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Ruling

Subject: Fixed trust status; Trust resettlement

Question 1

Is the trust a 'fixed trust' for the purposes of section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Will the unit holders (beneficiaries) of the trust have fixed entitlements to all the income and capital of the trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the ITAA 1936?

Answer

Yes.

Question 3

Will the Commissioner confirm that the execution of the proposed amendments to the trust deed will not result in the happening of CGT Event E1 (section 104-55) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July 2012 to 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The following description of the scheme is based on documents and background information provided by the applicant.

In relation to the trust:

· it was settled in the 2007 income year;

· it will only have two unit holders;

· the trustee can only issue ordinary units;

· the percentage of unit holdings of the unit holders will not change; and

· the trustee can only amend the trust deed with unanimous unit holder approval.

The trustee of the trust proposes to vary the trust deed pursuant to the powers conferred on the trustee by the trust deed in relation to the reclassification of units, the issue of units and the removal of doubt around the classification of the trust as a fixed trust.

The deed of variation details proposed amendments to the trust deed.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 95A(2)

Income Tax Assessment Act 1936 Division 272 of Schedule 2F

Income Tax Assessment Act 1936 Section 272-5 of Schedule 2F

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

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

Income Tax Assessment Act 1936 Paragraph 272-5(2)(d) 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 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Subsection 104-55(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Corporations Act 2001 Chapter 5C

Corporations Act 2001 Paragraph 601GC(1)(a)

Reasons for decision

Question 1 and 2

A 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997, and section 272-65 of Schedule 2F to the ITAA 1936; that definition provides that:

A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust.

The definition of '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 of 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 term 'vested and indefeasible' is not defined in the taxation legislation and to date there is no 'ATO view' which defines or clarifies the term. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 does discuss its ordinary meaning at some length, at paragraphs 13.4 to 13.9.

In Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16 ("Colonial") Stone J stated at [97] that in the absence of a definition, and subject to qualification in subsection 272-5(2) of Schedule 2F to the ITAA 1936, the term 'indefeasible' bears its ordinary meaning when applied to an interest, that is that 'the interest cannot be terminated, invalidated or annulled'. The meaning of the term 'vested and indefeasible' (in the context of Schedule 2F to the ITAA 1936) also appears 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; Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest "under a trust instrument". In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

The first step in determining whether a beneficiary has a vested and indefeasible interest in a share of the income or capital of a trust is to ascertain the terms of the trust upon which the relevant trust property is held. As the High Court recently stated in CPT Custodians Pty Ltd v Commissioner of State Revenue (Vic); Commissioner of State Revenue (Vic) v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [15], in taking this step:

'…a priori assumptions as to the nature of unit trusts under the general law and principles of equity [will] not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2), upon the terms of the particular trust. The term "unit trust" is the subject of much exegesis by commentators. However, "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which dictate the application to particular facts of the [relevant statutory definition]…'

There will be some circumstances in which a trust instrument must be read subject to the operation of a particular legal rule, whether by common law, statute or statutes. See, for example, the provisions of Chapter 5C of the Corporations Act 2001 which, if inconsistent with the constitution of a registered managed investment scheme, can have the effect of altering or modifying the scheme's constitution. It is possible for a constitution to be altered or modified by operation of law irrespective of whether the trust instrument itself expressly recognises the relevant common law rule or statute, and the entitlements of a beneficiary under the trust instrument are those as so altered or modified by operation of law.

Conclusion

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 unit holders with a vested interest in the income and capital of the trust.

Upon the implementation of the proposed amendments to the trust deed, the beneficiaries in the trust will have vested and indefeasible interests in a share of the income and capital and, thus, will have fixed entitlements to all the income and capital of the trust in accordance with the meaning of that term in subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Therefore, the trust will be a 'fixed trust', as per section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 for the period of application of the private ruling.

Question 3

Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens whenever a trust is created over a CGT asset by declaration or settlement.

Draft Taxation Determination TD 2012/D4 (TD 2012/D4) advises at paragraph 1:

… Unless the amendment causes the trust to terminate for trust law purposes, or the effect of the amendment is to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happens.

For trust law purposes a trust ends when its purpose is fulfilled. Alternatively, a trust can be terminated by the person who set up the trust.

The trust currently carries on an active trading business and the proposed amendments relate to the reclassification of units, the issue of units and the removal of doubt around the classification of the trust as a fixed trust.

As such, the proposed amendments to the trust deed will not cause the trust to terminate for trust law purposes and do not give rise to any changes with respect to any assets of the trust.

Therefore, the proposed amendments will not result in the assets of the trust being settled on the terms of a different trust.

TD 2012/D4 states further at paragraph 17 that:

…assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power.

The proposed amendments to the trust do not give rise to any changes to the property of the trust nor to the unit holders of the trust.

When considering whether the proposed amendments are a valid exercise of the trustee's power we must determine whether the terms of the trust deed provide the trustee with the ability to amend the trust.

Under the terms of the trust deed the trustee has the power to amend the trust deed and under the deed of variation the unit holders unanimously resolve to ratify and consent to the variations.

Therefore the proposed amendments to the trust deed, being a valid exercise of the power of amendment contained within the trust deed, will not result in the happening of CGT Event E1 (section 104-55 of the ITAA 1997).