Edited version of private advice

Authorisation Number: 1051967679420

Date of advice: 30 March 2022

Ruling

Subject: Fixed entitlements

Question 1

Will the Unitholders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

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

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust is a unit trust established by a Deed of Trust dated XX/month/20XX.

The Trust Deed has never been amended.

The Trustee has been the sole trustee of the Trust since its establishment.

Investment in the Trust does not require a PDS to be issued.

There is no expectation that the directors or shareholders of the Trustee will change during the Ruling period.

The Trust is a resident of Australia for taxation purposes.

All Unit issues, redemptions and transfers are conducted at a price based on the net asset value at the time of the relevant event.

There is no Unitholder agreement (or any other equivalent agreement) in place.

The Unitholders will, between them, be ultimate beneficiaries to at least 50% of the income and capital of the Trust throughout the Ruling Period.

Tax losses have been incurred in relation to the trading activities of the Trust in the income years ended 30 June 20XX, 30 June 20XX, 30 June 20XX, 30 June 20XX and 30 June 20XX.

Further Tax Losses may be incurred during the Ruling Period. This will depend upon market conditions.

The Trustee has never exercised a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the income or capital of the trust (refer to PCG 2016/16).

Section 272-35 of Schedule 2F to the ITAA 1936 will not have application to the arrangement.

The arrangement will not involve the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction.

Besides the relevance to the recoupment of Tax Losses the existence of 'fixed entitlements' as per the meaning of that term in section 272-5 of Schedule 2F to the ITAA 1936 will not have any other relevance to the Trust.

Assumptions

Throughout the Ruling Period:

•         Additional Units will be issued and Units will be repurchased on a basis that will satisfy subsection 272-5(2) of Schedule 2F to the ITAA 1936.

•         Only a single class of Units will remain on issue.

•         The Trustee will not exercise a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the income or capital of the Trust.

•         In relation to section 272-5 of Schedule 2F to the ITAA 1936 an arrangement will not be entered into which 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; or

­        fraud or evasion.

Relevant legislative provisions

Income Tax Assessment Act 1936

Section 100A

Subsection 95A(2)

Section 269-55 of Schedule 2F

Section 272-5 of Schedule 2F

Subsection 272-5(1) of Schedule 2F

Subsection 272-5(2) of Schedule 2F

Subsection 272-5(3) of Schedule 2F

Paragraph 272-5(3)(a) of Schedule 2F

Paragraph 272-5(3)(b) of Schedule 2F

Subparagraph 272-5(3)(b)(i) of Schedule 2F

Subparagraph 272-5(3)(b)(ii) of Schedule 2F

Subparagraph 272-5(3)(b)(iii) of Schedule 2F

Section 272-35 of Schedule 2F

Income Tax Assessment Act 1997

Subsection 995-1(1)

Corporations Act 2001

Chapter 5C

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

As per paragraph 16 of PCG 2016/16, the Trust Deed contains certain clauses by which a Unitholder's interest in a share of the income or capital of the Trust may be defeased. Therefore, it can be concluded, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, that all beneficiaries (Unitholders of the Trust) do not have fixed entitlements to all of the income and capital of the Trust.

Question 2

Summary

The Commissioner considers that it is reasonable to exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the beneficiaries of the Trust as having fixed entitlements to all of the income and capital of the Trust.

Detailed reasoning

It is reasonable to conclude, based on the "trust instrument" of the Trust, that for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the beneficiaries (Unitholders) of the Trust do not have fixed entitlements to any of the income and capital of the Trust.

However, pursuant to paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, and after having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) and submissions from the applicant, it is submitted that it is appropriate that the Unitholders of the Trust should be treated as having fixed entitlements to all of the income and capital of the Trust for the relevant income years.

In summary, as:

•         the trust instrument (being the Trust Deed) contains powers which have not been used to defease the interests of the beneficiaries in the income or capital of the Trust;

•         the likelihood of defeasance is low;

•         the requirements of safe harbour 6 in paragraph 54 of PCG 2016/16 are satisfied for the entire retrospective aspect of the Ruling Period and are expected to be (according to the facts and Assumptions) satisfied in respect of the prospective portion of the Ruling Period; and

•         there is little likelihood that a tax benefit of the Trust will be transferred,

the Commissioner will exercise the discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat all of the Unitholders of the Trust as having a fixed entitlement to their share of the income and capital of the Trust for the relevant income years.