Edited version of private advice

Authorisation Number: 1052257615711

Date of advice: 5 June 2024

Ruling

Subject: Fixed trust

Question 1

Do the unitholders in the Fund have fixed entitlements to all of the income and capital of the Fund pursuant to subsection 275-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

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

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Relevant facts and circumstances

The Fund was established by the Trust Deed and is a resident trust estate pursuant to subsection 95(2) of the ITAA 1936.

The trustee of the Fund (Trustee) is Company A, also a resident of Australia for tax purposes.

The Fund is an unregistered managed investment scheme. An offer to invest in the Fund was extended under the Information Memorandum to entities identified as a 'wholesale client' under the Corporations Act 2001.

According to the Information Memorandum, the Fund was established for the purpose of acquiring an economic interest in a private company, Company B. Subject to the discretion of the Trustee, investments in the Fund were subject to a minimum amount.

As at the date of this ruling:

•         the Unitholders in the Fund consist of individuals, private companies and private trusts, none of whom are widely held entities or superannuation funds;

•         units in the Fund have been issued across 2 tranches; and

•         the assets of the Fund consist of ordinary shares in Company B and cash.

The Fund does not have any carried forward tax losses.

Creation and issue of Units

The beneficial interest in the Fund is divided into units. Such units are held on and subject to the provisions of the Trust Deed, subject to any special rights or obligations conferred upon units pursuant to their Terms of Issue, and every unit confers an equal and undivided interest in the assets of the Fund as a whole (subject to liabilities) unless the Terms of Issue of a class of units otherwise provide.

Different classes of units may be created and issued and the rights of the Unitholders are subject to the rights, obligations and restrictions established by the Terms of Issue of the class of units which they hold, and subject always to the rights, obligations and restrictions which attach to the units issued in other classes.

All units on issue in the Fund to date are ordinary class units. No units in that class have been subject to any Terms of Issue.

Pursuant to the Trust Deed, units issued prior to or pursuant to the first Disclosure Document (i.e. the Information Memorandum), will be issued for the application price of $1 per unit. Where the Fund is not registered as a managed investment scheme, then the price at all other times is determined by the Trustee in its absolute discretion.

Consistent with this requirement under the Trust Deed, all units issued under the first and second tranches, pursuant to the Information Memorandum, were issued for $1 per unit. At all other times whilst the Fund remains an unregistered managed investment scheme, the Trustee (as is reflected in the Information Memorandum) intends to exercise its discretion under the Trust Deed and determine the issue price based on the net asset value per unit at the time.

Fractions of Units can be issued by the Trustee in accordance with the terms of the Trust Deed. However, the Trustee has confirmed that it has never utilised this power nor does it ever intend to do so.

The application price of units may be payable by instalments. Where a Unitholder doesn't pay an instalment due on a partly-paid unit on or by the day specified for payment under a served notice, the partly-paid units in respect of which the notice has been issued may be forfeited by the Trustee.

While the Trust Deed permits the application price of units to be paid by instalments, the Trustee has confirmed that all units issued to date are (and were at all times) fully-paid, it has no intention of issuing partly-paid units and therefore does not ever foresee a reason to forfeit a unit.

Redemption of units

Under the Trust Deed, some or all of a Unitholder's units may be redeemed either:

•         by the Trustee at any price and at any time, with written approval of that Unitholder; or

•         by written request by the Unitholder and subject to a special resolution of the Unitholders approving the redemption.

Where an asset of the Fund is sold by the Trustee to fund the redemption of a Unitholder's units, the Trustee may determine that the relevant Unitholder is entitled to the appropriate portion of any net capital gain that is included in the Fund's net income from the sale of that asset.

To date, the Trustee has not redeemed any Units pursuant to the Trust Deed and has advised that any redeemed units will only redeem for their net asset value at the time.

Income distribution entitlements

The Trustee holds the assets of the Fund on trust for the Unitholders on the terms contained in the Trust Deed.

The Trustee may determine the amount of Distributable Income of the Fund for a Distribution Period and, after payment of all tax, pay that amount to Unitholders who are Unitholders on the last day of that Distributable Period. Any person who is or was a Unitholder at any time during an income year will, on the last day of the income year, be presently entitled to all Distributable Income payable to them in respect of the income year in the proportion that the Distributable Income payable to them for the year bears to the sum of the Distributable Income payable to all persons who have been Unitholders at any time during the year.

The rights of a Unitholder to receive distributions in respect of partly-paid units they hold are as determined by the Trustee and provided in the Terms of Issue of the relevant units.

For the removal of doubt and despite anything else in the Trust Deed, it provides that the Trustee may in its discretion issue Units on terms that such units:

•         participate fully for Distributable Income in respect of the Distribution Period in which they're issued;

•         do not entitle the Unitholder to participate in the Distributable Income in respect of the Distribution Period in which they're issued; or

•         receive a fixed distribution rate entitlement out of Distributable Income, either for the whole Distribution Period in which they're issued or on a pro rata basis in accordance with the number of days the units were held.

As noted, all units on issue in the Fund to date are ordinary class units, none of which are subject to any Terms of Issue. While the Trust Deed clarifies that different classes of units may be issued with different rights to Distributable Income, the Trustee has advised that it does not intend to issue any units which gives effect to such discretion, it has never exercised a power capable of defeating a Unitholder's interest in the income or capital of the Fund and it does not intend to exercise such power.

Entitlements on winding up

The final distribution of either the net proceeds of the Fund (following the conversion of assets to money) or the net assets of the Fund on vesting will be distributed to Unitholders on a pro rata basis, subject to the Terms of Issue conferred on a particular class or classes of units.

Power to amend the Trust Deed

As long as the Fund is not registered as a managed investment scheme, pursuant to the Trust Deed the Trustee may amend the Trust Deed at its absolute discretion on terms it sees fit. In this regard, the Information Memorandum states as follows in its definition of the Trust Deed:

... The Trustee may make amendments to the Trust Deed, which are minor, technical or administrative, or which it reasonably believes will not prejudice a Unitholder. Unitholders must approve other variations.

The Trustee has never exercised its power to amend the Trust Deed and has advised that there are no proposed amendments to the Trust Deed at the present time, nor does the Trustee intend to ever amend the Trust Deed in a manner that would defeat a Unitholder's interest in the income or capital of the Fund.

Assumptions

Throughout the ruling period:

(a)  The Fund will only have one class of units (ordinary), will not issue units of a different class to those already on issue, will not issue further Units subject to any specific rights or obligations conferred on them pursuant to any Terms of Issue, and will not issue fractions of Units or partly-paid units.

(b)  Units in the Fund will be issued or redeemed on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936.

(c)   The Trustee will not exercise a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the income or capital of the Fund.

(d)  The Trust Deed will not be amended in a way so as to vary, modify or change the rights of existing Unitholders.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 95(2)

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

Income Tax Assessment Act 1936 subsection272-5(2) of Schedule 2F

Income Tax Assessment Act 1936 subsection272-5(3) of Schedule 2F

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

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

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

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

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

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

Income Tax Assessment Act 1936 section272-65 of Schedule 2F

Corporations Act 2001

Reasons for decision

Question 1

Summary

The Unitholders of the Fund do not (and will not) have fixed entitlements to a share of the income and capital of the Fund pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Detailed reasoning

A trust is a fixed trust pursuant to section 272-65 of Schedule 2F to the ITAA 1936 if persons have fixed entitlements to all of the income and capital of the trust. Under subsection 272-5(1) of Schedule 2F to the ITAA 1936 a person will be taken to have a fixed entitlement to a share of the income or capital of a trust if they have a vested and indefeasible interest under the trust instrument.

An interest is 'vested' if it 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.

The Unitholders have a vested interest under the Trust Deed, as demonstrated by:

•         a clause which requires the Trustee to hold the assets of the Fund on trust for the Unitholders on the terms contained in the Trust Deed;

•         a clause which states that the beneficial interest in the Fund is divided into units;

•         a clause which confirms that each Unitholder is presently entitled to a proportionate share of the Distributable Income; and

•         a clause which confirms that each Unitholder is entitled to a proportionate share of the net proceeds or assets (as applicable) of the Fund on winding up.

An interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events.

Paragraph 16 of PCG 2016/16 contains a non-exhaustive list of typical powers which may defease a beneficiary's interest in a trust. That is:

•         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.

The Unitholders do not have an indefeasible interest under the Trust Deed for a number of reasons. These include:

•         the Trustee's broad power under the Trust Deed to amend the Trust Deed at its absolute discretion on terms it sees fit;

•         the Trustee's power to issue further units and, when done so other than pursuant to the first Disclosure Document, to do so at a price determined by the Trustee in its absolute discretion;[1]

•         the Trustee's power to redeem existing units at any price;[2]

•         the Trustee's power to issue different classes of units with different rights to Distributable Income; and

•         the Trustee's power to enforce the forfeiture of partly paid units due to the non-payment of a call.

As a Unitholder's interest under the Trust Deed is not indefeasible, they are not taken to have a fixed entitlement to a share of the income or capital of the Fund pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Question 2

Summary

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

Detailed Reasoning

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) of Schedule 2F to the ITAA 1936.

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) 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.

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

The Trust Deed provides the Unitholders of the Fund with vested interests in a share of the income that the Fund derives and a share of the capital of the Fund, but the Unitholders do not have a fixed entitlement to the share of income and capital in the Fund.

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

The circumstances in which the Unitholder's entitlement is capable of being defeated are numerous (as noted in response to question 1). These circumstances include:

• the Trustee's ability to amend the Trust Deed on terms it sees fit;
• the Trustee's ability to issue further units at a price determined by the Trustee in its absolute discretion, and to redeem existing units at any price;
• the Trustee's ability to issue different classes of units with different rights to Distributable Income; and
• the Trustee's ability to enforce the forfeiture of partly paid units due to the non-payment of a call.

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

Despite the numerous circumstances in which the Unitholder's entitlement is capable of being defeated, the likelihood of their entitlement being defeated is relatively low. This is considered so on the basis that none of the powers available to the Trustee which are capable of defeating a Unitholder's entitlement under the Fund have been exercised or are intended to be exercised. Specifically:

•         while the Trustee has the ability to amend the Trust Deed on terms it sees fit, no such power has been exercised to date, no such amendments are currently proposed, and to the extent an amendment of the Trust Deed is made it is both subject to the declaration in the Information Memorandum that the Trustee will reasonably believe it will not prejudice a Unitholder and assumed for the purposes of this ruling (consistent with the Trustee's stated intention) that the amendment will not vary, modify or change the rights of the Unitholders;

•         while the Trustee has the ability to issue further units at a price determined by the Trustee in its absolute discretion, the Trustee (as is reflected in the Information Memorandum and is assumed for the purposes of this ruling) intends to determine the issue price in accordance with the savings rule under subsection 272-5(2) of Schedule 2F to the ITAA 1936 (i.e. based on the net asset value per unit at the time);

•         while the Trustee has the ability to redeem units at any price, no units have been redeemed to date and the Trustee (as is assumed for the purposes of this ruling) intends to only redeem units in accordance with the savings rule under subsection 272-5(2) of Schedule 2F to the ITAA 1936 (i.e. for their net asset value at the time);

•         while the Trustee has the ability to issue different classes of units with different rights to Distributable Income, all units on issue in the Fund to date are in the same class with the same rights, the Trustee does not intend to issue any units in a different class or any units subject to special/different rights (as is assumed for the purposes of this ruling), has never issued fractions of units (nor does it intend to, as assumed for the purposes of this ruling), has never exercised a power capable of defeating a Unitholder's interest in the income or capital of the Fund and does not intend to exercise such power (as assumed for the purposes of this ruling); and

•         while the Trust Deed allows for the payment of units by instalments and the Trustee has the ability to enforce the forfeiture of partly paid units due to the non-payment of a call, all units issued to date are (and were at all times) fully-paid, and as assumed for the purposes of this ruling (consistent with the Trustee's stated intention) no partly-paid units will be issued.

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

In relation to the nature of the trust the following comments are made:

• The Fund is a unit trust, but its units are not listed on an approved stock exchange.
• The Trust is an unregistered managed investment scheme for the purposes of the Corporations Act 2001.
• A commitment is made in the Information Memorandum to exercise powers in a particular (restrictive and/or non-adverse) way, i.e. that amendments to the Trust Deed "are minor, technical or administrative, or which [the Trustee] reasonably believes will not prejudice a Unitholder."

Other factors influencing the exercise of the Commissioner's discretion

Attachment C to PCG 2016/16 contains a non-exhaustive list of the factors the Commissioner will consider when deciding whether or not to exercise the discretion. Having regard to that list, each of the following factors favour the exercise of the discretion to treat the Unitholders in the Fund as having fixed entitlements to a share of the income and capital of the Fund:

•         the Trustee has never exercised a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the income or capital of the Fund;

•         a commitment is made in the Information Memorandum that the Trustee will not exercise a power to amend the Trust Deed in a way that would prejudice a Unitholder;

•         all Unitholders have the same rights to receive the income and capital of the Fund;

•         the Trustee deals with the Unitholders of the Fund on an arm's length basis; and

•         the Fund would satisfy the conditions for access to a safe harbour.

Conclusion

Having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) of Schedule 2F to the ITAA 1936 (and the commentary in PCG 2016/16 more broadly), it is considered that the Unitholders of the Fund may be treated as having fixed entitlements to all of the income and capital of the Fund for the ruling period.

In summary:

•         the circumstances under the terms of the Trust Deed in which the entitlement is capable of not vesting or a defeasance happening are not insignificant;

•         the likelihood of the entitlement not vesting or a defeasance happening is remote;

•         the 'nature of the Fund' is one of unregistered managed investment scheme with sufficient regulatory oversight; and

•         there are no apparent factors which suggest that the integrity purpose of Schedule 2F to the ITAA 1936 will be negatively impacted.

[1] The savings rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 is not satisfied under these circumstances.

[2] The savings rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 is not satisfied under these circumstances.