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Ruling

Subject: Trust - Fixed Entitlement

Question 1

Does the Commissioner consider it fair and reasonable to treat the Company, at each of the test times, the whole or part of its fixed entitlement to the income and capital of the Trust as an individual and for the individual's own benefit pursuant to subsection 272-30(3) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 31 December 2010

The scheme commences on:

1996

Relevant facts and circumstances

The Trust is not quoted on the official list of approved exchanges. The Trust is an 'unlisted widely held trust' as defined in section 272-110 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) at all times during the test period.

The Trust, since its establishment has had the same non-resident beneficiaries. The beneficiaries are subsidiaries of the Company which is a publically listed company.

The top 50 shareholders in the Company are institutional shareholders and no institutional shareholder held more than 5% of the shares in the Company in each of the test periods. There has been no abnormal trading in the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 266-75 of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 266-75(1)(b) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 266-75(3) of Schedule 2F

Income Tax Assessment Act 1936 Section 266-90 of Schedule 2F

Income Tax Assessment Act 1936 Subsection 266-90(1) of Schedule 2F

Income Tax Assessment Act 1936 Section 269-50 of Schedule 2F

Income Tax Assessment Act 1936 Subsection 269-50(1) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 269-50(2) of Schedule 2F

Income Tax Assessment Act 1936 Section 269-55 of Schedule 2F

Income Tax Assessment Act 1936 Subsection 269-55(1) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-30(3) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-30(4) of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 272-30(4)(a) of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 272-30(4)(b) of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 272-30(4)(c) of Schedule 2F

Income Tax Assessment Act 1936 Section 272-110 of Schedule 2F

Income Tax Assessment Act 1997 Division 166

Reasons for decision

Paragraph 266-75(1)(b) of Schedule 2F to the ITAA 1936 provides that section 266-75 applies to a trust that is an unlisted widely held trust at all times during the test period.

The Trust is an unlisted widely held trust at all times during the test period.

Therefore, in accordance with subsection 266-75(3) of Schedule 2F to the ITAA 1936, the Trust cannot claim a tax loss unless it meets the conditions in section 266-90 of Schedule 2F of the ITAA 1936.

Subsection 266-90(1) of Schedule 2F to the ITAA 1936 requires that an unlisted widely held trust must pass the 50% stake test in respect of the following times:

· the beginning of the test period;

· immediately after,

o any abnormal trading in the trust's units; and

o the end of every income year during the test period.

The Trustee of the Trust has advised that the Trust has no abnormal trading at any time during the relevant test period. The Trustee further advises that the units in Trust have been held by the same entities and in the same proportions since the Trust was established.

Section 269-50 of Schedule 2F to the ITAA 1936 explains what it means to have more than 50% stake of the income and capital of the trust.

More than a 50% stake in income

269-50(1)

If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the income of a trust, those individuals have more than a 50% stake in the income of the trust.

More than a 50% stake in capital

269-50(2)

If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the capital of the trust, those individuals have more than a 50% stake in the capital of the trust.

Under subsection 269-55(1) of Schedule 2F to the ITAA 1936, the 50% stake test will be passed if, at all times during a period or at 2 times:

· the same individuals have more than a 50% stake in the income of trust; and

· the same individuals (who may be different from those in paragraph (a) above) have more than a 50% stake in the capital of trust.

Under sections 269-50 and 269-55 of Schedule 2F to the ITAA 1936, the same individuals must have, indirectly through the Company and for their own benefit, fixed entitlement to a greater than 50% share of income and capital of the Trust.

Where an interposed listed company has directly or indirectly, a fixed entitlement to a share of income or capital of the main entity (the Trust), subsection 272-30(3) of Schedule 2F to the ITAA 1936 contains the Commissioner's discretionary power to treat the company as holding the whole or part of its fixed entitlement as an individual and for the individual's benefit.

In the present case, the Trustee has requested the Commissioner, under subsection 272-30(3) of Schedule 2F to the ITAA 1936, to consider whether it is fair and reasonable to treat GE as holding, at the test times, the whole or part of its fixed entitlement as an individual and for the individual's own benefit.

Subsections 272-30(3) and (4) of Schedule 2F to the ITAA 1936 specifically provide:

272-30(3)

If

(a) at the test time a listed public company or widely held unit trust has, directly or indirectly, a fixed entitlement to a share of the income or capital of the main entity; and

(b) having regard to the matters set out in subsection (4), the Commissioner considers it fair and reasonable to treat the company or trust as holding, at the test time, the whole or part of its fixed entitlement as an individual and for the individual's own benefit;

272-30(4)  

For the purposes of paragraph (3)(b), the matters are:

(a) the practicability of identifying any individuals who at the test time have fixed entitlements to a share of the income or capital of the main entity indirectly through the company or trust and for their own benefit; and

(b) any change before or after the test time in the individuals who can be identified as having fixed entitlements of the kind mentioned in paragraph (a); and

(c) any other matter that the Commissioner considers relevant

Paragraphs 13.43 and 13.44 of the Explanatory Memorandum to Taxation Law Amendment (Trust Loss and other Deductions) Bill 1997 (Cth) (EM), in reference to subsections 272-30(3) and (4) of Schedule 2F to the ITAA 1936 states as follows:

13.43 There are considerable practical difficulties in tracing interests in or through listed public companies, because of the large number of shareholders and the likelihood that individuals will not hold shares in the listed public company directly. Similar problems arise for widely held unit trusts. The main problem is that it may be difficult, in particular cases, to identify all the direct and indirect holders of fixed entitlements in those entities.

13.44 A provision has been included in the Bill to assist in overcoming difficulties in appropriate cases. This provision will allow the Commissioner to treat all or part of the fixed entitlements in a trust (or interposed entity where relevant) held, directly or indirectly, by a listed public company or widely held unit trust as being held by that company or trust as an individual for its own benefit.

The EM acknowledges that there are considerable practical difficulties in tracing interests through listed public companies to the individual shareholders due to the large number of shareholders and the likelihood that individuals will not hold shares in the listed company directly. Therefore, the Commissioner is empowered under subsection 272-30(3) of Schedule 2F to the ITAA 1936 and after having regard to the matters in subsection 272-30(4) of Schedule 2F to the ITAA 1936, to treat the listed public company as holding its fixed entitlements as if it were being held by an individual for its own benefit.

Paragraph 272-30(4)(a) - The practicability of identifying any individuals who at the test time have fixed entitlements to a share of the income or capital of the main entity indirectly through the company for their own benefit

Taking into account the views put forward by the Trustee and the guidance provided by the EM, the Commissioner accepts that, in this case, it is not practicable to trace individual shareholding for the purposes of the 50% stake test.

Paragraph 272-30(4)(b) - Any change before or after the test time in the individuals who can be identified as having fixed entitlement of the kind mentioned in paragraph (a); and

The Trustee advises that they are not aware of any change in individuals who can be identified before or after the test time.

Paragraph 272-30(4)(c) - Any other matters that the Commissioner considers relevant.

The Trustee has indicated that there has been no change in the units in of the Trust since its establishment. There are no intentions to change or amend the trust unit structure of the Trust.

Conclusion

Having regard to the matters under Subsection 272-30(4) of Schedule 2F to the ITAA 1936 the Commissioner considers it fair and reasonable to treat the Company as holding, at each of the test times, the whole or part of its fixed entitlement to the income and capital of the Trust as an individual and for the individual's own benefit pursuant to subsection 272-30(3) of Schedule 2F to the ITAA 1936.