Edited version of private advice

Authorisation Number: 1052103414404

Date of advice: 26 June 2023

Ruling

Subject: Scrip for scrip roll-over relief

Question 1

Will the Original Interest Holders be eligible to obtain roll-over relief pursuant to Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the exchange of their Original Interests for interests in the Acquiring Entity?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) to deem the Original Interest Holders of the Original Entities as having fixed entitlements to all of the income and capital of the Original Entities and the Acquiring Entity?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

Relevant facts and circumstances

1. The entities to which this private ruling applies (collectively, the Original Interest Holders) variously own units (Original Interests) in the Original Entities (listed below).
2. All units in the Original Entities were issued more than 12 months ago but after 20 September 1985.

3.    Scheme

A head entity, Acquiring Entity, will acquire 100% of the units in the Original Entities.

Step 1- Each Original Entity's issued units will be split into the proportionate number of units that represents the proportion of net asset value that the particular Original Entity contributes to the group's net asset value.

Step 2 - The Acquiring Entity will then swap units created in itself for the units that the Original Interest Holders hold in the Original Entities on a one for one basis. The Original Interest Holders will then hold issued units in Acquiring Entity in proportion to their original interests' net asset value of the group.

4.    The Acquiring Entity holds interest in some of the entities listed in the tables below. These interests are not included in the scheme, as it relates to the exchange of Original Interests for interests in the Acquiring Entity. Depending on the context, The Acquiring Entity is an Original Entity and/or the Acquiring Entity

5.    The main reason for consolidating the unit trusts under the Acquiring Entity is to achieve economies of scale in Western Australia and eventually Australia. The arrangement will increase the value of the business as a whole because of the wide reach, streamlined processes, purchasing power and doctor retention (through relocation etc). There are administrative benefits in making distributions of profits to unitholders under a single unit trust.

6.    The purpose for seeking that the unit trusts be treated as fixed trusts is to give the unitholders assurances as to the precise percentage of profits to which they are entitled.

7. The net asset value is based on the current value of each Original Entity as determined by a third party valuer.
8. All Original Entities have one class of units. Only Original Entities' units will be exchanged for units in Acquiring Entity and nothing more.
9. All Original Interest Holders have the same voting rights and all Original Interest Holders have been individually informed and given the same opportunity to participate in the scheme on substantially similar terms. All have agreed to participate.
10. The Original Interest Holders will make a capital gain on the transfer of their units in the Original Entities to Acquiring Entity.
11. There is no CGT exemption for any capital gain that may be derived on the Original Interest Holders disposal of their units in the Original Entities in the swap for the units in Acquiring Entity.
12. The Original Interest Holders cannot choose a roll-over under Divisions 122 or 615 of the ITAA 1997 with respect to the exchange of units.
13. All Original Interest Holders will choose for roll-over relief to apply.
14. The Acquiring Entity will also choose for roll-over relief to apply.
15. If any Original Interest Holder has a significant stake or common stake for the purposes of subsections 124-783(7) and 124-783(10) of the ITAA 1997 (including entities that hold a right to acquire a stake in the Original Entity or the Acquiring Entity within 5 years of the arrangement for the purposes of section 124-783A of the ITAA 1997), the Original Interest Holder will inform the trustee in writing of the cost base of its Original Interest as at the time just before a CGT event happened in relation to it for the purposes of paragraph 124-781(3)(d) of the ITAA 1997.
16. All dealings and transactions are on an arm's length basis. All Original Interest Holders of the Original Entities and the trustee of the Acquiring Entity deal with each other at arm's length. The transactions are for net asset value and based on independent valuations.
17. Neither the Original Entities nor the Acquiring Entity have over 300 beneficiaries before the scheme started.
18. The replacement units for the Original Interest Holder's units in the Original Entities are like for like in comparison to their original units held.
19. None of the Original Interest holders are foreign residents.
20. The Acquiring Entity is not a foreign resident.
21. All units in the Original Entities are held by the Original Interest Holders on capital account, and not as revenue assets, trading stock or Division 230 of the ITAA 1997 financial arrangements.
22. The Original Interest Holders are the unit holders of the following entities (together described as Original Entities):

•         XX

•         XX

•         ...

23. In relation to the Original Entities and the Acquiring entity:

a)    There will only be one class of units issued (including in the Acquiring Entity)- i.e. no units of different classes will be issued.

b)    No units in the Original Entities will be reclassified. The rights attached to units already in existence will not be modified.

c)    Units will only be transferred or redeemed at the request of a unit holder. The unit holder has sole discretion over their unit holdings.

d)    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 Fixed entitlements and fixed trusts.

e)    No units will be issued or redeemed at a discount. All future transactions of units will be at 'net asset backed value'

f)     The trustee will ensure that units will only be transferred or transmitted for market value.

g)    No partly paid units will be issued.

h)    No streaming of income or capital will occur.

i)      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.

j)      All unitholders will be entitled to the income and capital of the trust in proportion to their unitholding - if requested by a unit holder, 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 unit holder. The trustee will only transfer to that particular unit holder assets of the trust to the extent that the market value of the assets equivalent to their proportion of unitholding.

24. Unit trust details

Table 1: Unit trust details

25. Unit holdings for each unit trust

Table 2: Unit holdings for each unit trust

26.  Directors of corporate trustees for unitholders

Table 3: Directors of corporate trustees for unitholders

27. Trust deed

Table 4: Trust deed

28. Clauses in the trust deed relating to the income and capital of the trust.

Table 5: Clauses in the trust deed relating to the income and capital of the trust

29. Application of the 'savings rule' in subsection 272-5(2) of Sch 2F of the ITAA 1936 and clauses in the trust deed relating to the trustee's discretions that may cause a beneficiary's interests to be defeasible.

Table 6: Application of the 'savings rule' in subsection 272-5(2) of Sch 2F of the ITAA 1936 and clauses in the trust deed

30. Carried forward tax losses, expected current year tax losses and expected bad debts or debt/equity swap losses for each unit trust. (All carried forward losses will stay in each separate trust- only profits if there are any. No losses will be transferred up into the head entity via distributions). No debt/equity swaps will occur.)

Table 7: Carried forward tax losses, expected current year tax losses and expected bad debts

31. Associations

•         There are no associations between any entity engaged to perform valuation services and the trustee and unitholders.

•         All transactions between all entities (whether related or unrelated) are conducted at arm's length.

32. Self-assessment for each unit trust

A self-assessment of whether each trust meets the safe harbour conditions (in Item 6 of paragraph 54) in Practical Compliance Guidelines PCG 2016/16 Fixed entitlements and fixed trusts for the reasons provided:

a)    The trust has a trust instrument.

b)    All beneficial interests in the income and capital of the Trust are vested.

c)    All beneficial interests have the same rights to receive the income and capital of the trust.

d)    All beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capital of the trust.

e)    The trust is not a discretionary trust or a trust with default income or capital beneficiaries - that is, no beneficial interest in the income or capital of the trust is capable of being defeated, partly or wholly, by the exercise of a power of appointment of income or capital by the trustee or other done.

f)     The Trustee has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust, and an arrangement has not been entered into which would result in:

•         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.

Assumptions

Assumptions for each unit trust - i.e. the Original Entities and the Acquiring Entity

33.  Throughout the Ruling Period (from the inception of earliest unit trust to 30 June 2028), no powers have been or will be exercised to defeat the interest of any unitholder, with respect to their units including:

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

b)    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.

c)    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.

d)    No units will be issued or redeemed at a discount.

e)    The trustee will ensure that units will only be transferred or transmitted for market value.

f)     No partly paid units will be issued.

g)    No streaming of income or capital will occur.

h)    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.

i)      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.

j)      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.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-781

Income Tax Assessment Act 1997 subsection 124-781(1)

Income Tax Assessment Act 1997 subparagraph 124-781(1)(a)(i)

Income Tax Assessment Act 1997 paragraph 124-781(1)(b)

Income Tax Assessment Act 1997 paragraph 124-781(1)(c)

Income Tax Assessment Act 1997 paragraph 124-781(1)(d)

Income Tax Assessment Act 1997 subsection 124-781(2)

Income Tax Assessment Act 1997 paragraph 124-781(2)(a)

Income Tax Assessment Act 1997 paragraph 124-781(2)(b)

Income Tax Assessment Act 1997 paragraph 124-781(2)(c)

Income Tax Assessment Act 1997 subsection 124-781(3)

Income Tax Assessment Act 1997 paragraph 124-781(3)(a)

Income Tax Assessment Act 1997 paragraph 124-781(3)(b)

Income Tax Assessment Act 1997 paragraph 124-781(3)(c)

Income Tax Assessment Act 1997 paragraph 124-781(3)(d)

Income Tax Assessment Act 1997 subsection 124-781(4)

Income Tax Assessment Act 1997 section 124-782

Income Tax Assessment Act 1997 section 124-783

Income Tax Assessment Act 1997 subsection 124-783(1)

Income Tax Assessment Act 1997 subsection 124-783(2)

Income Tax Assessment Act 1997 subsection 124-783(3)

Income Tax Assessment Act 1997 subsection 124-783(4)

Income Tax Assessment Act 1997 subsection 124-783(5)

Income Tax Assessment Act 1997 subsection 124-783(7)

Income Tax Assessment Act 1997 subsection 124-783(8)

Income Tax Assessment Act 1997 subsection 124-783(10)

Income Tax Assessment Act 1936 Division 272

Income Tax Assessment Act 1936 section 272-5 of Schedule 2F

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

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

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

Income Tax Assessment Act 1936 subparagraph 272-5(3)(b)(i) of Schedule 2F

Income Tax Assessment Act 1936 subparagraph 272-5(3)(b)(ii) of Schedule 2F

Income Tax Assessment Act 1936 subparagraph 272-5(3)(b)(iii) of Schedule 2F

Income Tax Assessment Act 1936 subparagraph 272-35 of Schedule 2F

Income Tax Assessment Act 1936 subsection 272-59(2) of Schedule 2F

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

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

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The Original Interest Holders will be eligible to obtain roll-over relief under Subdivision 124-M of the ITAA 1997 in respect of the exchange of their units in the Original Entitles for units in Acquiring Entity.

Detailed reasoning

Subdivision 124-M of the ITAA 1997 sets out the requirements for replacement asset roll-over relief. More specifically, section 124-781 of the ITAA 1997 sets out the preconditions for replacement of trust interests roll-over relief as follows:

124-781(1) There is a roll-over if:

(a) an entity (also the original interest holder) exchanges:

(i) a unit or other interest (also the holder's original interest) in a trust (also the original entity) for a unit or other interest (also the holder's replacement interest) in another trust (also the acquiring entity and the replacement entity); or

(ii) an option, right or similar interest (also the holder's original interest) issued by the original entity that gives the holder an entitlement to acquire a unit or other interest in the original entity for a similar interest (also the holder's replacement interest) in another trust (also the acquiring entity and the replacement entity); and

(b) entities have *fixed entitlements to all of the income and capital of the original entity and the acquiring entity; and

(c) the exchange is in consequence of an arrangement that satisfies subsection (2) or (2A); and

(d) the conditions in subsections (3) and (4) are satisfied.

...

Subparagraph 124-781(1)(a)(i)

An 'exchange' occurs when each of the unitholders (the 'original interest holder') exchanges their units in the original trust ('the original interest') for units ('replacement interest') in another trust (the 'acquiring entity' and the 'replacement entity').

In this case, the Original Interest Holders will exchange their units in the Original Entities for units in the Acquiring Entity.

Paragraph 124-781(1)(b)

Each of the original interest holders have a fixed interest in relation to their interest in the particular original entity and in the acquiring entity, such that each unitholder has a fixed entitlement to the share of the income or capital of the relevant original entity and in the acquiring entity.

All Original Interest Holders have fixed entitlements to all of the income and capital of the Original Entities and subsequently the Acquiring Entity, in which case paragraph 124-781(1)(b) will be satisfied.

Paragraph 124-781(1)(c)

This paragraph requires that the exchange is in consequence of an arrangement that satisfies subsection (2) or (2A).

'Arrangement' is defined in section 995-1 of the ITAA 1997 as 'any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.'

Paragraph 11.23 of the Explanatory Memorandum (EM) to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 provides that:

"What constitutes a single arrangement is a question of fact. Relevant factors in determining whether what takes place is part of a single arrangement would include, but not be limited to, whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously, and the intention of the parties in all the circumstances as evidenced by objective facts."

The Scheme satisfies the definition of 'arrangement' in section 995-1 and exhibits all the characters of a single arrangement as outlined in the above extract of the EM.

On the facts, the Scheme will satisfy subsection 124-781(2) for reasons as set out further below. Consequently paragraph 124-781(1)(c) will be satisfied.

Paragraph 124-781(1)(d)

This paragraph requires that the conditions in subsections 124-781(3) and 124-781(4) will be satisfied.

On the facts, the arrangement will satisfy the conditions in subsections 124-781(3) and 124-781(4) as set out below.

Subsection 124-781(2) of the ITAA 1997: Conditions for arrangement

Paragraph 124-781(2)(a)

The Acquiring Entity will acquire 100% of the interests in Original Entities, thus satisfying the requirement that the arrangement must result in the acquiring entity owning 80% or more of the trust voting interests in the original entity or, if there are none, 80% or more of the units or other interests in the original entity.

Paragraph 124-781(2)(b)

All Original Interest Holders will exchange their units in the Original Entities for units in the Acquiring Entity, thus satisfying the requirement that the arrangement must be one in which at least all owners of trust voting interests in the original entity could participate.

Paragraph 124-781(2)(c)

All Original Interest Holders have the same terms for participating in the Scheme thus satisfying the requirement that the arrangement must be one in which participation was available on substantially the same terms for all of the owners of interests or units of a particular type in the original entity.

The requirements of subsection 124-781(2) will be met in this case.

Subsection 124-781(3) of the ITAA 1997: Conditions for roll-over

Paragraph 124-781(3)(a)

The requirement under this provision is that the original interest holder acquired its original interest on or after 20 September 1985.

The condition in this paragraph will be satisfied as all units in the Original Entities were issued more than 12 months ago but after 20 September 1985.

Paragraph 124-781(3)(b)

The condition in this provision will be satisfied as, apart from the roll-over, the Original Interest Holders will make a capital gain from CGT event A1 under section 104-10 when they dispose of their units in the Original Entities.

Paragraph 124-781(3)(c)

This paragraph requires that the original interest holder must choose 'to obtain the roll-over or, if section 124-782 applies to it for the *arrangement, it and the trustee of the acquiring entity jointly choose to obtain the roll-over'.

In determining if the third condition is satisfied, it has to be determined if section 124-782 applies. Section 124-782 applies if the original unitholder obtains a roll-over and they were a significant stakeholder or a common stakeholder for the arrangement.

Section 124-783 relevantly sets out the meaning of significant stakeholder, common stakeholder, significant stake and common stake as follows:

Significant Stakeholder

124-783(1) An original interest holder is a significant stakeholderfor an *arrangement if it had:

(a) a *significant stake in the original entity just before the arrangement started; and

(b) a significant stake in the replacement entity just after the arrangement was completed.

124-783(2) Also, if an original interest holder is an acquiring entity, any other original interest holder is a significant stakeholder for an *arrangement if it:

(a) had a *significant stake in the original entity just before the *arrangement started; and

(b) is an *associate of the replacement entity just after the arrangement was completed.

Common Stakeholder

124-783(3) An original interest holder is a common stakeholder for an *arrangement if it had:

(a) a *common stake in the original entity just before the arrangement started; and

(b) a common stake in the replacement entity just after the arrangement was completed.

124-783(4) If an acquiring entity for an *arrangement is an original interest holder, each other original interest holder that has a replacement interest is a common stakeholder for the arrangement.

124-783(5) No original interest holder is a common stakeholder for an *arrangement if either the original entity or the replacement entity had at least 300 *members (for a company) or 300 beneficiaries (for a trust) just before the arrangement started.

Significant stake

...

124-783(7) An entity has a significant stake in a trust at a time if the entity, or the entity and the entity's *associates between them, had at that time the right to receive 30% or more of any distribution to beneficiaries of the trust of income or capital of the trust.

124-783(8) No original interest holder has a significant stake in a company that has at least 300 *members or a trust that has at least 300 beneficiaries if it is reasonable for the company or the trustee of the trust to conclude that this is the case on the information available to it.

Note:

There are some cases where a company or trust will not be regarded as having 300 members or beneficiaries: see section 124-810.

Common stake

....

124-783(10) If the original entity and the replacement entity are trusts, an entity, or 2 or more entities, have a common stake in the original entity just before the *arrangement started and in the replacement entity just after the arrangement was completed if the entity or entities, and their *associates, between them:

(a) had, just before the arrangement started, the right to receive 80% or more of any distribution to beneficiaries of the original entity of income or capital of the original entity; and

(b) had, just after the arrangement was completed, the right to receive 80% or more of any distribution to beneficiaries of the replacement entity of income or capital of that entity.

In this case the Original Interest Holders and the Acquiring Entity will elect for roll-over to apply.

Paragraph 124-781(3)(d)

This provides that if section 124-782 applies to the original interest holder, the holder must inform the trustee 'in writing of the cost base of its original interest as at the time just before a CGT event happened in relation to it'.

To the extent that section 124-782 applies, the Original Interest Holder will inform the Acquiring Entity of the cost base of the units they held in the relevant Original Entity just before the happening of CGT event A1.

Therefore, the third condition in subsection 124-781(3) will be satisfied.

Subsection 124-781(4) of the ITAA 1997: Further roll-over conditions in certain cases

Subsection 124-781(4) provides further roll-over conditions that must be satisfied if the original interest holder and the acquiring entity did not deal with each other at arm's length and neither the original entity nor the replacement entity had at least 300 members just before the arrangement started.

The question whether the parties are dealing with each other at arm's length is not decided by asking whether the parties were at arm's length to each other. Subsection 995-1(1) of the ITAA 1997 provides:

'in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstances.'

The fact that there is no ownership connection between the parties is not determinative, on its own, of whether the parties deal with each other at arm's length. The question is whether the parties dealt with each other at arm's length; The Trustee for the Estate of the late AW Furse No. 5 Will Trust v. FC of T 91 ATC 4007 at 4014-4015; (1990) 21 ATR 1123 at 1132.

In Granby Pty Ltd v. FC of T 95 ATC 4240 at 4243; (1995) 30 ATR 400 at 403 Lee J stated that the provision 'dealing with each other at arm's length' invited an analysis of the manner in which the parties conduct themselves in forming the transaction. The question is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs and the expression means, at least, that the parties have acted severally and independently in forming their bargain.

Further, Lee J stated (at ATC 4244; ATR 403-404) that:

If the parties to the transaction are at arm's length it will follow, usually, that the parties will have dealt with each other at arm's length. That is, the separate minds and wills of the parties will be applied to the bargaining process whatever the outcome of the bargain may be.

However, this will not be the case where the parties collude to achieve a particular result, or where one of the parties submits the exercise of its will to the discretion of the other. In such a case the lack of the exercise of an independent will in the formation of the transaction would indicate a lack of real bargaining.

In Collis v. FC of T 96 ATC 4831; (1996) 33 ATR 438 (Collis) the Federal Court found that the parties were not dealing at arm's length because one party was indifferent to the allocation of the sale price for the parcel of land. This indifference was indicative of a submission of one party's will to the other party's wishes which demonstrated a lack of arm's length dealing.

Therefore, consideration must be given to not only the relationship or connection between the Original Interest Holders and the Acquiring Entity but also the nature and circumstances of the dealing.

In this case, while the Original Interest Holders and the Acquiring Entity do not have at least 300 members, this subsection would not apply because it is provided as a fact that each of the Original Interest Holders deal with the Acquiring Entity at arm's length. Therefore, the further roll-over condition in subsection 124-781(4) do not need to be satisfied.

For these reasons, the unitholders of the Original Entities would be able to choose roll-over under Subdivision 124-M.

Question 2

Summary

The terms of the trust instrument do not provide the Original Interest Holders with vested and indefeasible interests in all of the income and capital of the Original Entities and the Acquiring Entity. However, 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 Original Interest Holders as having fixed entitlements to all of the income and capital of the Original Entities and the Acquiring Entity.

Detailed Reasoning

What is a fixed trust?

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 deeds.

It is accepted that the trust deeds provide the Original Interest Holders with a vested interest in the income and capital of the relevant trust. Relevantly, for the Original Entities Clause XX of the particular trust deed provides that Original Interest Holders will be entitled to income and capital based on their pro rata share of units held in the particular trust. Clause XX of the trust deeds for the of the Original Entities provides that on termination of the particular trust the Original Interest Holders are entitled to their proportionate share of the assets of the trust (after costs incurred in the liquidation of the trust).

However, there are various clauses in the trust deeds 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 Clause XX), the trustee has the power to issue new units and different classes of units; and
• Vary the Trust Deed (Clause XX ).

Therefore, the Original Interest Holders as beneficiaries of the trusts (i.e. the Original Entities and the Acquiring Entity), do not have a fixed entitlement to a share of the income or capital of the trusts for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Where all of the beneficiaries' interests in the corpus and/or income 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 unit holders' interests in the corpus of income 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 four key matters that the Commissioner takes into account in deciding whether to exercise the discretion:

a)    the circumstances in which a beneficiary's interest is capable of being defeated or not vesting.

b)    the likelihood of the interest being defeated or not vesting;

c)    the nature of the trust; and

d)    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 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 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 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 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:

o   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

o   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 deeds provide the Original Interest Holders with relevant vested interests in a share of the income that the relevant trust derives from time to time and a share of the capital of the relevant trust.

Each Original Interest Holder of the relevant trust does not, however, have a fixed entitlement to the share of income and capital in that 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) with respect to each unit trust. As such the saving rule in Subparagraph 272-5(3)(b)(i) of Schedule 2F to the ITAA 1936 would be satisfied.

•         Redemption of units: The trustee of each unit trust may redeem units only with the consent of all of the Original Interest Holders of that particular trust. 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 trust deed of each unit trust can only be amended with the unanimous approval of the relevant Original Interest Holders. No amendments have been made to any of the trust deeds.

The Commissioner accepts that the assumptions mitigate the circumstances in which the beneficiaries' interests in the income and capital of the particular 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 particular trust was settled to the date of this ruling application is relevant. It is noted that defeasible powers contained in the trust deeds have not been exercised to defease any of the requisite interests of the Original Interest Holders.

•         In respect of the Ruling period 1 July 2013 to 30 June 2028, having regard to the Assumptions, the trustee of each unit trust has exercised or may exercise its powers under the trust deed such that:

• There will only be one class of units 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 Original Interest Holders.
• 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 particular 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 trustees will not seek to amend or vary the trust deeds to defeat the interest or change the fixed entitlements of Original Interest Holders to the income and capital of the trusts.
• In the event a trust is terminated, all Original Interest Holders will be entitled to the income and capital of the relevant trust in proportion to their unitholding - if requested by a Original Interest Holder, 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 Original Interest Holders. The trustee will only transfer to that particular Original Interest Holder assets of the relevant trust to the extent that the market value of the assets is equivalent to their proportion of unitholding.

The trustee of each unit trust has never exercised their powers under the trust deed in a way that the above assumptions would not be applicable and will not to do so for the Ruling period, to defeat Original Interest Holders' interest in the income or capital of the particular trust. Consequently, the Commissioner would accept that the likelihood of the beneficiaries' interests in the income and capital of the trusts 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 trusts the following factors are relevant:

•         The trusts are unitised trusts; however, the units of each trust are not publicly listed on an approved stock exchange and each trusts is not a managed investment scheme. Therefore, the circumstances and likelihood in which each Original Interest Holders' entitlement is capable of not vesting or the defeasance happening is not reduced in these trusts.

•         The purposes of the Original Entities (including the Acquiring Entity) is to conduct medical practices. The purpose of consolidating interests under the Acquiring Entity is to achieve economies of scale in Western Australia and eventually Australia. The arrangement will increase the value of the business as a whole because of the wide reach, streamlined processes, purchasing power, doctor retention (through relocation etc). There are administrative benefits to managing unitholders' interests under a single unit trust.

•         The unit trusts are to be treated as fixed trusts to give the unitholders assurances as to the precise percentage of profits to which they are entitled.

•         The trustees are not required to hold an Australian Financial Services Licence in order to act as trustee of these trusts 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 of each unit trust to adversely affect the interests of beneficiaries is limited - the parties are 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:

•         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 trustees of the trusts 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 instruments' of the trusts that for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the beneficiaries of the trusts do not have fixed entitlements to any of the income and capital of the trusts.

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 Original Interest Holders of the trusts should be treated as having fixed entitlements to all of the income and capital of the trusts as relevant for the relevant income years.

In summary, as:

•         the trust instruments (being the trust deeds) contain powers which will not be used to defease the interests of the beneficiaries in the income or capital of the trusts - 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" of each trust is a unit trust established for the purposes of conducting a medical practice;

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

•         there is little likelihood that a tax benefit of the trusts 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 Original Interest Holders of the trusts as having a fixed entitlement to their share of the income and capital of the trusts for the relevant income years.