Edited version of private advice

Authorisation Number: 1051951223329

Date of advice: 14 March 2022

Ruling

Subject: Fixed trust discretion

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 2

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 3

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 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 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:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust is a unit trust that was settled pursuant to the Trust Deed dated during the year ended 30 June 20XX.

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

The directors of Company A are:

a)    Person A;

b)    Person B;

c)    Person C; and

d)    Person D.

The issued shares in Company A are held by Person A (two ordinary shares) and Person B (two ordinary shares).

Company A is not:

a)    The holder of an Australian Financial Services Licence (AFSL) for the purposes of the Corporations Act 2001 and

b)    Subject to any regulation by the Australian Prudential Regulation Authority (APRA) or any other Australian Federal Government authority.

The Trust was established pursuant to the Trust Deed on the issuing of an initial 1,500 units (the Units).

There have been no amendments to the Trust Deed.

A further 1,498,500 units were issued pursuant to the Trust Deed.

The Units are not listed on the stock exchange and there is no expectation that they will be in the 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.

Company A as trustee for the X Family Trust holds all 1,500,000 units.

The main activity of the trust is commercial transactions and investments.

All units are of the same class and units may not be issued at a discount.

The Trust does not have any prior year tax losses.

The Trust is a resident trust estate for the purposes of section 95(2) of the ITAA 1936.

Company A as trustee of the Trust does not have the power to determine whether a receipt is to be treated as income or capital, or to stream specific income or capital to different unit holders.

Company A is not prevented from owning units in the Trust for its own benefit, however Company A does not hold any units in the Trust in its own capacity, other than as Trustee for the X Family Trust.

Pursuant to subclause 3.6 of the Trust Deed, further units can be issued by the Trustee at unit fair value as defined in subclause 1.1 of the Trust Deed as the value of the net assets of the Trust Fund determined in accordance with generally accepted Australian accounting principles divided by the total number of units on issue for the time being as determined by the Trustee in good faith provided that if the Trustee if for any reason unable to make such determination or if requested by any unitholder the value per unit determined by an independent qualified valuer selected by the Trustee adopting generally accepted Australian accounting principles.

Pursuant to subclause 3.7 if the Trustee issues additional Units, such additional units must first be offered to the Unitholders in proportion to their existing unitholdings at the time. If there are any units that are not the subject of an accepted offer from Unitholders, those Units may be offered by the Trustee at the Unit Fair Value to a third party, provided such third party is approved by Special Resolution of the Unitholders.

Pursuant to subclause 3.10 subject to unanimous consent of all Unitholders, the Trustee may redeem Units from a Unitholder at a price per Unit equal to the Fair Unit Value.

Pursuant to clause 9 of the Trust Deed the unitholders are presently and absolutely entitled to the income of the Trust less the expenses and outgoings of the Trust property incurred, and the capital, in fixed proportions based on the number of Units of which they are respectively registered as the holders. The Trustee will pay or apply the net Taxable Income of the Trust to or for the benefit of the Unitholders in proportion to the number of Units of which are each registered at the end of each Accounting period.

Pursuant to clause 14, with unanimous consent by the unitholders the Trustee may at any time by deed or resolution vary all or any of the trusts and provisions contained in the deed.

Any variation can not:

•         affect the beneficial entitlement to any amount to which the unitholders is entitled prior to the variation,

•         give any person a preferential right to acquire units,

•         give the trustee any discretion to determine the income of the trust fund including the power to determine whether an amount be treated as income

•         give the trustee power to issue units with rights different to the rights of the units already issued, or

•         give the trustee power to accumulate or set aside income or net income of the trust fund including to any reserve of the trust fund

The Trustee has stated in the application that during the ruling period 1 July 2021 to 30 June 2025:

•         There are no forecast tax losses, bad debts or debt/equity swap losses;

•         No streaming of income or capital to different unit holders will occur;

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

•         If units are issued they will only be issued or transferred for a price determined on the basis of the Unit Fair Value, according to Australian Accounting principles, of the Trust at the time of the transfer;

•         No units of different classes will be issued; and

•         There are no proposals to amend the Trust deed

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

The Trust Deed executed during the year ended 30 June 20XX.

Relevant legislative provisions

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

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

Reasons for decision

Question 1

Summary

The terms of the Trust Deed 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.

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.

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.

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 provides further guidance on this issue. Paragraphs 13 and 14 of PCG 2016/16 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.

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 PCG 2016/16 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.

Paragraph 16 of PCG 2016/16 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 dated 17 June 2016.

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 PCG 2016/16, that may cause the beneficiary's interest to be defeasible, namely:

•         Issuing of new Units

Subclause 3.6 of the Trust Deed gives the Trustee powers to issue additional units at the Unit Fair Value.

•         Variation of Trust

Clause 14 gives the Trustee the power to vary all or any of the trusts and provisions contained in the Trust Deed with the unanimous consent of the Unitholders. However any variation can not:

•         affect the beneficial entitlement to any amount to which the unitholders is entitled prior to the variation,

•         give any person a preferential right to acquire units,

•         give the trustee any discretion to determine the income of the trust fund including the power to determine whether an amount be treated as income

•         give the trustee power to issue units with rights different to the rights of the units already issued, or

•         give the trustee power to accumulate or set aside income or net income of the trust fund including to any reserve of the trust fund.

•         Redemption of Units

Subclause 3.10 provides that the Trustee may redeem units from a Unitholder at the Unit Fair 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.

If the clauses of the Trust Deed are deemed to impart defeasible powers, and while the Trustee 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 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 pursuant to former subsection 160APHL(11) of the ITAA 1936.

Question 3

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 ITAA 1936 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.

PCG 2016/16 provides guidance on what factors the Commissioner will need to consider when making his decision on exercising the discretion. In each case the Commissioner will weigh up all factors (favourable and unfavourable) of the case.

Paragraph 55 of PCG 2016/16 outlines factors favourable to the exercise of the Commissioner's 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 adverse to the exercise of the Commissioner's discretion are listed in paragraph 56 of the PCG, which states:

•         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) 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) 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 as discussed in Question 1, and 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 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

In relation to the likelihood of the interest not vesting or defeasance happening paragraphs 31 to 33 of PCG 2016/16 provide:

31.  When considering the likelihood of the interest not vesting or being defeated, the Commissioner must form a view as to the probability that the contingency or defeasance will happen. Where the likelihood of the contingency or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion.

32.  Where the trustee or manager of the trust has a particular power to defeat a beneficiary's interest, it is relevant to consider how often, if at all, they have exercised that power over a relevant period.

33.  Any preconditions or caveats that affect the likelihood of a beneficiary's interest not vesting or being defeated are also relevant.

Despite the Trustee's powers to cause potential defeasance, 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 Trustee of 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,

•         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, pursuant to Clause 9 of the Trust Deed,

•         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, any amendments or variations require unanimous consent of the Unitholders, and no further amendments are contemplated by the Trustee.

The nature of the Trust

Paragraph 34 of PCG 2016/16 provides:

The nature of the trust refers to its basic legal characteristics and its economic function, both actual and intended. The ability of the trustee or manager of the trust to adversely affect the interests of beneficiaries could be limited where:

•         additional responsibilities are placed on the trustee by legislation, most commonly as a registered managed investment scheme under Chapter 5C of the Corporations Act 2001

•         contractual restrictions limit the trust manager's access to trust assets

•         the trust is subject to industry regulations, licensing or registration requirements, which are legally enforceable, such as the Australian Securities Exchange (ASX) Listing Rules which are enforceable against listed entities and their associates

•         commitments are made in a Product Disclosure Statement, Investment Memorandum or other document to exercise powers in a particular (restrictive and/or non-adverse) way

•         the trust deed restricts the ability of the trustee to issue and redeem units at anything other than market value or other values approximating net asset value, or

•         the unanimous (100%) approval of the beneficiaries is required prior to the exercise of a power capable of defeating a beneficiary's interest by the trustee or manager.

Taking into account the factors mentioned in paragraph 34 of PCG 2016/16, it is noted that, based on the statements provided:

•         The Trust is closely-held and was established for the purpose of undertaking commercial transactions and investments for the benefit of its Unitholder, the X Family Trust.

•         The purpose of establishing the Trust is to allow the Unitholder to derive income/profits from commercial and investment activities undertaken by the Trust. At the date of the ruling application, the Trust has one Unitholder.

•         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.

As 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 PCG 2016/16, 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 of PCG 2016/16.

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, 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 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 PCG 2016/16, the Commissioner would exercise his discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the Unitholders' interests fixed entitlements.

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:

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) 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 9 of the trust 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.

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.

The factors the Commissioner must consider under former paragraph 160APHL(14)(c) 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 listed in paragraphs 34 and 35 of PCG 2016/16. All these matters were considered in Question 3 except for potential tax benefits relating to streaming of franking credits.

Streaming of franking credits

Division 207-55(3) of the ITAA 1997 provides that a beneficiary's share of a franked distribution is equal to the amount included when determining the beneficiary's share of the trust's income under section 95 of the ITAA 1936.

The Trust Deed states at subclause 9.3 that the Unitholders shall be presently and absolutely entitled to all income of the Trust less the expenses and outgoings of the Trust, in fixed proportions based on the number of Units of which they are respectively registered as holders, any dividend income and attached franking credits will be paid to or applied for the benefit of the unitholders at the end of the Accounting period pursuant to subclause 9.4 of the Trust Deed.

The Trust Deed does not allow the Trustee to stream franked dividends as a separate class of income and the Trustee cannot choose to make one or more unit holders specifically entitled to franked dividends while distributing other classes of income to different beneficiaries.

Relevantly, the determination of the Trust as a fixed trust will not lead to any identified tax benefits or Part IVA outcome.

Since it has already been determined that the Commissioner would 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, the Commissioner would 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).