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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012670382168

Ruling

Subject: Fixed entitlement to share of income or capital: subsection 272-5(3) of Schedule 2F to the ITAA 1936

Question 1

Will the Commissioner exercise his discretion in sub-section 272-5(3) to treat all the unit holders of the Fund to have fixed entitlements to the income and capital of the Fund, such that the Fund would be a fixed trust as defined in section 995-1?

Answer

Yes. The Commissioner considers that it is reasonable to exercise the discretion to treat the Relevant Security Holders as having fixed entitlements to a share of the income and capital of the Fund, pursuant to subsection 272-5(3) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936).

This ruling applies for the following periods:

1 July 2014 to 30 June 2016

Relevant facts and circumstances

The Fund is a unit trust registered with ASIC as a managed investment scheme (MIS) for the purposes of the Corporations Act 2001 (Cth) (Corporations Act) and is listed on the Australian Securities Exchange (ASX). As such, the Fund is subject to external supervision of its operations and the RE is subject to certain fiduciary controls because the trust is a MIS.

The Fund was established in 20XX with the intention of giving its Australian investors the opportunity to gain exposure to a portfolio of overseas-based residential property assets. The Fund specifically targets and invests in properties that it believes will generate attractive rental income and the potential for long-term rental and capital growth.

The Fund has been listed on the ASX since 20YY. The Fund has undertaken several capital raisings since it was established. This capital has been used to fund the Fund's investments. Some funds have also been secured through debt overseas.

The Fund also satisfies the requirements to be regarded as a managed investment trust (MIT) for Division 275 purposes and has made an election pursuant to section 275-115 to treat the disposal of certain assets, including shares in a company, as being held on capital account.

The Fund's constitution provides that:

    • The RE has a discretion to issue units with any preferred, deferred or other special rights, obligations or restrictions whether in relation to distributions, voting, return of capital, withdrawal, payment of calls or otherwise that the RE determines.

    • The rights attaching to units in a class of units cannot be cancelled, varied or adversely affected without a special resolution of members and a special resolution of members of the class affected.

    • The constitution may only be amended if the Corporations Act allows it by resolution or by deed executed by the RE.

    • While the Fund is listed the RE may in its discretion from time to time sell or redeem any units held by a member which comprise less than a marketable parcel as provided in the Listing rules without a request by the member. The RE, however, must notify the member in writing of its intention to sell or redeem units. The RE may not sell or redeem the relevant units if before the expiry of 6 weeks from the date of the notice, the member advises the RE that the member wishes to retain the units.

Relevant legislative provisions

    • Section 272-5 of Schedule 2F

    • Subsection 272-5(1) of the ITAA 1936

    • Subsection 272-5(2) of the ITAA 1936

    • Subsection 272-5(3) of the ITAA 1936

    • Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Reasons for decision

Subsection 272-5(3) of Schedule 2F to the ITAA 1936 may be applied where, among other things, 'a beneficiary with an interest in a share of income that the trust derives from time to time, or of the capital of a trust, does not have a fixed entitlement to the share.'

Subsection 272-5(3) of Schedule 2F to the ITAA 1936 provides that:

    If:

    (a) a beneficiary with an interest in a share of income that the trust derives from time to time, or of the capital of a trust, does not have a fixed entitlement to the share; and

    (b) the Commissioner considers that the beneficiary should be treated as having the fixed entitlement, having regard to:

      (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;

the beneficiary has the fixed entitlement.

Having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) of Schedule 2F to the ITAA 1936 there is a reasonable case for the Commissioner to exercise the discretion pursuant to subsection 272-5(3) to treat the interests of the unit holders in the income and capital of the Fund as fixed entitlements.

As such, persons have fixed entitlements to all of the income and capital of the Fund and the Fund will be a 'fixed trust' for the purposes of section 272-65 of Schedule 2F to the ITAA 1936.


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