Edited version of private advice

Authorisation Number: 1052073056190

Date of advice: 21 December 2022

Ruling

Subject: Fixed interests

Question

Will the Commissioner exercise the 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?

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

Year ending 30 June 20XX

The scheme commences on:

26 June 20XX

Relevant facts and circumstances

Background

The Trustee was incorporated on 29 April 20XX to act as trustee for the Unit Trust.

The Trustee, in its personal capacity, does not carry on a business or any other activity.

The Trust was established under the Trust Deed as a unit trust on 26 June 20XX.

The Trust does not qualify as a 'managed investment trust' (MIT) under Division 275 or an 'attribution managed investment trust' (AMIT) under Division 276 of the ITAA 1997.

The Trust is not a 'widely held trust' for the purposes of former section 160APHD of the ITAA 1936.

The Trust and the Unitholders are residents of Australia for income tax purposes.

Under the terms of the Trust Deed, the Unitholders do not 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.

The Trust owns 100% of the shares in the Company (Shares).

The Trust Deed was amended by deed of variation on 19 October 20XX (Deed of Variation).

Pursuant to the Trust Deed, the purpose of the Trust is to hold the Shares.

The Trust does not hold any other material assets other than the Shares and does not carry on any trading business.

The Shares are ordinary shares.

It is not envisaged that there will be any further changes in the unitholding of the Trust during the Ruling Period.

The Unitholders entered into the Unitholders Deed on 26 June 20XX (Unitholders Deed).

The Unitholders Deed was amended by deed of amendment on 19 October 20XX (Deed of Amendment).

The Trust only has Ordinary units on issue which carry equal voting, income and capital rights for the Unitholders.

The Trustee is seeking the Commissioner of Taxation to exercise his discretion pursuant to the former subsection 160APHL(14) of the ITAA 1936 to deem the Unitholders' as holding a fixed interest in the corpus of the Trust to enable the Trustee to distribute any franked dividends it derives to Unitholders during the Ruling Period.

The Trustee of the Trust will distribute the fully franked dividends to the Unitholders in proportion to their unitholding in the Trust and in accordance with the provisions of the Trust Deed.

Assumptions

Throughout the Ruling Period, in respect of the Trust:

•         Only one class of Units will be on issue in the Trust.

•         Any further Units in the Trust will be issued, or any redemption of Units will happen, in accordance with the 'savings rule' in former subsection 160APHL(13) of the ITAA 1936.

•         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.

•         An arrangement has not been, and will not be, entered into which would result in:

o   a 'related payment' under former section 160APHN of the ITAA 1936;

o   a Unitholder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee of the Trust (refer to former section 160APHM of the ITAA 1936);

o   a Unitholder not being sufficiently exposed to the risk of loss or opportunity for gain in respect of the shares in the Trust as explained by ATO Interpretative Decision ATO ID 2014/10;

o   the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936;

o   any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying; or

o   fraud or evasion.

Relevant legislative provisions

Income Tax Assessment Act 1936

former section 160APHL

former subsection 160APHL(11)

former subsection 160APHL(13)

former subsection 160APHL(14)

former subsections 160APHL(14)(a), (b) and (c)

Paragraph 177EA(5)(b)

Income Tax Assessment Act 1997

Paragraphs 207-150(1)(c) to (h)

Subsection 995-1(1)

Taxation Administration Act 1953

Section 357-110

Section 359-5

Corporations Act 2001

Chapter 5C

Reasons for decision

Question 1

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. However, the Commissioner considers that it is reasonable to exercise the 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

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." [emphasis added]

Is there an 'interest in so much of the corpus of the trust as is comprised by the trust holding'?

Former section 160APHL of the ITAA 1936 provides that in calculating the extent of a beneficiary's interest, it is necessary to distinguish between the interest of a beneficiary in shares held by a widely-held trust (as defined below), and the interest of a beneficiary in shares held by other trusts.

The Trust is not a 'widely held trust' for the purposes of former section 160APHD of the ITAA 1936.

This necessitates that a 'look through' approach will be required to determine the interest that a beneficiary has in each of the underlying shares in the Trust [refer to paragraphs 4.26, 4.77 and 4.88 of the EM with accompanied the Taxation Laws Amendment Bill (No. 2) 1999.]

Although the method of calculating the interest that a beneficiary has in the trust holding differs as between widely-held trusts and trusts other than widely-held trusts, the beneficiaries of both types of trusts do have an interest in the trust holding.

It is accepted that the Trust Deed provides Unitholders with a vested interest in the capital of the Trust.

Further, interests of the Unitholders are not contingent. That is, the Trust is not a discretionary trust or a trust with default capital beneficiaries - such that, no beneficial interest in the capital of the trust is capable of being defeated, partly or wholly, by the exercise of a power of appointment of capital by the Trustee or other donee. The Unitholder's interests in the corpus are proportionate to the number of Units that they hold and can be calculated by reference thereto.

No vested and indefeasible interest

We consider the effect of the High Court's judgement in CPT Custodian case is that it is not possible for a beneficiary of the trust to have a Fixed Interest for the purposes of former subsection 160APHL(11) of the ITAA 1936. This is because a trustee's indemnity results in the trustee having an interest in the trust's property.

There also certain powers contained in the Trust Deed that contain powers that may defease the interests that the Unitholders have in the corpus of the Trust (detailed below).

Therefore, it follows that the Unitholders of the Trust 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.

In view of the conclusion above that the beneficiaries (Unitholders) of the Trust 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, the only way that the beneficiaries can have such a vested and indefeasible interest is if the Commissioner exercises the discretion in former subsection 160APHL(14).

Former subsection 160APHL(14) of the ITAA 1936 contains a discretion, whereby in cases where beneficiaries do not have a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding, the Commissioner may determine that the interest is to be taken to be vested and indefeasible.

The requirements to be satisfied in respect of the discretion are contained in former subsections 160APHL(14)(a), (b) and (c) of the ITAA 1936.

In terms of former paragraph 160APHL(14)(a) -

The taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding:

As discussed above, it is accepted that the taxpayer has an interest in so much of the corpus of the Trust as is comprised by the trust holding

In terms of former paragraph 160APHL(14)(b) -

Apart from this subsection, the interest would not be a vested or indefeasible interest:

Although a Unitholder's interest in the capital of the Trust is vested, the Trust Deed of the Trust contains certain clauses by which a Unitholder's interest in a share of the capital of the Trust may be defeased.

In terms of former paragraph 160APHL(14)(c) -

Having regard to the factors prescribed in former paragraph 160APHL(14)(c):

These factors 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 circumstances in which the interest is capable of not vesting or the defeasance can happen

The powers contained in the Trust Deed that may defease a Unitholder's interest in the corpus of the Trust are noted.

The likelihood of the interest not vesting or the defeasance happening

In terms of the likelihood of the powers that may defease a Unitholder's interest in the corpus the following is noted:

•         Clause X Issue of Units

This Clause will satisfy the requirements of the 'savings rule' in former paragraph 160APHL(13)(d) of the ITAA 1936 such that the ability to issue additional Units by the Trustee will not constitute a defeasible power.

For the purposes of this private ruling an Assumption has been included that, throughout the Ruing Period, any further Units in the Trust will be issued in accordance with the 'savings rule' in former subsection 160APHL(13) of the ITAA 1936.

•         Clause X Redemption of Units

This Clause will satisfy the requirements of the 'savings rule' in former paragraph 160APHL(13)(d) of the ITAA 1936 such that the ability to redeem Units by the Trustee will not constitute a defeasible power.

For the purposes of this private ruling an Assumption has been included that, throughout the Ruing Period, any redemption of Units will happen in accordance with the 'savings rule' in former subsection 160APHL(13) of the ITAA 1936.

•         Clause X Units of different classes; Clause X Determination of Income; and Clause X Modification of class rights

Only one class of Units has been on issue in the Trust.

For the purposes of this private ruling an Assumption has been included that, throughout the Ruing Period, only one class of Units will be on issue in the Trust.

•         Clause X Variation of this Document (the Trust Deed)

The Trust Deed was amended on 19 October 20XX, however, the amendment did not defeat a Unitholder's interest in the income or capital of the Trust.

For the purposes of this private ruling an Assumption has been included that, throughout the Ruing Period, 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.

Nature of the Trust

The Trust was established in connection with the commercial decision to acquire the Group.

Other matters

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

The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1999, which accompanied the introduction of former subsection 160APHL(14) of the ITAA 1936, outlined the purpose of those integrity measures:

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

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

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

The purpose of the integrity measures will not be undermined due to the inclusion of the Assumptions for the purpose of this ruling.

Conclusion

The Unitholders of the Trust do not 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.

However, pursuant to the requirements of former subparagraphs 160APHL(14)(c)(i), (ii) and (iii) of the ITAA 1936 it is considered appropriate that the Unitholders should be treated as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding.

Relevantly:

•         the Trust Deed contains clauses that may constitute defeasible powers, however, these powers have not been used to defeat a Unitholder's interest in the Corpus of the Trust);

•         certain Assumptions have been included for the purposes of this private ruling, including that the Trustee will not exercise a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the capital of the Trust; and

•         there is little likelihood that a franking credit trading scheme exists in connection with the facts.

Therefore, it is appropriate for the Commissioner to exercise the discretion under former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding during the Ruling Period.