Edited version of private advice

Authorisation Number: 1051901515570

Date of advice: 21 September 2021

Ruling

Subject: 160APHL(14) discretion

Question

Will the Commissioner exercise the discretion in former subsection 160APHL(14) of the Income Tax Assessment Act 1936 (ITAA 1936) to treat the Unitholders 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 periods:

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commences on:

1 July 2021

Relevant facts and circumstances

The Trust

The Trust is a unit trust established by trust deed on 26 April 20XX (the Deed).

Trustee Pty Ltd (the Trustee) is the trustee of the Trust.

The Trust:

•         is an Australian resident for tax purposes;

•         has not made a family trust election;

•         is not a Managed Investment Scheme for the purposes of the Corporations Act 2001;

•         is not listed on the ASX;

•         does not have market capitalisation.

The Trustee:

•         is an Australian resident for tax purposes;

•         is not a trustee of any other trusts;

•         has a director who is an Australian resident for tax purposes;

•         is not an Australian Financial Services License holder;

•         is not subject to any regulation by the Australian Prudential Regulation Authority or any other Australian Federal Government Authority.

The Trustee wholly owns a number of companies.

The Trustee's shareholding in these companies comprises the Trust Fund. The Trust holds no other assets.

The Trustee has no dealings with these companies other than being their shareholder.

These companies had retained profits and franking balances of nil when they were acquired by the Trust.

These companies have not paid franked dividends in the past.

The Trustee has returned net income of nil in the 2019 and 2020 income years.

The Trust has a single class of ordinary units issued. The units are owned as follows (together referred to as the Unitholders):

•         One third owned by Discretionary Trust No. 1;

•         Two thirds owned by Discretionary Trust No. 2.

The two Unitholders are controlled by unrelated business partners and act with each on an arm's length basis.

The Deed may be amended with consent of Unitholders holding at least 75% of shares per cl 22.1. Any amendments that adversely affect the rights of a Unitholder must receive unanimous consent of the adversely affected Unitholder(s).

To date, no amendments have been made to the Deed.

With not less than 50% consent of the Unitholders, the trustee may terminate the trust prior to vesting per cl 11.2. The Trustee will determine the Trust prior to vesting at the direction of all Unitholders.

In the 20XX income year, the Trust had carried forward tax losses of $X,XXX.

No arrangements are in place to give the benefit of these tax losses to the Unitholders.

To date no payments have been made that would be related payments under former section 160APHN of the ITAA 1936.

Unitholder interests

Each Unitholder has a proportional interest in the Trust Fund vested in them per cl 4.1 of the Deed.

Each Unitholder is entitled to a proportional beneficial interest in the Trust Fund but is not entitled to any particular asset in accordance with cl 4.2 of the Deed.

The Trustee is to distribute the net income of the Trust to the Unitholders proportionately at the end of the Trust's Accounting period for that year per cls 13.6 and 13.7.

The Trustee may determine to distribute the capital of the Trust to the Unitholders proportionately per cl 14.2.

To date, the Trustee has not exercised a power to defeat a Unitholder's capital or income entitlement.

Per cl 4.4, with unanimous consent the Trustee may:

•         divide existing units, or units to be issued, into classes with special or limited rights,

•         reclassify existing units into new or existing classes.

In exercising the power under cl 4.4, the Trustee may create new unit classes with different rights, privileges, conditions, or restrictions.

The Unitholders currently do not have any special rights or interests in the Trust Assets.

Unit dealings

A Unitholder, or with Trustee consent another person, may apply for the issue of new units in the manner prescribed in cl 4.5(a). On receipt of a valid application, the Trustee is to first offer the new units to the existing Unitholders proportionate to their current holdings.

Units not acquired by an existing Unitholder, are then offered to other Unitholders, then to the person who applied for the issue of new units and then are to be disposed of otherwise by the Trustee.

The price of new units is to be unanimously agreed to by all Unitholders, otherwise they will be valued as a percentage of the net asset value as determined by an independent and competent valuer per cl 4.6.

To date, no new units in the Trust have been issued.

At any time, a Unitholder may request in writing that the Trustee convert their units into money or to distribute property of equal value per cl 12.1. The Trustee has absolute discretion to refuse such a request per cl 12.2.

The process for redeeming units can be waived by unanimous Unitholder consent per cl 12.9.

To date, no units in the Trust have been redeemed.

Assumptions

Throughout the Ruling Period:

•         Any distributions and related franking credits will be made proportionate to the number of units held by the Unitholders.

•         Existing units in the Trust will not be reclassified.

•         Further units will not be issued.

•         The Unitholders will not sell or dispose of their unitholding.

•         No units will be redeemed.

•         The Trust will not be terminated.

•         No amendments will be made to the Deed.

•         No payments will be made that have the effect of transferring the benefit of a dividend and related franking credits to another person.

•         The Trust will not have any tax losses, bad debts, or debt/equity swap losses.

•         No arrangement will have been entered into that would result in:

•      a related party payment under section 160APHN of the ITAA 36;

•      a Unitholder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee (refer to former section 160 APHM of the ITAA 36);

•      a Unitholder not being sufficiently exposed to the risk of loss or opportunity in respect of the shares in the Taxpayer explained by ATO Interpretative Decision ATO ID 2014/10;

•      Taxpayer Alerts TA 2015/1, TA 2015/2 or 2018/1 applying;

•      the Commissioner making a determination under the General Anti-Avoidance Rules and particularly paragraph 177EA(5)(b) of ITAA36 which relates to disposing of company shares in order for anyone to obtain franking credit benefits;

•      Paragraphs 207-150(1)(c) through 207-150(1)(h) of the ITAA 97 applying;

•      Fraud or evasion.

Relevant legislative provisions

Income Tax Assessment Act 1936 Former Section 160APHL

Income Tax Assessment Act 1936 Former Subsection 160APHL(11)

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

Income Tax Assessment Act 1936 Former Paragraph 160APHL(14)(a)

Income Tax Assessment Act 1936 Former Paragraph 160APHL(14)(b)

Income Tax Assessment Act 1936 Former Paragraph 160APHL(14)(c)

Income Tax Assessment Act 1936 Former Subparagraph 160APHL(14)(c)(i)

Income Tax Assessment Act 1936 Former Subparagraph 160APHL(14)(c)(ii)

Income Tax Assessment Act 1936 Former Subparagraph 160APHL(14)(c)(iii)

Income Tax Assessment Act 1936 Former Subparagraph 160APHL(14)(c)(iv)

Income Tax Assessment Act 1936 Former Section 160APHM

Income Tax Assessment Act 1936 Former Section 160APHN

Income Tax Assessment Act 1936 Subsection 177EA(5)

Income Tax Assessment Act 1997 Paragraph 207-150(1)(c)

Income Tax Assessment Act 1997 Paragraph 207-150(1)(d)

Income Tax Assessment Act 1997 Paragraph 207-150(1)(e)

Income Tax Assessment Act 1997 Paragraph 207-150(1)(f)

Income Tax Assessment Act 1997 Paragraph 207-150(1)(g)

Income Tax Assessment Act 1997 Paragraph 207-150(1)(h)

Reasons for decision

Fixed interests

Former section 160APHL(11) provides:

For the purposes of subsection (10), the taxpayer's interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.

In Dwight v Commissioner of Taxation 92 ATC 4192, Hill J provided at [4202-4203]:

Estates may be vested in interest or vested in possession, the difference being between a present fixed right of future enjoyment where the estate is said to be vested in interest and a present right of present enjoyment of the right, where the estate is said to be vested in possession:

Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 496 per Griffith CJ, at 501 per Isaacs J. A person with an interest in remainder, subject to a pre-existing life interest, has an interest which is vested in interest, but being a future interest is not yet vested in possession. That person's interest will vest in possession on the death of the life tenant. In the present context the word 'vested' is used in contradistinction to contingent.

An interest is said to be defeasible where it can be brought to an end and indefeasible where it cannot. Thus, a beneficiary with an interest which is not contingent but which interest may be brought to an end by the exercise of a power of appointment, would be said to have a vested but defeasible interest...

Unitholders in the Trust have a beneficial interest in the net income and capital of the Trust vested in them by operation of the Deed. As a result, Unitholders of the Trust have a vested interest of the corpus of the Trust.

The vested interest the Unitholders of the Trust hold in the corpus in the Trust can be defeased by:

•         amendments to the Deed;

•         the issue of units not in accordance with the savings rule in former subsection 160APHL(13);

•         the reclassification of units; and

•         the redemption of units not in accordance with the savings rule in former subsection 160APHL(13).

As a result, the Unitholders do not have an indefeasible interest.

Former subsection 160APHL(14) allows the Commissioner to determine an interest as being vested and indefeasible if its prescribed conditions are met.

Threshold condition

Former paragraph 160APHL(14)(a) requires the relevant taxpayer to have an interest in the corpus of the Trust.

This condition is met as the Unitholders in the Trust will have an interest in the corpus of the Trust.

Not vested or indefeasible condition

Former paragraph 160APHL(14)(b) requires that the interest in the corpus of the Trust is not vested or indefeasible.

This condition is met as the interests of the Unitholders in the Trust are defeasible.

Factors to have regards to

Paragraph 160APHL(14)(c) provides:

the Commissioner considers that the interest should be treated as being vested and indefeasible, having regard to:

                         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;

Circumstances in which defeasance can occur

Unitholder interests in the Trust can be defeased in the circumstances stated in paragraph 37.

Likelihood of defeasance

The circumstances in which the interests in the Trust can be defeased will not occur during the Ruling Period in accordance with the Assumptions forming part of this Ruling.

Nature of the Trust

The Trust is a unit trust with only two Unitholders. Both of those Unitholders are discretionary trusts.

Other matters

The discretion in former subsection 160APHL(14) of the ITAA 1936 relates to the utilisation of a tax offset for a share of the franking credit on a franked distribution. It was introduced as a part of integrity measures aimed at defeating franking credit trading schemes.

The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1999, which accompanied the introduction of former subsection 160APHL(14), outlined the purpose of those integrity measures:

4.6 One of the underlying principles of the imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves: a degree of wastage of franking credits is an intended feature of the imputation system.

4.7 In substance, the owner of shares is the person who is exposed to the risks of loss and opportunities for gain in respect of the shares. However, franking credit trading schemes allow persons who are not exposed, or have only a small exposure, to the risks and opportunities of share ownership to obtain access to the full value of franking credits, which often, but for the scheme, would not have been used at all, or would not have been fully used. Some of these schemes may operate over extended periods, and typically involve a payment related to the dividend which has the effect of passing its benefit in economic terms to a counterparty. The schemes therefore undermine an underlying principle of imputation.

In exercising the discretion, the Commissioner must ensure that the purpose of the integrity measures are not undermined.

The purpose of the integrity measures will not be undermined due to the Assumptions forming part of this Ruling.

Conclusion

The Commissioner will exercise the discretion under former subsection 160APHL(14) to treat the Unitholders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding during the Ruling Period.