Edited version of your written advice

Authorisation Number: 1012878827782

Date of advice: 15 September 2015

Ruling

Subject: Fixed trust determination

Issue 1

Will the Trust be a 'fixed trust' under section 272-65 of Schedule 2F to the 1936 Act and section 995-1 of the 1997 Act?

Question 1

Will the Members of the Trust have fixed entitlements to all of the income and capital of Trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No

Question 2

Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the Members of the Trust as having fixed entitlements to all of the income and capital of the Trust?

Answer:

Yes

Issue 2

Will the interests of the Members of the Trust in the trust holding be fixed interests under former subsection 160APHL(10) of the Income Tax Assessment Act 1936?

Question 3

Will the Members of the Trust have a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the ITAA 1936?

Answer:

No

Question 4

Will the Commissioner exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Members 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

This ruling applies for the following period

Year ended 30 June 2014

Year ended 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 commenced on

1 July 2013

Relevant facts and circumstances

Background of the Trust

The Trust was established pursuant to the Constitution ("the Trust Deed").

Company A is the Trustee of the Trust.

The Trust is an Australian unit trust.

Units in the Trust are not listed on any stock exchange and will not be during the Ruling Period.

The Trust is not registered as a managed investment scheme under Chapter 5C of the Corporations Act 2001 (Cth) ("Corporations Act") and will not become an MIS during the Ruling Period.

The Trustee is not the holder of an Australian Financial Services licence (AFSL) for the purposes of Part 7.6 of the Corporations Act.

Members in the Trust

The investors became Members ("the Unit Holders") in the Trust. Their investments were made by subscribing for units in the Trust.

Further issues of Units

While the Units are not Officially Quoted, Units must only be issued with an application price calculated in accordance with the formula:

(Net Asset Value + Transaction Costs)/Number of Units in Issue

Further issues of Units have been made.

Transfers of Units

Transfer of Units have occurred during the life of the Trust

Redemptions of Units

Units have been redeemed during the existence of the Trust:

Other relevant information

There will be no Unit Issues or Unit Transfers prior to 30 June 2019.

There has only ever been a single class of Units on issue since the establishment of the Trust. This is because the Constitution does not provide for the issue of multiple classes of Units.

It is not proposed to issue Units of different classes prior to 30 June 2019.

It is not possible to re-classify a Unit of a particular class to a different class under the Trust Deed.

There is no intention to redeem further Units during the remainder of the Ruling Period.

It is not possible to stream income or capital to different Members under the Trust Deed.

The Trustee does not have carried forward tax losses. There is a tax loss for the current year. No tax losses are forecast to occur during the remainder of the Ruling Period.

Context of 'fixed entitlement's' for the Trust

The Trustee holds an investment in the ordinary shares of an investee company. The Trustee expects the investee company to pay franked dividends on its ordinary shares. The Trust wishes to distribute these franked dividends to its Members.

Proposed Amendments

The Manager intends to amend the Constitution of the Trust by making the Proposed Amendments.

The Manager wishes to obtain confirmation from the Commissioner of Taxation that after the Proposed Amendments are made, the Trust will be characterised as a 'fixed trust' for income tax purposes.

The purpose of the Proposed Amendments is to ensure that the Trust is characterised as a 'fixed trust'. In the context of considering the entitlements of the Members to franking credits received indirectly through the Trust, it has been brought to the Manager's attention that trusts which industry would ordinarily consider to be 'fixed trusts' may not satisfy the technical requirements to qualify as 'fixed trusts' for income tax purposes.

The Manager does not expect to make further amendments to the Constitution of the Trust in the foreseeable future.

Assumption(s)

The Commissioner is requested to assume:

a) the Proposed Amendments will be made, and

b) for the purposes of determining the Application Price and Redemption Price of units in the Trust, the Manager will value the assets and liabilities of the Trust in accordance with Australian accounting principles.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 272-5 of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-5(2) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-5(3) of Schedule 2F

Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F

Income Tax Assessment Act 1936 former section 160APHL

Income Tax Assessment Act 1936 former subsection 160APHL(10)

Income Tax Assessment Act 1936 former subsection 160APHL(11)

Income Tax Assessment Act 1936 former subsection 160APHL(14)

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

Reasons for decision

Issue 1

Question 1

Summary

The Members of the Trust do not have fixed entitlements to all of the income and capital of Trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

The term 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936 to mean a trust in which entities or persons (respectively):

… have fixed entitlements to all of the income and capital of the trust.

The definition of the term 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that 'an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.'

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a 'fixed entitlement' in a trust:

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.

It is accepted that the Constitution (after the Proposed Amendments are executed) provides Members with a vested interest in the income and capital of the Trust.

Under the Trust Deed, the Members in the Trust may not be considered to have a vested and indefeasible interest in all of the income and capital of the Trust as the Trust Deed provides defeasible powers.

As such Members do not have a fixed entitlement to a share of the income or capital of the Trust for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Question 2

In view of the conclusion above that Members in the Trust do not have vested and indefeasible interests, pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, subsection 272-5(3) may be considered.

Summary

The Commissioner considers that it is reasonable to exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the Members of the Trust as having fixed entitlements to all of the income and capital of the Trust.

Detailed reasoning

Subsection 272-5(3) of Schedule 2F to the 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.

As per paragraph 272-5(3)(b) it is considered that the Members 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) as discussed above.

Based on the information provided, 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 Members in the income and capital of the Trust as fixed entitlements.

Issue 2

Question 3

Summary

The terms of the trust instrument do not provide the Members with a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the ITAA 1936.

Detailed reasoning

A taxpayer must be a "qualified person" to be entitled to a franking credit in respect of a dividend. To be a qualified person, a taxpayer must satisfy the 45-day holding period rule. Although the related payments rule is applied by reference to the repealed provisions of the ITAA 1936, the Tax Office stated in Determination TD 2007/11 that the ITAA 1936 rules have ongoing application as a result of being "imported" into the ITAA 1997 regime via the anti-manipulation rule in s 207-145(1)(a) of the ITAA 1997.

In the case of a trust distribution consisting wholly or partly of dividend income, generally the trustee must be a qualified person and, in addition, the beneficiary must be at risk for a prescribed period during the qualification period in respect of the taxpayer's interest in the membership interest from which the dividend income is derived (former section 160APHL of the ITAA 1936).

The effect of deemed long and short positions under former sections 160APHL(7) and (10) relating to shares held is that unless a beneficiary has a fixed interest constituted by a vested and indefeasible interest in the corpus of the trust or an exception applies, a beneficiary in a non-widely held trust will typically have a net position of zero, i.e., not be sufficiently at risk, meaning that franking credits will not pass through the trust (eg see ATO ID 2002/122 ).

For the purposes of former section 160APHL of the ITAA 1936 the Trust is in the category of 'all other non-widely held trusts' apart from family trusts, deceased estates and employee share scheme trusts.

A "fixed interest" in the trust holding is defined in former subsection 160APHL(11) of the ITAA 1936 as "a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding." [emphasis added]

Is there an 'interest in so much of the corpus of the trust as is comprised by the trust holding'?

Former section 160APHL provides that in calculating the extent of a beneficiaries interest, it is necessary to distinguish between the interest of a beneficiary in shares held by a widely-held trust (as defined below), and the interest of a beneficiary in shares held by other trusts.

The Trust is not a 'widely held trust' for the purposes of former section 160APHD of the ITAA 1936.

This necessitates that a 'look through' approach will be required to determine the interest that a Member has in each of the underlying shares in the Trust.

Although the method of calculating the interest that a Member has in the trust holding differs as between widely-held trusts and trusts other than widely-held trusts, the beneficiaries of both types of trusts do have an interest in the trust holding.

No vested and indefeasible interest

It has already been determined, in relation to Question 1, that the Members of the Trust do have a vested interest in a share of the capital of the Trust but not an indefeasible interest in a share of the capital of the trust, i.e. an interest in a share (or proportion) of all of the capital of the trust. (Note: The terms 'corpus' and 'capital' are considered to be synonymous for current purposes.)

Therefore, it follows that the Members of the Trust do not have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding.

Question 4

Summary

The Commissioner considers that it is reasonable to exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Members 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.

Detailed reasoning

In view of the conclusion above that the Members of the Trust do not have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding (being the Trustee's ownership of shares) pursuant to former subsection 160APHL(11) of the ITAA 1936, the only way that the Members can have such a vested and indefeasible interest is if the Commissioner exercises the discretion in former subsection 160APHL(14).

Former subsection 160APHL(14) of the ITAA 1936 contains a discretion, whereby in cases where 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.

The requirements to be satisfied in respect of the discretion are contained in former subsections 160APHL(14)(a), (b) and (c) of the ITAA 1936.

In terms of former paragraph 160APHL(14)(a) -

The taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding:

As discussed above, the Members in the Trust will have an interest in so much of the corpus of the trust as is comprised by the trust holding.

In terms of former paragraph 160APHL(14)(b) -

Apart from this subsection, the interest would not be a vested or indefeasible interest:

As discussed above, although a Member's interest in the capital of the Trust is vested, the Constitution of the Trust contains certain clauses by which a Member's interest in a share of the capital of the Trust may be defeased.

In terms of former paragraph 160APHL(14)(c) -

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.

It has already been determined, in relation to Issue 1 Question 2, that the Commissioner should exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the Members of the Trust will be treated as having a fixed entitlement to (being a vested and indefeasible interest in) all of the capital of the Trust.

Therefore, for the reasons given in relation to Issue 1, the Commissioner will exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Members of the Trust as having a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding (being the Trustee's ownership of shares).