ATO ID 2002/676: Trust - members fixed entitlement to all the income and capital of a superannuation fund.
Date of decision: 1 May 2002
Year of income: Year ending 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Do the members of the superannuation fund have fixed entitlements to all the income and capital of the fund under subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. The members of the superannuation do not have fixed entitlements to all the income and capital of the fund under subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Facts
The superannuation fund is a complying superannuation fund with only two members, a husband and wife. The directors of the trustee company of the superannuation fund are the husband and wife. Under a clause of the superannuation fund trust deed there are conditions under which a member shall forfeit entitlement to any benefit entitlement and the trustee has discretion to pay or apply any amounts that have been forfeited and held in the forfeiture account. When winding up the fund under a clause of the superannuation fund trust deed, the trustee may pay the following benefits in the following order to the extent that the assets of the fund permit:

Reasons for decision
Summary: Fixed entitlement to a share of income or capital is defined in subdivision 272-A of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936). 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 explanatory memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 in relation to the fixed entitlement to income or capital of a trust explains that: A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest, which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring. Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until some time in the future. A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement. Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated. The members of the superannuation fund are not considered to have a vested and indefeasible interest in all of the income and capital of the fund as the trust deed provides for the following: Therefore, as the members of the superannuation fund do not have a vested and indefeasible interest in all the capital of the fund, they do not have a fixed entitlement to all the income and capital of the fund.

Legislative references: Income Tax Assessment Act 1936 Subdivision 272-A of Schedule 2F subsection 272-5(1) of Schedule 2F
Other references: Explanatory memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997
Subject references: Trusts Superannuation funds Fixed entitlements Vested and indefeasible interest