Edited version of private advice

Authorisation Number: 1052320995740

Date of advice: 24 October 2024

Ruling

Subject: Commissioner's discretion - trusts

Question 1

Will the unitholders of the Trust have a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the Income Tax Assessment Act 1936 (ITAA 1936), once the Deed of Amendment is implemented?

Answer 1

No.

Question 2

If the answer to Question 1 is 'no', will the Commissioner exercise the discretion under former subsection 160APHL(14) of the ITAA 1936 to treat the unitholders of the Trust as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding?

Answer 2

Yes.

This ruling applies for the following periods:

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Year ending 30 June 2028

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

The Trust

The A Trust is a unit trust established by trust deed on XX X 19XX (Trust Deed).

A Company Pty Limited (the Trustee) is the trustee of the Trust and has been the trustee since the establishment of the Trust.

The Trust has, and has only had, a single class of ordinary units on issue.

All units in the Trust (Units) are fully paid.

The Units carry equal rights to the income and capital of the Trust.

The Units were initially issued to the following unitholders:

•                     B Nominees Pty Limited (B Nominees) as trustee for (ATF) the B Family Trust - 25 units;

•                     C Nominees Pty Limited (C Nominees) ATF the C Family Trust - 25 units;

•                     D Nominees Pty Limited (D Nominees) ATF the D Family Trust - 25 units; and

•                     Individual E - 25 units.

The Units were subsequently transferred as follows:

•                     from B Nominees ATF the B Family Trust to Holdings B Pty Ltd (Holdings B) - 25 units;

•                     from C Nominees ATF the C Family Trust to Holdings C Pty Ltd (Holdings C) - 25 units;

•                     from D Nominees ATF the D Family Trust to Holdings D Pty Ltd (Holdings D) - 25 units; and

•                     from E to F Nominees Pty Limited (F Nominees) ATF the F Family Trust - 25 units.

The first 3 transfers above occurred on XX X 19XX and the 4th transfer occurred on X X 19XX.

F Nominees ATF the F Family Trust transferred its Units to Holdings D and Holdings C (jointly) on X X 20XX.

A subdivision of all Units occurred on XX X 20XX pursuant to the Deed of First Variation whereby all the issued Units of $1 each in the capital of the Trust were subdivided into 2 Units of $0.50 each. Since this time, the unitholding in the Trust has remained unchanged as follows:

•                     Holdings D- 50 units

•                     Holdings C- 50 units

•                     Holdings D and Holdings C (jointly) - 50 units and

•                     Holdings B - 50 units.

No Units have ever been redeemed by the Trust.

The Trust carries on a trading business and holds assets including plant and equipment used as part of the trading business.

The Trust also holds shares in 2 companies:

•                     Company Y - The Trust owns 100% of the shares which it has held since the company was incorporated on XX X 20XX. The company is a trading company that undertakes contract work for the group.

•                     Company Z - The Trust owns 50% of the shares which it has held since the company was incorporated on XX X 19XX. The company is a trading company. The Trust provides input materials to this company.

Both of Company Y and Company Z are profitable and have positive franking account balances.

All distributions of income and capital to unitholders of the Trust (Unitholders) have been in proportion to their number of units held.

The Trust is an Australian resident for tax purposes.

The Trust has not made a family trust election pursuant to section 272-80 of Schedule 2F to the ITAA 1936.

The Units are not listed for quotation in the official list of an approved stock exchange.

The Trust is not a registered managed investment scheme under Chapter 5C of the Corporations Act 2001.

The Trustee has never exercised a power to defeat a Unitholder's interest.

Trust Deed Amendments

Clause 12 of the Trust Deed provides as follows:

This Deed and the terms upon which the Fund is held upon trust may be amended at any time in any way if a meeting of Unit Holders is duly convened and so resolves by a majority of seventy five per cent (75%) of those present and voting in person or by proxy and the Trustee assents thereto PROVIDED THAT any such amendment shall treat all units equally (unless the Unit Holders unanimously so resolve otherwise).

Since the establishment of the Trust, the Trust Deed has been amended once by the Deed of First Variation dated XX X 20XX (as mentioned above).

The Trustee intends to amend the Trust Deed pursuant to clause 12 of the Trust Deed and in accordance with the amendments contained in the Deed of Amendment for broadly, the following matters:

•                     ensuring that the price at which Units are issued and redeemed shall be determined by dividing the net asset value of the Fund, according to Australian accounting principles, at the relevant time by the number of Units on issue (clauses 6 and 8);

•                     requiring a unanimous resolution of all Unitholders in order to make any amendments to the Trust Deed and in order to terminate the Trust earlier than 30 June 20XX (clauses 11 and 12);

•                     requiring all Unitholders to be present in person or by proxy to form a quorum for a meeting (clause 20(j));

•                     amending the income and capital distributions clauses to allow the Trust to be administered in line with contemporary practices (clause 22); and

•                     prohibiting the Trustee from creating, or converting any existing Units to, any new classes of Units with any special rights or restrictions, or from exercising any rights under the Trust Deed after receiving a direction given by unanimous resolution of Unitholders not to do so (clauses 25 and 26).

The above amendments to the Trust Deed will be effective as from the date of the Deed of Amendment which will be implemented if a positive ruling is obtained from the Commissioner. For the remainder of this ruling, the Trust Deed incorporating the proposed amendments under the Deed of Amendment is referred to as the 'Amended Trust Deed'.

Assumptions

It is assumed that throughout the ruling period:

Any distributions of income (including franked distributions and related franking credits) and capital will be made in proportion to the number of Units held by Unitholders.

Any issue or redemption of Units will be in accordance with the savings rule in former subsection 160APHL(13) of the ITAA 1936.

Existing Units will not be reclassified and no further classes of Units will be created.

No amendments will be made to the Trust Deed, other than those in the Deed of Amendment.

The Trustee will not exercise a power capable of defeating a Unitholder's interest in the income or capital of the Trust.

The Trust will not be terminated.

No arrangement has been or will be entered into which results in:

•                     a related payment under former section 160APHN of the ITAA 1936 - that is, a payment with the effect of transferring the benefit of a dividend and related franking credit to a person other than a beneficiary of the Trust;

•                     a Unitholder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of the shares held by the Trustee;

•                     a Unitholder 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[1];

•                     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 applying; or

•                     fraud or evasion.

Relevant legislative provisions

Income Tax Assessment Act 1936 former Division 1A of Part IIIAA

Income Tax Assessment Act 1936 former section 160APHL

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

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

Income Tax Assessment Act 1936 former subsection 160APHL(12)

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

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

Income Tax Assessment Act 1936 former paragraph 160APHL(14)(a)

Income Tax Assessment Act 1936 former paragraph 160APHL(14)(b)

Income Tax Assessment Act 1936 former paragraph 160APHL(14)(c)

Income Tax Assessment Act 1936 former subparagraph 160APHL(14)(c)(i)

Income Tax Assessment Act 1936 former subparagraph 160APHL(14)(c)(ii)

Income Tax Assessment Act 1936 former subparagraph 160APHL(14)(c)(iii)

Income Tax Assessment Act 1936 former subparagraph 160APHL(14)(c)(iv)

Income Tax Assessment Act 1936 former subsection 160APHM(2)

Income Tax Assessment Act 1936 former subsection 160APHM(3)

Income Tax Assessment Act 1936 former section 160APHN

Income Tax Assessment Act 1936 former subsection 160APHO(2)

Income Tax Assessment Act 1936 former subsection 160APHO(3)

Income Tax Assessment Act 1936 paragraph 177EA(5)(b)

Income Tax Assessment Act 1936 section 272-80 of Schedule 2F

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 section 207-10

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Assessment Act 1936 section 207-150

Income Tax Assessment Act 1997 paragraph 207-150(1)(a)

Income Tax Assessment Act 1997 paragraph 207-150(1)(c)

Income Tax Assessment Act 1997 paragraph 207-150(1)(d)

Income Tax Assessment Act 1997 paragraph 207-150(1)(e)

Income Tax Assessment Act 1997 paragraph 207-150(1)(f)

Income Tax Assessment Act 1997 paragraph 207-150(1)(g)

Income Tax Assessment Act 1997 paragraph 207-150(1)(h)

Corporations Act 2001 Chapter 5C

Corporations Act 2001 section 601GC

Corporations Act 2001 paragraph 601GC(1)(b)

Reasons for decision

All subsequent legislative references are to the ITAA 1936 and all subsequent references to trust clauses are to the Amended Trust Deed, unless otherwise indicated.

Question 1

Will the unitholders of the Trust have a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding, for the purposes of former subsection 160APHL(11), once the Deed of Amendment is implemented?

Summary

The terms of the Amended Trust Deed will not provide the Unitholders 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).

Detailed reasoning

Beneficiaries of trusts - entitlement to franking credits

Company Y and Company Z are both profitable and have positive franking account balances. If franked dividends are paid from these companies to the Trust, the Trustee may distribute the franked dividends to the Unitholders.

Division 207 of the ITAA 1997 sets out the consequences of an entity receiving directly or indirectly a franked distribution from a corporate tax entity. Generally, an entity receiving a franked distribution must gross up their assessable income for the franking credit and may be entitled to a tax offset equal to the franking credit on the distribution (section 207-10 of the ITAA 1997).

Subdivision 207-B of the ITAA 1997 contains rules that apply to franked distributions that flow through trusts and partnerships. Under paragraph 207-150(1)(a) of the ITAA 1997, a beneficiary that receives a franked distribution that flows indirectly to it is not entitled to a tax offset if the beneficiary is not a 'qualified person' in relation to the distribution for the purposes of Division 1A of former Part IIIAA. Although Division 1A of former Part IIIAA was repealed with effect from 1 July 2002, it is necessary to have regard to the rules contained in the repealed provisions in determining whether an entity is a qualified person for the purposes of section 207-150 of the ITAA 1997 in respect of a franked distribution - see Taxation Determination TD 2007/11 Income tax: imputation: franked distributions: qualified persons: does an entity have to be a qualified person within the meaning of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 to avoid the application of paragraphs 207-145(1)(a) and 207-150(1)a) of the Income Tax Assessment Act 1997 in respect of a franked distribution made directly or indirectly to the entity on or after 1 July 2002?

Qualified person

Broadly speaking, to be a qualified person in relation to a dividend, a taxpayer must satisfy both the holding period rule and the related payment rule.

The related payment rule is not applicable in respect of a distribution made in respect of interests in shares held by the Unitholders on the basis of the assumption made for the purposes of this ruling that no related payment under former section 160APHN will be made during the ruling period.

A taxpayer satisfies the holding period rule if the taxpayer held the interest in the shares on which a dividend has been paid at-risk for a continuous period of not less than 45 days, not counting the day of acquisition and disposal of the interest (or 90 days for preference shares).[2] In calculating the number of days for which the taxpayer continuously held the shares or interest, any days on which the taxpayer has materially diminished risks of loss or opportunities for gain in respect of the shares or interest are to be excluded.[3]

A taxpayer is taken to have materially diminished the risks of loss and opportunities for gain with respect to shares or interests if the net position of the taxpayer results in the taxpayer having less than 30% of the risks and opportunities associated with the shares or interests (former subsection 160APHM(2)). Pursuant to former subsection 160APHM(3), the taxpayer's net position is worked out using the financial concept known as delta.[4]

Beneficiary's interest in shares - former section 160APHL

Former subsection 160APHL(10) provides that:

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.

Broadly speaking, the 'trust holding' is the share or interest in a share that is held by the trustee of a trust. The effect of former subsection 160APHL(10) is that if a beneficiary of a trust does not have a 'fixed interest' and has no other long positions which relate to the trust holding, the beneficiary's net position in his or her interest in the shares held by the trust will be zero, and the beneficiary will have materially diminished risks of loss and opportunities for gain. As a result, the beneficiary will not be a qualified person and will not be entitled to a tax offset for the franking credits.

Fixed interest for purposes of former section 160APHL(10)

Former subsection 160APHL(11) states that for the purposes of former subsection 160APHL(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'.

(Note: The terms 'corpus' and 'capital' are considered to be synonymous for current purposes.)

Vested and indefeasible interest

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 present right of present enjoyment, whereas an interest is vested in interest if it gives its holder a present right to future enjoyment (see Dwight v Commissioner of Taxation 92 ATC 4192 per Hill J at [4202-4203]).

Unitholders have a beneficial interest in the corpus of the Trust vested in them under the Amended Trust Deed under the following provisions:

•                     Under clause 3, the Fund shall be held upon trust for the Unitholders absolutely in proportion to the number of Units held by them. The Fund is defined under clause 1 to include all accumulations of income and all moneys, rights or property of any description transferred to the Trustee or acquired by the Trustee.

•                     Under clause 11(d), upon the determination of the Fund, the Trustee shall realise all the property of the Trust (pursuant to clause 11(c)) and the proceeds of such realisation shall be distributed amongst Unitholders proportionately to the number of Units held by them.

•                     Under clause 22(f), the Trustee may at any time pay, apply or credit any amount of income or capital to or for the benefit of the Unitholders in accordance with their Relevant Proportions as at a date the Trustee determines. 'Relevant Proportions' is defined in clause 22(m) in relation to each Unitholder to mean the number of the Units held by that Unitholder as a proportion of the total Units on issue at the relevant time expressed as a percentage.

•                     Under clause 22(g), any remaining income of the Trust for a financial year that has not been distributed under clause 22 by the end of the last day of the financial year will be held in trust for the Unitholders in accordance with their respective Relevant Proportions.

As a result, Unitholders will have a vested interest in the corpus of the Trust.

Indefeasible interest

The word 'indefeasible' is not defined in the ITAA 1936 or ITAA 1997 so takes it ordinary meaning when applied to an interest, that is that the interest cannot be terminated, invalidated or annulled (see Colonial First State Investments Ltd v. Commissioner of Taxation [2011] FCA 16 (Colonial).

Redemption and allocation of additional units

Former subsection 160APHL(12) states that:

Subject to subsection (13), if the taxpayer has an interest in the trust holding and either:

(a)           the interest may be redeemed under the terms of the trust for less than its value; or

(b)           the value of the interest may be materially reduced by:

(i)            if the trust is a unit trust - the issue of further units; or

(ii)            otherwise - the creation of other interests under the trust;

the interest is taken to be defeasible.

Former subsection 160APHL(13) provides a 'savings rule' in relation to defeasible interests and states:

If:

(a)           the trust is a unit trust and the taxpayer holds units in the unit trust; and

(b)           the units are redeemable or further units are able to be issued; and

(c)           where units in the unit trust are listed for quotation in the official list of an approved stock exchange (within the meaning of section 470) - the units held by the taxpayer 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)           where the units are not listed as mentioned in paragraph (c) - the units held by the taxpayer will be redeemed, or any further units will be issued, for a price determined on the basis of the unit trust's net asset value, according to Australian accounting principles, at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that further units are able to be issued, does not mean that the taxpayer's interest, as a unit holder, in so much of the corpus of the trust as is comprised by the trust holding is defeasible.

The following clauses in the Amended Trust Deed constitute powers that cause the interest of Unitholders to be taken to be defeasible under former subsection 160APHL(12):

Clause 6(b) provides the Trustee with a power to issue additional Units. Under clause 6(d) the price at which Units are allotted must be determined by dividing the net asset value of the Trust at the time of issue, determined according to Australian accounting Principles, by the number of Units on issue.

Clause 8 provides the Trustee with the power to redeem Units for the payment of the redemption price, determined by dividing the net asset value of the Trust at the time of the redemption (determined according to Australian Accounting Principles) by the number of Units on issue.

However, these clauses in the Amended Trust Deed will satisfy the savings rule in former subsection 160APHL(13) such that this trustee power will not constitute a defeasible power.

Broad powers to amend the trust instrument

In Colonial, the Federal Court considered the indefeasibility issue in the limited context of amending the constitution of a registered managed investment scheme under section 601GC of the Corporations Act 2001.

Stone J held that a power of the trustee or manager to amend the constitution of the trust (under paragraph 601GC(1)(b) of the Corporations Act 2001) resulted in the beneficiaries' interests being defeasible.

Under clause 12, the Trustee can amend the Amended Trust Deed and the terms upon which the Fund is held upon trust at any time in any way, if a meeting of Unitholders is convened and a resolution passed by unanimous resolution of all Unitholders provided that the Trustee assents to the amendment and the amendment treats all Units equally (unless the Unitholders unanimously resolve otherwise). The Amended Trust Deed will therefore restrict the ability of the Trustee to amend the Trust Deed and to defeat the interest of any particular Unitholder.

However, any ability to amend the Trust Deed, whether requiring unanimous approval or not, will constitute a power capable of defeating a beneficiary's interest in the income or capital of the Trust. As noted by Stone J in Colonial 2011 ATC 20-235 at [106] 'it follows [from the unit holders' ability to amend the Constitution] that the members could vote to terminate the present right to a share of income and capital.'

An amendment could also permit the amendment of clauses which currently do not contain defeasible powers to do so.

Interest not vested and indefeasible

Since the Unitholders 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), the only way that the beneficiaries can have such a vested and indefeasible interest is if the Commissioner exercises the discretion in former subsection 160APHL(14).

Question 2

If the answer to Question 1 is 'no', will the Commissioner exercise the discretion under former subsection 160APHL(14) to treat the unitholders of the Trust as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding?

Summary

The Commissioner considers that it is reasonable to exercise the discretion in former subsection 160APHL(14) to treat the Unitholders 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

Commissioner's discretion under former subsection 160APHL(14)

Former subsection 160APHL(14) states:

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.

Former paragraph 160APHL(14)(a) - the taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding

Former section 160APHL contains rules to determine a beneficiary's interest in shares that comprises the trust holding. Although the method of calculating the interest that a beneficiary has in the trust holding differs as between widely-held trusts and trusts other than widely-held trusts, the beneficiaries of both types of trusts are capable of having an interest in the trust holding.

Former paragraph 160APHL(14)(a) 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 example of a contingent interest is one that relies upon the exercise, or the non-exercise, of a trustee's discretion in relation to the income or capital of a trust. As discussed in Question 1, Unitholders will have a vested interest in the corpus of the Trust under clauses 3, 11(d), 22(f) and 22(g).

Since any distributions of income (including franked distributions and related franking credits) will be made in proportion to the number of Units held by Unitholders, beneficiaries of the Trust will have an interest in so much of the corpus of the Trust as is comprised by the trust holding.

Former paragraph 160APHL(14)(b) - apart from this subsection, the interest would not be a vested or indefeasible interest

As discussed in Question 1, although a Unitholder's interest in the corpus of the Trust is vested, a Unitholder's interest in a share of the corpus of the Trust may be defeated by the power to amend the Trust Deed. Therefore, the interest of Unitholders is not indefeasible.

Former paragraph 160APHL(14)(c) - the Commissioner considers the interest to be 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.

Former subparagraphs 160APHL(14)(c)(i) and (ii): the circumstances in which the defeasance can happen and the likelihood of the defeasance happening.

Under clause 12, the Trustee can amend the Amended Trust Deed and the terms upon which the Fund is held upon trust at any time in any way, if a meeting of Unitholders is convened and a resolution passed by unanimous resolution of all Unitholders provided that the Trustee assents to the amendment and the amendment treats all Units equally (unless the Unitholders unanimously resolve otherwise).

The interest of some or all Unitholders could be defeated by clause 12 if Unitholders unanimously resolve to terminate the rights of such Unitholders to a share of the capital of the Trust. In particular, the interests of some Unitholders could be defeated if Unitholders unanimously resolve not to treat all Units equally. However, it is considered that the likelihood of Unitholders resolving to defeat their own interests in the capital of the Trust or the interest of other Unitholders is extremely low given the requirement that such a resolution would require a unanimous vote of all Unitholders.

Similarly, the interest of Unitholders could also be defeated by amendments that remove restrictions in clauses that limit the ability of the Trustee to defeat the interest of particular Unitholders. For example, the removal of the requirement that the Amended Trust Deed can only be amended by way of unanimous resolution of Unitholders or that amendments treat Units equally. However, once again it is considered that the likelihood of Unitholders resolving to pass such amendments that may defeat their interest is extremely low so that the likelihood of such defeasance is also extremely low.

Defeasance can also occur if additional Units are issued or redeemed but for the savings rule.

In terms of the likelihood of the defeasance happening (in respect of the particular clauses discussed above), it is noted that assumptions are made that for the ruling period:

•                     there will be no further amendments to the Trust Deed (aside from the amendments set out in the Deed of Amendment);

•                     any issue of additional Units or redemption of Units will be made in accordance with the savings rule; and

•                     the Trustee will not exercise a power capable of defeating a Unitholder's interest in the income or capital of the Trust.

•                     Former subparagraph 160APHL(14)(c)(iii) - the nature of the trust

The nature of the Trust is as follows:

•                     The Trust carries on trading activities and holds shares in companies which also carry on related trading activities.

•                     The Trust is a unit trust with only 3 Unitholders which are all companies. The Units are not publicly listed on an approved stock exchange.

•                     The Trust is not a registered managed investment scheme under Chapter 5C of the Corporations Act 2001.

Former subparagraph 160APHL(14)(c)(iv) - any other matter the Commissioner thinks relevant

The Commissioner has also taken into account the following:

The Trust has owned 100% of the shares in Company Y since 20XX and 50% of the shares in Company Z since 19XX.

75% of the Units have been held by the current Unitholders since XX X 19XX with the remaining 25% acquired on XX X 20XX.

The discretion in former subsection 160APHL(14) pertains 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 which accompanied the introduction of former subsection 160APHL(14) outlined 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), the Commissioner must be mindful not to undermine the intended effect of the integrity measures themselves. In this regard, there is no arrangement aimed at undermining the purpose of the franking credit integrity rules.

It is noted that certain assumptions are made for the purposes of this ruling which are aimed at preventing the purpose of the integrity measures from being undermined, namely that throughout the ruling period an arrangement has not been, and will not be, entered which would result in:

•                     a 'related payment' under former section 160APHN

•                     a Unitholder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee

•                     a Unitholder 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 ID 2014/10

•                     the Commissioner making a determination under paragraph 177EA(5)(b)

•                     any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying, or

•                     fraud or evasion.

Conclusion

The beneficiaries of the Trust 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).

However, pursuant to the requirements of former subparagraphs 160APHL(14)(c)(i) to (iv) it is considered appropriate that the Unitholders 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.

Relevantly:

•                     the Amended Trust Deed contains only one provision (apart from the provisions relating to the issue and redemption of Units which are covered by the savings rule) that may constitute a defeasible power (that has not been used to defeat Unitholder's interest in the Corpus of the Trust);

•                     the Trustee has not, and will not, exercise a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the capital of the Trust;

•                     the likelihood of defeasance is low; and

•                     there is little likelihood that a franking credit trading scheme exists in connection with the facts.

Therefore, it is appropriate for the Commissioner to exercise the discretion under former subsection 160APHL(14) to treat the Unitholders 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.

[1] Is the conclusion that a beneficiary of a unit trust cannot satisfy the qualification period in the former section 160APHO of the Income Tax Assessment Act 1936 (ITAA 1936) a relevant matter for the Commissioner to consider in exercising the discretion to treat the unit holder's interest as vested and indefeasible under former paragraph 160APHL(14)(c) of the ITAA 1936?

[2] Former subsection 160APHO(2).

[3] Former subsection 160APHO(3).

[4] Delta is a well known financial concept that measures the relative change in the price of an option or other derivative for a given small change in the price of an underlying asset. An option with a positive delta indicates that its price is expected to rise and fall with the underlying asset, while a negative delta indicates an inverse relationship.