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Edited version of private advice
Authorisation Number: 1052193470287
Date of advice: 4 December 2023
Ruling
Subject: Fixed trust
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 of the Income Tax Assessment Act 1997 Act (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Assessment Act 1936 (ITAA 1936) such that the Trust will be a 'fixed trust' under section 272-65 of Schedule 2F to the ITAA 1936 and section 995-1 of the ITAA 1997?
Answer
No
Question 2
If the answer to Question 1 is 'no' will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the 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 interests of the Unit Holders in the capital of the Trust be 'fixed interests' under former subsection 160APHL(10) of the ITAA 1936?
Answer
No
Question 4
If the answer to Question 3 is 'no', will the Commissioner exercise his discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unit Holders 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:
1 July XXXX to 30 June XXXX
Relevant facts and circumstances
The Trust was established pursuant to the terms of the trust deed dated XXXX (Trust Deed).
The Trust conducts investment activities for Family A and Family B in the form of holding shares in Company A with the intention of being able to distribute dividends if and when declared by Company A.
The current trustee of the Trust is Company D (Trustee). The Trustee's directors are Individual A and Individual B. The Trustee has X ordinary shares on issue, X of which are owned by Individual A and X of which are owned by Individual B. This effectively gives Family A and Family B equal control over the Trustee.
The Trustee is not a trustee of any other trust.
The Trustee is not a holder of an Australian Financial Services license and is not subject to any regulation by the Australian Prudential Regulation Authority (APRA) or any other Australian Federal Government authority.
X ordinary units (Ordinary Units), at $1 per unit, were issued by the Trustee on XXXX. The original unit holders were:
• Company B as trustee for Trust A held X units;
• Individual B as trustee for Trust B held X units, and
• Individual C as trustee for Trust C held X units.
On XXXX, the X units held by the trustee for Trust C, were redeemed and sold in equal proportion to the trustee for Trust A, and the trustee for Trust B (to substantively effect the sale and purchase of units from the Trust C to the Trusts A and B).
The current unit holdings are:
• Company B as trustee for Trust A holds X units, and
• Individual B as trustee for Trust B holds X units.
(collectively described as the Unit Holders).
All entities are Australian residents for income tax purposes.
The trust deed
The salient terms of the Trust Deed are as follows:
Schedule X relates to Original Unit Holders, their Units, Contributions, Unit price and total Unit Holder contribution.
Clause X deals with assets held on trust:
X. Declaration of Trust
X. The Trustees hereby declare that it will henceforth stand possessed of the Trust Fund and the income thereof upon the trusts and with and subject to the powers and provisions expressed in this Deed concerning the same. The Schedules to this Deed form part of this Deed and the provisions in the Schedules override the other provisions of this Deed, to the extent of any inconsistency.
Relevantly, Clause X defines, among other things, the following terms:
Trust Fund means the said Original Unit Holders' Contribution all moneys paid to and accepted by the Trustees upon the issue of Units pursuant to Clause X hereof the accumulations of income hereafter directed or empowered to be made all accretions to the Trust Fund and the investments and property from time to time representing the said money and accumulations or any part or parts thereof respectively.
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Special Resolution means a resolution passed as special business at a duly convened general meeting by such majority of the votes cast by those present and voting on the resolution as is set out in Item X of Schedule X and if a majority is not set out therein by a three quarters majority. [Item X of Schedule X provides that Number of Votes for Special Resolution pursuant to Clause X (If no contrary provision made Clause X specifies three quarter majority).]
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Unit means an undivided part or share in the Trust Fund having the characteristics hereafter provided
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Unit Holder means the person for the time being registered under the provisions of this Deed as the holder of a Unit and includes persons jointly so registered.
Clauses X and X deal with units - amongst other things, the issue, redemption, transfer and transmission of units, rights attached to units, and reflects that the beneficial interest of the Trust Fund is to be divided into units:
X. The Units
X. The beneficial interest in the Trust Fund as originally constituted and as existing from time to time shall be vested in the Unit Holders for the time being.
X. Each person who becomes registered as a Unit Holder shall be deemed to have agreed to become a party to this Deed and any supplemental deed and shall be entitled to the benefit of and shall be bound by the terms and conditions of this Deed and of any supplemental deed.
X. Each Unit shall entitle the registered holder thereof together with the registered holders of all other Units to the beneficial interest in the Trust Fund (in proportion to their respective number of units and subject to any special rights or restrictions provided in any of the Schedules in relation to Units of any class) as an entirety but subject thereto shall not entitle a Unit Holder to any particular security or investment comprised in the Trust Fund or any part thereof and no Unit Holder shall be entitled to the transfer to him of any property comprised in the Trust Fund.
X. The Trust Fund as originally constituted by the Original Unit Holders' Contribution shall be divided into Units each of the value set out in Item X of Schedule X, which Units shall be held by the Original Unit Holders the names and addresses of whom are set out in Item X of Schedule X.
X. The Original Unit Holders shall hold the number of Units set out opposite their names in Item X of Schedule X respectively, for which they have contributed the respective sums also set out there.
X. The Trustees shall have power from time to time (subject to Clause X) to issue such additional Units of any class at their market price as the Trustee shall think fit provided that no Units shall be issued unless the issue is approved by a unanimous vote of all the Unit Holders.
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X. The Trustees may at any time cause a valuation of the property and assets of the Trust Fund to be made by competent valuers or experts as the Trustees may select.
X. The Trustees may at any time sell call in and convert into money or cause to be sold any investments and property constituting the whole or part of the Trust Fund and apply the net proceeds of such sale and conversion in or towards return of capital or redemption of the Units or any one or more of the Units by dividing such net proceeds amongst the Unit Holders in proportion to the respective numbers of the Units at the date of distribution. The Trustees may with the unanimous consent of all the Unit Holders redeem any or more of the Units for their market price.
X. Market price for the purpose of this clause means the market price of a Unit ascertained on the basis of the net market value of the Trust Fund determined in accordance with Australian accounting principles.
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X. Transfer and Transmission of Units
X. A person entitled to Units by transmission shall be entitled to receive and may give a good discharge for all moneys payable in respect of the Units but except as otherwise provided by this Deed shall not be entitled to any of the rights or privileges of a Unit Holder unless and until he shall become registered in respect of the Units.
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Schedules X and X provide that the Trustee may issue Special Units with the unanimous resolution of ordinary Unit Holders, to any person or entity as it sees fit and at such price and on such terms as it sees fit, and set out the rights, set out the rights, privileges and restrictions attached to Ordinary Units and Special Units. Relevantly, Item X of Schedule X provides that the Trustee has the capacity to issue Special Units to the Original Unit Holders or to any other person in the future, and that the provisions contained in Schedule X shall override the other provisions of this deed to the extent of any inconsistency.
Clause X requires the unit subscription price to be paid upfront at settlement before the issue of units. Therefore, the issue of forfeiture for non-payment is not applicable.
Clause X deals with the duration and the termination of the Trust:
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X. The Trust may be terminated at any time before the Vesting Day if so resolved by a Special Resolution of the Unit Holders and such termination shall take effect from a date to be nominated in the resolution.
X. Upon the termination of the Trust but subject to the provisions of paragraph (X) of this clause and subject to any special rights or restrictions provided in any of the Schedules in relation to Units of any class the Trustees shall proceed as follows:
(X) the Trustees shall unless otherwise authorised by a Special Resolution of the Unit Holders sell by public auction to the highest bidder all property and investments constituting the Trust Fund. Any Unit Holder may bid at the auction;
(X) the Trustees shall from time to time and as soon as is practicable distribute the cash available in the Trust Fund to Unit Holders proportionally to their holdings until the assets of the Trust Fund have been completely turned into cash and distributed to Unit Holders provided always that the Trustees shall retain full provision for all costs disbursements commissions brokerage fees expenses claims and advertising costs and demands incurred or expected by the Trustees in the liquidation of the Trust;
(X) notwithstanding anything herein contained the Trustees may in their discretion at the request of any Unit Holder transfer or convey to such Unit Holder any property or investment or part thereof or share therein in specie in satisfaction of or part satisfaction of the entitlement of the Unit Holder on the termination of the Trust;
(X) every distribution under the provisions of sub-clause (X) or (X) of this clause shall be made only against production of the relevant Unit Certificates accompanied by a request for payment in such form as the Trustees require. For any interim distribution the Trustees shall endorse Certificates with a notice of the payment made and for the final distribution Certificates shall be surrendered to the Trustees.
X. Notwithstanding anything herein contained (but subject always to any special rights or restrictions provided in any of the Schedules in relation to Units of any class) the Trustees may at any time and from time to time before termination of the Trust with the unanimous consent of all the Unit Holders affected apply any property or investment or part thereof or share therein or cash in satisfaction of the interest in the Trust Fund conferred by the holding of a number of Units of any class to be determined by the Trustees.
X. Each such Unit shall be satisfied by application of such property or payment of such sum for each such Unit as in the opinion of the Trustees represents the reasonable value thereof.
X. Any sum applied in satisfaction of Units of any class shall (subject to any special rights or restrictions provided in any of the Schedules in relation to Units of any class) be paid to the Holders of Units of that class in proportion to the number of such Units held be them respectively.
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Clause X provides for the determination and classification of the 'Income' of the Trust and distribution and accumulation of income:
X. (Collect income) The Trustees shall collect receive and get in all dividends interest rents and other income from the investments of the Trust Fund.
X. (Pay costs) The Trustees shall pay out of the gross income of the Trust Fund, all costs and disbursements, commissions, fees, taxes (including land tax and income tax) management charges and other proper outgoings in respect of the investments and administration of the Trust Fund.
X. (Pay net income) Subject to any special rights or restrictions provided in any of the Schedules in relation to Units of any class the Trustees shall in each Accounting Period until the Vesting Day or the date of the termination of the Trust whichever shall first occur pay apply or set aside the net income of the Trust Fund of that Accounting Period for or for the benefit of the Unit Holders in proportion (but in respect of Special Units (if any) not necessarily in proportion) to the number of Units of which they are respectively registered as Holders at the end of the Accounting Period.
X. (Accumulations) Notwithstanding anything contained in sub-clause X of this clause the Trustees may with the consent of the holders of a majority of the• issued voting Units and subject to any law in force at the time in relation to this Deed so permitting accumulate all or any part of the income arisen or arising during such period and such accumulation shall be dealt with as an accretion to the Trust Fund but so that the Trustees may at any time or times resort to all such accumulations and pay or apply the whole or any part or parts thereof as if they were income of the Trust Fund.
X. (Interim distributions) Subject to any special rights or restrictions provided in any of the Schedules in relation to Units of any class the Trustees may make one or more interim distributions of income during any Accounting Period such interim distributions to be made to the Unit Holders in proportion (but in respect of Special Units (if any) not necessarily in proportion) to the number of Units of which they are respectively registered at the time.
X. (Determinations) A determination by the Trustees to pay apply or set aside any amount of the net income of the Trust for or for the benefit of any Unit Holder in respect of an Accounting Period (and the implementation of such determination) may be made by:
(X) resolution (either orally or in writing) and upon that determination or resolution being made, it shall be irrevocable and the beneficiary will have an immediate vested indefeasible interest in and to that part of the income so paid, applied or set aside for the financial year to which the determination or resolution relates;
(X) placing such amount to the credit of the Unit Holder in the books of the Trust Fund;
(X) drawing a cheque in respect of such amount made payable to or for the credit or benefit of the Unit Holders;
(X) paying same in cash to or for the benefit of the Unit Holder; or
(X) issuing additional Units to the Unit Holder as provided in Clause X hereof.
X. (Determinations exceed net income) If at the end of any Accounting Period the amounts in respect of which determinations have been made pursuant to sub-clause X exceed the net income of the Trust Fund for the Accounting Period, the amount of the excess shall in the first place be deducted from the amounts which the Trustees have determined to accumulate and in the second place should any deficiency remain the Trustees shall be deemed to have applied the capital of the Trust Fund the value of which shall thereupon be adjusted accordingly.
X. (If no determination made) The Trustees shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectively made at or prior to foregoing provisions of this clause (subject to any special rights or restrictions provided in any of the Schedules in relation to Units of any class) in trust for the holders of Units in proportion to the number of Units of which they are respectively registered as holders on the last day of such Accounting Period and any amount so held for a particular Unit Holder shall not form part of the Trust Fund, instead being set aside and held by the Trustees as a separate trust fund for that Unit Holder. In that case, the Trustees, prior to paying it to the Unit Holder, shall have the powers to invest, apply or deal with all or any part of it (or the income from it) in any way authorized by this deed in reference to the Trust Fund.
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X. (Access capital) The Trustees may with the sanction of a Special Resolution at any time or times and from time to time before the date of the termination of the Trust out of the capital of the Trust Fund raise any sum or sums and pay the same to Unit Holders or any class of Unit Holders in proportion (but in respect of Special Units if any not necessarily in proportion) to the Units registered in their respective names at the date of such resolution for their own use and benefit in addition to any income to which the said Unit Holders may from time to time be entitled.
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X. (Treatment of profits, gains etc. as income, and allocation of expenses, losses etc) The Trustees may in their discretion determine to:
(X) treat any profit, receipt or gain of any sort (whether in the nature of capital or income), which is characterized as income pursuant to the Act, as income of the Trust Fund in any one or more categories; and
(X) allocate any expense, payment, outgoing or loss of the Trust (including allowable deductions pursuant to the Act and capital losses calculated pursuant to Section 160 Z(1)(b) of the Act) against (or deduct them from) income or capital of the Trust in any one or more categories
X. (Distribution of income or capital of a category) The Trustees may in their discretion make a resolution or determination to distribute or accumulate (as applicable) net income in respect of an Accounting Period or capital so that it separately deals with all or part of the net income or capital of a category, and all or part of that net income or capital may be specifically or separately allocated and identified in a distribution to a beneficiary or in any accumulation.
X. (Net capital gain treated as income of the Trust Fund) Where the Trustees have determined to treat a net capital gain (as defined in the Act) as income of the Trust Fund, they may in their discretion distinguish that income from other income of the Trust Fund and deal with it in a different manner from the other income of the Trust Fund and may distribute it to the Unit Holders or any one or more of them as the Trustees determine pursuant to the Trustees' powers.
X. (Effect of allocation on categories of income) If the Trustees do not exercise their discretion as provided in the previous sub clause, outgoings and expenses of the Trust Fund for an Accounting Period must be allocated firstly against and deducted from income which is not income of a category. To the extent to which that income is insufficient to absorb all expenses and outgoings, then the part which is not so absorbed must be allocated against any income of a category to which a tax credit, rebate or exemption does not attach and thereafter against the remaining income.
X. (Distributed income or capital retains categorization) Income or capital which has been categorized by the Trustees, retains that categorization despite passing to or being received by a beneficiary and despite the beneficiary becoming presently entitled to it.
Clause X sets out the powers of the Trustee - which include:
X. Notwithstanding the Trusts hereinbefore declared and in addition to and without limiting the power and discretion vested in the Trustees by law the Trustees shall have the power to deal with the Trust Fund and attend to matters and act in such manner for the purpose or benefit of the Trust as if the Trustees were the absolute and beneficial owners of the Trust Fund and without limiting the generality of the foregoing shall have the following powers and discretions which may be exercised by the Trustees at any time and from time to time in the Trustees' discretion
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(X) to sell or otherwise dispose of any real or personal property or a share or interest therein for the time being forming the whole or part of the Trust Fund and to join with any other co-owner or co owners or partner or partners in selling or otherwise disposing of any of the real or personal property by public auction tender or private treaty at whatever price or prices and whether for cash or on terms and generally upon whatever terms and conditions the Trustees think fit and to grant options for sale or disposition of any real or personal property.
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(X) to appropriate (and Section 30(1)(k) of the Trustees Act 1962 shall not be applicable) any part or parts of the Trust Fund in its then actual condition or state of investment in or towards the satisfaction of any share or shares therein whether vested or contingent to which any person is or may be entitled with power for that purpose to conclusively determine the value of the Trust Fund or any part of parts thereof in whatever manner the Trustees think fit and an appropriation made pursuant to this paragraph shall bind all persons interested in the Trust Fund
Clause X provides for when the Trust Deed may be amended:
X. Variation of Trusts
X. The Trustees may at any time and from time to time by deed vary all or any of the trusts provisions terms arid conditions contained in this Deed (as varied from time to time by any previous deed) PROVIDED THAT the rule known as the Rule against Perpetuities is not thereby infringed and provided that any such variations:
(X) shall not be in favour of or result in any benefit to the Trustees or any of them;
(X) insofar as it creates new beneficial interests in the Trust Fund or any part thereof shall be for the benefit of all or one or more of the Unit Holders or in the case of a Unit Holder which holds its Units in a trust capacity for the benefit of all or anyone or more of the persons or entities on whose behalf such units are held or for such persons or entities as a whole and in the case of a Unit Holder who is a natural person shall be for the benefit of any one or more persons born or unborn being lineal descendants of whatever degree (or the spouse of any lineal descendant) of any grandparent of such Unit Holders; and
(X) shall not affect the beneficial entitlement to any amount set aside for any Unit Holder prior to the variation.
X. A Deed of variation made pursuant to this clause shall not take effect unless and until it is ratified within sixty (60) days thereafter by unanimous resolution of all the Unit Holders and if it is not so ratified within that period it shall be null and void.
X. In this clause "vary" includes revoke add to or amend and "variation" has a corresponding meaning.
X. These presents shall not be capable of being revoked added to or varied otherwise than as expressly herein provided.
Amendments to the trust deed
By Deed of Removal and Appointment of Trustee dated XXXX Company D was appointed as the trustee of the Trust, to replace the previous trustee.
By Deed of Variation dated XXXX, changes were made to the Trust Deed for the purpose of conveying that 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 of the ITAA 1997 and subsection 272-5(1) of Schedule 2F of the ITAA 1936.
Relevantly, the amendments:
• Remove the Trustee's (limited unilateral) power under clause X of the Trust Deed to redeem units from the Unit Holders. Pursuant to new Clause X, Units cannot be redeemed without the unanimous consent of the Unit Holders. If the Unit Holders unanimously consent to the Trustee redeeming any Units, the net proceeds shall be distributed amongst the Unit Holders in proportion to their respective numbers of the Units at the date of distribution.
• Remove the Trustee's discretion under clauses X to clause X of the Trust Deed to identify, segregate and distribute income streams to the Unit Holders. The Trustee retains the discretion to accumulate income and capital.
• Remove the Trustee's discretion under clause X to classify receipts as income or capital.
• Remove the Trustee's power to issue Special units.
• Alter quorum and special resolution requirements as follows:
X Variation to Unit holder Quorum Requirements
The Trustee varies Schedule X of the Trust Deed by
(a) deleting the words in Item X of Schedule X of the Trust Deed and replacing it with the following
- Number of Members and Units Held for Quorum pursuant to clause X (if no contrary provision made, clause X specifies at least 2 Unit Holders holding at least 40% of the voting Units)
- IF there are 3 or more Unit Holders, then 3 Unit Holders holding a total of at least 75% of the Ordinary Units, or
- IF there are 2 Unit Holders or less, then ALL Members must be present
(b) deleting the words in Item X of Schedule X of the Trust Deed and replacing it with the following
- Number of Votes for Special Resolution pursuant to clause X (If no contrary provision made Clause X specifies three quarter majority)
- Must be a unanimous decision of 100% of the Unit Holders.
No other amendments have been made to the Trust Deed.
Associations
There are no associations between any entity engaged to perform valuation services and the Trustee and Unit Holders.
There are no associations between the Unit Holders.
All transactions between all entities are conducted at arm's length.
Trust investments
The Trust's only investment are the X ordinary shares that it holds in Company A.
The Trustee is the sole shareholder in Company A
The Trustee acquired the shares for market value.
Company A has not declared any dividends since the Trustee commenced holdings shares in Company A but is proposing to distribute fully franked dividends of $X sometime between XXXX and XXXX and at regular annual intervals thereafter.
100% of the dividends and attached imputation credits will flow to the Trustee as Company A's sole shareholder.
Trust distributions
The Trust will distribute the franked dividends and attached imputation credits to Family A and Family B in proportion to their Unit Holdings in the Trust.
There are family trust elections in place for Trust A and Trust B in respect of the XXXX income year (starting XXXX with Individual A as the specified individual for Trust A and Individual B as the specified individual for Trust B). Trust distributions will only be made to the relevant family groups.
Losses
There are no carried forward tax losses and no expected current year tax losses.
There are no expected bad debts or debt/equity swap losses.
The Trustee has self-assessed that the Trust meets the safe harbour conditions in Item 6 of paragraph 54 in Practical Compliance Guidelines PCG 2016/16 Fixed entitlements and fixed trusts for the reasons provided:
• it has a trust instrument (the Trust Deed and variations)
• it is not a discretionary trust or a trust with default income or capital beneficiaries as no beneficial interest in the income or capital 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 donee)
• the Trustee has never exercised a power capable of defeating a beneficiary's (that is, Unit Holder's) interest to defeat a Unit Holder's interest in the income or capital of the trust
• all beneficial interests in the income and capital of the Trust are vested
• 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
• all beneficiaries (that is, Unit Holders) have the same rights to receive the income and capital of the Trust
• the Trustee will only issue and redeem units for market value or other values approximating net asset value (satisfying the 'savings rule' in subsection 272-5(2) in Schedule 2F of the ITAA 1936)
• the Trustee is not able to compulsorily redeem units
• the Trust Deed can only be amended with the unanimous approval of the Unit Holders, and
• an arrangement has not been entered into which would result in section 272-35 in Schedule 2F of the ITAA 1936 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
The amendments to the Trust Deed are valid.
Throughout the Ruling Period, no powers have been or will be exercised to defeat the interest of any Unit Holder, with respect to their units (Ordinary Units) including:
• There will only be one class of units - that is, no units of different classes will be issued.
• No units will be reclassified. The rights attached to units already in existence will not be modified.
• Units will only be transferred or redeemed at the request of a Unit Holder.
• 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 - that is, on the basis of the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16.
• No units will be issued or redeemed at a discount.
• The Trustee will ensure that units will only be transferred or transmitted for market value.
• No partly paid units will be issued.
• No streaming of income or capital will occur.
• The Trustee will not seek to amend or vary the Trust Deed to defeat the interest or change the fixed entitlements of Unit Holders to the income and capital of the Trust.
• 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 equivalent to their proportion of unitholding.
Throughout the Ruling Period, no arrangement has been or will be entered into which would result in section 272-35 in Schedule 2F of the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or in fraud or evasion.
Throughout the Ruling Period, in addition to an undertaking that no powers have been or will be exercised to defeat the interest of any Unit Holder (as set out above), no arrangement has been or will be entered into which would result in:
• a 'related payment' under former section 160APHN of the ITAA 1936
• a Unit Holder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee of the Trust (refer to former section 160APHM of the ITAA 1936)
• a Unit Holder not being sufficiently exposed to the risk of loss or opportunity for gain in respect of the units in the Trusta
• the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936
• any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying, or
• fraud or evasion.
The Ruling period is XXXX to XXXX.
Relevant legislative provisions
Income Tax Assessment Act 1936 former section 160APHD
Income Tax Assessment Act 1936 former subsection 160APHL(10)
Income Tax Assessment Act 1936 subsection 160APHL(14)
Income Tax Assessment Act 1936 former section 160APHP
Income Tax Assessment Act 1936 subsection 272-5(1) of Schedule 2F
Income Tax Assessment Act 1936 subsection 272-5(3) of Schedule 2F
Income Tax Assessment Act 1936 section 272-65 of Schedule 2F
Income Tax Assessment Act 1997 section 995-1
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 of the Income Tax Assessment Act 1997 Act (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Assessment Act 1936 (ITAA 1936) such that the Trust will be a 'fixed trust' under section 272-65 of Schedule 2F to the ITAA 1936 and section 995-1 of the ITAA 1997?
Summary
The Unit Holders as beneficiaries of the Trust do not have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the ITAA 1997 and subsection 272-5(1) of Schedule 2F to the ITAA 1936.
Detailed reasoning
The 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
(b) the units are redeemable or further units are able to be issued
(c) 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) 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.
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.
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 (and variations).
It is accepted that the Trust Deed provides the Unit Holders with a vested interest in the income and capital of the Trust. Relevantly, Clause X provides that Unit Holders will be entitled to income and capital based on their pro rata share of units held in the Trust and Clause X provides that on termination of the trust the Unit Holders are entitled to their proportionate share of the assets of the Trust.
However, there are various clauses in the Trust Deed relating to the Trustee's discretions that may cause a beneficiary's interests to be defeasible - including the power to:
• Issue new units (under Clause X).
• Vary the Trust Deed (Clause X).
Therefore, 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 to the ITAA 1936 to deem the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust?
Summary
As the Unit Holders in the Trust do not have vested and indefeasible interests, pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, subsection 272-5(3) of Schedule 2F to the ITAA 1936 may be considered. The Commissioner considers that it is reasonable to exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the Unit Holders as beneficiaries of the Trust as having fixed entitlements to all of the income and capital of the Trust.
Detailed reasoning
A finding that a trust is a fixed trust for Schedule 2F of the ITAA 1936 has broad implications (that is, it applies for income tax purposes generally).
Where all of the beneficiaries' interests in the corpus of the trust are not fixed interests, the trustee may request that the Commissioner exercise the discretion to treat beneficiaries' interests as being vested and indefeasible.
A trust can both rely on the savings rule in relation to some trustee powers (the power to issue or redeem units), and request that the Commissioner exercise the discretion in the context of other powers that may defeat a beneficiary's interest (such as in relation to a power to amend).
'Savings rule' - subsection 272-5(2) of Schedule 2F to the ITAA 1936:
As explained above, the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 explains certain conditions where units that are redeemable will not be considered defeasible.
Paragraph 18 of PCG 2016/16 states 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 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 PCG 2016/16):
• 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 - deemed fixed entitlement:
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 unitholder agreements, product disclosure statements or other documents with legal consequences that the trustee or manager will not exercise a power capable of defeating a beneficiary's interest at all, or in a way that is adverse to the rights of beneficiaries to receive the income and capital of the trust
• all beneficiaries have the same rights to receive the income and capital of the trust
• the trust instrument can only be amended with the unanimous (100%) approval of all the beneficiaries
• although the trust instrument can be amended without the unanimous approval of beneficiaries, the approval percentage calculated on the current interest or unit holdings of beneficiaries effectively means that all beneficiaries must approve any amendment (for example, where the approval of 75% of unitholders is required to make the amendment and the smallest unit holding is more than 25% of the units)
• the trust instrument has been amended in accordance with section 601GC of the Corporations Act 2001 (so as to assist with the efficient administration of the trust) but no beneficial interests in the income and capital of the trust are adversely affected
• the beneficiaries whose rights to receive the income and capital of the trust have been adversely affected by the exercise of a power capable of defeating a beneficiary's interest have explicitly consented to that specific act (such as upon the redemption of the interests of an employee not covered by the savings rule upon the cessation of employment)
• the trustee or manager deals with the beneficiaries of the trust on an arm's length basis
• the trust is governed by a foreign law that is similar to Chapter 5C of the Corporations Act 2001, and
• the trust would satisfy the basic and specific conditions (as applicable to the type of trust) for access to a safe harbour.
Factors adverse to the exercise of the Commissioner's discretion are listed in paragraph 56 of PCG 2016/16 and include:
The Commissioner regards the following factors unfavourably when deciding whether to exercise the discretion:
• a trustee or manager exercises a power to defeat beneficiaries' interests in the income or capital of the trust, however:
- the nature of the power that is exercised will be important, for example, compulsorily redeeming units where a unitholder's stake is less than a minimum specified in the trust instrument, and the unitholder receives the redemption price of those units, is unlikely to preclude the exercise of the discretion
- where external factors (such as those in the Global Financial Crisis) temporarily affect the ability of the trustee or manager to fund distributions or redemptions, this is unlikely to preclude the exercise of the discretion (for example, a temporary wholesale freezing or deferral of interests)
• there are significantly different beneficiaries of the trust in an income year for which an entity seeks to have a fixed entitlement, than the beneficiaries of the trust in the income year(s) in which the trust made a tax loss, or incurred a bad debt deduction or debt/equity swap deduction
• an arrangement has been entered into which would result in:
(a) section 272-35 having application
(b) the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or
(c) fraud or evasion.
Losses
The concept of a 'fixed entitlement' was originally introduced in the context of the trust loss measures and should primarily be interpreted in that context (in the absence of any express provision or explanatory guidance that indicates a different context is relevant). The trust loss measures are an important integrity measure, removing a structural flaw in the tax system. The concept of a 'fixed entitlement' is fundamental to the structure and effectiveness of the trust loss measures.
The EM to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 states (at paragraph 13.13) in respect of the Commissioner's power in subsection 272-5(3) of Schedule 2F to the ITAA 1936 that:
This provision is intended to provide for special circumstances where there is a low likelihood of a beneficiary's vested interest being taken away or defeated and, having regard to the scheme of the trusts loss provisions to prevent the transfer of the tax benefit of losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement.
This indicates that when looking at the facts of a case, in the context of the criteria listed in subsection 272-5(3) of Schedule 2F to the ITAA 1936, unless the context of the provision for which fixed entitlement is required provides otherwise, the Commissioner should always have regard to whether the absence of a fixed entitlement, in these circumstances, could result in the trafficking (or transfer) of the tax benefit of any tax losses.
Application to your circumstances
Paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936
The Trust Deed (as amended) 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.
Each Unit Holder of the Trust does not, however, have a fixed entitlement to the share of income and capital in the Trust.
As a result, paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 is satisfied.
Subparagraph 272-5(3)(b)(i) of Schedule 2F to the ITAA 1936
Paragraphs 29 and 30 of PCG 2012/16 state that 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.
Application to your circumstances
In relation to the circumstances in which the entitlement is capable of not vesting or the defeasance happening, the following factors are relevant:
• Issue of units - During the Ruling Period, only one class of unit has been or will be issued and the units have been or will only be issued for a price determined on the basis of the Net Fund Value or Net Asset Value (according to Australian accounting principles). As such the saving rule in paragraph 272-5(2)(d) would be satisfied.
• Redemption of units - The Trustee may redeem units only with consent of the Unit Holders. 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 amendments ensure that the Trust Deed can only be amended with the majority (in this case unanimous) approval of the Unit Holders. With the exception of the amendments no other amendments have been made to the Trust Deed.
The Commissioner accepts that the assumptions mitigate the circumstances in which the beneficiaries' interests in the income and capital of the Trust can be defeated.
Subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936
Paragraphs 31 to 33 of PCG 2016/16 state that:
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.
Application to your circumstances
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 will be issued.
- No units will be reclassified. The rights attached to units already in existence will not be modified.
- Units will only be transferred or redeemed at the request of a 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 - that is, 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 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 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
Paragraph 34 of PCG 2016/16, explains that:
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.
Application to your circumstances
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 unrelated Unit Holders.
• The Trustee is not required to hold an Australian Financial Services License in order to act as Trustee of this Trust and therefore not subject to Australian financial services regulations.
• The parties are dealing on an arm's length basis.
The Commissioner accepts that in these circumstances the ability of the Trustee to adversely affect the interests of beneficiaries is limited - the parties are unrelated parties dealing on an arm's length basis.
Schedule 2F to the ITAA 1936 and tax losses
In relation to the circumstances pertaining to the existence of a tax loss it is noted that:
• At the date of the ruling application, there are not losses and the Trustee does not forecast a tax loss for the Trust.
• No arrangements have been or will be entered into that would result in section 272-35 in Schedule 2F of the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or in fraud or evasion.
• If there are further units to be issued and/or redeemed, the Trustee will do so satisfying the saving rule in paragraph 272-5(2)(b) of Schedule 2F to the ITAA 1936.
Conclusion
It is accepted that based on the 'trust instrument' of the Trust that for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the beneficiaries of the Trust do not have fixed entitlements to any of the income and capital of the Trust.
However, pursuant to paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, and after having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) of Schedule 2F to the ITAA 1936 and submissions from the applicant, the Commissioner considers it is appropriate that the Unit Holders of the Trust should be treated as having fixed entitlements to all of the income and capital of the Trust for the relevant income years.
In summary, as:
• the trust instrument (being the Trust Deed and variations) contains powers which will not be used to defease the interests of the beneficiaries in the income or capital of the Trust - that is, the circumstances in which the entitlement is capable of not vesting or a defeasance happening are limited having regard to the Assumptions included
• the 'nature of the trust' is a unit trust established for the purposes of carrying out investment
• the likelihood of the entitlement not vesting or a defeasance is low, and
• there is little likelihood that a tax benefit of the Trust will be transferred (the opportunity to traffic any tax loss appears to be limited)
it is 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 Unit Holders of the Trust as having a fixed entitlement to their share of the income and capital of the Trust for the relevant income years.
Question 3
Will the interests of the Unit Holders in the capital of the Trust be 'fixed interests' under former subsection 160APHL(10) of the ITAA 1936?
Summary
The terms of the Trust Deed (as amended) do not provide the Unit Holders with a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the ITAA 1936.
Detailed reasoning
In order to be eligible for the franking credit tax offset, beneficiaries are required to have fixed interests in the corpus of a trust. This requirement derives from the holding period rule and related payments rules.
Broadly, shares acquired by a discretionary trusts (non-fixed trust) would fail the 45 day rule. Former subsection 160APHL(10) of the ITAA 1936 provides that where the trustee has made a family trust election, there is no deemed short position - this means that in the absence of any positions taken by the trustee to reduce the risk of holding the shares, the only position of the beneficiary would normally be a deemed long position under former subsection 160APHL(7) and consequently franking benefits can pass through to the beneficiaries in this situation:
160APHL(10) Additional positions of the taxpayer.
If:
(a) the trust is not a family trust within the meaning of Schedule 2F; and
(b) the trust is not a trust for the purposes of this Act merely because of the reference to executors and administrators in paragraph (a) of the definition of trustee in subsection 6(1); and
(c) the taxpayer's interest in the relevant share or the relevant shares is not an employee share scheme security;
the taxpayer has, in addition to any other long and short positions (including the positions that the taxpayer is taken to have under subsection (8)) in relation to the taxpayer's interest in the relevant share or relevant shares, a short position equal to the taxpayer's long position under subsection (7) and a long position equal to so much of the taxpayer's interest in the trust holding as is a fixed interest.
160APHL(11) A vested and indefeasible interest constitutes a fixed interest.
For the purposes of subsection (10), the taxpayer's interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding.
Relevantly, a unit trust with unrelated family investors would not be in the position to make the requisite family trust elections to facilitate the passage of imputation credits to the beneficiaries of the trust.
Application to your circumstances
The Trust, being a unit trust, is unable to make family trust elections to enable imputation credits attached to the franked dividends to flow through to the Unit Holders.
Question 4
If the answer to Question 3 is 'no', will the Commissioner exercise his discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unit Holders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding?
Summary
The Commissioner considers that it would be reasonable to exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unit Holders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding for the Ruling Period.
Detailed reasoning
The discretion in former subsection 160APHL(14) of the ITAA 1936 is relevant where a trustee distributes a franked distribution to beneficiaries.
Where beneficiaries do not have a vested and indefeasible interest in so much of the corpus (capital) of the trust as is comprised by the trust holding (being the trustee's ownership of shares) pursuant to former subsection 160APHL(11) of the ITAA 1936, they can only have such a vested and indefeasible interest if the Commissioner exercises the discretion in former subsection 160APHL(14).
Pursuant to former subsection 160APHL(14) of the ITAA 1936, where beneficiaries do not have a fixed interest, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed interest where it is reasonable to do so based upon the factors prescribed in paragraph 160APHL(14)(c) of the ITAA 1936 - the Commissioner may treat a beneficiary as having a fixed interest (in cases where in fact beneficiaries do not have a fixed interest) having regard to:
(a) the circumstances in which the entitlement is capable of not vesting or the defeasance can happen
(b) the likelihood of the entitlement not vesting or the defeasance happening
(c) the nature of the trust, and
(d) any other matter the Commissioner thinks relevant.
The first three factors are the same as those applying in the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem a fixed entitlement to the income and capital of a trust, as discussed above.
Any other matter the Commissioner thinks relevant
The discretion in former subsection 160APHL(14) of the ITAA 1936 relates to the utilisation of a tax offset for a share of the franking credit on a franked distribution.
It was introduced as a part of integrity measures aimed at defeating franking credit trading schemes. The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1999 which accompanied the introduction of former subsection 160APHL(14) of the ITAA 1936 outlines the purpose of the integrity measures:
4.6 One of the underlying principles of the imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves: a degree of wastage of franking credits is an intended feature of the imputation system.
4.7 In substance, the owner of shares is the person who is exposed to the risks of loss and opportunities for gain in respect of the shares. However, franking credit trading schemes allow persons who are not exposed, or have only a small exposure, to the risks and opportunities of share ownership to obtain access to the full value of franking credits, which often, but for the scheme, would not have been used at all, or would not have been fully used. Some of these schemes may operate over extended periods, and typically involve a payment related to the dividend which has the effect of passing its benefit in economic terms to a counterparty. The schemes therefore undermine an underlying principle of imputation.
As such, when considering the exercise of the discretion in former subsection 160APHL(14) of the ITAA 1936, the Commissioner must bear in mind the intended effect of the integrity measures.
Application to your circumstances
Relevantly:
• the Trust Deed (as amended) contains clauses that may constitute a defeasible power, for example, the power to issue new units under Clause X and to vary the Trust Deed under Clause X. However, the Trustee has not and will not, exercise any power capable of defeating a Unit Holder's interest to defeat a Unit Holder's interest in the capital of the Trust
• the likelihood of defeasance is low given the terms of the Trust Deed; and
• there is little likelihood that a franking credit trading scheme exists in these circumstances - relevantly, the Trust has held shares in the relevant entity from which dividends will be received which were acquired for market value, there have been no changes to the Unit Holders since inception (other than the brief period Individual C as trustee for Trust C held X units) and family trust elections are in place with respect to the Unit Holders and family trust distributions will be made limited to the relevant family groups.
In relation to the likelihood of the intended effect of the integrity measures being undermined the following factors are relevant:
• The transactions between all entities are conducted at arm's length.
• In respect of the Ruling Period, the assumptions are the Trustee or Unit Holders have not entered and will not enter into an arrangement that would result in
- a 'related payment' under former section 160APHN of the ITAA 1936
- a Unit Holder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee of the Trust (refer to former section 160APHM of the ITAA 1936)
- a Unit Holder not being sufficiently exposed to the risk of loss or opportunity for gain in respect of the units in the Trust as explained by ATO Interpretative Decision ATO ID 2014/10
- the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936'
- any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying, or
- fraud or evasion.
Consequently, the Commissioner accepts that the likelihood of the integrity measures being undermined would be low.
Conclusion
The Unit Holders do not have a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the ITAA 1936.
However, pursuant to the requirements of former subparagraphs 160APHL(14)(c)(i), (ii) and (iii) of the ITAA 1936 it is considered appropriate that the Unit Holders should be treated as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding.
Therefore, the Commissioner exercises his 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 of the Trust as is comprised by the trust holding during the Ruling Period.