Edited version of private advice

Authorisation Number: 1052371910095

Date of advice: 25 March 2025

Ruling

Subject: Commissioner's discretion - fixed entitlement

Question 1

Will the Income Unit Holders be taken to pay a dividend to the Trust per section 109C or section 109D of ITAA 1936 when they pay their respective proportion of the Initial Sum to the Trust in return for the issue of the Income Units on the establishment of the Trust?

Answer 1

No.

Question 2

Will there be any direct value shifting implications pursuant to Division 725 of ITAA 1997 because of the issuing of the Income Units and the Capital Units upon the establishment of the Trust?

Answer 2

No.

Question 3

Will the Unit Holders have fixed entitlements to all the income and capital of the unit trust within the meaning of subsection 272-5(1) of Schedule 2F of ITAA 1936?

Answer 3

No.

Question 4

If above is no, will the Unit Holders have fixed entitlements to all the income and capital of the Trust under subsection 272-5(3) of Schedule 2F of ITAA 1936?

Answer 4

Yes.

Question 5

Will the Income Unit Holders have a vested and infeasible interest in so much of the corpus of the Trust as is comprised by the trust holding, within the meaning of former subsection 160APHL(3) of ITAA 1936, for the purposes of former subsection 160APHL(11) of ITAA 1936, such that the Income Unit Holders will each be a 'qualified person' for the purposes of Division 1A for the purposes of the former part IIIA of ITAA 1936?

Answer 5

No.

Question 6

If above is no, will the Commissioner exercise their discretion under former subsection 160APHL(14) of ITAA 1936 to treat the Income Unit Holders as having a vested and indefeasible interest in so much of the corpus of the unit trust as comprised by the trust holding such that the Income Unit Holders will each be a qualified person for the purposes of Division 1A for the purposes of the former Part IIIA of ITAA 1936?

Answer 6

No.

This ruling applies for the following periods:

Years ending 30 June 20XX to 20XX

Relevant facts and circumstances

The entities involved in the below scheme will be Australian residents over the ruling period.

Proposed Scheme

It is proposed that a trust, the Trust, will be established with:

•                     the Trustee as the trustee

•                     Capital Unit Holders, holding 100 Capital Units each at an issue price of $1 per unit

•                     Income Unit Holders, holding 100 Income Units each at an issue price of $1 per unit.

Unit Holders is a reference to the Capital Unit Holders and the Income Unit Holders.

Following execution of the Trust Deed the Unit Holders will pay the Initial Sum (the amount owed by the Unit Holders for the issue of their respective units upon the establishment of the trust (the Initial Units)). The Initial Sum will form the entirety of the initial Trust Fund.

The Trust will be an associate of the shareholders of the Income Unit Holders within the meaning of section 318 of the ITAA 1936.

The Trust will, throughout the ruling period:

•                     be an Australian resident for CGT purposes within the meaning of section 995-1(1) of the ITAA 1997

•                     not make a family trust election or interposed entity election for the purposes of Schedule 2F to the ITAA 1936

•                     not be listed for quotation in the official list of an approved stock exchange

•                     not be a managed investment scheme

•                     not make any distributions of corpus of the Trust

•                     not issue any additional units

•                     not exercise powers capable of defeating a Unit Holder's interests in the income or capital of the Trust

•                     not redeem any units

•                     not create any new classes of units or amend or vary any of the rights attaching to the Initial Units.

There will be no transfer of units over the ruling period.

Rights to income

Capital Unit Holders have a right to any net capital gains of the Trust.

Income Unit Holders have a right to receive all other income of the Trust.

Rights to corpus

Generally, upon termination of the Trust each Income Unit Holder is entitled to receive the amount they paid for their units (issue price) (up to their proportionate holding in the value of the Trust at that time) and the Capital Unit Holders will receive any remaining corpus in proportion to their holdings.

More specifically, upon termination of the trust:

•                     if there is a decrease in the value of the Trust as a whole, this loss is first allocated against the Capital Units

•                     if there is an increase, this gain is wholly allocated to the Capital Units.

Meetings

All Unit Holders have the right to receive notices of and attend, participate in and vote at meetings of Unit Holders. Each class of Unit Holders also have the right to receive notices of and attend, participate in and vote at meetings of Unit Holders holding Units of their respective class.

Prohibition on certain actions

The Trustee does not have the power to:

•                     create any new classes of units

•                     convert units from one class to another

•                     vary rights attaching to units

•                     issue additional units in addition to the Initial Units

•                     redeem any units.

The Trustee can amend the Trust deed only if:

•                     there is unanimous consent of all Unit Holders

•                     that exercise does not breach the rule against perpetuities, and

•                     if that exercise would adversely affect the rights of a Unit Holder - that Unit Holder's consent.

Unit Holders are prohibited from transferring any of their units other than in the following limited circumstances:

•                     where the Unit Holder is a trustee, a new trustee of a relevant trust is appointed

•                     where the Unit Holder is a corporation, the corporation enters receivership, administration or liquidation; or a petition for its winding up is presented to court; or a resolution of its members is passed for its winding up - in this case, the relevant person appointed to administer the assets of the Unit Holder will become the new Unit Holder.

Does Part IVA apply to this private ruling?

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

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

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

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

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

Reasons for decision

Question 1

Summary

The Income Unit Holders will not be taken to pay a dividend to the Trust per section 109C or section 109D of ITAA 1936 when they pay their respective proportion of the initial sum to the Trust in return for the issue of the Income Units on the establishment of the Trust.

Detailed reasoning

Section 109D

Section 109D provides that a private company is taken to pay a dividend to an entity if the private company loans an amount to the entity during the year that is not fully repaid before lodgment date and the entity is a shareholder in the private company (or an associate of the shareholder) or it is reasonable to conclude that the loan is made because the entity was a shareholder or associate at some time.

The meaning of loan for Division 7A of the ITAA 1936 purposes is as follows:

In this Division, loan includes:

(a)           an advance of money; and

(b)           a provision of credit or any other form of financial accommodation; and

(c)           a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and

(d)           a transaction (whatever its terms or form) which in substance effects a loan of money.

In this case there will be no obligation for Trust to repay an amount to the corporate Income Unit Holders. The payment arises from the subscription for the issue of Income Units.

The Commissioner does not consider that the payment for Income Units is a 'loan'. Thus, section 109D will not apply to the moneys paid for the issue of Income Units.

Section 109C

Section 109C provides that a payment made by a private company to a shareholder, or shareholder's associate, will be taken to be a dividend.

However, section 109J of the ITAA 1997 states that:

A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment:

(a)           discharges an obligation of the private company to pay money to the entity; and

(b)           is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length.

In this case, the relevant payment will be made from the corporate Income Unit Holders to discharge the obligation of the Income Unit Holders for their subscription of units. It is not considered that this amount is more than would have been required to discharge the obligation in arm's length dealings. As such, 109J applies such that 109C will not apply to the relevant payment.

Question 2

Summary

There will not be any direct value shifting implications pursuant to Division 725 of ITAA 1997 because of the issuing of the Income Units and the Capital Units upon the establishment of the Trust.

Detailed reasoning

Section 725-145 provides that there is a direct value shift under a scheme where the scheme causes a decrease in the market value of one or more of the relevant interests, which include equity or loan interests in a unit trust, and:

•                     one or more of the interests are issued at a discount, and/or

•                     there is an increase in the market value of one or more of the interests.

In your case, there is no evidence that there will be any scheme that would cause a decrease in the market value of any of the Units. Once the subscription moneys are paid into the Trust, the Initial Sum will compose the entirety of the Trust Fund. There is very limited ability to change the rights of the Units.

As such, there will be no direct value shift under section 725-145 upon the issue of the Units.

Question 3

Summary

The Unit Holders do not have fixed entitlements to all the income and capital of the Trust within the meaning of section 272-5(1) of schedule 2F of ITAA 1936.

Detailed reasoning

The term 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936 to mean a trust in which entities or persons (respectively) '... have fixed entitlements to all of the income and capital of the trust.'

The definition of the term 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that

an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a 'fixed entitlement' in a trust:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

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

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

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

An interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events. An example of a defeasible interest is an interest of a default beneficiary in the income or capital of the trust.

In addition, subsection 272-5(2) states that:

If:

(a)           a person holds units in a unit trust; and

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

(c)           if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and

(d)           if the units are not listed as mentioned in paragraph (c) - the units held by the person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a Unitholder, in the income or capital of the unit trust is defeasible.

Practical Compliance Guidelines PCG 2016/16 (PCG 2016/16) outlines the process for determining if beneficiaries have fixed entitlements to all of the income and capital of a trust. It also outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being entitlement. These factors are contained in subsection 272-5(3) of the Schedule 2F to ITAA1936.

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

•                     broad powers to amend the trust instrument

•                     powers to issue new units after the trust is settled, or to redeem existing units

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

•                     a power to classify receipts as being on income or capital account where the units that have been issued do not all have the same rights to receive the income and capital of the trust

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

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

•                     a power to enforce the forfeiture or cancellation of partly paid units due to the non-payment of a call except where such partly paid units would be void ab initio.

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

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

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

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

Application to your circumstances

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

Considering the given facts, the Trust Deed grants a vested interest in the income and capital of the Trust to the Unit Holders.

The Trust Deed prohibits the trustee from a range of activities that could defeat the interests of any of the Unit Holders. This includes the issue or redemption of units, the changing of the rights attaching to units, and the unilateral amendment of the Trust Deed.

However, the Trust Deed may be amended with agreement from all Unit Holders and with consent of the Unit Holder/s whose rights may be affected. Thus, these interests in the income and capital of the Trust can be defeated with consent of the Unit Holder whose rights would be affected.

As the interests are defeasible, the Unit Holders will not have fixed entitlements to all the income and capital of the Trust within the meaning of subsection 272-5(1) of Schedule 2F of ITAA 1936.

Question 4

Summary

The Unit Holders will have fixed entitlements to all the income and capital of the Trust under subsection 272-5(3) of Schedule 2F of ITAA 1936.

Detailed reasoning

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

If:

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

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

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

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

(iii)            the nature of the trust; then

the beneficiary has the fixed entitlement.

Paragraph 55 of PCG 2016/16 outlines factors favourable to the exercise of the Commissioner's discretion:

The Commissioner regards the following factors favourably when deciding whether to exercise the discretion:

•                     a trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust

•                     commitments are made in Unitholder agreements, Product Disclosure Statements or other documents with legal consequences that the trustee or manager will not exercise a power capable of defeating a beneficiary's interest at all, or in a way that is adverse to the rights of beneficiaries to receive the income and capital of the trust

•                     all beneficiaries have the same rights to receive the income and capital of the trust

•                     the trust instrument can only be amended with the unanimous (100%) approval of all the beneficiaries

•                     although the trust instrument can be amended without the unanimous approval of beneficiaries, the approval percentage calculated on the current interest or unit holdings of beneficiaries effectively means that all beneficiaries must approve any amendment (for example, where the approval of 75% of Unitholders is required to make the amendment and the smallest unit holding is more than 25% of the units)

•                     the trust instrument has been amended in accordance with section 601GC of the Corporations Act 2001 (so as to assist with the efficient administration of the trust) but no beneficial interests in the income and capital of the trust are adversely affected

•                     the beneficiaries whose rights to receive the income and capital of the trust have been adversely affected by the exercise of a power capable of defeating a beneficiary's interest have explicitly consented to that specific act (such as upon the redemption of the interests of an employee not covered by the savings rule upon the cessation of employment)

•                     the trustee or manager deals with the beneficiaries of the trust on an arm's length basis

•                     the trust is governed by a foreign law that is similar to Chapter 5C of the Corporations Act 2001, and

•                     the trust would satisfy the basic and specific conditions (as applicable to the type of trust) for access to a safe harbour.

Factors adverse to the exercise of the Commissioner's discretion are listed in paragraph 56 of PCG 2016/16 and include:

•                     a trustee or manager exercises a power to defeat beneficiaries' interests in the income or capital of the trust, however:

-                             the nature of the power that is exercised will be important, for example, compulsorily redeeming units where a Unitholder's stake is less than a minimum specified in the trust instrument, and the Unitholder receives the redemption price of those units, is unlikely to preclude the exercise of the discretion

-                             where external factors (such as those in the Global Financial Crisis) temporarily affect the ability of the trustee or manager to fund distributions or redemptions, this is unlikely to preclude the exercise of the discretion (for example, a temporary wholesale freezing or deferral of interests)

•                     there are significantly different beneficiaries of the trust in an income year for which an entity seeks to have a fixed entitlement, than the beneficiaries of the trust in the income year(s) in which the trust made a tax loss, or incurred a bad debt deduction or debt/equity swap deduction

•                     an arrangement has been entered into which would result in:

a)            section 272-35 having application

b)            the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or

c)            fraud or evasion.

Application to your circumstances

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

As discussed in the previous Question, the Unitholders of the Trust do not have a fixed entitlement to the share of income and capital in the Trust. While vested in interest, the interests are capable of being defeated.

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

When examining the circumstancesin which a beneficiary's interest is capable of not vesting or being defeated, the Commissioner will have regard to any factor that may affect the defeasance of any beneficiary's interest, including:

•                     the number of circumstances of potential defeasance, and

•                     the significance of those circumstances.

This includes having regard to:

•                     any person who is capable of altering the beneficiary's interest

•                     the nature of their relationship to the beneficiary, and

•                     any limitation on their capability to so alter that interest.

As discussed in the previous Question, the Trust Deed allows interests to only be defeated by first amending the Trust Deed, which requires consent of all Unit Holders including the express consent of the Unit Holders whose rights will be affected. Without amending the Trust Deed, it seems the Trustee is unable to defeat the existing interests of the Unit Holders.

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

When considering the likelihoodof the interest not vesting or being defeated, the Commissioner must form a view about the probability that the contingency or defeasance will happen. Where the likelihood of the contingency happening is high or the action or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion.

Where the trustee or manager of the trust has a particular power to defeat a beneficiary's interest, it is relevant to consider how often, if at all, they have exercised that power over a relevant period.

Any preconditions or caveats that affect the likelihood of a beneficiary's interest not vesting or being defeated are also relevant.

In relation to the likelihood of the entitlement not vesting, or the defeasance happening, the following factors are relevant:

•                     It is noted that there are currently no defeasible powers contained in the provided Trust Deed and changing the Trust Deed requires unanimous consent of all Unit Holders.

•                     In respect of the Ruling period, having regard to the facts, the Trustee will take no actions that would affect the interests of the Unit Holders.

•                     In the event the Trust is terminated, the Unit Holders' rights are unchanged in relation to the income and capital of the Trust.

Consequently, in the Commissioner's view, the likelihood of any defeasance happening, particularly against a Unit Holder's wishes, is vanishingly small.

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

Paragraph 34 of PCG 2016/16 states:

The nature of the trust refers to its basic legal characteristics and its economic function, both actual and intended. The ability of the trustee or manager of the trust to adversely affect the interests of beneficiaries could be limited where:

•                     additional responsibilities are placed on the trustee by legislation, most commonly as a registered managed investment scheme under Chapter 5C of the Corporations Act 2001

•                     contractual restrictions limit the trust manager's access to trust assets

•                     the trust is subject to industry regulations, licensing or registration requirements, which are legally enforceable, such as the Australian Securities Exchange (ASX) Listing Rules which are enforceable against listed entities and their associates [sections 793C and 1101B of the Corporations Act 2001]

•                     commitments are made in a product disclosure statement, investment memorandum or other document to exercise powers in a particular (restrictive and/or non-adverse) way

•                     the trust deed restricts the ability of the trustee to issue and redeem units at anything other than market value or other values approximating net asset value, or

•                     the unanimous (100%) approval of the beneficiaries is required prior to the exercise of a power capable of defeating a beneficiary's interest by the trustee or manager.

•                     In relation to the nature of the trust the following factors are relevant:

•                     the Trust is a unitised trust with the current drafting of the Trust Deed preventing any changes to the rights of the Unit Holders

•                     changes to the Trust Deed require 100% approval of the Unit Holders and express consent of any Unit Holder whose rights are affected

•                     the Trustee will not exercise powers capable of defeating a Unit Holder's interests in the income or capital of the Trust.

The Commissioner accepts that in these circumstances the ability of the Trustee to adversely affect the interests of beneficiaries is limited.

Conclusion

Having regard to the above, the Commissioner considers that the Unit Holders should be treated as having the fixed entitlement, pursuant to paragraph 272-5(3)(b) of Schedule 2F of the ITAA 1936.

Thus, under paragraph 272-5(3), the Unit Holders will have fixed entitlements in the Trust.

Question 5

Summary

The Income Unit Holders will not have a vested and infeasible interest in so much of the corpus of the Trust as comprises the trust holding, within the meaning of former subsection 160APHL(3) of ITAA 1936, for the purposes of former subsection 160APHL(11), such that the unit holders will each be a 'qualified person' under former section 160APHO.

Detailed Reasoning

To be a qualified person, a taxpayer must satisfy the 45-day holding period rule (former subsection 160APHO of the ITAA 1936). Although the related payments rule is applied by reference to the repealed provisions of the ITAA 1936, the ATO stated (somewhat belatedly) in Taxation Determination TD 2007/11 that the ITAA 1936 rules have ongoing application as a result of being 'imported' into the ITAA 1997 regime via the anti-manipulation rule in paragraph 207-145(1)(a) of the ITAA 1997.

In the case of a trust distribution consisting wholly or partly of dividend income, to be a qualified person, the beneficiary's interest in the shares must be held 'at risk' for a prescribed period during the qualification period in respect of the taxpayer's interest in the membership interest from which the dividend income is derived (former subsection 160APHL(9) and section 160APHO of the ITAA 1936).

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

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

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

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

For the same reasons as discussed under Question 3, it is considered the Income Unit Holders have a vested interest in the capital/corpus of the Trust.

However, as also discussed under Question 3, the interests are defeasible. As such the Income Unit Holders will not have fixed interests in the trust holding under former subsection 160APHL(11) of ITAA 1936

In addition, the Income Unit Holders do not hold their interests in the shares sufficiently at risk (see Rights to corpus in the Relevant facts and circumstances). They are not entitled to receive any additional amount over the issue price of their units (i.e. capital gains), regardless of what happens to the value of the corpus of the Trust, which includes the value of the shares. They are also protected against a decline in value of their units - losses will first be wholly allocated against the Capital Units.

As the interests are not sufficiently held at risk by the Income Unit Holders, the condition to be a qualified person under former paragraph 160APHO(2) will not be met.

Question 6

Summary

The Commissioner will not exercise his discretion under former subsection 160APHL(14) of ITAA 1936 to treat the Income Unit Holders as having a vested and infeasible interest in so much of the corpus of the unit trust as consists of the trust holding.

Detailed reasoning

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.

As already discussed, the Unit Holders have an interest in the corpus of the trust, which is defeasible, thus satisfying former paragraphs 160APHL(14)(a) and (b).

Former paragraph 160APHL(14)(c)

ATO ID 2014/10 Income Tax - Entitlements to franking credits in an employee remuneration arrangement: Commissioner's discretion (ATOID 2014/10) discusses factors the Commissioner will consider under former section APHL(14)(c) and relevantly states:

Consistent with the intent of the imputation system, the Commissioner will not exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the interest as being vested and indefeasible where the employee is not sufficiently exposed to the risk of loss or opportunity for gain.

For reasons discussed in Question 5 above, and in line with the discussion in ATOID 2014/10, it is considered that the Income Unit Holders are not sufficiently exposed to the risk of loss or opportunity for gain as:

•                     they are not entitled to any gains made on the shares, and/or

•                     they are protected from any loss made on the shares up to the total issue price paid by the Capital Unit Holders.

Consequently, the Commissioner will not exercise his discretion under former subsection 160APHL(14) of the ITAA 1936 to treat the Income Unit Holders' interests as vested and indefeasible.