Edited version of private advice

Authorisation Number: 1052095986022

Date of advice: 17 March 2023

Ruling

Subject: Fixed trust

Issues

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 of the Income Tax Assessment Act 1997 Act (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Assessment Act 1936 (ITAA 1936) such that the Trust will be a 'fixed trust' under section 272-65 of Schedule 2F to the ITAA 1936 and section 995-1 of the ITAA 1997?

Answer

No

Question 2

If the answer to Question 1 is 'no' will the Commissioner exercise the discretion in 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 3

Will the interests of the Unitholders in the capital of the Trust be 'fixed interests' under former subsection 160APHL(10) of the ITAA 1936?

Answer

No

Question 4

If the answer to Question 3 is 'no', will the Commissioner exercise his discretion in 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?

Answer

Yes

Question 5

Will CGT event A1 in section 104-10, CGT event E1 in section 104-55, CGT event E2 in section 104-60, or event E5 in section 104-75 of theITAA 1997 happen as a result of making the proposed amendments to the Trust Deed for the Trust?

Answer

No

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Trust was established pursuant to the terms of the trust deed (Trust Deed).

The Trustee is not a trustee of any other trust.

The Trustee is not a holder of an Australian Financial Services licence and is not subject to any regulation by the Australian Prudential Regulation Authority (APRA) or any other Australian Federal Government authority.

100 ordinary units, and $1 per unit (Ordinary Unit), were issued, to Trustee of Family Trust A, Trustee of Family Trust B and Trustee of Family Trust C (collectively described as the Unitholders).

No further units have been issued.

No units have been transferred between the Unitholders.

All entities are Australian residents for income tax purposes.

The Trust Deed

The salient terms of the Trust Deed are as follows:

...

B. The Initial Unit Holder has paid or intends on the execution of this Deed to pay to the Trustee the Initial Sum.

C. The Initial Sum is to form part of the Trust Fund and the Trustee has consented to hold the Trust Fund upon the trusts and subject to the terms of this Deed.

Clause X deals with assets held on trust:

The Trustee will stand possessed of the Trust Fund on trust for the Unit Holders upon the trusts and subject to the powers and provisions expressed in this Deed.

Relevantly, Clause X defines Trust Fund to mean:

a)    the Initial Sum and all moneys paid to and accepted by the Trustee upon the issue of Units in accordance with the provisions of this Deed;

b)    all property and moneys paid or transferred to and accepted by the Trustee as addition to the capital of the Trust Fund;

c)    the investments for the time being representing such moneys and property;

d)    all accumulations of income directed or empowered to be made and all accretions and additions to the Trust Fund including, without limitation, any accretions or additions which may arise from any bonus, premium or other payment or as consideration for or in connection with any property forming part of the Trust Fund; and

e)    all other assets and property for the time being of the Trust.

Clause X also defines Unit Holders to mean 'an Initial Unit Holder or any other person for the time being registered under the provisions of this Deed as the holder of a Unit and includes persons jointly so registered'.

In turn, Initial Unit Holders are the entities described as such in Schedule X.

Clause X deals with the issue of units and rights attaching to units and, amongst, other things, reflects that the beneficial interest in the Trust Fund is to be divided into units:

(a) The beneficial interest in the Trust Fund as originally constituted and as existing from time to time shall be vested in the Unit Holders for the time being.

(b) Each person who becomes registered as a Unit Holder shall be deemed to have agreed to become a party to this Deed and shall be entitled to the benefit of this Deed.

(a). Each Unit shall (subject to the conditions and restrictions on which the Unit is issued) entitle the registered holder of that Unit together with the registered holders of all other Units to a beneficial interest in the Trust Fund as an entirety but shall not entitle a Unit Holder to any particular security or investment comprised in the Trust Fund or any part of the Trust Fund and no Unit Holder shall be entitled to the transfer of any property comprised in the Trust Fund.

(b) The Trust Fund as originally constituted by the Initial Sum shall be divided into Units of one dollar which shall be classified as set out in the First Schedule and held by the Initial Unit Holder.

(c) Subject to clause ..., Units shall be divided into the classes set out in the ...Schedule and each class of Unit (including the Units referred to in clause ... shall confer the rights and be subject to the restrictions set out in the ... Schedule.

(d) To the extent of any inconsistency the provisions of the X Schedule shall override the provisions contained in this Deed

(e) The Trustee may:

(i) create whether in respect of issued or unissued Units such new class or classes of Units having such rights and being subject to such restrictions or limitations as the Trustee may determine with the unanimous consent of Unitholders.

(ii) reclassify any Unit whether issued or unissued.

(f) The Trustee shall have power from time to time to issue additional Units of any class and in any manner and/or at such price as the Trustee shall think fit.

(g) The Trustee may at any time cause a valuation of the assets of the Trust Fund to be made by such competent valuers or experts as the Trustee selects.

...

(i) The Trustee shall (whether or not the same are issued as redeemable or not) have power to redeem Units from a Unit Holder either with the consent of the Unit Holder or at a price per Unit reflecting the fair value of the Units as determined in good faith by the Trustee based on the net asset value of the Trust Fund according to Australian accounting principles.

Notwithstanding any other provision of this Deed, the total number of Unit Holders at any time must not exceed 20 (counting joint holders of a Unit as a single Unit Holder for the purposes of such calculation).

Clause X defines Unit to mean an undivided part or share in the Trust Fund having the characteristics provided by this Deed.

Schedule X provides that units may be divided into Ordinary Units and other classes of units and sets out the rights, privileges and restrictions attached to each class of units. Relevantly, it provides that all Ordinary Units are of equal value and each Ordinary Unit carries equal rights as to voting and participation in the income and capital of the Trust. The schedule further provides that any other classes of Units shall have such rights and be subject to such restrictions or limitations as shall be determined by the Trustee at the time of creation provided that no new class or classes of units shall be created without the unanimous consent of the Unit Holders.

Clause X deals with transfer and transmission (as a result of death or bankruptcy) of units:

(a) Unit Holders may request the Trustee to register transfers for all or any of the Units held by them...

...

(e) A person entitled to Units by transmission shall be entitled to receive and may give a good discharge for all moneys payable in respect of the Units but shall not be entitled to any of the rights or privileges of a Unit Holder unless and until he becomes registered holder of those Units.

Clause X deals with the Trustee's powers as it relates to the termination of the Trust:

...

On the termination of the Trust, subject only to any ratified plan referred to in clause... the Trustee shall proceed as follows:

a) The Trustee shall unless otherwise authorised by a Special Resolution of the Unit Holders realise all of the property and investments constituting the Trust Fund.

b) The Trustee shall from time to time and as soon as is practicable distribute the cash available in the Trust Fund to Unit Holders proportionally to their holdings until the assets of the Trust Fund have been completely turned into cash and distributed to Unit Holders, provided that the Trustee shall retain full provisions for all costs incurred or expected by the Trustee in the liquidation of the Trust.

Clause X deals with the income and capital of the Trust and provides for the determination and classification of the 'Income' of the Trust and distribution and accumulation of income:

...

a) Subject to any special rights or restrictions provided in the ... Schedule or otherwise attaching to Units of any class:

i) the Trustee shall in each Accounting Period determine to pay, apply or set aside the Net Taxable Income of the Trust Fund of tat Accounting Period to or for the benefit of the Unit Holders in proportion to the number of Units of which they are each registered as Unit Holders at the end of the Accounting Period.

ii) where the Net Trust Income is greater than the Net Taxable Income for an Accounting Period, the Trustee may pay, apply or set aside all or any part of such excess to or for the benefit of the Unit Holders in proportion to the number of Units in which they are each registered as Unit Holders at the end of the Accounting Period

Subject to clause ..., the Trustee may, with the sanction of a Special Resolution of Unit Holders and subject to any law in force at the time in relation to this Deed so permitting, accumulate all or any part of the income arisen or arising during the period and such accumulation shall be dealt with as an accretion to the Trust Fund but so that the Trustee may at any time or times resort to all such accumulations and pay or apply the whole or any part or parts of the Trust Fund as if they were income of the Trust Fund.

...

d) A determination to pay apply or set aside any amount for any Unit Holder and the implementation of such determination may be made at the request of the Unit Holder.

...

(iv) by issuing additional Units to the Unit Holder subject to first having obtained the prior written consent of all Unit Holders.

The Trustee may with the sanction of a Special Resolution distribute income of the Trust Fund to any Unit Holder or Unit Holders having regard to its source, classification, nature and origin as:

a) overseas income;

b) interest Income;

c) capital gains brought to account as income under Part lllA of the Income Tax Assessment Act 1936 (as amended);

d) franked dividends:

e) unfranked dividends;

f) income of any other class or description

in part or whole satisfaction of the entitlement of that Unit Holder or those Unit Holders to income under this Deed.

In relation to or for the purposes of calculating net income or of making a determination, payment, distribution, application, allocation or setting aside under this clause 9 or otherwise in or for the purposes of administering or dealing with the net Income or capital of the Trust Fund generally:

a) the Trustee may determine and classify whether any receipt, profit, gain, payment, expense, loss, outgoing or other amount or any property or any sum of money or investment however characterised is or is not to be treated as income or capital of the Trust Fund or otherwise whether it is to be on account of income or capital; and

b) in determining the net income or the Trust for any Accounting Period, the Trustee may, at its absolute discretion, determine whether and to the extent of which current and prior year losses (of revenue or capital nature) will be taken into account.

The Trustee may at any time or times and from time to time before the date of termination of the Trust pay out any of the capital or the Trust to Unit Holders in accordance with their respective entitlements to such capital based on the rights attaching to the class or classes of Units held by the respective Unit Holders.

Clause X sets out the powers of the Trustee - which include powers to deal with the Trust Fund, investments and reclassification of income:

The Trustee shall have the same powers over and in respect of the Trust and the Trust Fund as if it were the absolute beneficial owner of the Trust Fund.

Without limiting clause..., the Trustee shall have the following powers:

a) To apply and invest all moneys at any time forming part of the Trust Fund in any investments...

...

i) To exercise all rights and privileges and perform all duties and do all acts matters and things pertaining to any investments or property of the Trust Fund as the Trustee could do if it was the beneficial owner of the investments or property

....

n) To determine whether any receipts or gains shall be treated as capital or income and generally to determine all matters as to which any doubt may arise under this Deed or in relation to the Trust.

...

(v) To exercise any power conferred on trustees by statute or under the general law...

Clause X provides for when the Trust Deed may be amended:

a) The Trustee may at any time and from time to time by deed or resolution vary all or any of the trusts and provisions contained in this Deed (as varied from time to time by any previous deed or resolution) provided that:

...

ii) any variation shall not affect the beneficial entitlement to any amount set aside for any Unit Holder prior to the variation;

iii) the variation is approved by the Unit Holders. either by the unanimous consent of the Unit Holders or by Special Resolution;

iv) the variation does not permit Units to be issued or redeemed for a price other than that determined on the basis of the net asset value of the Trust Fund according to Australian accounting principles of the Trust at the time of the issue or redemption; and

v) the variation does not permit the Trustee to distribute income or capital to Unit Holders in any proportions other than in proportion to the number of Units of which they are each registered as Unit Holders at the time of distribution.

...

The trusts and provisions contained in this Deed shall not be capable of being revoked added to or varied otherwise than as expressly provided by this Deed.

Clause X defines Special Resolution to mean 'a resolution passed as special business at a duly convened general meeting by a unanimous vote cast by those present and voting on the resolution end includes a resolution in writing referred to in clause X'.

Amendments to the Trust Deed

Since the establishment of the Trust, no amendments have been made to the Trust Deed.

Proposed amendments to the Trust Deed

The purpose of the proposed amendments to the Trust Deed (as set out in the Deed of Amendment) is to convey that the Unitholders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1 of the ITAA 1997 and subsection 272-5(1) of Schedule 2F of the ITAA 1936, Relevantly, the proposed amendments:

•         Remove the Trustee's power to issue different classes of units by limiting the units in the Trust Ordinary Units, and make consequential amendments relating to this change.

•         Reflect that that units will be issued and redeemed will be at a price based on the net asset value of the Trust Fund, determined in accordance with Australian accounting principles, divided by the number of Units on issue.

•         Provide the Trust Deed can only be amended with the unanimous approval of the unit holders.

•         Remove the option of a ratified plan.

Associations

There are no associations between any entity engaged to perform valuation services and the Trustee and Unitholders.

There are no associations between the Unitholders.

All transactions between all entities are conducted at arm's length.

Trust investments

The main activity of the Unit Trust is investment (passive investments in companies).

The Trustee has received fully franked dividends from a related entity, which has flowed through to the Unitholders.

Trust Distributions

Family trust elections are in place for all Unitholders and trust distributions have only been made to the relevant family groups.

Losses

There are no carried forward tax losses and no expected current year tax losses.

There are no expected bad debts or debt/equity swap losses.

The Trustee has self-assessed the Trust meets the safe harbour conditions in Item 6 of paragraph 54 in Practical Compliance Guidelines PCG 2016/16 Fixed entitlements and fixed trusts.

Assumptions

The proposed amendments to the Trust Deed are valid.

Throughout the Ruling Period, no powers have been or will be exercised to defeat the interest of any Unitholder, with respect to their units (Ordinary Units) including:

•         There will only be one class of units - i.e. no units of different classes will be issued.

•         No units will be reclassified. The rights attached to units already in existence will not be modified.

•         Units will only be transferred or redeemed at the request of a Unitholder.

•         Units will be issued, redeemed, transferred or transmitted for a price determined on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 - i.e. on the basis of the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16.

•         No units will be issued or redeemed at a discount.

•         The Trustee will ensure that units will only be transferred or transmitted for market value.

•         No partly paid units will be issued.

•         No streaming of income or capital will occur.

•         The Trustee will not seek to amend or vary the Trust Deed to defeat the interest or change the fixed entitlements of Unitholders to the income and capital of the Trust.

•         All Unitholders will be entitled to the income and capital of the trust in proportion to their unitholding - if requested by a unitholder, the Trustee will transfer assets rather than pay cash in satisfaction of amounts owing, including as part of winding up the trust, to that particular unitholder. The Trustee will only transfer to that particular unitholder assets of the Trust to the extent that the market value of the assets equivalent to their proportion of unitholding.

Throughout the Ruling Period, no arrangement has been or will be entered into which would result in section 272-35 in Schedule 2F of the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or in fraud or evasion.

Throughout the Ruling Period, in addition to an undertaking that no powers have been or will be exercised to defeat the interest of any Unitholder (as set out above), no arrangement has been or will be entered into which would result in:

•         A 'related payment' under former section 160APHN of the ITAA 1936.

•         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).

•         A Unitholder not being sufficiently exposed to the risk of loss or opportunity for gain in respect of the units in the Trust.

•         The Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936.

•         Any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying.

•         Fraud or evasion.

Relevant legislative provisions

Income Tax Assessment Act 1936 former section 160APHD

Income Tax Assessment Act 1936 former subsection 160APHL(10)

Income Tax Assessment Act 1936 subsection 160APHL(14)

Income Tax Assessment Act 1936 former section 160APHP

Income Tax Assessment Act 1936 subsection 272-5(1) of Schedule 2F

Income Tax Assessment Act 1936 subsection 272-5(3) of Schedule 2F

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

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 104-75

Reasons for decision

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 of the Income Tax Assessment Act 1997 Act (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Assessment Act 1936 (ITAA 1936) such that the Trust will be a 'fixed trust' under section 272-65 of Schedule 2F to the ITAA 1936 and section 995-1 of the ITAA 1997?

Summary

The Unitholders as beneficiaries of the Trust do not have fixed entitlements to all of 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.

Detailed reasoning

The term 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936 to mean a trust in which entities or persons (respectively):

... have fixed entitlements to all of the income and capital of the trust.

The definition of the term 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that 'an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.'

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

In addition, subsection 272-5(2) states that:

If:

(a) a person holds units in a unit trust; and

(b) the units are redeemable or further units are able to be issued; and

(c) if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and

(d) if the units are not listed as mentioned in paragraph (c) - the units held by the person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a Unitholder, in the income or capital of the unit trust is defeasible.

PCG 2016/16: Fixed entitlements and fixed trusts, explains that a trust is a fixed trust if the beneficiaries have fixed entitlements to all of the income and capital of the trust and confirms that a person will have a fixed entitlement to a share of income or capital of a trust if, under the trust instrument, that person has a vested and indefeasible interest in that share of income or capital. Relevantly, it explains when an interest is defeasible - paragraphs 15 and 16 of PCG 2016/16 define indefeasible interests:

15. 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.

16. Powers in modern trust instruments which cause a beneficiary's interests to be defeasible 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.

For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument consists of the Trust Deed.

It is accepted that the Trust Deed provides the Unitholders with a vested interest in the income and capital of the Trust. Relevantly, Clause X provides that Unitholders will be entitled to income and capital based on their pro rata share of units held in the Trust and Clause X provides that on termination of the trust the Unit Holders are entitled to their proportionate share of the assets of the Trust (after costs incurred in the liquidation of the trust) subject to a ratified plan referred to in Clause X.

However, there are various clauses in the Trust Deed relating to the Trustee's discretions that may cause a beneficiary's interests to be defeasible - including the power to:

• Issue new units - including different classes of units (under current Clause X and the Second Schedule the Trustee has the power to issue new units and different classes of units, and under the proposed amendments to Clauses X and the X Schedule the Trustee will have the power to issue additional units).
• Vary the Trust Deed (Clause X)
• Determine prior to vesting a plan for continuation of the Trust, conversion into an alternate type of trust or sale and realisation in a manner other than in accordance with Clause X (subject to the plan not offending the rule against perpetuities, being ratified by a Special Resolution and operating fairly between Unit Holders)

Therefore, 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

If the answer to Question 1 is 'no' will the Commissioner exercise the discretion in 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

As the Unitholders in the Trust do not have vested and indefeasible interests, pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, subsection 272-5(3) of Schedule 2F to the ITAA 1936 may be considered. 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 Unitholders as beneficiaries of the Trust as having fixed entitlements to all of the income and capital of the Trust.

Detailed reasoning

A finding that a trust is a fixed trust for Schedule 2F ITAA 1936 has broad implications (i.e. it applies for income tax purposes generally).

Where all of the beneficiaries' interests in the corpus of the trust are not fixed interests, the trustee may request that the Commissioner exercise the discretion to treat beneficiaries' interests as being vested and indefeasible.

A trust can both rely on the savings rule in relation to some trustee powers (the power to issue or redeem units), and request that the Commissioner exercise the discretion in the context of other powers that may defeat a beneficiary's interest (such as in relation to a power to amend).

Savings rule

The 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 provides that the mere fact that a trustee has power to redeem units in a unit trust, or issue further units for the following value does not mean that Unitholders' interests in the corpus of the unit trust are defeasible:

•         where the units are listed for quotation in the official list of an approved stock exchange - the same price as other units are offered for sale on that exchange at the time of the redemption or issue, or

•         where the units are not so listed - a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles.

The Commissioner considers that the savings rule is satisfied where further units may be issued or existing units redeemed in any of the following situations (paragraphs 18 and 19 Practical Compliance Guideline PCG 2016/16 Fixed entitlements and fixed trusts):

•         for a price based on a market value of the assets and liabilities of the trust which has been determined by a licensed valuer

•         for a price based on a market value of the assets and liabilities of the trust which has not been determined by a licensed valuer, but which nevertheless is accurate

•         for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs)

•         for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs), including where accrued distributions are excluded from the net asset value based on a 'unit day's pricing model'

•         for a price based on the volume weighted average price (VWAP) of the units, or

•         in accordance with ASIC Corporations (Managed investment product consideration) Instrument 2015/847, ASIC Class Order [CO 13/655] and ASIC Class Order [CO 13/657] (if relevant), or any other ASIC guidance or relief on the same subject.

Discretion

Subsection 272-5(3) of Schedule 2F to the ITAA 1936 contains a discretion, whereby in cases where beneficiaries do not have a fixed entitlement, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed entitlement where it is reasonable to do so based upon the factors prescribed in paragraph 272-5(3)(b).

Paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936 stipulates that the Commissioner may treat a beneficiary as having a fixed entitlement (in cases where in fact beneficiaries do not have a fixed entitlement).

In broad terms, there are 4 key matters that the Commissioner takes into account in deciding whether to exercise the discretion:

• the circumstances in which a beneficiary's interest is capable of being defeated or not vesting.
• the likelihood of the interest being defeated or not vesting;
• the nature of the trust; and
• whether the exercise of the discretion would enable a taxpayer to obtain a tax benefit from a trust with a tax loss in circumstances where the economic loss incurred was not borne by the taxpayer.

Paragraph 55 of PCG 2016/16 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 Unitholder 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 adverse 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 Unitholders 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 PCG 2016/16 and include:

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 Unitholder's stake is less than a minimum specified in the trust instrument, and the Unitholder 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.

Losses

The concept of a 'fixed entitlement' was originally introduced in the context of the trust loss measures and should primarily be interpreted in that context (in the absence of any express provision or explanatory guidance that indicates a different context is relevant). The trust loss measures are an important integrity measure, removing a structural flaw in the tax system. The concept of a 'fixed entitlement' is fundamental to the structure and effectiveness of the trust loss measures.

The EM to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 states (at paragraph 13.13) in respect of the Commissioner's power in subsection 272-5(3) of Schedule 2F to the ITAA 1936 that:

This provision is intended to provide for special circumstances where there is a low likelihood of a beneficiary's vested interest being taken away or defeated and, having regard to the scheme of the trusts loss provisions to prevent the transfer of the tax benefit of losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement.

This indicates that when looking at the facts of a case, in the context of the criteria listed in subsection 272-5(3) of Schedule 2F to the ITAA 1936, unless the context of the provision for which fixed entitlement is required provides otherwise, the Commissioner should always have regard to whether the absence of a fixed entitlement, in these circumstances, could result in the trafficking (or transfer) of the tax benefit of any tax losses.

Paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936:

The current Trust Deed and proposed amendments provide the Unitholders with vested interests in a share of the income that the Trust derives from time to time and a share of the capital of the Trust.

Each Unitholder of the Trust does not, however, have a fixed entitlement to the share of income and capital in the Trust.

As a result, paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 is satisfied.

Subparagraph 272-5(3)(b)(i) of Schedule 2F to the ITAA 1936:

When examining the circumstances in which a beneficiary's interest is capable of not vesting or being defeated, the Commissioner will have regard to any factor that may affect the defeasance of any beneficiary's interest, including:

•         the number of circumstances of potential defeasance, and

•         the significance of those circumstances.

This includes having regard to:

•         any person who is capable of altering the beneficiary's interest

•         the nature of their relationship to the beneficiary, and

•         any limitation on their capability to so alter that interest.

In relation to the circumstances in which the entitlement is capable of not vesting or the defeasance happening, the following factors are relevant:

• Issue of units: During the Ruling period, only one class of unit has been or will be issued and the units have been or will only be issued for a price determined on the basis of the Net Fund Value or Net Asset Value (according to Australian accounting principles). As such the saving rule in paragraph 272-5(2)(d) would be satisfied.
• Redemption of units: The Trustee may redeem units with or without the consent of the Unitholders. The redemption price has been or will be determined on the basis of the Net Fund Value or Net Asset Value (according to Australian accounting principles. As such, the saving rule in paragraph 272-5(2)(d) of Schedule 2F to the ITAA 1936 would be satisfied.
• Amendment of the Trust Deed: The proposed amendments ensure that the Trust Deed can only be amended with the unanimous approval of the Unit Holders and has removed the option of a ratified plan referred to in Clause X. With the exception of the proposed amendments no amendments have been made to the Trust Deed.

The Commissioner accepts that the assumptions mitigate the circumstances in which the beneficiaries' interests in the income and capital of the Trust can be defeated.

Subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936:

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 happening is high or the action or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion.

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.

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

In relation to the likelihood of the entitlement not vesting, or the defeasance happening, the following factors are relevant:

•         The Trustee's behaviour from the time the Trust was settled to the date of this ruling application is relevant. It is noted that defeasible powers contained in the Trust Deed have not been exercised to defease any of the requisite interests of the Unitholders.

•         In respect of the Ruling period 1 July 20XX to 30 June 20XX, having regard to the assumptions, the Trustee has exercised or may exercise its powers under the Trust Deed such that:

-       There will only be one class of units will be issued.

-       No units will be reclassified. The rights attached to units already in existence will not be modified.

-       Units will only be transferred or redeemed at the request of a Unitholder.

-       Units will be issued or redeemed for a price determined on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 - i.e. on the basis of the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16.

-       No units will be issued or redeemed at a discount.

-       No partly paid units will be issued.

-       No streaming of income or capital will occur.

-       The Trustee will not seek to amend or vary the Trust Deed to defeat the interest or change the fixed entitlements of Unitholders to the income and capital of the Trust.

-       In the event the Trust is terminated, all Unitholders will be entitled to the income and capital of the trust in proportion to their unitholding - if requested by a Unitholder, the Trustee will transfer assets rather than pay cash in satisfaction of amounts owing, including as part of winding up the trust, to that particular Unitholder. The Trustee will only transfer to that particular Unitholder assets of the Trust to the extent that the market value of the assets is equivalent to their proportion of unitholding.

The Trustee has never exercised its powers under the Deed in a way that the above assumptions would not be applicable and will not to do so for the Ruling period, to defeat a Unitholder's interest in the income or capital of the Trust. Consequently, the Commissioner would accept that the likelihood of the beneficiaries' interests in the income and capital of the Trust being defeated would be low.

Subparagraph 272-5(3)(b)(iii) of Schedule 2F to the ITAA 1936:

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 (sections 793C and 1101B of the Corporations Act 2001);

•                    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.

In relation to the nature of the trust the following factors are relevant:

• The Trust is a unitised trust; however, the Units are not publicly listed on an approved stock exchange and the Trust is not a managed investment scheme. Therefore, the circumstances and likelihood in which each Unitholder's entitlement is capable of not vesting or the defeasance happening is not reduced in this Trust.
• The purpose of establishing the Trust is to allow the Unitholders to derive income/profits from the investments made by the Trust. At the date of the ruling application, the Trust has 3 unrelated Unitholders.
• The Trustee is not required to hold an Australian Financial Services Licence in order to act as Trustee of this Trust and therefore not subject to Australian financial services regulations.
• The parties are dealing on an arm's length basis.

The Commissioner accepts that in these circumstances the ability of the Trustee to adversely affect the interests of beneficiaries is limited - the parties are unrelated parties dealing on an arm's length basis.

Schedule 2F to the ITAA 1936 and tax losses

In relation to the circumstances pertaining to the existence of a tax loss it is noted that:

• At the date of the ruling application, there are not losses and the Trustee does not forecast a tax loss for the Trust.
• No arrangements have been or will be entered into that would result in section 272-35 in Schedule 2F of the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or in fraud or evasion.
• If there are further units to be issued and/or redeemed, the Trustee will do so satisfying the saving rule in paragraph 272-5(2)(b) of Schedule 2F to the ITAA 1936.

Conclusion

It is accepted that 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 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) of Schedule 2F to the ITAA 1936 and submissions from the applicant, it is considered that it would be 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 and proposed variations) contains powers which will not be used to defease the interests of the beneficiaries in the income or capital of the Trust - i.e. the circumstances in which the entitlement is capable of not vesting or a defeasance happening are limited having regard to the Assumptions included;

•         the "nature of the trust" is a unit trust established for the purposes of carrying out investment;

•         the likelihood of the entitlement not vesting or a defeasance is low; and

•         there is little likelihood that a tax benefit of the Trust will be transferred (the opportunity to traffic any tax loss appears to be limited)

It would be reasonable for the Commissioner to 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

Question 3

Will the interests of the Unitholders in the capital of the Trust be 'fixed interests' under former subsection 160APHL(10) of the ITAA 1936?

Summary

The terms of the Trust Deed do not provide the Unitholders 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

Broadly, shares acquired by a discretionary trust (non-fixed trust) would fail the 45 day rule, 160APHL(10) of the ITAA 1936 provides that where the trustee has made a family trust election, there is no deemed short position - this means that in the absence of any positions taken by the trustee to reduce the risk of holding the shares, the only position of the beneficiary would normally be a deemed long position under former subsection 160APHL(7) and consequently franking benefits can pass through to the beneficiaries in this situation:

160APHL(10) Additional positions of the taxpayer.

If:

(a) the trust is not a family trust within the meaning of Schedule 2F; and

(b) the trust is not a trust for the purposes of this Act merely because of the reference to executors and administrators in paragraph (a) of the definition of trustee in subsection 6(1); and

(c) the taxpayer's interest in the relevant share or the relevant shares is not an employee share scheme security;

the taxpayer has, in addition to any other long and short positions (including the positions that the taxpayer is taken to have under subsection (8)) in relation to the taxpayer's interest in the relevant share or relevant shares, a short position equal to the taxpayer's long position under subsection (7) and a long position equal to so much of the taxpayer's interest in the trust holding as is a fixed interest.

160APHL(11) A vested and indefeasible interest constitutes a fixed interest.

For the purposes of subsection (10), the taxpayer's interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.

Relevantly, as it is the case here, a unit trust with unrelated family investors would not be in the position to make the requisite family trust elections to facilitate the passage of imputation credits to the beneficiaries of the trust.

Question 4

If the answer to Question 3 is 'no', will the Commissioner exercise his discretion in 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?

Summary

The Commissioner considers that it would be reasonable to exercise the discretion in 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 for the Ruling Period.

Detailed reasoning

The discretion in former subsection 160APHL(14) is relevant where a Trustee distributes a franked distribution to Beneficiaries. In order to be eligible for the franking credit tax offset the Beneficiaries are required to have Fixed Interests in the corpus of a Trust. This requirement derives from the Holding Period Rule and Related Payments Rules.

Where beneficiaries 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, they can only have such a vested and indefeasible interest if the Commissioner exercises the discretion in former subsection 160APHL(14) of the ITAA 1936.

Pursuant to former subsection 160APHL(14) of the ITAA 1936, where beneficiaries do not have a fixed 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 paragraph 160APHL(14)(c) of the ITAA 1936 - the Commissioner may treat a beneficiary as having a fixed interest (in cases where in fact beneficiaries do not have a fixed interest) having regard to:

•         the circumstances in which the entitlement is capable of not vesting or the defeasance can happen; and

•         the likelihood of the entitlement not vesting or the defeasance happening; and

•         the nature of the trust; and

•         any other matter the Commissioner thinks relevant.

The first three factors are the same as those applying in the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem a fixed entitlement to the income and capital of a trust, as discussed above.

Any other matter the Commissioner thinks relevant

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 Taxation Laws Amendment Bill (No. 2) 1999 which accompanied the introduction of former subsection 160APHL(14) of the ITAA 1936 outlines the purpose of the 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.

As such, when considering the exercise of the discretion in former subsection 160APHL(14) of the ITAA 1936, the Commissioner must bear in mind the intended effect of the integrity measures.

Relevantly:

•         the Trust Deed contains clauses that may constitute a defeasible power e.g. the power to issue new units under Clause X and to vary the Trust Deed under Clause X. However, the Trustee has not and will not, exercise any power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the capital of the Trust;

•         the likelihood of defeasance is low given the terms of the Trust Deed; and

•         there is little likelihood that a franking credit trading scheme exists in these circumstances - relevantly, the Trust has held shares in the relevant entity from whom dividend have been received during its period of operation, there have been no changes to the Unitholders since inception and family trust elections are in place with respect to the Unitholders and family trust distributions have been limited to the relevant family groups.

In relation to the likelihood of the intended effect of the integrity measures being undermined the following factors are relevant:

•         The transactions between all entities are conducted at arm's length.

•         In respect of the Ruling period 1 July 20XX to 30 June 20XX, the assumptions are the Trustee or Unitholders have not entered and will not enter into an arrangement that would result in:

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

-       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);

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

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

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

-       fraud or evasion.

Consequently, the Commissioner would accept that the likelihood of the integrity measures being undermined would be low.

Conclusion

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.

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.

Therefore, it it would be reasonable 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.

Question 5

Will CGT event A1 in section 104-10, CGT event E1 in section 104-55, CGT event E2 in section 104-60, or event E5 in section 104-75 of theITAA 1997 happen as a result of making the proposed amendments to the Trust Deed for the Trust?

Summary

In this case, the proposed amendments do not cause or result in any assets of the Trust being transferred to any Unitholder. Therefore, CGT event A1 will not happen as a result of making the proposed amendments to the Trust Deed for the Trust.

In accordance with the assumptions, the proposed amendments to the terms of the Trust are made in proper exercise of a power of amendment and are properly supported by that power. Consistent with the Commissioner's views in TD 2012/21, CGT events E1 or E2 will not apply to the proposed amendments.

CGT event E5 will not happen as a result of making the proposed amendments to the Trust Deed, as prior to the proposed amendments no beneficiary was absolutely entitled to any of the assets of the Trust.

Detailed reasoning

CGT Event A1

Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset.

Under subsection 104-10(2) of the ITAA 1997, you dispose of a CGT asset when a change of ownership occurs from you to another entity. Relevantly, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

CGT Event A1 may apply where a CGT asset is transferred by a trustee to a beneficiary, as that transfer will be a disposal of an asset for CGT purposes.

In this case, the proposed amendments do not cause or result in any assets of the Trust being transferred to any Unitholder.

Therefore, CGT event A1 will not happen as a result of making the proposed amendments to the Trust Deed for the Trust.

CGT events E1 and E2

The application of CGT event E1 or E2 to amendment to a trust deed will generally turn on questions of trust law, concerning the scope of the variation power in the trust instrument.

In TD 2012/21 the Commissioner states that CGT events E1 or E2 will not happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court unless:

• the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or
• the effect of the change or court approved variation is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

The Commissioner accepts the general proposition that where there is some continuity of property and membership of the trust, changes to the terms of a trust that are made in proper exercise of a power of amendment will not terminate the trust where they are properly supported by that power. Accordingly, the scope of the amendment power and the validity of its exercise in a particular case will be critical.

Application in these circumstances

The facts of this ruling contain an assumption that the Trustee has the power to amend the Trust Deed in accordance with the proposed amendments.

In accordance with the assumption:

• The proposed amendments will not result in the termination of the Trust, provided that the amendments are validly made within the scope of the amendment power.
• The proposed amendments will not, if valid, result in any assets of the Trust being held on new and different trusts.

There is continuity of property and membership of the trust - the main asset of the Trust will continue to be held for the benefit of the Unitholders.

On the basis of the assumption that the proposed amendments are valid, and in accordance with the views expressed in TD 2012/21, neither CGT events E1 or E2 will happen by reason of the variation of the trust instrument.

It should be noted that where a proposed change is beyond the power conferred by the terms of a trust, it will be of no effect. Therefore, it cannot give rise to a resettlement of the trust, and would not result in CGT events E1 or E2 happening.

CGT event E5

Section 104-75 of the ITAA 1997 provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

Draft Taxation Ruling TR 2004/D25 Income Tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25)sets out the Commissioner's view on when a beneficiary may become absolutely entitled to an asset.

Paragraphs 10 and 11 of TR 2004/D25 provide:

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40).

11. Under the rule in Saunders v Vautier, the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it.

Paragraphs 73 and 74 of TR 2005/D25 describe the type of interest required in the trust asset for a beneficiary to be absolutely entitled:

73. The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible. A trustee would only be obliged to satisfy a demand from a beneficiary with such an interest.

74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.

Furthermore, paragraph 23 of TR 2004/D25 states:

If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

The nature of the beneficiary's interest in the asset, and whether it meets the requirements of absolute entitlement, therefore depends on the particular trust instrument, and whether the trustee has made a resolution in favour of a beneficiary (such that the beneficiary would be absolutely entitled to a CGT asset as against the Trustee).

In this case, no beneficiary has a vested and indefeasible interest in any CGT asset of the Trust under the Trust Deed - and the amendments do not cause any beneficiary to have an entitlement to a vested and indefeasible interest in any CGT asset of the Trust.

Therefore, CGT event E5 will not happen as a result of making the proposed variations to the Trust Deed for the Trust.