Edited version of private advice

Authorisation Number: 1052132791463

Date of advice: 23 June 2023

Ruling

Subject: Trust - fixed entitlement and fixed trust

Issue 1

Will XYZ Fund (Trust) be a 'fixed trust' under section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) and section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Question 1

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

Answer

No.

Question 2

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

Answer

Yes.

Issue 2

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

Question 3

Will the Unitholders of the Trust have a 'vested and indefeasible interest' in so much of the 'corpus of the Trust', as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the ITAA 1936?

Answer

No.

Question 4

Will the Commissioner exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders of the Trust as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX - 20XX

The scheme commenced on:

XX Month 20XX

Relevant facts and circumstances

•         The Trust was established in XXXX.

The Trust is an Australian multi-class unit trust with main activity of investments.

The Trust is an unlisted registered managed investment scheme.

The Trustee of the Trust holds Australian Financial Service Licence.

The Trust is governed by the trust instrument.

The Trustee declared it will hold the trust fund on trust for Unitholders on the terms of the trust instrument.

The Trustee has powers (amongst other things) to:

•         amend the trust instrument

•         issue or redeem units

•         issue units of different classes

•         reclassify units to a different class

•         forfeit unpaid units

•         classify any item as either income or capital.

The Trustee can amend the trust instrument if the change will not adversely affect Unitholders' rights.

The initial units must be issued at the specified issue price.

The further units will be issued at the issue price determined on the basis of the net asset value according to Australian accounting principles.

The units are redeemable at the redemption price determined on the basis of the net asset value according to Australian accounting principles.

The Trustee can issue units of different classes. All units in a class rank equally for distribution.

Each class may have different rights. The rights to income and capital of a particular class must be the same for every membership interest in that class.

The Trustee can reclassify units to a different class but it cannot be an arbitrary action.

The Trustee must identify and allocate to all Unitholders within a class, a proportionate share of the net income of the trust estate for the Trust for the purposes of section 95 of the Income Tax Assessment Act 1936 (ITAA 1936).

Where trust corpus or capital is returned to Unitholders, those units which are partly paid receive a pro-rata return of capital proportional to the extent to which their units are paid.

The Trust currently does not have any prior year tax losses.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F

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 section 272-65 of Schedule 2F

Income Tax Assessment Act 1936 former section 160APHL

Income Tax Assessment Act 1936 former section 160APHD

Income Tax Assessment Act 1936 former subsection 160APHL(7)

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

Income Tax Assessment Act 1936 former subsection 160APHL(11)

Income Tax Assessment Act 1936 former subsection 160APHL(13)

Income Tax Assessment Act 1936 former subsection 160APHL(14)

Income Tax Assessment Act 1997 paragraph 207-145(1)(a)

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

Reasons for decision

Issue 1

Question 1

Summary

The Unitholders 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 Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

The concept of a 'fixed entitlement' is central to trust loss provisions (Schedule 2F to the ITAA 1936) which is used to determine whether a trust is a fixed trust. In practice, it may be difficult for many trusts to satisfy the definition of 'fixed trust' unless the Commissioner exercises his discretion to treat the beneficiaries' interest as fixed entitlements.

Practical Compliance Guideline PCG 2016/16

The Guideline outlines the process for determining if beneficiaries have fixed entitlements to all of the income and capital of a trust.

The Guideline also outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being a fixed entitlement.

The Guidance does not apply, among other things, for the purposes of applying former subsection 160APHL(14) of the ITAA 1936 (about the holding period rule for franking credits).

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.

Fixed Entitlement

The definition of the term 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 relevantly 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 ITAA 1936.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 provides that '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'.

The word 'interest' is a word that is capable of many meanings. In the absence of a definition, one must infer its meaning from the context in which it is found (Gartside v Inland Revenue Commissioner [1968] AC 553 at 602-603 and 617-618; Commissioner of Stamp Duties (Queensland) v Livingston (1964) 112 CLR 12 at 28-29; and CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98). There may be circumstances in which the word 'interest' could be interpreted broadly to include any right or advantage that a person might be able to claim with respect to the income or capital of the trust and/or in respect of the trustee, whether present or future, ascertained or potential.

In the context of Schedule 2F to the ITAA 1936, however, it is clear that for an interest to be recognised as a 'fixed interest' it must be a right with respect to a share of the income or of the capital of the trust that is susceptible to measurement. To adopt the words of Lord Wilberforce in Gartside v Inland Revenue Commissioners, the right must have 'the necessary quality of definable extent'.

The term 'vested and indefeasible' is not defined in the taxation legislation. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997does discuss its ordinary meaning at some length, at paragraphs 13.4 to 13.6.

In the context of Schedule 2F to the ITAA 1936, the meaning of the term 'vested and indefeasible' has not been judicially considered, other than a discussion in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 in the limited context of amending the constitution of a registered MIS under section 601GC of the Corporations Act 2001.

However, the term 'vested and indefeasible' does appear in subsection 95A(2) of the ITAA 1936 and has been considered in that context by the courts - refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 173 CLR 264; 91 ATC 5000.

Also relevant are MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v Commissioner of Stamp Duties (1952) 88 CLR 54 at 63; and Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a 'fixed entitlement' to a share of income or capital there must be a 'vested and indefeasible interest' under a trust instrument.

Trust Instrument

In all cases, the determining factor in deciding whether 'fixed entitlements' exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

The first step in determining whether a beneficiary has a 'vested and indefeasible' interest in a share of the income or capital of a trust is to ascertain the terms of the trust upon which the relevant trust property is held. As the High Court stated in CPT Custodians Pty Ltd v Commissioner of State Revenue (Vic); Commissioner of State Revenue (Vic) v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [15], in taking this step:

'...a priori assumptions as to the nature of unit trusts under the general law and principles of equity [will] not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2), upon the terms of the particular trust. The term "unit trust" is the subject of much exegesis by commentators. However, "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which dictate the application to particular facts of the [relevant statutory definition]...'

There will be some circumstances in which a trust instrument must be read subject to the operation of a particular legal rule, whether by common law, statute, or statutes. See, for example, the provisions of Chapter 5C of the Corporations Act which, if inconsistent with the constitution of a registered MIS, can have the effect of altering or modifying the scheme's constitution. It is possible for a constitution to be altered or modified by operation of law irrespective of whether the trust instrument itself expressly recognises the relevant common law rule or statute, and the entitlements of a beneficiary under the trust instrument are those as so altered or modified by operation of law.

Vested and Indefeasible Interests

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 provide that:

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.

Vested interests

In term of the concept of 'fixed entitlement', an interest is 'vested' if it is vested in interest (a right to future enjoyment) or vested in possession (a right of present enjoyment) (paragraph 13 of PCG 2016/16).

In the present case, each unit in a class confers on Unitholders an interest in the class assets corresponding to units of that class. Further the trust instrument provides the Unitholders with a vested interest in the income and capital of the Trust.

Indefeasible interests

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 (paragraph 15 of PCG 2016/6).

Under paragraph 16 of PCG 2016/16, the Commissioner considers powers in modern trust instruments which may cause a beneficiary's interests to be defeasible include powers to:

•         amend the trust instrument;

•         issue new units or redeem exiting units;

•         reclassify existing units so that they do not all have equal rights to receive the income and capital of the trust;

•         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;

•         appoint a beneficiary's interest in the income or capital of the trust to another beneficiary;

•         settle or appoint any part of the corpus of the trust to a new trust with different beneficiaries; and

•         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.

Despite the trustee's powers to amend the trust deed requiring special approval by all unitholders subject to certain restrictions, the mere existence of a power to amend the trust instrument constitutes a defeasible power (Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 at [106]).

Where unanimous approval by all unitholders is required before amendments are made, this will only be relevant to the considerations of the Commissioner for the purposes of determining the likelihood of a defeasance occurring for the purposes of subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936.

Under the trust instrument, the Trustee's powers which may cause Unitholders' interests to be defeasible include, amongst other things, a power to amend the trust instrument; a power to issue further units or issue units of different classes, a power to redeem units and a power to re-classify units from one class to another class.

Prima facie, the Unitholders of the Trust may not be considered to have a vested and indefeasible interest in all of the income and capital of the Trust.

Saving rule in Subsection 272-5(2)

Subsection 272-5(2) of Schedule 2F to the ITAA 1936 provides a case where interest not defeasible (referred to as the 'saving rule' in PCG 2016/16 at paragraphs 18 to 20).

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 unit holder, in the income or capital of the unit trust is defeasible.

The Commissioner considers that the saving ruleis satisfied where further units may be issued or existing units redeemed for an appropriate value including for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (Paragraph 19 of PCG 2016/16).

Partly paid units are capable of satisfying the savings rule. In this regard, the relevant price per unit should be adjusted to reflect the proportion of the paid-up amount (Paragraph 22 of PCG 2016/16).

In the present case, the Trustee can issue further units. For all current/future classes, the initial units are/will be issued at the specified issue price per unit. When further units are issued the price is determined by a formula in according to accounting principles. The issued units are redeemable. For all current/future classes, the redemption price is determined by a formula in according to accounting principles. Where there are any partly paid or unpaid units, the formula is adjusted to ensure Unitholders are treated fairly based on their paid-up proportions.

Therefore, the Trust can rely on the 'saving rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 in relation to the powers to issue further units or to redeem existing units.

However, the other powers that may defeat the Unitholders' interest (powers to amend the trust instrument, re-classify units and forfeiture), means that the Unitholders 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.

Accordingly, the Trust is not a fixed trust under section 272-65 of Schedule 2F to the ITAA 1936.

Question 2

Summary

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

Detailed reasoning

Discretion to treat an interest as a fixed entitlement in subsection 272-5(3)

Where a trust is not a fixed trust, because all of the beneficiaries' interests in the income and capital of the trust are not fixed entitlements, the trustee may request that the Commissioner exercise the discretion to treat beneficiaries' interests as being fixed entitlements.

Subsection 272-5(3) of Schedule 2F to the ITAA 1936 provides that:

If:

(a) a beneficiary with an interest in a share of income that the trust derives from time to time, or of the capital of a trust, does not have a fixed entitlement to the share; and

(b) the Commissioner considers that the beneficiary should be treated as having the fixed entitlement, having regard to:

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

(ii) the likelihood of the entitlement not vesting or the defeasance happening; and

(iii) the nature of the trust;

the beneficiary has the fixed entitlement.

At the National Taxation Liaison Group (NTLG), Trust Consultation sub-group meeting on 28 November 2006, the ATO advised that:

In applying the discretion, the ATO would have regard to what the Office understands was the policy that underlay the provisions at the time they were enacted. The Commissioner would also have to apply the statutory tests having regard to the terms of particular trust deeds and all the relevant circumstances. (Minutes of NTLG meeting - 7 December 2006)

In deciding whether or not to exercise the discretion, the Commissioner must consider the factors prescribed in paragraph 272-5(3)(b):

•         the circumstances in which the interest is capable of not vesting or being defeated

•         the likelihood of the interest not vesting or being defeated, and

•         the nature of the trust.

Each factor is considered below.

Circumstances in which the interest is capable of not vesting or being defeated

The Commissioner will have regard to factors that may affect the defeasance of any beneficiary's interest, including the number of circumstances of potential defeasance, 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.

Under the trust instrument, the circumstances in which the Unitholders' interest is capable of not vesting or being defeated include:

Issue of further units - The Trustee can issue further units for the price determined by a formula in according to accounting principles.

In this circumstance, the savings rule will apply to ensure that the Unitholders' interests are not defeasible and are fixed entitlements.

Redemption of units- The Trustee can redeem issued units for the price determined by a formula in accordance to accounting principles. Where there are any partly paid or unpaid units, the formula is adjusted to ensure Unitholders are treated fairly based on their paid-up proportions.

In this circumstance, the savings rule will apply to ensure that the Unitholders' interests are not defeasible and are fixed entitlements.

Issue of different classes of units- The Trustee can issue units of different classes. All units rank equally and the rights to income and capital of a particular class must be the same. The trust instrument provides that the Unitholders within a specific class will have pre-defined entitlements to income and capital. The Trustee must identify and allocate to all Unitholders within each class, a proportionate share of the net income of the trust estate for the Trust for purposes of section 95 of the ITAA 1936.

The Commissioner considers that a reference to 'units' in the saving rules includes a class of vested interest which can be expressed as being a beneficial interest in a percentage share of the total income or capital of the trust. The interest must also be capable of being measured as a percentage of the total beneficial interest in the income or capital of the trust enjoyed by the holders of that same class of interest in the trust (paragraph 20 of PCG 2016/16).

In this circumstance, the savings rule will apply to ensure that the Unitholders' interests are not defeasible and are fixed entitlements.

Reclassification of units - The Trustee can reclassify units to different classes but it cannot be an arbitrary action. A typical situation is when there is a unit redemption request from a Unitholder, the unit may then be reclassified to a different class. All the rights, characteristics, and entitlement (income and capital) of the separate redemption class remain identical to the original class until the redemption process is completed.

As the rights and entitlements to income and capital remain unchanged on reclassification, this circumstance will weigh towards a favourable exercise of the discretion.

Forfeiture- The units may be issued on terms that the issue price is payable at call. If a call is not paid on or before the due date, the Trustee may forfeit the partly paid units in respect of which amounts are payable with effect from a date set by the Trustee, including all distributions and other moneys payable to the relevant Unitholders.

The trust instrument effectively makes the Unitholders right to the income and capital of the Trust subject to them having fully paid for their units and therefore those rights. The ability of the Trustee to effectively cancelled units that remain unpaid beyond a certain date is not considered to weigh against the exercise of the discretion.

Amendments to trust instrument - The Trustee may by deed amend the trust instrument provided the change will not adversely affect the Unitholders' rights.

This circumstance will weigh towards a favourable exercise of the discretion.

Likelihood of the interest not vesting or the defeasance happening

The Commissioner must form a view as to the probability that the contingency or defeasance will happen. Where the likelihood of the contingency or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion. 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.

There will be future classes of units on issue which will be treated completely separately (unitholders, assets, entitlements, etc).

It is considered that the likelihood is high that some form of defeasance will happen in relation to the units.

Nature of the trust

The ability of the trustee 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 MIS 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 ASX Listing Rules which are enforceable against listed entities and their associates

•                     commitments are made in a PDS, 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.

The Trust is an unlisted registered MIS and is subject to ASIC's regulations including its conduct and disclosure requirements under the Corporations Act. The Trustee does not hold any units in the Trust for its own benefit. The Trust instrument is the primary document governing the legal relationship between the Trustee and the Unitholders.

Other contextual factors

The concept of 'fixed entitlement' is central to the operation of the trust loss rules, the purpose of which is to prevent the transfer of the tax benefit of those losses or deductions. The tax benefits of a loss are transferred when a person who did not bear the economic loss at the time it was incurred by the trust obtains a benefit from the trust being able to deduct the loss (paragraph 36 of PCG 2016/16).

Because the discretion to treat beneficiaries' interests as being a fixed entitlement is part of the trust loss rules, and because of the resultant consequence of being treated as a fixed trust, these contextual factors are also relevant even when the reason for requesting that the Commissioner exercise the discretion is related to one of other legislative provisions including former sections 160APA and 160APHD of the ITAA 1936 (Franking of dividends).

The Trust currently does not have any prior year tax losses. The Trustee has requested that the Commissioner exercise the discretion to treat the Trust as a fixed trust under the trust loss rules in Schedule 2F to the ITAA 1936in order to recoup tax losses carried forwarded.

Conclusion

Having regard to the relevant factors prescribed in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, it is reasonable, on balance, for the Commissioner to treat the Unitholders of the Trust as having a fixed entitlement in the income and capital of the Trust.

Accordingly, Unitholders have a fixed entitlement to their share of the income and capital of the Trust and the Trust is a fixed trust.

Issue 2

Question 3

Summary

As established above in Question 1, the terms of the trust instrument do not provide the Unitholders of the Trust with a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the ITAA 1936.

Detailed reasoning

A taxpayer must be a 'qualified person' to be entitled to a franking credit in respect of a dividend. To be a qualified person, a taxpayer must satisfy the 45-day holding period rule (former section 160APHC of the ITAA 1936). Although, the related payments rule (former section 160APHU of the ITAA 1936) is applied by refence to the repealed provisions of the ITAA 1936, the rules have ongoing application as a result of being 'imported' into the ITAA 1997 regime via the anti-manipulation rules in paragraph 207-145(1)(a) of the ITAA 1997.

In the case of a trust distribution consisting wholly or partly of dividend income, generally the trustee must be a qualified person and, in addition, the beneficiary must be at risk for a prescribed period during the qualification period in respect of the taxpayer's interest in the membership interest from which the dividend income is derived (former section 160APHL of the ITAA 1936).

The effect of deemed long and short positions under former subsections 160APHL(7) and (10) relating to shares held is that unless a beneficiary has a fixed interest constituted by a vested and indefeasible interest in the corpus (capital) of the trust or an exception applies, a beneficiary in a non-widely held trust will typically have a net position of zero, i.e., not be sufficiently at risk, meaning that franking credits will not pass through the trust (see ATO ID 2002/122).

Practice Statement PS LA 2002/11: Issues concerning fixed entitlements to a share on the income or capital of a trust has application to former sections 160APA and 160APHD of the ITAA 1936 but not directly to former section 160APHL (only indirectly via the definition of 'widely held trust' which, in part, relies upon the definition of 'fixed trust' in Schedule 2F to the ITAA 1936).

For the purposes of former section 160APHL of the ITAA 1936, the Trust is in the category of 'all other non-widely held trust' apart from family trusts, deceased estates, and employee share scheme trusts.

A 'fixed interest' in the trust holding is defined in former subsection 160APHL(11) of the ITAA 1936 as 'a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding'.

No vested and indefeasible interest

As previously established in Question 1 that the Unitholders of the Trust have a vested interest in a share of capital of the Trust but that 'vested interest' is not an indefeasible interest in a share of the capital of the Trust, i.e., an interest in a share (or proportion) of all the capital of the trust. (Note: the term 'corpus' and 'capital' are considered to be synonymous for current purposes.)

Therefore, it follows that the Unitholders of the Trust do not have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding.

Question 4

Summary

The Commissioner considers that it is reasonable to exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders of the Trust as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding.

Detailed reasoning

As the Unitholders of the Trust do not have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding pursuant to former subsection 160APHL(11) of the ITAA 1936, the only way that the Unitholders can have such a vested and indefeasible interest is if the Commissioner exercises the discretion in former subsection 160APHL(14).

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

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

Former paragraph 160APHL(14)(a)

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

As discussed above, the Unitholders of the Trust do not have an interest in so much of the corpus of the Trust as is comprised by the trust holding.

Former paragraph 160APHL(14)(b)

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

As discussed above, despite the Unitholders' interest in the corpus (capital) of the Trust, the trust instrument of the Trust contains certain clauses by which the Unitholders' interest in a share of the capital of the Trust may be defeated.

Former paragraph 160APHL(14)(c)

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

These factors are:

(i)            the circumstance in which the interest is capable of not vesting or the defeasance can happen; and

(ii)           the likelihood of the interest not vesting or the defeasance happening; and

(iii)          the nature of the trust; and

(iv)          any other matter the Commissioner thinks relevant.

As previously determined in Question 2, the Commissioner exercises the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the Unitholders of the Trust will be treated as having a fixed entitlement to (being a vested and indefeasible interest in) all of the capital of the Trust.

The factors in former paragraph 160APHL(14)(c) are identical to the factors in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, except for an additional factor in subparagraph (iv) of former paragraph 160APHL(14)(c).

The saving rule in former subsection 160APHL(13) of the ITAA 1936 is identical to the saving rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936.

Therefore, for the reasons given in relation to Issue 1, the Commissioner will exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholder of the Trust as having a vested and indefeasible interest in so much of corpus (capital) of the Trust as is comprised by the trust holding (being the Trustee's ownership of shares).

ATO view documents

Law Administration Practice Statement PSLA 2002/11 Issues concerning fixed entitlements to a share of the income or capital of a trust

Practical Compliance Guidelines PCG 2016/16 Fixed entitlements and fixed trust

Taxation Determination TD 2007/11 Income tax: imputation: franked distributions: qualified persons: does an entity have to be a qualified person within the meaning of Division1A of former Part IIIAA of the Income Tax Assessment Act 1936 to avoid the application of paragraph 207-145(1)(a) and 207-150(1)(a) of the Income Tax Assessment Act 1997 in respect of a franked distribution made directly or indirectly to the entity on or after 1 July 2002?

Other references (non ATO view)

Colonial First State Investments Ltd v Federal Commissioner of Taxation - [2011] FCA 16; (2011) 192 FCR 298; 2011 ATC 20-235;(2011) 81 ATR 772