Edited version of private advice

Authorisation Number: 1051943512620

Date of advice: 25 January 2022

Ruling

Subject: Fixed trust entitlements

Question 1

Do the Unitholders of the ABC 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 2

Do the Unitholders of the ABC 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 3A

Is it likely the Safe Harbour provisions in Practical Compliance Guideline PCG 2016/16: Fixed entitlements and fixed trusts will be satisfied?

Answer

Yes, for past income years.

Question 3B

If the answer to Question 1 is no, 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 ABC Trust as having fixed entitlements to all of the income and capital of the Trust?

Answer

Yes.

Question 4

If the answer to Question 2 is no, will the Commissioner exercise his discretion in accordance with former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders of the ABC 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.

This ruling applies for the following periods:

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

The scheme commences on:

7 February 20XX

Relevant facts and circumstances

Background

The Trust

The ABC Trust (the Trust) is a unit trust.

ABC Pty Ltd acts, and at all relevant times has acted, as Trustee of the Trust (the Trustee).

The Trust was established pursuant to the ABC Trust Deed (the Trust Deed).

The Units are not listed on the stock exchange (and there is 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 Trustee has stated that the Trust was established for the sole purpose of undertaking investment activities. The Trust expects to receive regular and recurrent franked dividends from XYZ Pty Ltd that will be sourced from such activities.

No additional units have been issued, or any units redeemed, in the Trust since establishment. The Trust only has ordinary units on issue and the Trustee does not have the ability to issue units of any other class. Further, the Trustee has stated that it does not expect that any further units will be issued, or transferred, to any entity outside the Group.

The Trust Deed

Pursuant to the Trust Deed:

•         In accordance with clause XX of the Deed, with the prior consent of each Unitholder, the Trustee may only issue units to a person who applies for units at Market Value (as determined pursuant to clause XX of the Deed);

•         Further, without the prior consent of each Unitholder under subclause X(X), the Trustee may only issue units to a person who applies for units if the conditions set out in subclause X(X) are satisfied. Pursuant to that subclause, the Trustee must not issue units:

(i) to any person without the prior consent of the percentage of Unitholders (see paragraph X(X) below;

(ii) at an issue price not equal to Market Value (as determined pursuant to clause XX of the Deed) of the units being issued; and

(iii) without first offering those units to the Unitholders in proportion to their relative unit holdings, with any units not accepted by a Unitholder subsequently offered to the other Unitholders on a similar proportionate basis.

•         The Deed defines the percentage of Unitholders as any percentage of Holders specified in Schedule X and if no percentage is specified 50.1% and includes, as the context requires, a group of Unitholders who hold that percentage. Accordingly, pursuant to Schedule X of the Deed, the specified percentage of Unitholders is 51% (the Percentage of Unitholders).

•         Similarly, in accordance with clause XX of the Deed, with the prior consent of each Unitholder, the Trustee may only re-purchase or redeem units from a Unitholder at Market Value (see subclause XX(X));

•         Further, if the Trustee does not have the prior consent of each Unitholder under subclause XX(X), the Trustee may not re-purchase or redeem units from the Unitholder:

(i) without the prior consent of the Percentage of Unitholders;

(ii) at a price not equal to the Market Value (as determined pursuant to clause XX of the Deed) of the units being redeemed; and

(iii) without first offering those units for sale to the Unitholders in the proportion that the number of units issued to each of them bears to the total number of units issued to all unitholders (excluding the units proposed to be re-purchased or redeemed), with (once again) any units not accepted by a Unitholder subsequently being offered for sale to the other Unitholders on a similar proportionate basis.

•         Net income of the Trust (as defined in clause X.X of the Deed) is vested in the Unitholders and distributions must occur in proportion to the number of units held by the Unitholders in accordance with clause XX of the Deed (Distribution Clause);

•         The Trustee has the power to separately record classes of capital or Net Income of the Trust pursuant to clause XX. In accordance with the Distribution Clause the separately recorded classes of Net Income of the Trust must be distributed in proportion to the number of units held by the Unitholders;

•         The Trust ends 80 years (less one day) after the date that it commenced, or at any earlier time provided by the Deed or by law in accordance with clause XX(X) of the Deed;

(i) Pursuant to clause X(X) of the Deed, the Fund of the Trust is held by the Trustee on trust for the Unitholders subject to the Law and the Deed.

(j) Clause XX(X) of the Deed prohibits the Trustee from amending, adding to or varying the Deed in a way that reduces the future rights or entitlements of, or increases the future obligations of, a Unitholder.

•         Additionally, clause XX(X) of the Deed provides that the Trustee must not amend, add to or vary the Deed in a way that reduces a Unitholder's rights to any unpaid income or capital distributions.

The Trust amendments

17. It is noted that the ABC Deed was amended less than 12 months after establishment. The Trustee has advised that these amendments did not materially affect the interests of any of the Unitholders.

18. The Trustee has stated that no further amendments have been made or are contemplated in future.

Assumptions

Throughout the Ruling Period, it is assumed that:

•         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 amendments will be made to the Deed, and

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

­   section 272-35 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 any 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

former section 160APHD

former section 160APHL

former section 160APHM

former section 160APHN

section 272-5 of Schedule 2F

section 272-65 of Schedule 2F

Income Tax Assessment Act 1997

subsection 995-1(1)

Reasons for decision

Question 1

Summary

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 of 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 and indefeasible interest

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 consists of the Trust Deed, including the Deed of Variation.

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 XX gives the Trustee powers to issue additional units, with the prior consent of each Unit Holder, at a price equal to its Market Value.

•         Variation of Trust

Clause XX gives the Trustee the power to amend, add to or vary the provisions of the Trust Deed by way of a written, signed resolution, passed by a percentage of Unit Holders. An amendment could also permit the amendment of clauses which currently do not contain defeasible powers to do so.

•         Classification of Receipts

Clause XX allows the Trustee to determine if a receipt is income or capital; and

•         Redemption of Units

Clause XX effectively provides for the redemption of Units, at Market Value.

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.

Whilst the applicant contends that none of these clauses (given the Deed contains sufficient restrictions) should constitute defeasible powers, and if so deemed, none of these powers have or will be acted upon (see page 14 of the application), 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 2

Summary

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 3A

Summary

The applicant satisfies the requirements for the safe-harbour provisions outlined in the PCG, for past income years. However, it will not satisfy these provisions for the future income years as requested, as explained below.

Detailed reasoning

Safe Harbour provisions

The applicant contends that the Trust satisfies the safe harbour conditions 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. 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 (as is the case in this instance) 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' provisions 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.

Question 3B

Summary

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.

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.

Some of the 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 and 2.

Paragraph 272-5(3)(b)

Paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936 appears 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,

•         The Trustee has never exercised its reclassification power,

•         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,

•         No streaming of the Distributable Income or capital of the Trust may happen in any way that is not directly proportionate to each Unitholder's respective interest in the Trust,

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

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

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 is closely-held and was established for the purpose of undertaking investment activities for the benefit of its Unitholders. The Unitholders are from the same Family Group. There is no indication that any other member of the Family Group will become a Unitholder.

•         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 X Unit Holders.

•         Since its inception, each current Unitholder in the Trust has held the same respective unit holding proportions.

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

•         The Trustee will not exercise its amendment power for the purpose of diluting or otherwise defeating the interests of any unitholders.

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 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.

•         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, 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 further 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, it is likely the Commissioner would consider exercising his discretion subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the Unitholders' as having fixed entitlements to a share of the income and capital of the trust.

Question 4

Summary

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 2, 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 24 of the Deed effectively provides that the beneficial interest in the capital of the Trust shall be vested in the Units and that distributions thereof shall be to the Unitholders on a proportional basis in line with the units 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 3.

Since it has already been determined, in relation to Question 3, 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.

Conclusion

Therefore, for the reasons given in relation to Question 3, it is likely the Commissioner would likely 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).