Edited version of private advice

Authorisation Number: 1051921109587

Date of advice: 8 March 2022

Ruling

Subject: Fixed trust - fixed entitlement

Question 1

Do the Unitholders of the Trust have fixed entitlements to 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 2A

Does the Trust satisfy the Safe Harbour provisions in Practical Compliance Guideline PCG 2016/16: Fixed entitlements and fixed trusts?

Answer

Yes, for past income years

Question 2B

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

Answer

Yes. For income tax years ending 30 June 20XX to Income tax year ending 30 June 20XX.

Question 3

Do 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 his discretion in accordance with 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 their unitholding?

Answer

Yes, for income tax years ending 30 June 20XX to Income tax year ending 30 June 20XX.

This ruling applies for the following periods:

Income tax years ended 30 June 20XX to 30 June 20XX

The scheme commences on:

XX/XX/XXXX

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The following documents, or relevant parts of them, form part of the facts in this Ruling:

•                     Structure organisation chart

•                     The Deed for Trust A (Trust Deed), executed on XX/XX/XXXX

•                     Financial Statements for Trust A from 20XX to 20XX Financial Years

•                     Trust Tax Return for Trust A from 20XX to 20XX Financial Years

•                     Constitution of Company B

These documents were provided to the Commissioner on XX/XX/XXXX.

Background

The Trust A (the Trust) was established by the Trust Deed, which was executed on XX/XX/XXXX.

Company A acts, and at all relevant times has acted, as Trustee of the Trust (the Trustee).

The Trust was established, pursuant to the Trust Deed, on the issuing of ordinary units (the Units).

The Units are not listed on the stock exchange (and you have no expectation they will be in future).

The Trust is neither a Managed Investment Scheme in accordance with Chapter 5C of the Corporations Act 2001, nor is it a widely-held unit trust.

The Trust issued xx units at $X per unit on establishment. In early 20XX, the Trust issued additional xx units for fund raising. The holders of the Units of the Trust are as follows:

The Trust have no tax losses incurred or carried forward form prior years. The Trust have made the distribution to the unitholders based on the percentage of the units held by the unitholders for the relevant income years.

The Trustee is an Australian tax resident proprietary limited company. The current directors are Person A, Person B and Person C (all appointed on XX/XX/XXXX).

The Trustee issued capital X ordinary shares of $X each fully paid to the following:

•                     XX ordinary shares held by Trust B.

•                     XX ordinary shares held by Trust C.

•                     XX ordinary shares held by Super Fund A.

Investment in Company B

The Trust holds X% Company B's issued shares (X obtained on XX/XX/XXXX, which equals X% of the issued shares and X obtained on XX/XX/XXXX which equals X% of the new issued shares), which were issued at $X each. The remaining shares in Company B are held by otherwise unrelated third parties.

Company B is an Australian tax resident proprietary limited company and not listed on the stock exchange.

Company B acquired X% of Company C on XX/XX/XXXX.

The current Directors of Company B are Person A, Person B and Person C (all appointed on XX/XX/XXXX). The directors are all Australian residents for tax purposes.

The shares of Company B are divided into Ordinary and A Class shares. A Class shares are not entitled to receive dividends, however are entitled to receive a share of any gain on sale of Company B at a point in the future on a "Realisation Event". A Realisation Event broadly means a sale or distribution of sale proceeds of X% or more of the Ordinary Shares on issue. (See Clause X.X of Constitution of Company B).

The Trust

The Trustee has stated that the Trust was established for the sole purpose of undertaking investment activities, which is evidenced, the Trustee asserts, by not only its shareholding in Company B, but also the lack of other business activities undertaken by the Trust. The Trust expects to receive regular and recurrent franked dividends from in Company B that will be sourced from the company's subsidiary Smoke Alarms Australia's business activity.

Additional units were issued to the same beneficiaries in early 20XX, the issuance slightly changed the percentages of units held by the beneficiaries by less than 0.X%. No additional units have been issued, or any units redeemed, in the Trust after this issuance. The Trustee has stated that the Trust only has Ordinary Units on issue. No Sponsor Units or other classes of unit has been issued or expected to be issued. The Trustee has the right to issue units of different class, only with approval by Special Resolution or written approvals of all Members. Further, the Trustee has stated that the existing rights attached to the ordinary units of the Trust will not be varied by the corporate trustees of the Trust.

The Trust Deed

You have provided relevant clauses of the Trust Deed which detail the obligations and rights of the parties. Pursuant to the Deed:

•                     the beneficial interest in the Property is divided into Units and all Units confer identical interest and rights.

•                     Distribution Clause stated each Member has a vested and indefeasible interest in a share of the Trust Income reduced by any previous distributions in respect of the Units held by that Member of Distributable Income in that Year.

•                     At any time after X months of the First Closing Date, the Trustee may issue units only with approval by Special Resolution or written approval of all Members. Special Resolution means a resolution passed by at least X% of the votes cast by Members entitled to vote on the resolution.

•                     the Units will be issued at the Net Unit Value plus Transaction Cost after X months from the First Closing Date.

•                     The Trustee can forfeit any or all of a Defaulting Member's Units, in its discretion.

•                     The Trustee may allow the redemption of Units at the Net Unit Value upon approval in writing by all Members.

•                     Valuation Clause sets Net income of the Trust must be calculated in accordance to clauses in the Trust Deed to ensure the fixed and indefeasible interest of existing Members in the Trust in maintained.

•                     The Trust ends X years (less one day) after the date that it commenced, or at any earlier time provided by the Deed or by law;

•                     The Deed provide power to the Trustee has throughout the world all the powers in relation to the Trust, its Property and liabilities, that it is legally possible for a natural person, corporation or trustee to have, as if it were the absolute and beneficial owner of all the Trust's property.

•                     The Deed provides the Trustee power to amend, add to or vary the Deed with the consent of all the Unitholders. The Deed conversely stipulates that no amendment if it will have a materially adverse effect on Member's rights (and, for this purpose, any amendment which causes a defeasance of any interest in income and/or capital of the Trust will be taken to have a materially adverse effect on each Member).

Assumptions

Throughout the Ruling Period, it is assumed that:

•                     No other classes of units have been issued other than the Ordinary Units.

•                     Existing units in the Trust will not be reclassified.

•                     Further units will not be issued.

•                     None of the Unitholders will sell or dispose of their units.

•                     No units will be redeemed.

•                     The Trust will not be terminated.

•                     No further amendments will be made to the Deed, and

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

-              section 272-35 of the ITAA 1936 having application

-              the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction,

-              the stripping of company profits, manipulation of franking credits or debits or other arrangement involving interests in shares to obtain a tax benefit, or

-              fraud or evasion

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 95A

Income Tax Assessment Act 1936 former section 160APHD

Income Tax Assessment Act 1936 former section 160APHL

Income Tax Assessment Act 1936 former section 160APHM

Income Tax Assessment Act 1936 former section 160APHN

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

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

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

Reasons for decision

Question 1

Do the Unitholders of the Trust have fixed entitlements to 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?

Summary

No. The terms of the trust instrument do not provide the beneficiaries with vested and indefeasible interests in all of the income and capital of the Trust.

Detailed reasoning

Whether a trust qualifies as a 'fixed trust' is particularly important because it is used to determine how certain provisions of the income tax laws, such as the carry forward loss rules, apply.

What is a fixed trust?

The term 'fixed trust' is defined the same in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936); that definition provides that:

"A trust is afixed trust if persons have fixed entitlements to all of the income and capital of the trust".

What constitutes a fixed entitlement?

Subsection 272-5(1) of Schedule 2F of 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".

Broadly, a beneficiary has a fixed entitlement to the income or capital of a trust if they have a vested and indefeasible interest in the income or capital of the trust.

Vested interest

The term 'vested' is not defined in the tax legislation and takes on its ordinary meaning.

Practical Compliance Guideline, PCG 2016/16: Fixed entitlements and fixed trusts (the PCG) provides further guidance on this issue. Paragraphs 13 and 14 of the PCG relevantly state:

"In terms of the concept of 'fixed entitlement', an interest is 'vested' if it is vested in interest or vested in possession. An interest is vested in possession when it gives its holder a right of present enjoyment, whereas an interest is vested in interest if it gives its holder a present right to future enjoyment.

The mere object of a discretionary trust does not have a vested interest in, and therefore does not have a fixed entitlement to, either the income or capital of the trust".

Indefeasible interest

The term 'indefeasible' is not defined in the tax legislation, however, broadly speaking, an interest is generally indefeasible where it cannot be terminated, invalidated or annulled (see Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16, paragraph 97).

Paragraph 15 of the PCG provides that:

'an interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events. An interest of a default beneficiary in the income or capital of the trust is an example of a defeasible interest".

Examples

The PCG (at paragraph 16) also identifies powers in modern trust instruments which cause a beneficiary's interest to be defeasible. Such powers include:

•                     Broad powers to amend the trust instrument.

•                     Powers to issue new units after the trust is settled, or to redeem existing units.

•                     A power to reclassify existing units so that they do not all have equal rights to receive the income and capital of the trust.

•                     A power to classify receipts as being on income or capital account where the units that have been issued do not all have the same rights to receive the income and capital of the trust.

•                     A power to appoint a beneficiary's interest in the income or capital of the trust to another beneficiary.

•                     A power to settle or appoint any part of the corpus of the trust to a new trust with different beneficiaries.

•                     A power to enforce the forfeiture or cancellation of partly paid units due to the non-payment of a call except where such partly paid units would be void ab initio".

Application to your circumstances

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 of a trust there must be a vested and 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.

For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument is the Trust Deed dated XX/XX/XXXX.

To that end, whilst it is accepted that the Trust Deed provides Unitholders with a vested interest in the income and capital of the Trust, this interest is not indefeasible.

In particular, is noted that the Deed contains several clauses, in accordance with paragraph 16 of the PCG, that may cause the beneficiary's interest to be defeasible, namely:

•                     Issuing of new Units

Clause X gives the Trustee powers to create and issue one or more different Classes of Units with interests and rights differing from each other Class of Units, with approval by Special Resolution or written approval of all Members.

•                     Redemption of Units

Clause X gives the Trustee right to allow the redemption of Units, at Net Unit Value upon approval in writing by all Members.

•                     Making New Investment

Clause X.X gives the Trustee the power to make New Investment approved by the Investment Committee, following the procedures in clauses X.X or X.X.

•                     Enforcing the forfeiture

Clause X gives the Trustee power to forfeit any or all of a Defaulting Member's Units, in its discretion.

•                     Variation of Trust

Clause X gives the Trustee the power to amend, add to or vary the provisions of the Trust Deed by authorised by a Special Resolution or by the way of a written consent by all Members and the Trustee.

Conclusion

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 stipulates that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest. As previously noted, there are certain clauses of the Deed that may cause the beneficiaries' interests to be defeasible.

Although there are restrictions that no amendment may be made in a way that it will have a materially adverse effect on Members' rights and states that any amendment which causes a defeasance of any interest in income and/or capital will be taken to have a materially adverse effect on each member, clause 33.1 of the Deed provides the Trustee defeasible powers to amend the Deed with the consent of all the Unitholders. Whilst the applicant contends that none of these powers have or will be acted upon, for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the fact that a power held by the trustee has not yet been exercised is not relevant when determining if the power results in an interest being defeasible [see Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235]. The key question is whether the power, if exercised, would result in a defeasance of some or all of a beneficiary's rights to the income and/or capital of the trust.

As a result, given the clauses outlined above and their potential to cause defeasance, the Unitholders, as beneficiaries 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.

Question 2A

Does the Trust satisfy the Safe Harbour provisions in Practical Compliance Guideline PCG 2016/16: Fixed entitlements and fixed trusts?

Summary

Yes, for past income years. While there were no tax losses incurred or carried forward in the past income years, the applicant may not satisfy these provisions for the future income years.

Detailed reasoning

Safe Harbour provisions

The safe harbour conditions are outlined in the PCG (at paragraph 54). The conditions, if satisfied, provide that the trustee of a trust can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust for the purposes of section 272-5.

In its submissions, the applicant identified the conditions prescribed in the PCG at paragraph 54 for Category 6 ('Other trusts') of the safe harbour provisions as having particular relevance.

To fall within category 6 and be eligible for the safe harbour provisions, the following requirements must be met:

•                     the trust must have a trust instrument,

•                     all beneficial interests in the income and capital of the trust are vested,

•                     all beneficial interests have the same rights to receive the income and capital of the trust (see paragraph 17 of this Guideline),

•                     all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capital of the trust,

•                     the trust is not a discretionary trust or a trust with default income or capital

•                     beneficiaries - that is, no beneficial interest in the income or capital of the trust is capable of being defeated, partly or wholly, by the exercise of a power of appointment of income or capital by the trustee or other donee,

•                     a trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust, and

•                     an arrangement has not been entered into which would result in:

(a)          section 272-35 having application

(b)          the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or

(c)           fraud or evasion.

Application to your circumstances

Prima facie, the trust satisfies the conditions outlined in category 6. The Trustee stated that there were no tax losses incurred or carried forward in the past financial years. As per paragraph 52 of the PCG, a trustee that requires certainty as to whether or not the beneficiaries of the trust have fixed entitlements in relation to a future time must request the exercise of the Commissioner's discretion.

In this instance, the applicant is asking for certainty in applying the 'safe harbour' provisions in future years, certainty that cannot be provided. However, the applicant can assess if it would meet the 'safe harbour' at the end of each financial year without requesting the Commissioner to consider exercising his discretion under subsection 272-5(3) of Schedule F to the ITAA 1936. Alternatively, the Trustee may nevertheless request that the Commissioner consider exercising his discretion in subsection 272-5(3) of Schedule F to the ITAA 1936 to treat the Unitholders' interest as being vested and indefeasible, for the duration of the ruling period requested. The exercise of the discretion is considered in Question 2B.

Question 2B

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

Summary

Yes. Based on the facts provided, it would be reasonable for the Commissioner to exercise his discretion in subsection 272-5(3) of Schedule 2F to the ITAA1936 to treat the beneficiaries as having fixed entitlements to a share of the income and capital of the trust, for income tax years ending 30 June 2022 to Income tax year ending 30 June 2025.

Detailed reasoning

Commissioner's discretion

The Commissioner's discretion in subsection 272-5(3) of Schedule 2F to the ITAA1936 is intended to provide for circumstances where, despite the trust not technically meeting the requirements of a 'fixed trust', the likelihood of the beneficiary's vested interest being defeated is low, and it would be unreasonable in the context of the statutory scheme to treat the beneficiary's interest as not constituting a "fixed entitlement".

Subsection 272-5(3) states:

"If:

(a)          a beneficiary with an interest in a share of income that the trust derives from time to time, or of the capital of a trust, does not have a fixed entitlement to the share; and

(b)          the Commissioner considers that the beneficiary should be treated as having the 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; then

the beneficiary has the fixed entitlement."

The PCG provides guidance on what factors the Commissioner will need to consider when making his decision on exercising the discretion (see paragraphs 25-41 and Appendix C).

In each case the Commissioner will weigh up all factors (favourable and unfavourable) of the case.

Factors which the Commissioner will consider include:

Factors favourable to the exercising of discretion

Paragraph 55 of the PCG outlines factors favourable to the exercise of the Commissioner's discretion:

The Commissioner regards the following factors favourably when deciding whether to exercise the discretion:

•                     a trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust

•                     commitments are made in unit holder agreements, Product Disclosure Statements, or other documents with legal consequences that the trustee or manager will not exercise a power capable of defeating a beneficiary's interest at all, or in a way that is averse to the rights of beneficiaries to receive the income and capital of the trust

•                     all beneficiaries have the same rights to receive the income and capital of the trust

•                     the trust instrument can only be amended with the unanimous (100%) approval of all the beneficiaries

•                     although the trust instrument can be amended without the unanimous approval of beneficiaries, the approval percentage calculated on the current interest or unit holdings of beneficiaries effectively means that all beneficiaries must approve any amendment (for example, where the approval of 75% of unit holders is required to make the amendment and the smallest unit holding is more than 25% of the units)

•                     the trust instrument has been amended in accordance with section 601GC of the Corporations Act 2001 (so as to assist with the efficient administration of the trust) but no beneficial interests in the income and capital of the trust are adversely affected

•                     the beneficiaries whose rights to receive the income and capital of the trust have been adversely affected by the exercise of a power capable of defeating a beneficiary's interest have explicitly consented to that specific act (such as upon the redemption of the interests of an employee not covered by the savings rule upon the cessation of employment)

•                     the trustee or manager deals with the beneficiaries of the trust on an arm's length basis

•                     the trust is governed by a foreign law that is similar to Chapter 5C of the Corporations Act 2001, and

•                     the trust would satisfy the basic and specific conditions (as applicable to the type of trust) for access to a safe harbour.

Factors that are not favourable to the exercising of discretion

Factors adverse to the exercise of the Commissioner's discretion are listed in paragraph 56 of the PCG, which states:

The Commissioner regards the following factors unfavourably when deciding whether to exercise the discretion:

•                     a trustee or manager exercises a power to defeat beneficiaries' interests in the income or capital of the trust, however:

-              the nature of the power that is exercised will be important, for example, compulsorily redeeming units where a unit holder's stake is less than a minimum specified in the trust instrument, and the unit holder receives the redemption price of those units, is unlikely to preclude the exercise of the discretion

-              where external factors (such as those in the Global Financial Crisis) temporarily affect the ability of the trustee or manager to fund distributions or redemptions, this is unlikely to preclude the exercise of the discretion (for example, a temporary wholesale freezing or deferral of interests)

•                     there are significantly different beneficiaries of the trust in an income year for which an entity seeks to have a fixed entitlement, than the beneficiaries of the trust in the income year(s) in which the trust made a tax loss, or incurred a bad debt deduction or debt/equity swap deduction

•                     an arrangement has been entered into which would result in:

a)            section 272-35 having application

b)            the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or

c)            fraud or evasion.

Application to your circumstances

Paragraph 272-5(3)(a)

Paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 appears satisfied. As stated above, the Deed provides the Unitholders with vested interests in a share of the income and capital of the Trust. However, each Unitholder of the Trust does not have a fixed entitlement to the share of income and capital in the trust, in line with the analysis in Questions 1.

Paragraph 272-5(3)(b)

Paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936 appears on balance satisfied. Whilst there are clauses in the Trust Deed which give rise to circumstances of potential defeasance (see Question 1 for further details), and thus, suggests that subparagraph 272-5(3)(b)(i) is answered negatively, both the likelihood of the interests not vesting or being defeated and the nature of the Trust itself (discussed in detail below) suggests that both subparagraphs 272-5(3)(b)(ii) and 272-5(3)(iii) are satisfied.

Likelihood of the interest not vesting or being defeated

Despite the Trustee's powers to cause potential defeasance (as mentioned above), the Commissioner considers, based on the facts provided, the probability of defeasance happening is low. It is a material fact in this regard that the Trustee has not exercised a power capable of defeating a beneficiary's interest, in particular, the Trustee states:

•                    The Trust has not exercised any power that is capable of defeating a Unitholders' interest in the income or capital of the Trust, nor does it intend to in the relevant period,

•                    Additional units were issued to the same beneficiaries in early 20XX, the issuance slightly changed the percentages of units held by the beneficiaries by less than 0.X%, which is relatively minor,

•                    The Trustee has never redeemed units,

•                    There is no proposal to issue further units and or withdraw units in the future,

•                    The Trustee has never exercised its power to vary the investment,

•                    The Trustee stated that only one class of units has been issued (and no other classes of units may be issued) and each unit is of equal value and has the same rights,

•                    New units may only be issued for a price determined on the basis of the net asset value, according to Australian accounting principles, of the Trust at the time of issue as specified per Clause X.X and X.X of the Deed as explained above,

•                    The Unitholders of the Trust are entitled to income and capital of the Trust on the basis that is directly proportionate to their Unitholding, and

•                    There are very limited powers to amend the Deed, and no amendments are contemplated by the trustee.

•                    The Deed can only be amended by authorised by a Special Resolution or by the way of a written consent by all Members and the Trustee,

•                    The Trust will not introduce a Unitholder's Agreement, or any similar documentation separate to the Trust Deed which will influence whether or not a beneficiary under the Trust has a fixed entitlement to the income and capital.

•                    No Arrangements have or will be entered into that will result in s273-35 of Schedule 2F of the ITAA 1936 having application.

The nature of the Trust

Taking into account the factors mentioned in the PCG (paragraph 34), it is noted that, based on the statements provided:

•                    The Trust was established for the purpose of undertaking investment activities for the benefit of its Members (defined in subclause X.X as Unitholders), namely, initially, interests in Company C though holding X% shares of its head company Company B.

•                    The purpose of establishing the Trust is to allow the Unit Holders to derive income/profits from investment activities undertaken by the Trust. At the date of the ruling application, the Trust has three Unit Holders.

•                    Additional units were issued to the same beneficiaries in early 20XX, the issuance slightly changed the respective unit holding proportions held by the Unitholders by less than 0.X%, which is relatively minor,

•                    The Trustee has the power to amend the provisions of the Trust Deed, but this is only possible with the consent of all unitholders.

•                    Further, the Trust Deed does not allow amendment to be made in a way that it will have a materially adverse effect on Members' rights and states that any amendment which causes a defeasance of any interest in income and/or capital will be taken to have a materially adverse effect on each member and as explained above.

•                    No amendments have been made to the Trust Deed since the establishment of the Trust and it is not proposed that the trust deed will be amended going forward.

It is considered, in this instance, that powers afforded to the Trustee do not adversely affect the interests of the Unitholders, to the extent that the nature of the trust in of itself, precludes the Commissioner from exercising his discretion, favourable or otherwise.

To that end, since Paragraph 272-5(3)(a) and Paragraph 272-5(3)(b) appear to be satisfied, it would not be unreasonable for the Commissioner to consider that the Unitholders of the Trust should be treated as having a fixed entitlement, in so far as their respective interests are both vested and indefeasible.

Other considerations

As per paragraph 35 of the PCG, the Commissioner must consider "whether the exercise of the discretion would allow a person to obtain a tax benefit from a trust claiming a deduction for a tax loss, bad debt deduction or debt/equity swap deduction when the person did not bear the economic loss incurred by the trust" when exercising the discretion. It states that these factors are still relevant "even when the reason for requesting that the Commissioner exercise the discretion is related to one of the other legislative provisions listed in Attachment A".

In relation to the circumstances which pertain to the existence, or lack thereof, of a tax benefit, it is noted that:

•                    At the date of the ruling application, there was no tax losses incurred or carried forward for the Trust.

•                    The distribution in the past years (from 20XX income year to 20XX income year) were distributed based on the respective unit holding proportions held by the Unitholders

•                    There appears to be no arrangements to date that would give or can give any benefits of tax losses to any of the Unitholders.

•                    Throughout the Ruling period the trustee has stated no different classes of Units will be issued and that no streaming of income or capital will occur.

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

•                    The Trustee has said it will not make amendments to the Trust Deed during the Ruling period

As such, it is considered that, if the Commissioner were to exercise his discretion to deem fixed entitlements under subsection 272-5(3) of Schedule 2F to the ITAA 1936 this would not result in undermining the integrity purpose of Schedule 2F to the ITAA 1936 and would not give rise to a tax benefit.

Conclusion

Applying the guidance in the PCG, the Commissioner will exercise his discretion subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the Unitholders' interests fixed entitlements from 20XX income year to 20XX income year.

Question 3

Do 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?

Summary

No. The terms of the trust instrument do not provide the beneficiaries 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 "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." However, consistent with the analysis in Question 1, said interests while vested, are not indefeasible.

Application to your circumstances

As noted above in Question 1, the Trust Deed contains several clauses that contain a power that may defease the interest of a Unitholder in the corpus of the Trust.

Therefore, for the same reasons explained in Question 1, the Unitholders 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.

Question 4

Will the Commissioner exercise his discretion in accordance with 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 their unitholding?

Summary

Yes. Based on the facts provided, it would be reasonable for the Commissioner to consider exercising his 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

As noted above in Question 3, the Unitholders do not have a vested and indefeasible interest in the income and capital of the Trust under former subsection 160APHL(11) of the ITAA 1936.

In accordance with former subsection 160APHL(14) of the ITAA 1936, in cases where beneficiaries do not have a such an interest, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed interest where it is reasonable to do so based upon the factors prescribed in subsection 160APHL(14) of the ITAA 1936 which state:

(14) If:

(a)          the taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding; and

(b)          apart from this subsection, the interest would not be a vested or indefeasible interest; and

(c)          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;

the Commissioner may determine that the interest is to be taken to be vested and indefeasible.

Application to your circumstances

Former paragraph 160APHL(14)(a)

Former paragraph 160APHL(14)(a) of the ITAA 1936 contains a 'threshold' condition that the taxpayer has an interest in the corpus of the Trust.

An interest for these purposes is considered to be a 'vested interest' and not a 'contingent' interest (an interest that does not take effect until certain conditions are met).

In this case, Clause X of the trust deed effectively provides that distributions must be made to Members of that Class (only the Ordinary Class existed) pro rata as between Members, which in line with the proportion of the Capital Commitment of each Members based on the units each Member held. There is no contingency that exists.

Former paragraph 160APHL(14)(b)

As discussed above in Question 1, although a Unitholder's interest in the corpus of the Trust is vested, the Trust Deed contains certain clauses by which a Unitholder's interest in a share of the corpus of the Trust may be defeased.

Former paragraph 160APHL(14)(c)

The factors the Commissioner must consider 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.

The factors in former paragraph 160APHL(14)(c) of the ITAA 1936 are identical, 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).

Other matters the Commissioner may consider relevant are found in the PCG in paragraphs 34 and 35. These were considered in Question 2.

Since it has already been determined, in relation to Question 2, that the Commissioner would likely exercise 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 fixed entitlements to (being a vested and indefeasible interest in) all of the capital of the Trust, then a similar conclusion would result when considering the Commissioner's discretion under former subsection 160APHL (14) of the ITAA 1936. There are no other factors identified for the Commissioner to consider in exercising the discretion in former subsection 160APHL(14) of the ITAA1936

Conclusion

Therefore, for the reasons given in relation to Question 2, the Commissioner will exercise his discretion under 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) for the 20XX income year to 20XX income year.