Edited version of your written advice

Authorisation Number: 1012807080073

Ruling

Subject: Fixed Trust Entitlement & Part IVA

Question 1

Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem 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 apply Part IVA of the ITAA 1936 to the merger transaction or pre-merger restructure?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 2015

The scheme commences on:

During the income year ending 30 June 2015

Relevant facts and circumstances

The taxpayer (Company A) and Unit Trust B have agreed to formally merge their respective businesses.

Prior to the merger, both entities will restructure their respective businesses. As part of the restructure, Unit Trust C will be interposed within Company A's corporate structure in order to simplify the acquisition process and minimise the impost of stamp duty.

Under the merger, the Trust will be transferred to Unit Trust B. As consideration, Company A will receive cash and units in Unit Trust B. Company A proposes to apply scrip-for-scrip CGT rollover relief to disregard the portion of capital gain referrable to units received from Unit Trust B.

Unit Trust C

Unit Trust C (the Trust) is a unit trust settled in the income year ending 30 June 2015 under the terms set out in the Trust Deed.

All the units on issue are of the same class.

Company A is the sole unit holder of the units. Company D is the trustee (Trustee) for the Trust.

The Trust has been created for the purposes of a proposed merger and the Trustee is intended to hold Company A's subsidiary entities which B proposes to acquire. On completion of the merger, the trustee of Unit Trust B will become the sole unit holder of the units in Unit Trust C.

The Trust is not a Managed Investment Scheme for the purposes of the Corporations Act 2001.

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 Section 177A,

Income Tax Assessment Act 1936 Section 177C,

Income Tax Assessment Act 1936 Section 177CB,

Income Tax Assessment Act 1936 Section 177D and

Income Tax Assessment Act 1936 Section 177F.

Reasons for 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 Holder 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.

Question 2

In light of the commercial objectives of the scheme and having regard to substance of the scheme and the eight matters listed in subsection 177D(2) of the ITAA 1936 the Commissioner does not consider that any party to the scheme entered into the scheme for the sole or dominant purpose of obtaining a tax benefit.