Edited version of private advice

Authorisation Number: 1052160901871

Date of advice: 15 September 2023

Ruling

Subject: Commissioner's discretion - fixed interests

Question

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

Answer

No

Question 2

If the answer to question 1 is no, will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F the ITAA 1936 to treat the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust?

Answer

Yes.

Question 3

Will the Unit Holders of the Trust have a vested and indefeasible interest in so much of the corpus of the Trust as is compromised by the trust holding, for the purpose of subsection 160APHL(11) of the ITAA 1936?

Answer

No.

Question 4

If the answer to question 3 is no, will the Commissioner exercise the discretion in the former subsection 160APHL(14) of the ITAA 1936 to treat the Unit Holders of the Trust as a vested and indefeasible interest in so much of the corpus of the Trust as is compromised by the trust holding?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

The scheme commenced on:

17 November 2022

Relevant facts and circumstances

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

The Trustee is an Australian resident for tax purposes.

The sole director of the Trustee is an Australian resident for tax purposes.

All Units were issued at the establishment of the Trust on 17 November 2022.

The Trust is not and will not be listed on any approved stock exchange.

The Trust is not and will not be a managed investment scheme.

The Trustee does not hold a financial services licence.

The Trust Deed

The Trust Deed provides:

(a)          All beneficial interests of the Unit Holders in the Income and Capital are vested.

(b)          There may only be one class of Unit, which will be called "Ordinary" class

(c)           All Units have the same beneficial right to receive the Income and Capital of the Trust disregarding:

•         fees or charges imposed by the Trustee in relation to the Unit

•         the Unit Price payable on issue or redemption of the Units; and

•         exposure of the beneficial interest to foreign exchange gains and losses

(d)          The beneficial interest of each Unit Holder in the Income and Capital of the Trust is the proportion that the Units held by the Unit Holder at the relevant time bears to the total Units on the issue at that time; and

(e)          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.

•         fees or charges imposed by the Trustee in relation to the Unit

•         the Unit Price payable on issue or redemption of the Units; and

•         exposure of the beneficial interest to foreign exchange gains and losses

Beneficial interest of Unit Holders

The Trust Deed provides that the beneficial interest in the Trust Fund as existing from time to time is vested:

•                     in the Unit Holders for the time being; and

•                     if there is more than one Unit Holder, in the Unit Holders in proportion to the number of Units each holds disregarding the issue price of those Units.

The Trust Deed also provides that a Unit does not entitle its holder to any particular asset comprised in, or any particular part of the Trust Fund. Also, that each Unit entitles a Unit Holder equally with all other Unit Holders to the beneficial interest in the Trust Fund as an entirety.

Issue of Units

The Trustee, by resolution, may create and issue additional Units at an issue price. However, the Trustee requires written consent of all Unit Holders to create and issue additional Units, at a price and to a person agreed to by all Unit Holders. The price may not be less than the Unit Price.

The Trust Deed prevents the Trustee from owning units in the Trust, however, does not restrict the issue of Units to a director, officer or shareholder of a corporate trustee of the Trust or to a sole director or a sole shareholder of a corporate trustee of the Trust.

Redemption of Units

Any redemption of Units must be at the written request of the Unit Holder. If any Unit is issued or redeemed, then it must be redeemed at the Unit Price as indicated in the Trust Deed, being

(a)          with respect to the issue of a Unit, the net asset value of the Trust Fund at the time of the issue divided by the total number of Units issued prior to the issue of the Unit, and

(b)          With respect to the redemption of a Unit, the net asset value of the Trust Fund divided by the total number of Units issued at the relevant time prior to the redemption of the Unit,

and in this definition net asset value of the Trust Fund means the net assets of the Trust Fund determined according to Australian accounting principles or in such other manner as the Commissioner of Taxation may determine under section 272(3) of Schedule 2F of the Income Tax Assessment Act 1936.

Income and capital

The Unit Holders will be presently entitled to the Income of the Trust Fund for the Financial Year in proportion to the Units registered in their respective names.

The Trustee may in its discretion determine that the whole or any part of the Capital of the Trust Fund be distributed, set aside or applied for the Unit Holders in proportion to the Units registered in their respective names.

Variation of Trust

The Trust Deed may be varied by an ordinary resolution, however in prescribed circumstances a special resolution from 75% or greater of Unit Holders is required.

A variation of the Trust must not prejudicially affect the rights of Unit Holders to participate in the Income or Capital of the Trust Fund under the provisions of the Trust Deed.

Assumptions

Throughout the Ruling Period, it is assumed that:

The Trust will not be terminated.

The Trust will not be listed on any approved stock exchange.

No further amendments will be made to the Deed.

The value of the interests of the Unit Holders will not be materially reduced by the issue of further units.

•                     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 a Unit Holder

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 and in former paragraph 160APHL(13)(d) of the ITAA 1936 - i.e., based on 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 Unit Holders to the income and capital of the Trust.

No arrangement will have been entered into that 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,

•                     the stripping of company profits, manipulation of franking credits or debits or other arrangement involving interests in shares to obtain a tax benefit, or

•                     fraud or evasion.

Relevant legislative provisions

Income Tax Assessment Act 1936 former section 160APHL

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 1936 Schedule 2F subsection 272-5(1)

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

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

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

Income Tax Assessment Act 1997 section 995-1

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'

Reasons for decision

Question 1

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

Summary

The Unit Holders 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 ITAA 1936) because the Trust Deed contains several clauses, which cause beneficiary's interests to be defeasible.

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.

The concept of a 'fixed entitlement' is used to determine whether a trust is a fixed trust, whether a trust's beneficiaries have maintained the requisite proportion of ownership, and for tracing direct and indirect entitlements.

A beneficiary will have a fixed entitlement to a share of the income or capital of the trust if, under a trust instrument, their interest in the income or capital is vested and indefeasible.

An interest is 'vested' if the interest is vested in interest or vested in possession. An interest is vested in possession when it gives its holder a right of present enjoyment, whereas an interest is vested in interest if it gives its holder a present right to future enjoyment.

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 example of a defeasible interest is an interest of a default beneficiary in the income or capital of the trust.

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.

Practical Compliance Guidelines PCG 2016/16 (PCG2016/16) outlines the process for determining if beneficiaries have fixed entitlements to all of the income and capital of a trust. It 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 entitlement. These factors are contained in subsection 272-5(3) of the Schedule 2F to ITAA1936.

As per paragraph 16 of the PCG 2016/16, beneficiary's interests can be defeasible because of the following powers included in the trust deeds:

•                     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.

Moreover, the Commissioner will disregard the following factors which may otherwise result in a different conclusion when working out whether all beneficial interests have the same rights to receive the income and capital of the trust:

•                     fees or charges imposed by the trustee in relation to the beneficial interests

•                     issue price and redemption price of the beneficial interests (provided that the savings rule in subsection 272-5(2) is satisfied as explained below), and

•                     exposure of the beneficial interests to foreign exchange gains and losses.

Application to your circumstances

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

The Trust Deed states that regardless of any other term in the Deed, all beneficial interests of the Unit Holders in the Income and Capital are vested. The clause also grants a vested interest in the income and capital of the trust to Unit Holders in proportion to the Unit hold by each of them. Therefore, the beneficiaries have a vested interest in all the income and capital of the trust under the trust instrument, which is the provided Trust Deed.

However, the Trust Deed contains several clauses, which cause beneficiary's interests to be defeasible, namely:

•                     Issue of new Units

The Trust Deed provides that the Trustee may create and issue additional Units at an issue price and to such Persons as determined by the Trustee.

•                     Redemption of Units

The Trustee may redeem the units at request of a Unit Holder.

•                     Variation of Trust

The Trust Deed may be varied by an ordinary resolution, however in prescribed circumstances a special resolution from 75% or greater of Unit Holders is required.

Given the clauses outlined above and their potential to cause defeasance, the Unit Holders, 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 the ITAA 1936 to treat the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust?

Summary

Having regard to the relevant factors in paragraph 272-5(3)(b) of Schedule 2F the ITAA 1936, it is reasonable for the Commissioner to exercises his discretion to treat the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust.

Detailed reasoning

The Commissioner's discretion in subsection 272-5(3) of Schedule 2F to the ITAA1936 is intended to provide for circumstances where, despite the trust not technically meeting the requirements of a 'fixed trust', the likelihood of the beneficiary's vested interest being defeated is low, and it would be unreasonable in the context of the statutory scheme to treat the beneficiary's interest as not constituting a "fixed entitlement".

Subsection 272-5(3) states:

"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; then

the beneficiary has the fixed entitlement."

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:

•                     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.

Application to your circumstances

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

The Trust Deed provides the Unit Holders 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.

As discussed in Question 1, each Unitholder of the Trust does not, however, have a fixed entitlement to the share of income and capital in the Trust.

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

When examining the circumstancesin 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.

As discussed in Question 1, the Trust Deed contains several clauses which case the Unit Holders interest to be defeasible.

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

When considering the likelihoodof 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 Unit Holders.

•                     In respect of the Ruling period, 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 to 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 the Unit Holder.

-        units will be issued or redeemed for a price determined on a basis that satisfies the 'savings rule' in section 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 Unit Holders to the income and capital of the Trust.

-        in the event the Trust is terminated, all Unit Holders 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 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 Unit Holder'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

At paragraph 34 of PCG 2016/16, 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 Unit Holder'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 Unit Holders to derive income/profits from the investments made by the Trust. At the date of the ruling application, the Trust has two related Unit Holders.

•                     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 dealing on an arm's length basis.

Question 3

Will the Unit Holders of the Trust have a vested and indefeasible interest in so much of the corpus of the Trust as is compromised by the trust holding, for the purpose of former subsection 160APHL(11) of the ITAA 1936?

Summary

The terms of the Trust Deed do not provide the Unit Holders with a vested and indefeasible interest in so much of the corpus of the Trust as is compromised by the trust holding, for the purpose of former subsection 160APHL(11) of the ITAA 1936.

Detailed reasoning

Former subsection 160APHL(11) of the ITAA1936 states that 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.

In Dwight v Commissioner of Taxation 92 ATC 4192, Hill J provided at [4202-4203]:

Estates may be vested in interest or vested in possession, the difference being between a present fixed right of future enjoyment where the estate is said to be vested in interest and a present right of present enjoyment of the right, where the estate is said to be vested in possession:

Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 496 per Griffith CJ, at 501 per Isaacs J.

A person with an interest in remainder, subject to a pre-existing life interest, has an interest which is vested in interest, but being a future interest is not yet vested in possession. That person's interest will vest in possession on the death of the life tenant. In the present context the word 'vested' is used in contradistinction to contingent.

An interest is said to be defeasible where it can be brought to an end and indefeasible where it cannot. Thus, a beneficiary with an interest which is not contingent but which interest may be brought to an end by the exercise of a power of appointment, would be said to have a vested but defeasible interest...

Application to your circumstances

As noted above in Question 1, the Trust Deed contains several clauses that contain a power that may defease the interest of a Unit Holder in the corpus of the Trust.

Therefore, for the same reasons explained in Question 1, the Unit Holders 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.

Question 4

If the answer to question 3 is no, will the Commissioner exercise the discretion in the former subsection 160APHL(14) of the ITAA 1936 to treat the Unit Holders of the Trust as a vested and indefeasible interest in so much of the corpus of the Trust as is compromised by the trust holding?

Summary

After considering relevant factors, the Commissioner considers that it would be reasonable to exercise his discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unit Holders of the Trust as having a vested and indefeasible interest in so much of the corpus of the Trust as is compromised by the trust holding.

Detailed reasoning

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, where it is reasonable to do so based upon the factors prescribed in former paragraph 160APHL(14)(c) of the ITAA 1936, which state:

(14) If:

(a) the taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding; and

(b) apart from this subsection, the interest would not be a vested or indefeasible interest; and

(c) the Commissioner considers that the interest should be treated as being vested and indefeasible, having regard to:

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

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

(iii) the nature of the trust; and

(iv) any other matter the Commissioner thinks relevant;

the Commissioner may determine that the interest is to be taken to be vested and indefeasible

Application to your circumstances

Former paragraph 160APHL(14)(a)

It is accepted that the taxpayer has an interest in so much of the corpus of the Trust as is comprised by the trust holding.

Former paragraph 160APHL(14)(a) of the ITAA 1936 contains a 'threshold' condition that the taxpayer has an interest in the corpus of the Trust.

An interest for these purposes is considered to be a 'vested interest' and not a 'contingent' interest (an interest that does not take effect until certain conditions are met).

Former paragraph 160APHL(14)(b)

As discussed in Question 1, although a Unit Holder's interest in the capital of the Trust is vested, the Trust Deed contains clauses by which a Unit Holder's interest in the share of the capital of the Trust may be defeased.

Former paragraph 160APHL(14)(c)

The first three factors at former paragraph 160APHL(14)(c) are the same as those applying in the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 as discussed above.

Other matters

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

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

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

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

Other matters the Commissioner may consider relevant are found in the PCG 2016/16 in paragraph 34. These were considered in Question 2.

Since it has already been determined, in relation to Question 2, that the Commissioner would likely exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the Unit Holders of the Trust will be treated as having fixed entitlements (being a vested and indefeasible interest in) to all of the capital of the Trust, then a similar conclusion would result when considering the Commissioner's discretion under former subsection 160APHL(14) of the ITAA 1936. There are no other factors identified for the Commissioner to consider in exercising the discretion in former 160APHL(14) of the ITAA 1936.

Therefore, the Commissioner will exercise the discretion under former subsection 160APHL(14) of the ITAA 1936 to treat the Unit Holders as having 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) for the period during the Ruling Period.