ATO ID 2005/74: Consolidation: Membership and Discretionary Trusts
Date of decision: 3 November 2004
Year of income: Year ended 30 June 2005
Business line: Consolidation Centre of Expertise

Issue
If a trust is settled pursuant to a Deed that permits the trustee to add and remove persons to a defined class of objects, will that trust be eligible to be a member of a consolidated group as provided in item 2 of paragraph 703-15(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. A trust settled pursuant to a Deed that permits the trustee to add and remove persons to a defined class of objects will be eligible to be a member of the consolidated group as provided in item 2 of paragraph 703-15(2)(b) of the ITAA 1997.

Facts
A trust is settled pursuant to a Deed. The trustee is a resident of Australia for the purposes of that definition in section 6 of the Income Tax Assessment Act 1936 (ITAA 1936). None of the conditions in item 7 of subsection 703-20 of the ITAA 1997 exist in relation to that trust. The trust Deed identifies classes of objects from whom the trustee may nominate to benefit under the trust Deed. The trustee has only nominated members of a consolidated group. The trust Deed confers power on the trustee to add or remove objects from the pre-existing classes of objects.

Reasons for decision
Summary: Section 703-15 of the ITAA 1997 defines the entities capable of being a member of either a consolidated or consolidatable group. For a trust to be a wholly-owned subsidiary of a consolidated group all the membership interests in the trust must be beneficially owned by either the holding entity, and/or one or more wholly-owned subsidiaries of the holding entity. Subsection 960-130(1) of the ITAA 1997 stipulates that a member of a trust is any beneficiary, unit holder or object of the trust. Section 960-135 of the ITAA 1997 states that a membership interest is: by virtue of which you are a member of the entity. The United Kingdom Court of Chancery Division decision in Re Manisty's Settlement [1973] 2 All ER 1203 held that a power conferred on a trustee to add members to an pre-existing class of objects was valid. Conferring a power on a trustee to nominate any person as an object of a trust, will not result in the conferral of 'interests' or 'rights' on a broad range of persons. This view is confirmed by the New South Wales Supreme Court of Appeal decision in Hartigan Nominees Pty Ltd v. Rydge (1992) 29 NSWLR 405, where at 425 Mahoney J A states: As I have indicated, a class of possible beneficiaries under a discretionary trust may be wide and may be capable, as in this case, of significant extension. I doubt that it is the duty of a trustee to seek out such persons and inform them of the possibility that, in certain circumstances, they may acquire rights under the trust. I do not think that, for example, where property may be appointed among a group of employees, past, present and future, of a company, the trustee has a duty to seek out and convey information of this kind. For the purposes of section 960-135 of the ITAA 1997, the mere existence of a power to extend a pre-existing class of objects of a trust will not confer any rights on persons outside of that class, who may at some future point in time be added to that class via the powers conferred on the trustee(s). Therefore, a trust settled pursuant to a Deed that permits the trustee to add and remove persons to a defined class of objects will be eligible to be a member of the consolidated group as provided in item 2 of paragraph 703-15(2)(b) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 6
Case references: Re Manisty's Settlement Trusts [1973] 2 All ER 1203
Other references: R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines and Remedies, 3rd ed., Butterworths, Sydney, 1992. D Barnett, The nature of a beneficiary's interest in the assets of an express trust, (2004) 10 Australian Property Law Journal Consolidation Reference Manual, Part C1-1: Eligibility tests and rules
Subject references: Consolidation Consolidation - formation Consolidation - membership Wholly owned trusts