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Edited version of your written advice
Authorisation Number: 1012782957171
Ruling
Subject: Fixed trust entitlements
Question 1
Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the Income Tax Assessment Act 1936 to deem the beneficiaries of the Trust as having fixed entitlements to all of the income and capital of the trust?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2015
The scheme commences on
2007
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.
Company is the trustee (the Trustee) for the Trust.
The Trust was initially settled in 20XX under the terms set out in the Trust Deed.
The Trust operates a business.
The Trustee does not carry on any activities apart from being trustee of the Trust.
Since the establishment of the Trust the Trustee has not exercised any powers under the Trust Deed to:
n defease beneficiary entitlements; or
n redeem or cancel Units.
There have been no applications to transfer Units.
The Trust Deed has not been amended.
The Trust is not a Managed Investment Scheme for the purposes of the Corporations Act 2000.
The Trustee does not hold an Australian Financial Services Licence for the purposes of Part 7.6 of the Corporations Act 2001.
The Settlors legal representatives drafted the Trust Deed with the intention of creating a fixed trust.
The Trust Deed also includes clauses under which the interests of unit holders may be defeasible but are standard unit trust clauses.
The Trust Deed has not been amended.
Relevant legislative provisions
Income Tax Assessment Act 1936 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)
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Question 1
Summary
The Commissioner considers that it is reasonable to exercise his discretion to treat the beneficiaries as having fixed entitlements to a share of the income and capital of the trust.
Detailed reasoning
Subsection 272-5(3) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) contains a discretion, whereby in cases where beneficiaries do not have a fixed entitlement, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed entitlement where it is reasonable to do so based upon the factors prescribed in paragraph 272-5(3)(b). Paragraph 272-5(3)(b) stipulates that the Commissioner may treat a beneficiary as having a fixed entitlement (in cases where in fact beneficiaries do not have a 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 interpretation of section 272-5 of Schedule 2F to the ITAA 1936 (the meaning of vested and indefeasible) was raised at the March 2006 meeting of the NTLG, and referred to the newly formed Trust Consultation Sub-group for discussion; at their meeting on 28 November 2006, the ATO advised that:
In applying the discretion, the ATO would have regard to what the Office understands was the policy that underlay the provisions at the time they were enacted. The Commissioner would also have to apply the statutory tests having regard to the terms of the particular trust deeds and all the surrounding circumstances.
(see Minutes of NTLG meeting - 7 Dec 2006)
In the absence of any precedential guidelines, taxpayers seeking access to the Commissioner's discretion will be dealt with according to the relevant facts; on a case by case basis. In the case of trusts which are managed investment schemes, it is also appropriate that consideration is given to any potential impacts that the Corporations Act 2001 (as noted above), the regulatory powers of the Australian Securities and Investments Commission (ASIC), and the actions of the Australian Securities Exchange (ASX) may have on the administration of the trust and the entitlements of beneficiaries.
Recommendation
As per paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936 it is considered that the Unit Holders in the Trust may be treated as having fixed entitlements to all the income and capital of the Trust for the period of the scheme that is the subject of this private ruling application. This treatment is considered to be appropriate after having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii).
In summary, it is submitted that there is a reasonable case for the Commissioner to exercise the discretion pursuant to subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the interests of Unit Holders in the income and capital of the Trust as fixed entitlements.