Edited version of private advice

Authorisation Number: 1051593136001

Date of advice: 5 February 2020

Ruling

Subject: Fixed entitlements and the Commissioner's Discretion in section 272-5(3) of Schedule 2F of the Income Tax Assessment Act 1936

Issue 1

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

Question 1

Will the Unitholders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the ITAA 1997 and subsection 272-5(1) of Schedule 2F to the 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 treat the Unitholders 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 Unitholders of the Trust in the trust holding be fixed interests under former subsection 160APHL(10) of the ITAA 1936?

Question 3

Will the Unitholders 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 Unitholders of the Trust as having a vested and indefeasible interest in so much of the corpus of the Trust as is compromised by the trust holding?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

>The scheme commences on:

1 July 2018

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.

Background of the Trust

The Trust was established in late 20XX.

The Trust is an Australian unit trust.

The Trust commenced with an initial sum of $XX representing a certain number of ordinary units.

The Trust is not a managed investment scheme.

The Trust will become an unregistered managed investment scheme during the ruling period.

The Trust is not listed on any approved stock exchange.

The ABC company is the only unitholder of the Trust which currently owns a certain number of ordinary Units.

The main activity of the Trust is in the investment sector.

The Trustee of the Trust

The Trustee is a company and was registered in late 20XX.

The Trustee is an Australian resident for tax purposes.

The Trustee does not hold a financial services licence.

The Trustee does not have the power to stream income and capital to different unit holders.

The Trustee is not prevented from owning units in the Trust, but it does not own any units in the Trust.

The Trustee is not a trustee of any other trust.

The directors of the Trustee are Australian residents for tax purposes.

Other relevant information

Fractions of a unit may not be issued.

From the date the Trust was established to the date of the ruling application:

·        There had been no amendments to the trust deed

·        No Units of different classes were issued.

·        The Trust does not have any prior year tax losses

During the ruling period:

·        There are no forecast tax losses, bad debts or debt/equity swap losses.

·        No streaming of income or capital to different unitholders will occur

·        No units will be issued at a discount and/or redeemed at a discount

·        Different series of units may be issued that are ordinary units that provide for fees to be imposed by the Trustee as per clause 4.5 of the Trust Deed.

·        There is no proposal to amend the Trust deed will not be amended.

Under the Deed:

·        The Unit Holders will be entitled to the income and capital of the Trust in proportion to their unitholding.

·        Any valuation of assets must be consistent with the requirements of subsection 272-5(2) of the ITAA 1936.

·        The Trustee is allowed to amend the Trust Deed by Special Approval as defined in the Deed subject to certain conditions.

·        The Trustee may determine to wind up the Trust being one of the four termination events for the Trust as specified in the Deed.

The Trustee requested the Trust to be treated as a fixed trust under the trust loss rules in Schedule 2F to the ITAA 1936 so the Trustee is able to recoup tax losses carried forward and reducing compliance costs.

The Trustee will be receiving franked distributions for the Trust. The Trustee wishes to pass on the franking credits to the unitholders of the Trust.

Assumptions

The Trustee's powers to consolidate or divide Units have not been exercised and will not be exercised during the Ruling period (clause x.x).

The Trustee's absolute discretion to determine whether all or part of an amount is income or capital of the Trust and the extent to which reserves or provisions need to be made have not been exercised and will not be exercised during the Ruling period. Where the discretion is exercised, the Trustee is consistent in doing so.

Units in the Trust will not be listed on any approved stock exchange during the Ruling period.

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)

Income Tax Assessment Act 1936 Section 272-65

Income Tax Assessment Act 1936 Former section 160APHL

Income Tax Assessment Act 1936 Former section 160APHD

Income Tax Assessment Act 1936 Former subsection 160APHL(7)

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(13)

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

Income Tax Assessment Act 1997 Paragraph 207-145(1)(a)

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

ATO references

Practical Compliance Guidelines PCG 2016/16

Reasons for Decision

Issue 1 Question 1

Summary

The Unitholders 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 ITAA 1997 and subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Detailed reasoning

The term 'fixed trust' is defined in section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 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 ITAA 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.

In addition, subsection 272-5(2) states that:

If:

(a)   a person holds units in a unit trust; and

(b)   the units are redeemable or further units are able to be issued; and

(c)   if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and

(d)   if the units are not listed as mentioned in paragraph (c) - the units held by the person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a unit holder, in the income or capital of the unit trust is defeasible.

The word 'interest' is a word that is capable of many meanings. In the absence of a definition, one must infer its meaning from the context in which it is found (see Gartside v Inland Revenue Commissioner [1968] AC 553 at 602-603 and 617-618; Commissioner of Stamp Duties (Queensland) v Livingston (1964) 112 CLR 12 at 28-29; and CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98). There may be circumstances in which the word 'interest' could be interpreted broadly to include any right or advantage that a person might be able to claim with respect to the income or capital of the trust and/or in respect of the trustee, whether present or future, ascertained or potential.

In the context of Schedule 2F to the ITAA 1936, however, it is clear that for an interest to be recognised as a fixed interest it must be a right with respect to a share of the income or of the capital of the trust that is susceptible to measurement. To adopt the words of Lord Wilberforce in Gartside v Inland Revenue Commissioners, the right must have 'the necessary quality of definable extent'.

The term 'vested and indefeasible' is also not defined in the taxation legislation and to date there is no 'ATO view' which defines or clarifies the term. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997does discuss its ordinary meaning at some length, at paragraphs 13.4 to 13.9.

The meaning of the term 'vested and indefeasible' (in the context of Schedule 2F to the ITAA 1936) has not been judicially considered, other than a discussion in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 in the limited context of amending the constitution of a registered managed investment scheme under section 601GC of the Corporations Act 2001. However, the term 'vested and indefeasible' does appear in subsection 95A(2) of the ITAA 1936 and has been considered in that context by the courts - refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 173 CLR 264; 91 ATC 5000.

Also relevant are MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v Commissioner of Stamp Duties (1952) 88 CLR 54; and Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest 'under a trust instrument'. In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

The first step in determining whether a beneficiary has a vested and indefeasible interest in a share of the income or capital of a trust is to ascertain the terms of the trust upon which the relevant trust property is held. As the High Court recently stated in CPT Custodians Pty Ltd v Commissioner of State Revenue (Vic); Commissioner of State Revenue (Vic) v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [15], in taking this step:

'...a priori assumptions as to the nature of unit trusts under the general law and principles of equity [will] not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2), upon the terms of the particular trust. The term "unit trust" is the subject of much exegesis by commentators. However, "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which dictate the application to particular facts of the [relevant statutory definition]...'

There will be some circumstances in which a trust instrument must be read subject to the operation of a particular legal rule, whether by common law, statute or statutes. See, for example, the provisions of Chapter 5C of the Corporations Act which, if inconsistent with the constitution of a registered managed investment scheme, can have the effect of altering or modifying the scheme's constitution. It is possible for a constitution to be altered or modified by operation of law irrespective of whether the trust instrument itself expressly recognises the relevant common law rule or statute, and the entitlements of a beneficiary under the trust instrument are those as so altered or modified by operation of law.

Vested interests

For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument consists of the Trust Deed.

It is accepted that under the Deed the Unitholders have a vested interest in the income and capital of the Trust.

Defeasible powers in the Deed

Under subsection 272-5(1) in Schedule 2F to the ITAA 1936 a person will be taken to have a fixed entitlement to a share of the income or capital of a trust if they have a vested and indefeasible interest under the trust instrument.

Under the Deed of the Trust, the Unitholders of the Trust may not be considered to have a vested and indefeasible interest in all of the income and capital of the Trust because the Deed provides the Trustee a defeasible power in Clause XX referring to Amendments.

Despite the Trustee's powers to amend the Trust Deed require approval by all Unit Holders subject to certain restrictions, the mere existence of a power to amend the trust instrument constitutes a defeasible power (Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 at [106]).

Where unanimous approval by all Unitholders is required before amendments are made, this will only be relevant to the considerations of the Commissioner for the purposes of determining the likelihood of a defeasance occurring for the purposes of subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936.

Therefore, the Unitholders of the Trust 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.

Issue 1 Question 2

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 Unitholders 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) of Schedule 2F to the ITAA 1936 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 December 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 (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.

Paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936:

The Deed provides the Unitholders of the Trust with vested interests in a share of the income that the Trust derives from time to time and a share of the capital of the Trust as noted above. The Unitholders, however, do not have a fixed entitlement to the share of income and capital of the Trust. As a result, paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 is satisfied.

Subparagraph 272-5(3)(b)(i) of Schedule 2F to the ITAA 1936:

In relation to the circumstances in which the entitlement is capable of not vesting or the defeasance happening, the following comments are made:

·        Issue of Units - The Trustee is allowed to issue additional Units under the Deed. Where additional units will be issued the issue price is based on the net asset backed value of the Units as provided in the Deed. The Commissioner considers the savings rule subsection 272-5(2) is satisfied where further units may be issued or existing units redeemed in certain situations (PCG 2016/16 paragraph 19). Where the issue price of the units will based on the net asset value calculated according to Australian accounting principles the saving rule in paragraph 272-5(2)(d) of Schedule 2F will apply in respect of each relevant Unit issues.

·        Redemption (Withdrawal) of Units -. The Trustee may only redeem Units at the request of the unit holders as stipulated in the Deed. Consistent with subsection 272-5(2) of Schedule 2F, the redemption price as defined in the Deed is also determined on the basis of the net asset value (calculated according to Australian accounting principles) of the Trust at the time of redemption. As such the saving rule in paragraph 272-5(2)(d) will also apply in respect of each relevant Unit redeemed.

·        Amendments to the Deed - The Trustee may amend the Deed with the consent of all the Unit Holders - see clause xx. As at the date of this ruling application, the Trustee hasn't made any amendments or variations to the Deed since the establishment of the Trust. It is not proposed to amend the Deed during the Ruling period.

Subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936:

In relation to the likelihood of the entitlement not vesting, or the defeasance happening, the following comments are made:

·        The behaviour of the Trustee for the Trust from the time the Trust was established to the date of this ruling application is relevant. The Trustee applied for a private ruling soon after the Trust was established. As such in respect of past events, the defeasible powers contained in the Deed have not been exercised to defeat any of the requisite interests of the Unitholders.

·        In respect of the Ruling Period, the Trustee may exercise its powers under the Deed, such that:

-        different classes of Units may be issued only if it does not cause the Trust to cease as a fixed trust;

-        no Units will be reclassified if doing will cause the Trust to cease as a fixed trust;

-        having regard to the relevant restrictions in the Deed - only one class of Units may be issued

·        Clause X.X of the Trust Deed allows for a series of ordinary units, which provides for fees to be imposed by the Trustee in accordance with the Trust Deed, to be issued.

·        There is no proposal to amend the Trust Deed during the Ruling Period.

·        The Trustee has discretion to terminate the Trust. The Trustee may agree with the Unitholders that their entitlement on the winding up is to be satisfied by transferring specified assets to the unitholders at market value. The net proceeds of realisation on termination of the Trust must be distributed by way of Unit redemption.

Therefore, it is considered that the likelihood of defeasance happening is low.

Subparagraph 272-5(3)(b)(iii) of Schedule 2F to the ITAA 1936:

In relation to the nature of the Trust the following comments are made:

·        The Trust is a unitised trust, however, the Units are not publicly listed on an approved security exchange and the Trust is not a managed investment scheme. As such the circumstances and likelihood in which each unitholder's entitlement is capable of not vesting or the defeasance happening is not reduced in this Trust.

·        The Trust has only been established since 20XX with its main activity as funds management. At the date of the ruling application, the Trust has only one Unitholder.

·        The Trustee's activity is within the finance and investment sector.

·        The Trustee plans to apply for a financial services licence.

Schedule 2F to the ITAA 1936 and tax losses

The concept of a 'fixed entitlement' was originally introduced in the context of the trust loss measures and should primarily be interpreted in that context. The trust loss measures are an important integrity measure, removing a structural flaw in the tax system. The concept of a 'fixed entitlement' is fundamental to the structure and effectiveness of the trust loss measures.

The EM to the trust loss measures states (at paragraph 13.13) in respect of the Commissioner's power in subsection 272-5(3) of Schedule 2F to the ITAA 1936 that:

This provision is to provide for special circumstances where there is a low likelihood of a beneficiary's vested interest being taken away or defeased and, having regard to the scheme of the trusts loss provisions to prevent the transfer of the tax benefit of the losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement.

This passage seems to indicate that when looking at the facts of a case in the context of the criteria listed in subsection 272-5(3) of Schedule 2F to the ITAA 1936 regard should always be had to whether a fixed entitlement in these circumstances could result in the transfer of the benefit of the tax loss.

In this regard the Trustee of the Trust does not have any carried forward tax losses as the Trust has only recently been established.

In relation to the circumstances which pertain to the existence of a tax loss of the Trust, it is noted that:

·        At the date of the ruling application, the Trustee does not forecast any tax losses for the Trust.

·        If the activities of the Trust will result to tax losses, the Trustee intends to recoup the tax losses and any carried forward losses and that's the reason why they have asked for a 'fixed trust' determination.

·        There appears to be no arrangements that would give or can give any benefits of tax losses to any of the Unitholders. It is noted that as at the date of the ruling application there is only one Unitholder in the Trust.

·        The financial statements of the Trust were not provided but the Trustee does not have any tax losses forecast.

·        Throughout the Ruling period it is confirmed no different classes of Units will be issued and that no streaming of income or capital will happen.

·        Where Units may be issued or transferred and/ or redeemed, the Trustee will do so satisfying the saving rule in paragraph 272-5(2)(d) of Schedule 2F to the ITAA 1936.

·        It is not proposed that the Trustee will amend the Trust Deed during the Ruling period.

Conclusion/ Recommendation

As per paragraph 272-5(3)(b) it is considered that the Unitholders of 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.

In summary, it is submitted that as:

·        the circumstances in which the entitlement is capable of not vesting or a defeasance happening are limited;

·        the likelihood of the entitlement not vesting or a defeasance happening are remote;

·        the 'nature of the trust' is of one conducting investment activities; and

·        the opportunity to traffic any tax loss will be limited;

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 the Unitholders 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 Unitholders 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 ATO stated (somewhat belatedly) in Taxation 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 paragraph 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 subsections 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 (capital) 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 (e.g. see ATO ID 2002/122).

Practice Statement PS LA 2002/11: 'Issues concerning fixed entitlements to a share of the income or capital of a trust' has application to former sections 160APA and 160APHD of the ITAA 1936 but not directly to former section 160APHL (only indirectly via the definition of 'widely held trust' which, in part, relies upon the definition of 'fixed trust' in Schedule 2F to the ITAA 1936).

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 beneficiary's 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 beneficiary has in each of the underlying shares in the Trust (refer to paragraphs 4.26, 4.77 and 4.88 of the EM with accompanied the Taxation Laws Amendment Bill (No. 2) 1999).

Although the method of calculating the interest that a beneficiary 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 Unitholders of the Trust do have a vested interest in a share of the capital of the Trust but that 'vested interest' is 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 Unitholders 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.

Issue 2 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 Unitholders 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 Unitholders 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 Unitholders 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 paragraphs 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 Unitholders of the Trust do 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 beneficiary's interest in the capital of the Trust is vested, the Deed of the Trust contains certain clauses by which a unitholder'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:

·        the circumstances in which the interest is capable of not vesting or the defeasance can happen; and

·        the likelihood of the interest not vesting or the defeasance happening; and

·        the nature of the trust; and

·        any other matter the Commissioner thinks relevant.

It has already been determined, in relation to Issue 1 Question 2, that the Commissioner exercises the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the Unitholders 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.

The factors in former paragraph 160APHL(14)(c) are identical, mutatis mutandis, to the factors in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, except for an additional factor in subparagraph (iv) of former paragraph 160APHL(14)(c).

The saving rule in former subsection 160APHL(13) of the ITAA 1936 is identical, mutatis mutandis, to the saving rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936.

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 Unitholders 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).