Edited version of your private ruling

Authorisation Number: 1012495573547

Ruling

Subject: Income Tax: managed investment trust

Question 1

Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the Income Tax Assessment Act 1936 to treat the beneficiaries of the trust as having fixed entitlements to all of the income and capital of the trust?

Answer

Yes

Question 2

Will the Commissioner exercise the discretion in former subsection 160APHL(14) in Division 1A of Part IIIAA of the Income Tax Assessment Act 1936 to treat the beneficiaries of the trust 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

Question 3

Will the trust be a fixed trust within the meaning of subsection 995-1(1) of the Income Tax Assessment Act 1997?

Answer

Yes

Question 4

Will the trustee of the trust be a qualified person in relation to the dividends pursuant to former section 160APHO of the Income Tax Assessment Act 1936?

Answer

Yes

Question 5

Will the Commissioner make a determination under paragraph 177EA(5)(b) of Part IVA of the Income Tax Assessment Act 1936 that no imputation benefit is to arise in respect of a distribution made to the trustee of the trust?

Answer

No

Question 6

Will the modifications in subsection 275-100(2) of the Income Tax Assessment Act 1997 apply for calculating gains and losses made by the trustee of the trust from a CGT event involving membership interests?

Answer

Yes

Question 7

Will gains and losses made by the trustee of the trust on the swap arrangements be assessable and deductible respectively under section 230-15 of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences in:

Income year ending 30 June 2014

Relevant facts and circumstances

The Trustee, an Australian resident company, settled the trust with a constitution.

The trust is an Australian resident trust estate for the purposes of Division 6 of Part IIII of the Income Tax Assessment Act 1936 (ITAA 1936).

The trust will be a "managed investment scheme", as defined in section 9 of the Corporations Act 2001, registered under section 601EB of the Corporations Act 2001.

The trust will be a "widely held trust" as defined in former section 160APHD in Division 1A of Part IIIAA of the ITAA 1936.

The trust will not be a "trading trust" for the purposes of Division 6C of Part III of the ITAA 1936 and will not be a "corporate unit trust" within the meaning of section 102J of the ITAA 1936.

The trust will not be a trust covered by section 12-401 (trusts with wholesale membership) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

The trust will satisfy the requirements in subsection 12-402B(1) (closely held restrictions) of Schedule 1 to the TAA 1953.

The trust will be a unit trust and the units in the trust will only be held by Australian residents.

There will only be a single class of units on issue which carry identical rights and rank equally across all unit holders.

Entities of a kind covered in subsection 12-402(3) of Schedule 1 to the TAA 1953 will hold at least 40% of the units in the trust.

The Trustee will acquire and passively hold membership interests in share market index constituents over the long term pursuant to an investment strategy.

The Trustee will not actively trade in membership interests.

The Trustee will enter into swap arrangements as part of the investment strategy.

The Trustee's "net position" (as defined in former subsection 160APHJ(5) of the ITAA 1936) in relation to the membership interests will always be at least 30% (measured with a delta of plus 0.3).

The swap arrangements will be governed by standard International Swap and Derivatives Association (ISDA) agreements.

The Trustee will receive franked (including any associated franking credits) and unfranked distributions from the membership interests it holds.

The Trustee will not claim franking credits in relation to dividends paid on shares if the holding period requirement in former section 160APHO in Division 1A of Part IIIAA of the ITAA 1936 has not been satisfied in relation to those shares.

The Trustee will not hold sufficient membership interests in any particular entity to have influence over the dividend policy of the entity.

The Trustee may at any time distribute an amount of capital or income to the beneficiaries of the trust in accordance with the trust constitution. Distributions to beneficiaries will not be calculated by reference to any franking credits the Trustee will receive.

The Trustee will receive management fees which will not be calculated by reference to any franking credits the Trustee may receive.

The Trustee will enter all investment transactions at prevailing market prices and otherwise as arm's length dealings.

All participants in the scheme will operate independently.

The Trustee will make a choice under section 275-115 of the Income Tax Assessment Act 1997 (ITAA 1997) that covers the trust. The choice will be made in the approved form and on or before the latest of the days described in paragraph 275-115(3)(a) of the ITAA 1997.

The Trustee will either make an election under subsection 230-455(7) of the ITAA 1997 to have Division 230 of the ITAA 1997 apply to all financial arrangements that the trust starts to have, or will not be an entity for which Division 230 does not apply to gains and losses from financial arrangements pursuant to section 230-455 of the ITAA 1997.

The Trustee will not make fair value or financial reports election under Division 230 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 former Division 1A of Part IIIA

Income Tax Assessment Act 1936 section 160APHD

Income Tax Assessment Act 1936 section 160APHE

Income Tax Assessment Act 1936 section 160APHJ

Income Tax Assessment Act 1936 subsection 160APHJ(2)

Income Tax Assessment Act 1936 subsection 160APHJ(3)

Income Tax Assessment Act 1936 subsection 160APHJ(4)

Income Tax Assessment Act 1936 subsection 160APHJ(5)

Income Tax Assessment Act 1936 section 160APHL

Income Tax Assessment Act 1936 subsection 160APHL(2)

Income Tax Assessment Act 1936 subsection 160APHL(4)

Income Tax Assessment Act 1936 subsection 160APHL(10)

Income Tax Assessment Act 1936 subsection 160APHL(11)

Income Tax Assessment Act 1936 subsection 160APHL(13)

Income Tax Assessment Act 1936 subsection 160APHL(14)

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

Income Tax Assessment Act 1936 section 160APHM

Income Tax Assessment Act 1936 subsection 160APHM(2)

Income Tax Assessment Act 1936 section 160APHN

Income Tax Assessment Act 1936 subsection 160APHN(2)

Income Tax Assessment Act 1936 subsection 160APHN(3)

Income Tax Assessment Act 1936 subsection 160APHN(4)

Income Tax Assessment Act 1936 section 160APHO

Income Tax Assessment Act 1936 subsection 160APHO(1)

Income Tax Assessment Act 1936 paragraph 160APHO(1)(a)

Income Tax Assessment Act 1936 paragraph 160APHO(1)(b)

Income Tax Assessment Act 1936 subsection 160APHO(2)

Income Tax Assessment Act 1936 paragraph 160APHO(2)(a)

Income Tax Assessment Act 1936 subparagraph 160APHO(2)(a)(i)

Income Tax Assessment Act 1936 subparagraph 160APHO(2)(a)(ii)

Income Tax Assessment Act 1936 paragraph 160APHO(2)(b)

Income Tax Assessment Act 1936 subparagraph 160APHO(2)(b)(i)

Income Tax Assessment Act 1936 subparagraph 160APHO(2)(b)(ii)

Income Tax Assessment Act 1936 section 160APHU

Income Tax Assessment Act 1936 subsection 160APHU(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 paragraph 177D(2)(a)

Income Tax Assessment Act 1936 paragraph 177D(2)(b)

Income Tax Assessment Act 1936 paragraph 177D(2)(c)

Income Tax Assessment Act 1936 paragraph 177D(2)(d)

Income Tax Assessment Act 1936 paragraph 177D(2)(e)

Income Tax Assessment Act 1936 paragraph 177D(2)(f)

Income Tax Assessment Act 1936 paragraph 177D(2)(g)

Income Tax Assessment Act 1936 paragraph 177D(2)(h)

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 subsection 177EA(3)

Income Tax Assessment Act 1936 paragraph 177EA(3)(a)

Income Tax Assessment Act 1936 paragraph 177EA(3)(b)

Income Tax Assessment Act 1936 paragraph 177EA(3)(c)

Income Tax Assessment Act 1936 paragraph 177EA(3)(d)

Income Tax Assessment Act 1936 paragraph 177EA(3)(e)

Income Tax Assessment Act 1936 subsection 177EA(4)

Income Tax Assessment Act 1936 subsection 177EA(5)

Income Tax Assessment Act 1936 paragraph 177EA(5)(b)

Income Tax Assessment Act 1936 subsection 177EA(14)

Income Tax Assessment Act 1936 paragraph 177EA(14)(a)

Income Tax Assessment Act 1936 paragraph 177EA(14)(b)

Income Tax Assessment Act 1936 subsection 177EA(16)

Income Tax Assessment Act 1936 paragraph 177EA(16)(a)

Income Tax Assessment Act 1936 subsection 177EA(17)

Income Tax Assessment Act 1936 paragraph 177EA(17)(a)

Income Tax Assessment Act 1936 paragraph 177EA(17)(b)

Income Tax Assessment Act 1936 paragraph 177EA(17)(c)

Income Tax Assessment Act 1936 paragraph 177EA(17)(d)

Income Tax Assessment Act 1936 paragraph 177EA(17)(e)

Income Tax Assessment Act 1936 paragraph 177EA(17)(f)

Income Tax Assessment Act 1936 paragraph 177EA(17)(g)

Income Tax Assessment Act 1936 paragraph 177EA(17)(ga)

Income Tax Assessment Act 1936 paragraph 177EA(17)(h)

Income Tax Assessment Act 1936 paragraph 177EA(17)(i)

Income Tax Assessment Act 1936 paragraph 177EA(17)(j)

Income Tax Assessment Act 1936 subsection 177EA(19)

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Division 272 of Schedule 2F

Income Tax Assessment Act 1936 section 272-5

Income Tax Assessment Act 1936 subsection 272-5(1)

Income Tax Assessment Act 1936 subsection 272-5(2)

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

Income Tax Assessment Act 1936 paragraph 272-5(3)(a)

Income Tax Assessment Act 1936 paragraph 272-5(3)(b)

Income Tax Assessment Act 1936 subparagraph 272-5(3)(b)(i)

Income Tax Assessment Act 1936 subparagraph 272-5(3)(b)(ii)

Income Tax Assessment Act 1936 subparagraph 272-5(3)(b)(iii)

Income Tax Assessment Act 1936 section 272-65

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 204-30(6)

Income Tax Assessment Act 1997 section 207-150

Income Tax Assessment Act 1997 subsection 207-150(1)

Income Tax Assessment Act 1997 paragraph 207-150(1)(a)

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 section 230-15

Income Tax Assessment Act 1997 section 230-45

Income Tax Assessment Act 1997 subsection 230-45(1)

Income Tax Assessment Act 1997 paragraph 230-45(1)(a)

Income Tax Assessment Act 1997 paragraph 230-45(1)(b)

Income Tax Assessment Act 1997 paragraph 230-45(1)(c)

Income Tax Assessment Act 1997 paragraph 230-45(1)(d)

Income Tax Assessment Act 1997 paragraph 230-45(1)(e)

Income Tax Assessment Act 1997 paragraph 230-45(1)(f)

Income Tax Assessment Act 1997 subsection 230-45(2)

Income Tax Assessment Act 1997 paragraph 230-45(2)(a)

Income Tax Assessment Act 1997 paragraph 230-45(2)(b)

Income Tax Assessment Act 1997 paragraph 230-45(2)(c)

Income Tax Assessment Act 1997 paragraph 230-45(2)(d)

Income Tax Assessment Act 1997 section 230-455

Income Tax Assessment Act 1997 subsection 230-455(7)

Income Tax Assessment Act 1997 Division 275

Income Tax Assessment Act 1997 Subdivision 275-A

Income Tax Assessment Act 1997 section 275-10

Income Tax Assessment Act 1997 Subdivision 275-B

Income Tax Assessment Act 1997 section 275-100

Income Tax Assessment Act 1997 subsection 275-100(1)

Income Tax Assessment Act 1997 paragraph 275-100(1)(a)

Income Tax Assessment Act 1997 paragraph 275-100(1)(b)

Income Tax Assessment Act 1997 paragraph 275-100(1)(c)

Income Tax Assessment Act 1997 paragraph 275-100(1)(d)

Income Tax Assessment Act 1997 paragraph 275-100(1)(e)

Income Tax Assessment Act 1997 paragraph 275-100(1)(f)

Income Tax Assessment Act 1997 subsection 275-100(2)

Income Tax Assessment Act 1997 section 275-105

Income Tax Assessment Act 1997 subsection 275-105(1)

Income Tax Assessment Act 1997 paragraph 275-105(1)(a)

Income Tax Assessment Act 1997 paragraph 275-105(1)(c)

Income Tax Assessment Act 1997 paragraph 275-105(1)(e)

Income Tax Assessment Act 1997 subsection 275-105(2)

Income Tax Assessment Act 1997 paragraph 275-105(2)(a)

Income Tax Assessment Act 1997 section 275-110

Income Tax Assessment Act 1997 section 275-115

Income Tax Assessment Act 1997 subsection 275-115(1)

Income Tax Assessment Act 1997 subsection 275-115(2)

Income Tax Assessment Act 1997 subsection 275-115(3)

Income Tax Assessment Act 1997 paragraph 275-115(3)(a)

Income Tax Assessment Act 1997 subparagraph 275-115(3)(a)(i)

Income Tax Assessment Act 1997 subparagraph 275-115(3)(a)(ii)

Income Tax Assessment Act 1997 subsection 275-115(4)

Income Tax Assessment Act 1997 subsection 275-115(5)

Income Tax Assessment Act 1997 paragraph 275-115(5)(a)

Income Tax Assessment Act 1997 section 995-1

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

Taxation Administration Act 1953 Schedule 1

Taxation Administration Act 1953 section 12-400

Taxation Administration Act 1953 subsection 12-400(1)

Corporations Act 2001 section 9

Corporations Act 2001 Chapter 5C

Corporations Act 2001 section 601EB

Reasons for decision

Question 1

Subsection 272-5(3) of Schedule 2F to the ITAA 1936 contains a discretion whereby in cases in which beneficiaries do not have a fixed entitlement in a share of income that the trust derives, the Commissioner may treat such beneficiaries as having the fixed entitlement, having regard to the factors prescribed in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936.

These factors are:

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

(ii) the likelihood of the entitlement not vesting or the defeasance happening; and

(iii) the nature of the trust.

Having regard to the factors in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, the Commissioner will treat all of the beneficiaries of the trust as having a vested and indefeasible interest in a share of income that the trust derives from time to time, and of the capital of the trust, pursuant to subsection 272-5(3) of Schedule 2F to the ITAA 1936.

Question 2

Former subsection 160APHL(14) in Division 1A of Part IIIAA of the ITAA 1936 contains a discretion whereby in cases in which beneficiaries do not have a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding, the Commissioner may determine that the interest is to be taken to be vested and indefeasible, having regard to the factors prescribed in former paragraph 160APHL(14)(c).

These factors are:

(i) the circumstances in which the interest is capable of not vesting or the defeasance can happen; and

(ii) the likelihood of the interest not vesting or the defeasance happening; and

(iii) the nature of the trust; and

(iv) any other matter the Commissioner thinks relevant.

Having regard to the factors in former paragraph 160APHL(14)(c) of the ITAA 1936, the Commissioner will treat all of the beneficiaries as having a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding, pursuant to former subsection 160APHL(14) of the ITAA 1936.

Question 3

Under subsection 995-1(1) of the ITAA 1997, a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust.

An entity has a fixed entitlement to a share of the income or capital of a company, partnership or trust if the entity has a fixed entitlement to that share within the meaning of Division 272 of Schedule 2F to the ITAA 1936.

As the Commissioner will, pursuant to subsection 272-5(3) of Schedule 2F to the ITAA 1936, treat all of the beneficiaries as having fixed entitlements to all of the income and capital of the trust (see Question 1), the trust will be a fixed trust.

Question 4

Under paragraph 207-150(1)(a) of the ITAA 1997, a taxpayer must be a qualified person in relation to a franked distribution for the purposes of former Division 1A of Part IIIAA of the ITAA 1936 to receive the franking credits attached to the franked distribution that flowed indirectly through a trust.

Pursuant to the former subsection 160APHU(1) of the ITAA 1936, a beneficiary of a trust cannot be a qualified person in relation to a dividend unless the trustee of the trust is also a qualified person in relation to the dividend (paid by a company in which the trustee of the trust will hold legal title to shares).

The main test of what constitutes a qualified person is in former section 160APHO of the ITAA 1936. A taxpayer is a qualified person in relation to the dividend if the taxpayer held the relevant shares or interests in shares for a prescribed number of days during the relevant qualification period.

Related payment rule

To determine the relevant qualification period, it is necessary to determine whether the taxpayer has made, or is under an obligation to make, or is likely to make, a related payment in respect of any of the dividends it receives.

Former section 160APHN of the ITAA 1936 gives examples of, but does not limit, what constitutes the making of a related payment by the taxpayer in respect of a dividend paid in respect of shares, or in respect of a distribution made in respect of interests in shares, held by the taxpayer.

Based on the facts, the Trustee will not have made, or be under an obligation to make, or be likely to make, a related payment in respect of any dividends paid by entities in which the Trustee will hold membership interests.

Therefore, the relevant qualification period for the Trustee is the primary qualification period pursuant to former paragraph 160APHO(1)(a) of the ITAA 1936.

Former section 160APHD of the ITAA 1936 defines the primary qualification period in relation to a taxpayer in relation to shares, or an interest in shares, to mean the period beginning on the day after the day on which the taxpayer acquired the shares or interest and ending:

(a) if the shares are not preference shares - on the 45th day after the day on which the shares or interest became ex dividend; or

(b) if the shares are preference shares - on the 90th day after the day on which the shares or interest became ex dividend.

Former section 160APHE of the ITAA 1936 defines ex dividend.

Holding period requirement

If the shares held by the Trustee are not preference shares, the holding period requirement will be satisfied if the Trustee holds the shares on which a dividend has been paid for a continuous period of at least 45 days during the primary qualification period.

If the shares held by the Trustee are preference shares, the holding period requirement will be satisfied if the Trustee holds the shares on which a dividend has been paid for a continuous period of at least 90 days during the primary qualification period.

In determining whether the Trustee held the shares, or interest in shares, for at least 45 or 90 days in the primary qualification period, the Trustee does not count the day on which it acquired the shares or interest in shares. If the Trustee has disposed of the shares or interest in shares, it does not count the day on which the disposal occurred.

Furthermore, any days on which the Trustee has materially diminished risks of loss or opportunities for gain in respect of the shares or interest in shares (within the meaning of former sections 160APHM and 160APHJ of the ITAA 1936) are to be excluded. The exclusion of those days is not taken to break the continuity of the period for which the shareholder held the shares or interest in shares.

Under former subsection 160APHM(2) of the ITAA 1936, the Trustee is taken to have materially diminished risks of loss or opportunities for gain in respect of shares or an interest in shares if the Trustee's 'net position' (defined in former subsection 160APHJ(5) of the ITAA 1936) on a particular day in relation to the shares or interest has less than 30% of those risks and opportunities.

Based on the facts, the Trustee will:

· have a net position equating to at least 30% in relation to the membership interests, and

· hold the membership interests for the requisite holding period (depending on whether or not the membership interests held are preference shares).

Accordingly, the Trustee will be a qualified person in relation to the dividends paid in respect of the membership interests pursuant to former section 160APHO of the ITAA 1936.

Question 5

Section 177EA is a general anti-avoidance provision. Its object is to prevent abuse of the imputation system through schemes which circumvent the basic rules for the franking of dividends. If the section applies, subsection 177EA(5) empowers the Commissioner to make a determination to create a franking debit or cancel a franking credit.

Section 177EA applies if the conditions in subsection 177EA(3) are satisfied. These conditions are:

(a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

(b) either:

i. a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or

ii. a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and

(a) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

(b) except for section 177EA, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

(c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme, did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

The Trustee will issue units in the trust and acquire and passively hold membership interests in the long term; therefore:

· more than one 'scheme for a disposition of membership interests or interest in membership interests' as defined in subsection 177EA(14) of the ITAA 1936 can be identified

· frankable distributions are expected to be payable to the Trustee in respect of the membership interests in corporate tax entities

· it is reasonable to expect that the Trustee will receive franked distributions from its ownership of membership interests

· it is reasonable to expect that, except for section 177EA of the ITAA 1936, the Trustee will receive imputation benefits (as defined in subsection 204-30(6) of the ITAA 1997)

Accordingly, the conditions in paragraphs 177EA(3)(a) to (d) of the ITAA 1936 will be satisfied.

The remaining condition is whether, having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not incidental purpose) of enabling the relevant taxpayer (i.e. the Trustee or the beneficiaries of the trust) to obtain an imputation benefit: paragraph 177EA(3)(e) of the ITAA 1936 ("the requisite purpose").

This is a test of objective purpose. Circumstances which are relevant in determining whether the trust or any other person has the requisite purpose include, but are not limited to, the factors listed in subsection 177EA(17) of the ITAA 1936. The relevant circumstances listed encompass a range of circumstances which taken individually or collectively could indicate the requisite purpose.

Having regard to the relevant circumstances, it could not be concluded that the Trustee or any other person that enters into or carries out the scheme will do so for the purpose of enabling the relevant taxpayer to obtain an imputation benefit and as such, the condition in paragraph 177EA(3)(e) of the ITAA 1936 is not satisfied.

Accordingly, the Commissioner will not make a determination under paragraph 177EA(5)(b) of the ITAA 1936.

Question 6

Under Division 275 of the ITAA 1997, a managed investment trust (MIT) can make a choice to apply the CGT provisions as the primary code for taxing gains and losses on the disposal of certain CGT assets.

Section 275-100 of the ITAA 1997 is the main operative provision that sets out the tax consequences of making the choice to apply the CGT provisions for calculating certain MIT gains or losses.

The modifications in subsection 275-100(2) of the ITAA 1997 will apply to the trust if:

· a CGT event happens at a time involving a CGT asset: paragraph 275-100(1)(a) of the ITAA 1997

· the CGT asset is owned at that time by an entity that is a MIT in relation to the income year in which the time occurs: paragraph 275-100(1)(b) of the ITAA 1997

· the CGT event happens because the MIT disposes of, ceases to own or otherwise realises the asset: paragraph 275-100(1)(c) of the ITAA 1997

· the asset is covered by section 275-105 of the ITAA 1997: paragraph 275-100(1)(d) of the ITAA 1997

· the MIT is not a corporate unit trust or trading trust under section 275-110 of the ITAA 1997: paragraph 275-100(1)(e) of the ITAA 1997, and

· a choice under section 275-115 of the ITAA 1997 covering the entity is in force for the income year in which the time occurs: paragraph 275-100(1)(f) of the ITAA 1997.

The membership interests are CGT assets as defined in section 108-5 of the ITAA 1997.

The trust will, on the facts, be a MIT as defined in subsection 12-400(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

The trust will not be a corporate unit trust or trading trust.

A share in a company, a unit in a unit trust and a right or option to acquire or dispose of a share or unit are assets covered by section 275-105 of the ITAA 1997.

The Trustee will make a choice under section 275-115 of the ITAA 1997 that covers the Fund in the approved form and on or before the latest day it is required to lodge its income tax return in the income year the trust became a MIT or within the time allowed by the Commissioner.

Accordingly, at the time the Trustee disposes of, ceases to own or otherwise realises the membership interests, the modifications in subsection 275-100(2) of the ITAA 1997 will apply for calculating gains or losses from a CGT event that happens involving the membership interests.

Question 7

A "Division 230 financial arrangement" is not covered by section 275-105 of the ITAA 1997. As a result, the arrangement will not satisfy paragraph 275-100(1)(d) of the ITAA 1997. Accordingly, the modifications in subsection 275-100(2) of the ITAA 1997 cannot apply.

A "Division 230 financial arrangement" is defined in subsection 995-1(1) of the ITAA 1997:

a *financial arrangement is a Division 230 financial arrangement if Division 230 applies in relation to your gains and losses from the arrangement.

Thus, if a financial arrangement is excluded from the scope of Division 230 of the ITAA 1997 (for example, under Subdivision 230-H of the ITAA 1997, which provides that Division 230 does not apply to gains and losses from specified types of financial arrangement), it is not a "Division 230 financial arrangement". It would then be covered by section 275-105 of the ITAA 1997.

Under section 230-45 of the ITAA 1997, the swap arrangements are each a "financial arrangement". This is because, under subsection 230-45(1) of the ITAA 1997, the Trustee will have, under an arrangement (being each swap):

(a) a *cash settlable legal or equitable right to receive a *financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

(c) a combination of one or more such rights and/or one or more such obligations;

Furthermore, paragraphs 230-45(1) (d), (e) and (f) of the ITAA 1997 will not be satisfied.

The right that the Trustee has to receive, or an obligation that the Trustee has to provide, a financial benefit under each of the swap arrangements will be cash settlable if, and only if (pursuant to subsection 230-45(2) of the ITAA 1997):

(a) the benefit is money or a *money equivalent; or

(b) in the case of a right - the Trustee intends to satisfy or settle it by receiving money or a money equivalent or by starting to have, or ceasing to have, another *financial arrangement; or

(c) in the case of an obligation - the Trustee intends to satisfy or settle it by providing money or a money equivalent or by starting to have, or ceasing to have, another financial arrangement; or

(d) the Trustee has a practice of satisfying or settling similar rights or obligations as mentioned in paragraph (b) or (c) (whether or not it intends to satisfy or settle the right or obligation in that way).

On the facts, the swap arrangements are cash settlable pursuant to subsection 230-45(2) of the ITAA 1997.

There is no provision in Division 230 of the ITAA 1997 that applies to exclude the swap arrangements from the scope of Division 230.

As each swap the Trustee will enter into is a financial arrangement, and as Division 230 applies in relation to the gains and losses from each financial arrangement, each swap is a "Division 230 financial arrangement". This means that it is not an asset covered by section 275-105 of the ITAA 1997 and will be precluded from the CGT treatment provided for by subsection 275-100(2) of the ITAA 1997.

Accordingly, the gains and losses made by the Trustee on the swap arrangements will be assessable and deductible respectively under section 230-15 of the ITAA 1997.