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Ruling

Subject: Fixed Interest

Question and Answer

Will the Commissioner exercise the discretion in subsection 160APHL(14) of the Income Tax Assessment Act 1936 to deem the beneficiaries of the trust as having fixed interests in the corpus of the trust?

No.

This ruling applies for the following period

30 June 2011 and future years

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your representative has stated the facts as follows;

· The trust deed was established as a unit holder of the unit trust.

· The pre-CGT units in the unit trust were exchanged for shares in the company, under a subdivision 124-H rollover.

· The trust has a number of beneficiaries, all are Australian residents and there is an Australian resident trust.

· All the named beneficiaries form part of one extended family group but are not directly related such as to form a family group for the purposes of the family trust election rules in section 272-90 of Schedule 2F of the Income Tax Assessment Act 1936.

· The named beneficiaries are mainly the nieces and nephews of X (who is named in the deed) and who had no children.

· The trust has always been effectively controlled by the same extended gamily group for the benefit of only their family members.

· The trust received one fully franked distribution from ordinary shares it owns in an Australian resident company, namely the company.

· The trust has no other franked dividend from the company in the prior five income years.

· The trust was established for the sole purpose of holding the units in the unit trust, and it subsequently held the shares in the company for the sole benefit of the extended family beneficiaries, to derive dividend income.

· The trust deed was not amended in the income years where the trust owned the shares in the company.

· The trustee of the trust is Company Y.

· The appointer of the trust was X but the position of Appointer lapsed upon X's death.

Under a clause of the deed (as amended by a new clause ), the trustee can accumulate or distribute income to the named beneficiaries, or by deed appoint that it will be held on trust for such of those parties or their spouses, widows, widowers, children or grandchildren or any one or more of them as the trustee thinks fit.

The reason that amounts otherwise payable to a deceased beneficiary if they were alive might be held on trust for the residuary beneficiaries rather than going to the estate, is to remove the ability of a creditor of a deceased beneficiary to make claim on these funds.

A subclause Y(e) of the trust deed, states;

(e) the expressions "as the Trustee thinks fit" and "with absolute discretion" respectively shall give the Trustee the widest and most absolute and unexaminable discretion permitted by the laws relating to trusts including where applicable the power to prefer one or more to the total exclusion of any other or others.

Clause Z of the deed states;

Subject (save as there provided) to the provisions of Clause T hereof the Trustee shall at the Day of Distribution hold the corpus of the Trust Deed UPON TRUST to distribute the same to such of them the Beneficiaries as shall be living at the day of Distribution (or in the case of the said trustee provided that the corpus of the trust fund constituting the same shall not at the Day of Distribution have been distributed pursuant to the trusts contained in the Deed of Trust relating thereto) and if more than one in equal shares PROVIDED THAT if any of the Beneficiaries named n paragraphs (i) to (xii.) (both inclusive) of Clause 2 hereof shall not be living at the Day of Distribution the Trustee shall at the Day of Distribution hold the share of the corpus of the Trust Fund to which the deceased Beneficiary would have been entitled had he or she been living at the Day of Distribution UPON TRUST to distribute the same to the legal personal representatives of the deceased Beneficiary upon production of probate or letters of administration to be held by them by way of direct trust operating under this Deed for the persons beneficially entitled to that deceased Beneficiary's estate under his or her Will or on his or her intestacy and in the shares and upon the trusts which effect such residuary estate but such share shall not be part of the deceased Beneficiary's estate or liable for his or her liabilities or for the liabilities of his or her estate.

Clause Z1 of the deed states;

Notwithstanding the trusts hereinbefore contained the Trustee may with absolute discretion at any time or times and from time to time until the day of Distribution -

raise any sum or sums out of the capital of the Trust Fund and pay the same or transfer any portion of the Trust fund in its existing form of investment to or for the advancement or benefit of any Beneficiary (whether absolutely or by way of resettlement upon such trusts as the Trustee thinks fit) freed and discharged from the trusts of this deed;

Clause Z2 of the deed states;

Notwithstanding anything contained herein the Trustee may at any time or times and from time to time as the Trustee thinks fit -

by deed appoint that in lieu of the trust declared in Clauses A,B,C,& D hereof the Trust fund and the income therefrom shall be held on such trusts in favour of the Beneficiaries or their spouses or issue or brothers sisters nephews or nieces or any one or more of them as the Trustee thinks fit

Assumptions

You contend that the Commissioner may assume for the purposes of this ruling that:

· The beneficiary/ies that have become presently entitled to a franked distribution each have an annual entitlement to franking credits.

· The Family Settlement Trust is eligible to make a family trust election.

· The following imputation integrity provisions have not been breached;

Sec 177E; and

Sec 177EA; and that the following provisions do not impact on the Commissioner's ruling on this matter:

Division 974;

Division 208; and

Division 204-D

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 272-5(3)

Income Tax Assessment Act 1936 Section 160APHL

Income Tax Assessment Act 1936 subsection 160APHL(11)

Income Tax Assessment Act 1936 subsection 160APHL(14)

Income Tax Assessment Act 1936 subsection 160APHL(14)(c)

Reasons for decision

Under subsection 160APHL(11) of the Income Tax Assessment Act 1936 (ITAA 1936), a fixed interest will only arise where there is a vested and indefeasible interest in the corpus of the trust.

Subsection 160APHL(14) of the ITAA 1936 contains a discretion whereby, in cases 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.

Under The Taxation Laws Amendment (Trust loss and Other Deductions) Act 1988 the Explanatory Memorandum, Chapter 13, Interpretation of terms used in the provisions at point 13.13 it states;

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 trust loss provisions to prevent the transfer of the tax benefit of losses and other deductions incurred in the trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement

Application to your circumstances

Fixed Interest

It is your view that the beneficiaries have a vested and indefeasible interest in the trust corpus because under clause 4 of the trust deed it requires that distribution of corpus to be 'in equal shares'. In the event of the death of any beneficiary, the entitlement to the corpus is to be passed to the legal personal representative of the deceased.

Under subclause Z(e) of the trust deed it states;

(e) the expressions "as the Trustee thinks fit" and "with absolute discretion" respectively shall give the Trustee the widest and most absolute and unexaminable discretion permitted by the laws relating to trusts including where applicable the power to prefer one or more to the total exclusion of any other or others.

Under clause Y and Y(a) of the trust deed, discretion is given to the Trustee, by stating;

Notwithstanding the trusts hereinbefore contained the Trustee may with absolute discretion at any time or times and from time to time until the day of Distribution -

(a) raise any sum or sums out of the capital of the Trust Fund and pay the same or transfer any portion of the Trust fund in its existing form of investment to or for the advancement or benefit of any Beneficiary (whether absolutely or by way of resettlement upon such trusts as the Trustee thinks fit) freed and discharged from the trusts of this deed;

Further under other clauses of the trust deed states;

Notwithstanding anything contained herein the Trustee may at any time or times and from time to time as the Trustee thinks fit -

by deed appoint that in lieu of the trust declared in Clauses A,B,C,D & E hereof the Trust fund and the income there from shall be held on such trusts in favour of the Beneficiaries or their spouses or issue or brothers sisters nephews or nieces or any one or more of them as the Trustee thinks fit

Even if the trustee has never managed the trust in such a way as to deprive any beneficiary of his or her entitlement; the power does exits. Therefore a fixed interest does not exist.

Commissioner's discretion under 160APHL(14) of the ITAA 1936

Under clause Y of the trust deed it states;

Subject (save as there provided) to the provisions of Clause Z hereof the Trustee shall at the Day of Distribution hold the corpus of the Trust Deed UPON TRUST to distribute the same to such of them the Beneficiaries as shall be living at the day of Distribution (or in the case of the said trustee provided that the corpus of the trust fund constituting the same shall not at the Day of Distribution have been distributed pursuant to the trusts contained in the Deed of Trust relating thereto) and if more than one in equal shares….

Clause Y is subject to the provision of clause 6 which gives the trustee the power to hold the Fund, Z(a) of the trust deed states;

'….in favour of the Beneficiaries or their spouses or issue or brothers sisters nephews or nieces or any one or more of them as the Trustee thinks fit'

The Trustee has the power to enhance an individual's benefit where he or she thinks fit and, possibly, resulting in a beneficiary loosing their entitlement. Therefore, the entitlement is not vested.

Further, you refer to the flexibility given by clause Y of the trust deed in that the legal personal representative is able to hold corpus for the benefit of close family members and so the corpus amount is protected from creditors.

The Legal Personal Representative position is explained in Taxation Ruling IT 2622, Present Entitlement during the Stages of Administration of Deceased Estates, paragraph 2, which states;

…..When probate has been granted, the executor is free to call up the deceased's assets and liabilities and pay the debts, funeral and testamentary expenses. After these matters have been attended to, the executor distributes the property of the deceased to the beneficiaries of the estate.

Therefore, a creditor of the deceased has a legal claim against the estate; consequently, clause 4 of the trust deed does not provide protection against claims from creditors.

Having considered the relevant circumstances, the Commissioner will not exercise the discretion available to him pursuant to subsection 160APHL(14) of the ITAA 1936 to deem the beneficiaries of the trust as having fixed interests in the corpus of the trust.

There are no external controls or supervision that would restrict the Trustee from exercising his or her power as set out in the trust deed.