited version of private advice

Authorisation Number: 1052104519993

Date of advice: 14 April 2023

Ruling

Subject: Fixed trust

Issues

Question 1

Will the Unitholders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1 of the Income Tax Assessment Act 1997 Act (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Assessment Act 1936 (ITAA 1936) such that the Trust will be a 'fixed trust' under section 272-65 of Schedule 2F to the ITAA 1936 and section 995-1 of the ITAA 1997?

Answer

No.

Question 2

If the answer to Question 1 is 'no' 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.

Question 3

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

Answer

No.

Question 4

If the answer to Question 3 is 'no', will the Commissioner exercise his discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders 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 XXXX to 30 June XXXX

Relevant facts and circumstances

The Trust was established pursuant to the terms of the trust deed (Trust Deed).

The Trustee is not a trustee of any other trust.

The Trustee is not a holder of an Australian Financial Services licence and is not subject to any regulation by the Australian Prudential Regulation Authority (APRA) or any other Australian Federal Government authority.

100 ordinary units, and $1 per unit (Ordinary Unit), were issued, to Trustee of Family Trust A and Trustee of Family Trust B (collectively described as the Unitholders).

No further units have been issued.

No units have been transferred between the Unitholders.

All entities are Australian residents for income tax purposes.

The Trust Deed

The salient terms of the Trust Deed are as follows:

X. The Trustee has received from the Initial Unit Holders the sums of money in the proportions described in the X Schedule ("Initial Sum") to establish the Trust Fund

X. The Initial Sum forms part of the Trust Fund and the Trustee has consented to hold the Trust Fund on the Trusts and subject to the terms of this Deed

X(i) The Trust Fund is divided into the number of initial units as specified in the X Schedule.

(ii) The classes of units are specified in the X Schedule.

(iii) Any special rights, privileges, obligations and liabilities attaching to any class of units are specified in part X of the X Schedule.

(iv) Any additional Trustee powers exercised in accordance with Clause X are specified in the X Schedule.

(v) The Trustee has received applications for the issue of the initial units and the application moneys from the Initial Unit Holders in respect thereof.

X. This Trust Deed is made with the intention that the benefits of the trusts declared will enure for the benefit of every Unit Holder who holds Units and who will be bound by the provisions of this trust Deed.

Clause X deals with assets held on trust:

The Trustee declares that it will stand possessed of the Trust Fund and the income thereof upon trust for the Unit Holders upon the trusts and with and subject to the powers and provisions concerning the same in this Deed

Relevantly, Clause X defines Trust Fund to mean:

•         The Initial Sum;

•         The amounts contributed or credited or paid for any units issued pursuant to this Deed;

•         Any addition of any nature or description to any Property, derived and received from any source at any time, whether capital or income, held by the Trustee upon the Trust and subject to the powers and provisions of this Trust;

•         Any accumulation of income directed or empowered to be made in this Deed;

•         Any Property advanced to, acquired, borrowed or raised by the Trustee that is held by the Trustee upon the Trust and subject to the powers and provisions of this Trust;

•         All accretions to, or the income, profits or gains of, any of those things mentioned; and

•         Property of every description for the time being and from time to time representing the Property referred to in sub-paragraphs (a) to (f) of this definition.

Clause X deals with the issue of units and rights attaching to units and, amongst, other things, reflects that the beneficial interest of the Trust Fund is to be divided into units:

a). The beneficial interest in the Trust Fund as originally constituted and as existing from time to time will be vested in the Unit Holders.

b). Each Unit will entitle its Unit Holder together with the Unit Holders of all other Units to the beneficial interest in the Trust Fund as an entirety but will not entitle a Unit Holder to any particular security or investment comprised in the Trust Fund or any part thereof and no Unit Holder will be entitled to have transferred to the Unit Holder any property comprised in the Trust Fund other than in accordance with the provisions contained in this Deed.

c). The Trust Fund, as originally constituted by the Initial Sum, will be divided into the number of Units and be of such value as is set out in the X Schedule. The Units will:

1)    be held, in the first instance, by the Initial Unit Holders named in the X Schedule;

2)    each have a par value as set out in the X Schedule; and

3)    be divided into the classes (if any) set out in part X of the X Schedule....

4)    ...

Clause X. define Unit or Units to mean an undivided part or share in the Trust Fund and includes an issued Unit of any class specified in part X of the X Schedule.

Clause X deals with the issue of additional units:

The Trustee, with the consent in writing of the Unit Holders, may issue additional Units from time to time with power to classify or designate the same with or without special rights privileges powers liabilities or obligations or to reclassify Units which are already issued and in respect thereof to create amend or revoke any special rights privileges powers liabilities or obligations in such manner as the Trustee thinks fit provided that, unless Unit Holders waive the operation of this provision in any particular case:

a)    All new issues of Units of the classes set forth in part X of the X Schedule will comprise the same proportion of Units of those classes as are set forth in the X Schedule and will before their issue be offered in the first instance to existing Unit Holders holding Units of that class pro rata as nearly as may be to their existing holdings and without involving fractions

b)    All new issues of Units of classes not previously issued will be offered in the first instance to Unit Holders (of whatsoever class) pro rata to their existing holdings

c)    Offers of new issues ..., if not accepted, will be deemed to be declined, and ..., the Trustee may dispose of those Units in such manner as it thinks most beneficial to the Trust Fund....

d)    No Units will be issued subject to any special rights privileges powers liabilities or obligations and in respect of existing Units no rights privileges powers liabilities or obligations will be created amended or revoked.

Relevantly, Clause X defines Unit Holders to mean:

the Initial Unit Holders and the persons who for the time being are registered under the provisions of this Deed as the holders of Units and includes persons jointly so registered and the expression "Unit Holders" will include persons, Corporations and the trustees of trusts or settlements and other legal entities who from time to time until the Vesting Day come within the foregoing descriptions notwithstanding that such persons, Corporations, trustees or other legal entities may not be in existence or have come into the defined category at the date of this Deed and, in the case of such trustees, notwithstanding that the trusts or Settlements of which they are trustees have not been formed, or come into existence, or do not fall within the defined category at the date of this Deed.

In turn, Initial Unit Holders means 'the person or persons entity or entities described as such in the X Schedule'.

The X Schedule provides that units may be divided into Class A, Class B, Class C, Class D and Ordinary Units and sets out the rights, privileges and restrictions attached to each class of units. Relevantly, it provides that each Ordinary Unit carries all of the rights afforded to a Unit Holder in accordance with the terms of this Deed, including the right to Income and the capital of the Trust Fund without any restrictions.

The X Schedule provides that the value of the Ordinary Unit is $X per unit.

Clause X deals with the payment for units:

a). The Trustee may issue Units of any class, either under Clause X or under Clause X without requiring full immediate payment in cash for them (partly paid Units) whereupon the provisions of this Clause X will apply...

f). The Trustee will have a first and paramount lien on every partly paid Unit for all money (whether immediately payable or not) called or payable at a fixed time in respect of that Unit. The Trustee will also have a first and paramount lien on all partly paid Units registered in the name of the same Unit Holder for all money presently payable by that Unit Holder to the Trustee, but the Trustee may at any time declare any Unit to be wholly or in part exempt from the provisions of this paragraph. The Trustee's lien on a Unit extends to all Income or capital of the Trust Fund payable in respect of that Unit to its Unit Holder...

Clause X deals with the forfeiture of partly paid units

c)...Forfeiture will include all entitlements to all income, profits and gains of any kind in respect of the forfeited Unit not actually paid or credited to its holder before the fate of the forfeiture....

e). A person who has forfeited any Unit will cease to be the Unit Holder of the forfeited Unit,...

Clause X deals with the redemption, transfer and transmission of units:

Clause X Redemption of Unit

a). If a Unit Holder in writing requests the Trustee to redeem all or any of his Units at a price to be determined in accordance with the provisions hereinafter contained within Clause X,..

b). The Trustee may at any time and from time to time redeem any Unit by paying to the Unit Holder thereof the sum to be determined in accordance with the provisions hereinafter contained. The Trustee may determine to redeem any such Units without prior notice to the Unit Holder thereof of the Trustee's intention to redeem the said Units.

...

d).For the purpose of fixing the redemption sum for Units to be redeemed by the Trustee under the foregoing provisions:

1). The Trustee will pay on redemption to the Unit Holder the Fair Value of the Units being redeemed as determined by the auditor of the Trust Fund, and if there is no auditor by a chartered accountant nominated by the Trustee... The auditor or chartered accountant ...must consider any evidence as to value that may be presented to them by the Unit Holder or by the Trustee and have regard to any special rights or restrictions or conditions relating to the entitlement of the Units to share in the Income or capital of the Trust Fund and in distribution of the capital on the termination of the Trust Fund and to any rights, restrictions or conditions attaching to or affecting the Units...

2). From the value of the Units so to be redeemed will be deducted all necessary expenses incidental to any realisation by the Trustee of any Investment for the purpose of providing the redemption sum and any trusteeship fee payable in respect of the Trust Fund at the rate chargeable by the Trustee on the amount of the value of the Units so redeemed computed from the last day of the last preceding Accounting Period prior to the date on which the Units are redeemed by the Trustee.

Clause X Transfer and Transmission of Unit

a). Notwithstanding the following provisions of Clauses X, X, X and X, the Trustee may in its absolute discretion treat any request for transfer or transmission of Units as a request for redemption of Units and the provisions of Clause X will mutatis mutandis apply.

...

Clause X Transmission of Units

d). A person entitled to Units by transmission will be entitled to receive and may give a good discharge for all moneys payable in respect of the Units but except as otherwise provided by this Deed will not be entitled to any of the rights or privileges of a Unit Holder unless and until he will become registered in respect of the Units.

Relevantly, Clause X defines Fair Value to mean 'the fair value of particular Units determined in accordance with Australian accounting principles'.

Clause X deals with the Trustee's powers as it relates to the termination of the Trust:

...

b). As soon as practicable after the Vesting Day the Trustee will (subject as hereinafter provided) sell, call in and convert into money or cause to be sold, called in and converted into money, the Investments and Property constituting the Trust Fund:

1)... and subject to any special rights or restrictions provided in part X of the X Schedule or otherwise attaching to Units of any class divide the proceeds of such sale and conversion (less all proper costs and disbursements, commissions, brokerage fees and other outgoings and all proper provision for liabilities) in proportion to the number of Units of which they are at the date of the giving of such a notice respectively registered as the Unit Holders, and

2). The Trustee may in its discretion at the request of any Unit Holder transfer to such Unit Holder any assets of the Trust Fund in specie in satisfaction of the entitlement of the Unit Holder on the termination of this Trust

...

e). The Trustee may if it thinks fit transfer any of the Investments or Property of the Trust Fund to the trustee of any other trust (whether or not the Trustee hereof is in any way associated with such other trust) on receiving cash equivalent to the Fair Value of such investment at the date of transfer.

...

Clause X provides for the determination and classification of the 'Income' of the Trust and distribution and accumulation of income:

X. Determination and Classification

a). The Trustee will in each Accounting Period determine the Income of the Trust Fund.

b), The Trustee may classify the Income or capital of the Trust Fund into one or more such classes,...Without limiting the generality of the foregoing in such determination the Trustee may identify and account separately, for:

1). Any unrealised or realised gains relating to the re-valuation of assets;

2). Any Capital Profits;

3). The amount of any Franked Dividends;

4). The amount of any Unfranked Dividends;

5). Any Untaxed Amount;

6). Any Foreign Income;

7). Any difference between any Trust Income and Net Income before tax; and

8). Any amount to which a separately identifiable taxation consequence or benefit may attach.

X Distribution of Income

a). The Trustee may, if the Unit Holders so direct, ..., to do all or any of the following:

1). Subject to any special rights or restrictions provided in part X of the X Schedule or otherwise attaching to Units of any class to Distribute the same or any part thereof to all or one or more of the Unit Holders or to any class of Unit Holder; and

2). Accumulate the same or any part thereof.

...

4). The Trustee may in its discretion determine and identify which Income or which part of the Income or which class of Income (whether by reference to source nature or otherwise) of the Trust Fund is the subject of any particular determination or determinations and the Income the subject of any such determination shall be treated for all purposes as being distributed or accumulated as the case may be from the Income or part or class so identified

...

6). The Trustee will have a complete discretion as to the making of any determination and will not be bound to assign any reason for the determination;

...

X Accumulation and Amounts Set Aside

a). The amount of any accumulation will be dealt with as an accretion to the capital of the Trust Fund, but so that the Trustee may at any time resort to all such accumulations and distribute the whole or any part of those accumulations as if it were Income of the Trust Fund.

b). If the Trustee has not by the expiration of the Accounting Period determined to Distribute or accumulate the whole of the Income of the Accounting Period in the manner aforesaid then the Trustee will hold the Income not so Distributed or accumulated for that Accounting Period in trust for the Unit Holders whose Units are entitled to Income, in proportion to the number of such Units which they are respectively registered at the time.

...

X Trust Fund Capital

Subject to any special rights or restrictions attaching to any Units under part X of the X Schedule or otherwise pursuant to this Deed, the Trustee will have the power from time to time prior to the Vesting Day to Distribute:

a). The whole or any part of the capital of the Trust Fund to the Unit Holders in proportion to the number of Units for which they are respectively registered at the time; and

b). Any amount set aside for any Unit Holders or held by the Trustee in trust for a Unit Holder pursuant to Clause X of this Deed.

Relevantly, Clause X defines Income to mean 'Trust Income', and in turn Trust Income means income produced from:

a). the investment of the Trust Fund;

b). the Property of the Trust Fund; or

c). any other income producing activity;

after allowing for the expenses of the Trust calculated in accordance with the law of trusts, standard accounting procedures for trusts and the administrative powers contained within this Deed and may include realised or unrealised Capital Profits if so determined by the Trustee.

Clause X sets out the general, additional and specific powers of the Trustee - which include powers to deal with the Trust Fund, investments and reclassification of income:

b). The Trustee will have power to make or vary or sell any investment and to engage in any transaction or dealing on behalf of the Trust, as the Trustee could do if the Trustee were the beneficial owner of the Trust Fund absolutely entitled to, the assets comprising the Trust Fund and any increments in the value of those assets, and, in addition to the powers otherwise conferred upon trustees by law or elsewhere in this Deed have the following additional powers:...

...

19). To appropriate any part of the Trust Fund in the actual condition or state of investment thereof in or towards the satisfaction of the interest of any person in the Trust Fund or in or towards the satisfaction of any sum which the Trustee may determine to pay or apply to or for the benefit of any Unit Holder pursuant to this Deed and in making such appropriation to estimate the value of the component parts of the Trust Fund or to employ such persons to make such valuation as in the circumstances the Trustee deems proper without obtaining any consents otherwise required by law and every appropriation so made will bind all persons interested in the Trust Fund notwithstanding that they may not yet be in existence or may be under a legal disability;

...

28). With the consent of the Unit Holders, in any condition or circumstances which the Trustee thinks expedient to appoint either in respect of the whole of the Trust Fund or any part thereof new Trustees in any country in the world and to transfer assign and set over the investments for the time being representing the Trust Fund or any part thereof to any such new Trustees upon similar trusts and subject to similar terms and conditions to those declared in these presents ...;

29). With the consent of each class of Unit Holders at any time before the Vesting Day by any irrevocable deed (without infringing any rule against perpetuities to this Deed) to appoint that the whole or any part of the Trust Fund will thenceforth be held upon the trusts and with and subject to the powers and provisions of any other trust (not infringing the rule against perpetuities applicable to this Deed) and approved by the Trustee in favour or for the benefit of all or one or other of the Unit Holders registered at the time of such appointment and upon any such appointment being made the Trustee may transfer to the Trustees for the time being of the said other trust property comprised in the said appointment and thereupon the trusts herein declared concerning such property will cease and determine and the said property will for all purposes be subject to the trusts powers and provisions contained in the said other trust and be subject to and governed by the proper law of the said other trust whether or not such proper law will be the proper law of this trust;

....

c). Notwithstanding anything herein to the contrary or otherwise contained, the Trustees will have power at their absolute discretion:

...

5). To reclassify receipts of income as receipts of capital and to reclassify receipts of capital as receipts of income; to reclassify distributions of income as distributions of capital and distributions of capital as distributions of income; to recoup past years' losses out of current year's profits or out of capital as it determines and to allocate expenses against capital or against income as it determines

Clause X and Clause C reflect that consent (and the direction of the Unit Holders), refers to consent/direction by the majority of Unitholders other than special consent (which requires a majority of not less than 75%).

Clause X provides for when the Trust Deed may be amended:

X Variation of Trust

a). With the special consent of the Unit Holders, the Trustee may at any time and from time to time by supplemental deed or by resolution revoke, add to or vary all or any of the provisions of this Deed or any of the trusts hereinbefore limited or the trusts limited by any variation or alteration or addition made previously and may by the same or any other deed or resolution declare any new or other trusts or powers concerning the Trust Fund or any part or parts thereof the trusts whereof will have been so revoked added to or varied but so that the Rule against Perpetuities is not thereby infringed and so that such new or other trusts powers discretions alterations or variations:

1). Will not affect the beneficial entitlement to any amount set aside for any Unit Holder prior to the date of the variation alteration or addition; and

2). Are not in favour of or does not result in any benefit to the Trustee other than in its capacity as a Unit Holder where applicable.

b). This Deed is not capable of being revoked, added to or varied otherwise than as expressly herein provided.

c). Notwithstanding anything to the contrary hereinbefore expressed or implied, no discretion or power by this Deed conferred upon the Trustee or any other person may be exercised, and no provision of this Deed may operate so as to confer or be capable of conferring any benefit or interest on any Trustee, and this Clause is not capable of being varied as provided by Clause X or otherwise.

Clause X defines Special Resolution to mean 'a resolution passed as special business at a duly convened General Meeting by a 75% majority of the votes cast by those present and voting on the resolution'.

Amendments to the Trust Deed

Since the establishment of the Trust, no amendments have been made to the Trust Deed.

Proposed amendments to the Trust Deed

The purpose of the proposed amendments to the Trust Deed (as set out in the Deed of Amendment) is to convey that the Unitholders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1 of the ITAA 1997 and subsection 272-5(1) of Schedule 2F of the ITAA 1936, Relevantly, the proposed amendments:

•         Remove the Trustee's power to issue different classes of units by limiting the units in the Trust Ordinary Units, and make consequential amendments relating to this change.

•         Reflect that that units will be issued and redeemed at a price based on the net asset value of the Trust Fund, determined in accordance with Australian accounting principles, divided by the number of Units on issue.

•         Provide that the provisions of the Trust Deed are not capable of being revoked, added to, or otherwise varied in any way that would have the effect of preventing all of the Unitholders of the Trust from having fixed entitlements to all of the Income and Capital of the Trust.

Associations

There are no associations between any entity engaged to perform valuation services and the Trustee and Unitholders.

There are no associations between the Unitholders.

All transactions between all entities are conducted at arm's length.

Trust investments

The main activity of the Unit Trust is investment (passive investment in a related company).

The Trustee has received fully franked dividends from the related entity, which has flowed the Unitholders.

Family Trust elections

Family trust elections are in place for all Unitholders and trust distributions have only been made to the relevant family groups.

Losses

There are no carried forward tax losses and no expected current year tax losses.

There are no expected bad debts or debt/equity swap losses.

The Trustee has self-assessed the Trust meets the safe harbour conditions in Item 6 of paragraph 54 in Practical Compliance Guidelines PCG 2016/16 Fixed entitlements and fixed trusts.

Assumptions

The proposed amendments to the Trust Deed are valid.

Throughout the Ruling Period, no powers have been or will be exercised to defeat the interest of any Unitholder, with respect to their units (Ordinary Units) including:

•         There will only be one class of units - i.e. no units of different classes will be issued.

•         No units will be reclassified. The rights attached to units already in existence will not be modified.

•         Units will only be transferred or redeemed at the request of a Unitholder.

•         Units will be issued, redeemed, transferred or transmitted for a price determined on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 - i.e. on the basis of the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16.

•         No units will be issued or redeemed at a discount.

•         The Trustee will ensure that units will only be transferred or transmitted for market value.

•         No partly paid units will be issued.

•         No streaming of income or capital will occur.

•         The Trustee will not seek to amend or vary the Trust Deed to defeat the interest or change the fixed entitlements of Unitholders to the income and capital of the Trust.

•         All Unitholders will be entitled to the income and capital of the trust in proportion to their unitholding - if requested by a unitholder, the Trustee will transfer assets rather than pay cash in satisfaction of amounts owing, including as part of winding up the trust, to that particular unitholder. The Trustee will only transfer to that particular unitholder assets of the Trust to the extent that the market value of the assets equivalent to their proportion of unitholding.

Throughout the Ruling Period, no arrangement has been or will be entered into which would result in section 272-35 in Schedule 2F of the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or in fraud or evasion.

Throughout the Ruling Period, in addition to an undertaking that no powers have been or will be exercised to defeat the interest of any Unitholder (as set out above), no arrangement has been or will be entered into which would result in:

•         A 'related payment' under former section 160APHN of the ITAA 1936.

•         A Unitholder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee of the Trust (refer to former section 160APHM of the ITAA 1936).

•         A Unitholder not being sufficiently exposed to the risk of loss or opportunity for gain in respect of the units in the Trust.

•         The Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936.

•         Any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying.

•         Fraud or evasion.

Relevant legislative provisions

Income Tax Assessment Act 1936 former section 160APHD

Income Tax Assessment Act 1936 former subsection 160APHL(10)

Income Tax Assessment Act 1936 subsection 160APHL(14)

Income Tax Assessment Act 1936 former section 160APHP

Income Tax Assessment Act 1936 subsection 272-5(1) of Schedule 2F

Income Tax Assessment Act 1936 subsection 272-5(3) of Schedule 2F

Income Tax Assessment Act 1936 section 272-65 of Schedule 2F

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 104-75

Reasons for decision

Question 1

Will the Unitholders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1 of the Income Tax Assessment Act 1997 Act (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Assessment Act 1936 (ITAA 1936) such that the Trust will be a 'fixed trust' under section 272-65 of Schedule 2F to the ITAA 1936 and section 995-1 of the ITAA 1997?

Summary

The Unitholders as beneficiaries of the Trust do not 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.

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 Unitholder, in the income or capital of the unit trust is defeasible.

PCG 2016/16: Fixed entitlements and fixed trusts, explains that a trust is a fixed trust if the beneficiaries have fixed entitlements to all of the income and capital of the trust and confirms that a person will have a fixed entitlement to a share of income or capital of a trust if, under the trust instrument, that person has a vested and indefeasible interest in that share of income or capital. Relevantly, it explains when an interest is defeasible - paragraphs 15 and 16 of PCG 2016/16 define indefeasible interests:

15. An interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events. An interest of a default beneficiary in the income or capital of the trust is an example of a defeasible interest.

16. Powers in modern trust instruments which cause a beneficiary's interests to be defeasible include:

•         Broad powers to amend the trust instrument.

•         Powers to issue new units after the trust is settled, or to redeem existing units.

•         A power to reclassify existing units so that they do not all have equal rights to receive the income and capital of the trust.

•         A power to classify receipts as being on income or capital account where the units that have been issued do not all have the same rights to receive the income and capital of the trust.

•         A power to appoint a beneficiary's interest in the income or capital of the trust to another beneficiary.

•         A power to settle or appoint any part of the corpus of the trust to a new trust with different beneficiaries.

•         A 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.

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

It is accepted that the Trust Deed provides the Unitholders with a vested interest in the income and capital of the Trust. Relevantly, we accept having regard to the provisions of the Trust Deed as a whole and Clause X that Unitholders will be entitled to income and capital based on their pro rata share of units held in the Trust and Clause X provides that on termination of the trust the Unit Holders are entitled to their proportionate share of the assets of the Trust (after costs incurred in the liquidation of the trust) subject to a ratified plan referred to in Clause X.

However, there are various clauses in the Trust Deed relating to the Trustee's discretions that may cause a beneficiary's interests to be defeasible - including the power to:

• Issue new units - including different classes of units (under current Clause X and the Second Schedule the Trustee has the power to issue new units and different classes of units, and under the proposed amendments to Clauses X and the X Schedule the Trustee will have the power to issue additional units).
• Vary the Trust Deed (Clause X).

Therefore, the Unitholders as 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.

Question 2

If the answer to Question 1 is 'no' 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?

Summary

As the 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) of Schedule 2F to the ITAA 1936 may be considered. 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 as beneficiaries of the Trust as having fixed entitlements to all of the income and capital of the Trust.

Detailed reasoning

A finding that a trust is a fixed trust for Schedule 2F ITAA 1936 has broad implications (i.e. it applies for income tax purposes generally).

Where all of the beneficiaries' interests in the corpus of the trust are not fixed interests, the trustee may request that the Commissioner exercise the discretion to treat beneficiaries' interests as being vested and indefeasible.

A trust can both rely on the savings rule in relation to some trustee powers (the power to issue or redeem units), and request that the Commissioner exercise the discretion in the context of other powers that may defeat a beneficiary's interest (such as in relation to a power to amend).

Savings rule

The 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 provides that the mere fact that a trustee has power to redeem units in a unit trust, or issue further units for the following value does not mean that Unitholders' interests in the corpus of the unit trust are defeasible:

•         where the units are listed for quotation in the official list of an approved stock exchange - the same price as other units are offered for sale on that exchange at the time of the redemption or issue, or

•         where the units are not so listed - a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles.

The Commissioner considers that the savings rule is satisfied where further units may be issued or existing units redeemed in any of the following situations (paragraphs 18 and 19 Practical Compliance Guideline PCG 2016/16 Fixed entitlements and fixed trusts):

•         for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer

•         for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer, but which nevertheless is accurate

•         for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)

•         for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs), including where accrued distributions are excluded from the net asset value based on a 'unit day's pricing model'

•         for a price based on the volume weighted average price (VWAP) of the units, or

•         in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015/847, ASIC Class Order [CO 13/655] and ASIC Class Order [CO 13/657] (if relevant), or any other ASIC guidance or relief on the same subject.

Discretion

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).

In broad terms, there are four key matters that the Commissioner takes into account in deciding whether to exercise the discretion:

• the circumstances in which a beneficiary's interest is capable of being defeated or not vesting.
• the likelihood of the interest being defeated or not vesting;
• the nature of the trust; and
• whether the exercise of the discretion would enable a taxpayer to obtain a tax benefit from a trust with a tax loss in circumstances where the economic loss incurred was not borne by the taxpayer.

Paragraph 55 of PCG 2016/16 outlines factors favourable to the exercise of the Commissioner's discretion:

The Commissioner regards the following factors favourably when deciding whether to exercise the discretion:

• a trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust
• commitments are made in Unitholder agreements, Product Disclosure Statements or other documents with legal consequences that the trustee or manager will not exercise a power capable of defeating a beneficiary's interest at all, or in a way that is adverse to the rights of beneficiaries to receive the income and capital of the trust
• all beneficiaries have the same rights to receive the income and capital of the trust
• the trust instrument can only be amended with the unanimous (100%) approval of all the beneficiaries
• although the trust instrument can be amended without the unanimous approval of beneficiaries, the approval percentage calculated on the current interest or unit holdings of beneficiaries effectively means that all beneficiaries must approve any amendment (for example, where the approval of 75% of Unitholders is required to make the amendment and the smallest unit holding is more than 25% of the units)
• the trust instrument has been amended in accordance with section 601GC of the Corporations Act 2001 (so as to assist with the efficient administration of the trust) but no beneficial interests in the income and capital of the trust are adversely affected
• the beneficiaries whose rights to receive the income and capital of the trust have been adversely affected by the exercise of a power capable of defeating a beneficiary's interest have explicitly consented to that specific act (such as upon the redemption of the interests of an employee not covered by the savings rule upon the cessation of employment)
• the trustee or manager deals with the beneficiaries of the trust on an arm's length basis
• the trust is governed by a foreign law that is similar to Chapter 5C of the Corporations Act 2001, and
• the trust would satisfy the basic and specific conditions (as applicable to the type of trust) for access to a safe harbour.

Factors adverse to the exercise of the Commissioner's discretion are listed in paragraph 56 of PCG 2016/16 and include:

The Commissioner regards the following factors unfavourably when deciding whether to exercise the discretion:

• a trustee or manager exercises a power to defeat beneficiaries' interests in the income or capital of the trust, however:

-          the nature of the power that is exercised will be important, for example, compulsorily redeeming units where a Unitholder's stake is less than a minimum specified in the trust instrument, and the Unitholder receives the redemption price of those units, is unlikely to preclude the exercise of the discretion

-          where external factors (such as those in the Global Financial Crisis) temporarily affect the ability of the trustee or manager to fund distributions or redemptions, this is unlikely to preclude the exercise of the discretion (for example, a temporary wholesale freezing or deferral of interests)

• there are significantly different beneficiaries of the trust in an income year for which an entity seeks to have a fixed entitlement, than the beneficiaries of the trust in the income year(s) in which the trust made a tax loss, or incurred a bad debt deduction or debt/equity swap deduction
• an arrangement has been entered into which would result in:

a)    section 272-35 having application

b)    the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or

c)    fraud or evasion.

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 (in the absence of any express provision or explanatory guidance that indicates a different context is relevant). 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 Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 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 intended to provide for special circumstances where there is a low likelihood of a beneficiary's vested interest being taken away or defeated and, having regard to the scheme of the trusts loss provisions to prevent the transfer of the tax benefit of losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement.

This indicates 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, unless the context of the provision for which fixed entitlement is required provides otherwise, the Commissioner should always have regard to whether the absence of a fixed entitlement, in these circumstances, could result in the trafficking (or transfer) of the tax benefit of any tax losses.

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

The current Trust Deed and proposed amendments provide the Unitholders 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 Unitholder 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:

When examining the circumstances in which a beneficiary's interest is capable of not vesting or being defeated, the Commissioner will have regard to any factor that may affect the defeasance of any beneficiary's interest, including:

•         the number of circumstances of potential defeasance, and

•         the significance of those circumstances.

This includes having regard to:

•         any person who is capable of altering the beneficiary's interest

•         the nature of their relationship to the beneficiary, and

•         any limitation on their capability to so alter that interest.

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

• Issue of units: During the Ruling period, only one class of unit has been or will be issued and the units have been or will only be issued for a price determined on the basis of the Net Fund Value or Net Asset Value (according to Australian accounting principles). As such the saving rule in paragraph 272-5(2)(d) would be satisfied.
• Redemption of units: The Trustee may redeem units with or without the consent of the Unitholders. The redemption price has been or will be determined on the basis of the Net Fund Value or Net Asset Value (according to Australian accounting principles. As such, the saving rule in paragraph 272-5(2)(d) of Schedule 2F to the ITAA 1936 would be satisfied.
• Amendment of the Trust Deed: In the circumstances, the Trust Deed can only be amended with the unanimous approval of the Unit Holders. With the exception of the proposed amendments no amendments have been made to the Trust Deed. Further, the amendments provide that the provisions of this Deed are not capable of being revoked, added to, or otherwise varied in any way that would have the effect of preventing all of the Unitholders of the Trust from having fixed entitlements to all of the Income and Capital of the Trust.

The Commissioner accepts that the assumptions mitigate the circumstances in which the beneficiaries' interests in the income and capital of the Trust can be defeated.

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

When considering the likelihood of the interest not vesting or being defeated, the Commissioner must form a view as to the probability that the contingency or defeasance will happen. Where the likelihood of the contingency happening is high or the action or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion.

Where the trustee or manager of the trust has a particular power to defeat a beneficiary's interest, it is relevant to consider how often, if at all, they have exercised that power over a relevant period.

Any preconditions or caveats that affect the likelihood of a beneficiary's interest not vesting or being defeated are also relevant.

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

•         The Trustee's behaviour from the time the Trust was settled to the date of this ruling application is relevant. It is noted that 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 Ruling period, having regard to the assumptions, the Trustee has exercised or may exercise its powers under the Trust Deed such that:

­   There will only be one class of units will be issued.

­   No units will be reclassified. The rights attached to units already in existence will not be modified.

­   Units will only be transferred or redeemed at the request of a Unitholder.

­   Units will be issued or redeemed for a price determined on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 - i.e. on the basis of the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16.

­   No units will be issued or redeemed at a discount.

­   No partly paid units will be issued.

­   No streaming of income or capital will occur.

­   The Trustee will not seek to amend or vary the Trust Deed to defeat the interest or change the fixed entitlements of Unitholders to the income and capital of the Trust.

­   In the event the Trust is terminated, all Unitholders will be entitled to the income and capital of the trust in proportion to their unitholding - if requested by a Unitholder, the Trustee will transfer assets rather than pay cash in satisfaction of amounts owing, including as part of winding up the trust, to that particular Unitholder. The Trustee will only transfer to that particular Unitholder assets of the Trust to the extent that the market value of the assets is equivalent to their proportion of unitholding.

The Trustee has never exercised its powers under the Deed in a way that the above assumptions would not be applicable and will not to do so for the Ruling period, to defeat a Unitholder's interest in the income or capital of the Trust. Consequently, the Commissioner would accept that the likelihood of the beneficiaries' interests in the income and capital of the Trust being defeated would be low.

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

The nature of the trust refers to its basic legal characteristics and its economic function, both actual and intended. The ability of the trustee or manager of the trust to adversely affect the interests of beneficiaries could be limited where:

•                     additional responsibilities are placed on the trustee by legislation, most commonly as a registered managed investment scheme under Chapter 5C of the Corporations Act 2001;

•                     contractual restrictions limit the trust manager's access to trust assets;

•                     the trust is subject to industry regulations, licensing or registration requirements, which are legally enforceable, such as the Australian Securities Exchange (ASX) Listing Rules which are enforceable against listed entities and their associates (sections 793C and 1101B of the Corporations Act 2001);

•                     commitments are made in a product disclosure statement, investment memorandum or other document to exercise powers in a particular (restrictive and/or non-adverse) way;

•                     the trust deed restricts the ability of the trustee to issue and redeem units at anything other than market value or other values approximating net asset value, or

•                     the unanimous (100%) approval of the beneficiaries is required prior to the exercise of a power capable of defeating a beneficiary's interest by the trustee or manager.

In relation to the nature of the trust the following factors are relevant:

•                     The Trust is a unitised trust; however, the Units are not publicly listed on an approved stock exchange and the Trust is not a managed investment scheme. Therefore, the circumstances and likelihood in which each Unitholder's entitlement is capable of not vesting or the defeasance happening is not reduced in this Trust.

•                     The purpose of establishing the Trust is to allow the Unitholders to derive income/profits from the investments made by the Trust. At the date of the ruling application, the Trust has two unrelated Unitholders.

•                     The Trustee is not required to hold an Australian Financial Services Licence in order to act as Trustee of this Trust and therefore not subject to Australian financial services regulations.

•                     The parties are dealing on an arm's length basis.

The Commissioner accepts that in these circumstances the ability of the Trustee to adversely affect the interests of beneficiaries is limited - the parties are unrelated parties dealing on an arm's length basis.

Schedule 2F to the ITAA 1936 and tax losses

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

•                     At the date of the ruling application, there are no losses and the Trustee does not forecast a tax loss for the Trust.

•                     No arrangements have been or will be entered into that would result in section 272-35 in Schedule 2F of the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or in fraud or evasion.

•                     If there are further units to be issued 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.

Conclusion

It is accepted that based on the 'trust instrument' of the Trust that for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the beneficiaries of the Trust do not have fixed entitlements to any of the income and capital of the Trust.

However, pursuant to paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, and after having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) of Schedule 2F to the ITAA 1936 and submissions from the applicant, it is considered that it would be appropriate that the Unitholders of the Trust should be treated as having fixed entitlements to all of the income and capital of the Trust for the relevant income years.

In summary, as:

•                     the trust instrument (being the Trust Deed and proposed variations) contains powers which will not be used to defease the interests of the beneficiaries in the income or capital of the Trust - i.e. the circumstances in which the entitlement is capable of not vesting or a defeasance happening are limited having regard to the Assumptions included;

•                     the "nature of the trust" is a unit trust established for the purposes of carrying out investment;

•                     the likelihood of the entitlement not vesting or a defeasance is low; and

•                     there is little likelihood that a tax benefit of the Trust will be transferred (the opportunity to traffic any tax loss appears to be limited).

it would be reasonable for the Commissioner to exercise the discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat all of the Unitholders of the Trust as having a fixed entitlement to their share of the income and capital of the Trust for the relevant income years

Question 3

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

Summary

The terms of the Trust Deed 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

Broadly, shares acquired by a discretionary trusts (non-fixed trust) would fail the 45 day rule, 160APHL(10) of the ITAA 1936 provides that where the trustee has made a family trust election, there is no deemed short position - this means that in the absence of any positions taken by the trustee to reduce the risk of holding the shares, the only position of the beneficiary would normally be a deemed long position under former subsection 160APHL(7) and consequently franking benefits can pass through to the beneficiaries in this situation:

160APHL(10) Additional positions of the taxpayer.

If:

(a) the trust is not a family trust within the meaning of Schedule 2F; and

(b) the trust is not a trust for the purposes of this Act merely because of the reference to executors and administrators in paragraph (a) of the definition of trustee in subsection 6(1); and

(c) the taxpayer's interest in the relevant share or the relevant shares is not an employee share scheme security;

the taxpayer has, in addition to any other long and short positions (including the positions that the taxpayer is taken to have under subsection (8)) in relation to the taxpayer's interest in the relevant share or relevant shares, a short position equal to the taxpayer's long position under subsection (7) and a long position equal to so much of the taxpayer's interest in the trust holding as is a fixed interest.

160APHL(11) A vested and indefeasible interest constitutes a fixed interest.

For the purposes of subsection (10), the taxpayer's interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.

Relevantly, as it is the case here, a unit trust with unrelated family investors would not be in the position to make the requisite family trust elections to facilitate the passage of imputation credits to the beneficiaries of the trust.

Question 4

If the answer to Question 3 is 'no', will the Commissioner exercise his discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding?

Summary

The Commissioner considers that it would be reasonable to exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding for the Ruling Period.

Detailed reasoning

The discretion in former subsection 160APHL(14) is relevant where a Trustee distributes a franked distribution to Beneficiaries. In order to be eligible for the franking credit tax offset the Beneficiaries are required to have Fixed Interests in the corpus of a Trust. This requirement derives from the Holding Period Rule and Related Payments Rules.

Where beneficiaries 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, they can only have such a vested and indefeasible interest if the Commissioner exercises the discretion in former subsection 160APHL(14) of the ITAA 1936.

Pursuant to former subsection 160APHL(14) of the ITAA 1936, where beneficiaries do not have a fixed interest, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed interest where it is reasonable to do so based upon the factors prescribed in paragraph 160APHL(14)(c) of the ITAA 1936 - the Commissioner may treat a beneficiary as having a fixed interest (in cases where in fact beneficiaries do not have a fixed interest) having regard to:

•                     the circumstances in which the entitlement is capable of not vesting or the defeasance can happen; and

•                     the likelihood of the entitlement not vesting or the defeasance happening; and

•                     the nature of the trust; and

•                     any other matter the Commissioner thinks relevant.

The first three factors are the same as those applying in the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem a fixed entitlement to the income and capital of a trust, as discussed above.

Any other matter the Commissioner thinks relevant

The discretion in former subsection 160APHL(14) of the ITAA 1936 relates to the utilisation of a tax offset for a share of the franking credit on a franked distribution.

It was introduced as a part of integrity measures aimed at defeating franking credit trading schemes. The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1999 which accompanied the introduction of former subsection 160APHL(14) of the ITAA 1936 outlines the purpose of the integrity measures:

4.6 One of the underlying principles of the imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves: a degree of wastage of franking credits is an intended feature of the imputation system.

4.7 In substance, the owner of shares is the person who is exposed to the risks of loss and opportunities for gain in respect of the shares. However, franking credit trading schemes allow persons who are not exposed, or have only a small exposure, to the risks and opportunities of share ownership to obtain access to the full value of franking credits, which often, but for the scheme, would not have been used at all, or would not have been fully used. Some of these schemes may operate over extended periods, and typically involve a payment related to the dividend which has the effect of passing its benefit in economic terms to a counterparty. The schemes therefore undermine an underlying principle of imputation.

As such, when considering the exercise of the discretion in former subsection 160APHL(14) of the ITAA 1936, the Commissioner must bear in mind the intended effect of the integrity measures.

Relevantly:

•                     the Trust Deed contains clauses that may constitute a defeasible power e.g. the power to issue new units under Clause X and to vary the Trust Deed under Clause X. However, the Trustee has not and will not, exercise any power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the capital of the Trust;

•                     the likelihood of defeasance is low given the terms of the Trust Deed; and

•                     there is little likelihood that a franking credit trading scheme exists in these circumstances - relevantly, there have only been three shareholders in the Trading Entity being the Trustee and one family member of each of the Unitholders family group, there have been no changes to the Unitholders in the Trust since inception, family trust elections are in place with respect to the Unitholders and family trust distributions have been limited to the relevant family groups.

In relation to the likelihood of the intended effect of the integrity measures being undermined the following factors are relevant:

•                     The transactions between all entities are conducted at arm's length.

•                     In respect of the Ruling period 1 July XXXX to 30 June XXXX, the assumptions are the Trustee or Unitholders have not entered and will not enter into an arrangement that would result in:

­   a 'related payment' under former section 160APHN of the ITAA 1936;

­   a Unitholder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee of the Trust (refer to former section 160APHM of the ITAA 1936);

­   a Unitholder not being sufficiently exposed to the risk of loss or opportunity for gain in respect of the units in the Trust as explained by ATO Interpretative Decision ATO ID 2014/10;

­   the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936'

­   any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying; or

­   fraud or evasion.

Consequently, the Commissioner would accept that the likelihood of the integrity measures being undermined would be low.

Conclusion

The Unitholders do not 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.

However, pursuant to the requirements of former subparagraphs 160APHL(14)(c)(i), (ii) and (iii) of the ITAA 1936 it is considered appropriate that the Unitholders should be treated as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding.

Therefore, it it would be reasonable for the Commissioner to exercise the discretion under former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding during the Ruling Period.

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