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Edited version of your written advice
Authorisation Number: 1012776433722
Ruling
Subject: fixed trust discretion
Question
Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) to treat the beneficiaries of the trust as having fixed entitlements to all of the income and capital of the Trust for the ruling period?
Answer: Yes
This ruling applies for the following period(s)
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
The scheme commences on
1 July 2008
Relevant facts and circumstances
The Trust is an Australian resident unit trust.
On inception, the trust issued several units to each unit holder
The Trust is not an excepted trust as defined in section 272-100 of Schedule 2F of the ITAA 1936 as it has not made a family trust election.
The trust is not a managed investment scheme for the purposes of the Corporations Act 2001.
Following a transfer of unit holdings in the trust, there are now only two entities holding units in the trust.
There is proposed to be a transfer of a number of units between the two entities.
The change of unit holdings is expected to occur before 1 July 2015.
The Trust has carried forward tax losses.
Tax losses have been incurred as a result of significant running costs incurred by the business, e.g. salary and wages, wrapping and packaging, rent, superannuation expense, depreciation, etc.
You have stated that a tax loss may be incurred for the income year ended 30 June 2015.
You have confirmed that there are no other entities that will inject income into the Trust during the ruling period. If the tax losses will be utilised during the ruling period, the source of the assessable income that will be offset against the tax losses will be from your business.
You have confirmed that, during the ruling period, the Trustee has not deducted, and will not deduct, an amount in respect of a debt/equity swap relating to the whole or part of a debt.
You have confirmed that, during the ruling period, there may be some bad debts written off in the ordinary course of the business. Generally they are not material amounts.
The Trustee of the Trust does not act as trustee of any other trust.
You have confirmed that during the ruling period;
• there will be no change of Trustee
• further units will not be issued
• units will not be redeemed
• apart from the proposed transfer of units, there will be no other transfer of units; and
• The trust deed has not been amended since the inception of the Trust and will not be otherwise amended
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F
Income Tax Assessment Act 1936 Section 272-5 of Schedule 2F
Income Tax Assessment Act 1997 Section 995-1
Reasons for decision
Do the unit holders (beneficiaries) of the Trust have fixed entitlements?
A 'fixed trust' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), and section 272-65 of Schedule 2F to the ITAA 1936. That definition provides:
A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust.
Fixed entitlement is determined with reference to subsection 272-5(1) of Schedule 2F to the ITAA 1936:
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.
Determining whether a beneficiary has a 'vested and indefeasible' interest in a trust, requires an extensive review of the relevant trust instrument(s), including individual clauses, to determine the existence of defeasible powers.
Based on the information provided, it is accepted that the unit holders in the Trust have an interest, by way of their entitlement as unit holders in the Trust.
The Trust Deed (the relevant trust instrument) contains certain clauses by which a beneficiary's interest in a share of the income or capital of the trust may be defeasible. Therefore, it is considered reasonable to conclude, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, that all unit holders in the Trust do not have fixed entitlements to all the income and capital of the Trust.
Commissioner's discretion to deem fixed entitlement in subsection 272-5(3) of the ITAA 1936.
As the unit holders in the Trust do not have a fixed entitlement pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, subsection 272-5(3) may be considered 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 contains a discretion, whereby in cases where beneficiaries with an interest in the income and capital of the trust do not have a fixed entitlement, the Commissioner may, for the purposes of the Act, treat such cases as having fixed entitlement.
Subsection 272-5(3)(b) of Schedule 2F to the ITAA 1936 stipulates that the Commissioner may treat a beneficiary as having fixed entitlement (in cases where in fact beneficiaries do not have fixed entitlements) 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.
Based on the information provided, and 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 to treat the unit holders in the Trust as having fixed entitlements to both income and capital of the Trust under subsection 272-5(3) of Schedule 2F. Therefore, the Trust can be regarded as a fixed trust during the ruling period.