Private ruling: Trusts - vested and indefeasible interest
Date of advice: 25 July 2025
Published: 29 September 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q3: If the answer to Question 2 is 'no', what amendments would need to be made to the deed for the commissioner to exercise the discretion pursuant to 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? | A1: Not necessary to answer.

Relevant facts and circumstances: The Trust is an Australian resident trust estate that was settled by deed (The Deed). An Australian resident company is the trustee of the Trust (Trustee). The Trust is a unit trust that pursues its investment mandate in accordance with its investment strategy. The Trust is not a Managed Investment Trust. The trust owns: • 100% of the issued shares in a private company, (the Company). The Company principally carries on a land development business; and • 49% of the issued shares in another private company, (Company B). Company B holds land. It is anticipated the Company will pay franked dividends to the Trust in the income year ending 30 June 20YY. As at 30 June 20YY the Company had not paid any (franked) dividends to its shareholders, including the trust. All units in the Trust currently on issue are fully paid ordinary units. Investor capital contributions were originally issued as partly paid units, but these have since been fully paid, with all contributions made in equal proportions at all times. The units in the Trust are held by 20 entities (the Unitholders). At the time of this applications, it is not anticipated that the trust will have more than 20 Unitholders at any time while the Trust is in existence. None of the Unitholders are related parties of the Trustee such that the Trustee deals with the unit holders on an arm's length basis. The units in the Trust are not, and have not historically been, listed for quotation in the official list of an approved stock exchange. It is not anticipated the units in the trust will be listed for quotation in the official list of an approved stock exchange in the future. The Deed includes the following key items: • Clause 1.1 Definitions: defines 'fixed interest' and 'net asset value' Fixed interest has the meaning defined in former section 160APHL of the ITAA as re-enacted or substituted for the time being at any time. Net asset value means, at any time Units are issued or redeemed, the net asset value of the Trust at that time according to the Australian Accounting Standards. • Sub-clause 1.3(a) 1.3 General Compliance provision (a) where the trust is a Registered Scheme, a provision of this Deed which is inconsistent with a provision of the Corporations Act does not operate to the extent of the inconsistency • Sub-clause 2.3(b): 2.3 Fixed Trust (a) The Trust is intended to be a Fixed Trust. (b) To the extent that any clause of this Deed results or would result including the exercise of a power pursuant to this Deed by the Trustee) in the Trust ceasing to be a Fixed Trust, or the Unitholders ceasing to have Fixed Entitlements and Fixed Interests, those clauses are inoperative. • Clause 4.2, sub clause 7.1 (c)(i) and sub clause 8.1(b): provides guidance on the issue of new units and forfeiture of unpaid units • Clause 4.4 Clause 4.4 Equal value and fixed entitlements At any time, all Units must: (a) Be of equal value and rank, and (b) Carry equal entitlements to the Income and capital of the Trust such that the Units result in Fixed Entitlements and Fixed Interests. • Clause 4.8: that each unit holder's interest is indefeasible and vested Clause 4.8 Beneficial interest are vested a) For avoidance of doubt and despite any other provision of this Deed: (i) the beneficial interests of a Unit Holder in the Income and capital of the Trust are indefeasible and vested in that Unit Holder at all times; and (ii) at any time, each Unitholder: (A) has a Fixed Interest and a Fixed Entitlement in, and (B) is automatically and immediately entitled to, the Income and to any distributions of capital made by the Trustee in each case, on a pro rata basis according to the number of Units held by that Unit Holder divided by the total number of Units on issue at that time. b) No beneficial interest in the Income or capital of the Trust may be defeated, partly or wholly, by the exercise of a power of appointment of income or capital by the Trustee or other donee. • Clauses 9 and 10: withdrawal procedures in respect of redemption of units. • Clause 22.2: further guidance on situations where the trustee may amend the deed. Clause 22.2 Amendments to this Deed (a) Subject to clause (b), the Trustee with the consent in writing of all Unit Holders for the time being may at any time and from time to time by deed (whether revocable or irrevocable) revoke add to or vary all or any of the provisions of this Deed or any variation alteration or addition made to this Deed from time to time and may by the same or any other deed or deeds declare any new or other trusts or powers concerning the Trust or any part or parts. (b) The Deed may only be revoked, added to or varied if: (i) the law against perpetuities is not thereby infringed; (ii) the revocation, addition or variation does not affect: (A) the beneficial entitlements to Income or capital of any Unit Holder; or (B) the voting rights of any Unit Holder; and (iii) without limiting paragraph (ii) and for the sake of certainty, that revocation, addition or variation does not cause any Unit Holder to cease to have: (A) Fixed Entitlements to all the Income and capital of the Trust in proportion to the number of units held by that Unit Holder from time to time; (B) a Fixed Interest in so much of the corpus of the Trust as is comprised by the Trust holding. At no point has the Trustee exercised its powers set out in Clause 7 of the Deed to enforce the forfeiture or cancellation of partly paid units. Assumptions Throughout the ruling period: (a) the Trustee will not exercise a power capable of defeating a unitholder's interest in the income or capital of the Trust; (b) no partly paid units will be issued; (c) the Trustee will not amend the Deed to either defeat or be capable of defeating a unitholders' interest in the income or capital of the Trust; (d) the Trust is not and will not be a Managed Investment Trust (MIT) pursuant to Division 275 of the Income Tax Assessment Act 1997 (ITAA 1997); (e) the Trustee will not make the choice for the Trust to be treated as a MIT; and (f) no arrangement has been entered into, or will be entered into, which would result in: i. a 'related payment' under former section 160APHN of the ITAA 1936 being made; ii. the unitholders having materially diminished risks of loss or opportunities for gains of less than 30% in respect of shares held by the trustee in its capacity as trustee for the Trust; iii. the unitholders not being sufficiently exposed to the risk of loss or opportunity for gain in respect of the units in the Trust; iv. the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936; v. any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying; or vi. any fraud or evasion to happen.

Relevant legislative provisions: Income Tax Assessment Act 1936 former section 160APHL | Income Tax Assessment Act 1997 Division 207 | Income Tax Assessment Act 1997 Subdivision 207-F | Income Tax Assessment Act 1997 Section 207-145 | Income Tax Assessment Act 1997 Section 207-150

Reasons for decision: Detailed Reasoning - Detailed reasoning: 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 will be entitled to gross up their assessable income for the franking credit and obtain a tax offset equal to the franking credit received. However, Subdivision 207-F of the ITAA 1997 provides that an entity that receives a franking distribution, either directly or indirectly, will not be entitled to gross up their income for the franking credit received, nor claim a tax offset equal to the franking credit, if, among other things, the entity is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the ITAA 1936 (paragraphs 207-145(1)(a) and 207-150(1)(a) of the ITAA 1997). Former subsection 160APHL(11) of the ITAA 1936 states that 'for the purposes of subsection (10) of the ITAA 1936, 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'. The meaning of the terms 'vested' and 'indefeasible' are not defined in the ITAA 1936 or the ITAA 1997. | Detailed Reasoning - Vested: In Dwight v Federal Commissioner of Taxation (1994) 92 ATC 4192 (Dwight), Hill J said the following about the meaning of the word 'vested': Estates may be vested in interest or vested in possession, the difference being between a present fixed right of future enjoyment where the estate is said to be vested in interest and a present right of present enjoyment of the right, where the estate is said to be vested in possession... A person with an interest in remainder, subject to a pre-existing life interest, has an interest which is vested in interest, but being a future interest is not yet vested in possession. That person's interest will vest in possession on the death of the life tenant. In the present context the word "vested" is used in contradistinction to contingent. (at 4202-4203) In the circumstances here, Clause 4.8 of the Deed provides that each Unit Holder's beneficial interest in the Trust is vested in that unitholder. It provides that each Unit Holder has a fixed interest and entitlement in the Trust, and is entitled to the income and any distributions of capital made by the trustee in proportion to their Unit holding. Therefore, the unitholders have a vested interest in the corpus of the trust. | Detailed Reasoning - Indefeasible: In Dwigh t, Hill J stated that 'an interest is said to be defeasible where it can be brought to an end and indefeasible where it cannot'. (at 4203) In Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16 ( Colonial ), Stone J stated that the word indefeasible 'bears its ordinary meaning when applied to an interest, that is that the interest cannot be terminated, invalidated or annulled. (at paragraph 97). Further, in Colonial , the Federal Court considered the meaning of vested and indefeasible, and whether a power of amendment in section 601GC of the Corporations Act 2001, which concerns managed investment funds, caused the interests of the members of the managed investment fund to be defeasible. Stone J stated: 105..., the more telling argument that the right in question is defeasible stems from s601GC(1)(a), which empowers members to modify, repeal or replace the constitution of a unit trust by special resolution. In ING Funds Management Barrett J's commented that s601GC(1)(a) is a plenary power vested in members. ... 106 It follows that the members could vote to terminate the present right to a share of income and capital. Although in some circumstances such an exercise of power might be subject to implied limitations to which his Honour refers, there it no reason to believe that this would always be so. For that reason it must be concluded that the Wholesale Fund is not a fixed trust... Former subsection 160APHL(12) of the ITAA 1936 states: 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 - in creation of further interests under the trust; the interest is taken to be defeasible. Former subsection 160APHL(13) of the ITAA 1936 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 the 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 comprised by the trust holding is defeasible. | Detailed Reasoning - Application to your circumstances: In the circumstances here, Sub-Clause 2.3(b) of the Deed provides that, to the extent that any clause in the deed results or would result in the unitholders ceasing to have fixed interest, those clauses are inoperative. The units are not, and the Trustee has no intention for the units to be listed for quotation in the official list of an approved stock exchange. Former paragraph 160APHL(13)(a) of the ITAA 1936 is satisfied as the trust is a unit trust and the taxpayer holds units in the unit trust. Former paragraph 160APHL(13)(b) of the ITAA 1936 is satisfied as the further units are able to be issued in accordance with clause 8.1(b) of the Deed. Former paragraph 160APHL(13)(d) of the ITAA 1936 is satisfied as clause 8.1(b) of the Deed specifies that the subscription price or any new units issued by the Trustee is required to be calculated based on the net asset value of the Trust Fund determined in accordance with Australian accounting principles at the time of issue. Former paragraphs 160APHL(13)(a), (b), and (d) of the ITAA 1936 are satisfied and therefore former subsection 160APHL of the ITAA 1936 applies to cancel the operation of former subsection 160APHL(12) of the ITAA 1936. In addition, where the issue of new units is conducted in accordance with former subsection 160APHL(13) of the ITAA 1936, as required by sub clause 8.1(b) of the Deed, no material reduction in the value of the interest will be taken to have occurred. There is no power of redemption conferred on the Trustee in the Deed. The Trustee may repurchase units after the unitholder requests to do so in writing as per clause 9 of the Deed. The repurchase power cannot be exercised by the Trustee to defeat the unitholders interests. Clause 4.4 of the Deed requires that all units must have equal value, rank, and entitlements to income and capital of the Trust at all times. The Trustee is not conferred with a power to vary these rights to income and capital in any way. The Trustee has no discretionary power to vary the appointment of income or capital to the unitholders otherwise than in accordance with their proportional interest. Although the entitlements to income and capital are based on the proportion of the unit holding and are not discretionary, the Trustee has the power to determine receipts as income or capital under Clause 13.3 and 13.4 of the Deed. Clause 13.10 of the Deed provides the Trustee with the power to appoint the corpus or capital of the trust to the unit holders in proportion with their unit holding, the Deed does not otherwise provide the Trustee with the power to appoint or settle any part of the corpus to a new trust. The Trustee can enforce forfeiture of partly paid units under sub-clause 7.1(c)(i) of the Deed in circumstances of non-payment of all or any part of the unpaid application price of the unit when called by the Trustee. If the operation of this clause would cause the unitholders to have a defeasible interest in the capital of the Trust, sub-clause 2.3(b) of the Deed could apply so that Clause 7 is inoperative. Sub-clause 2.3(b) renders any clause that could cause the Unitholders interest to become defeasible inoperative, and therefore the Unitholders interests are indefeasible under the Deed. | Detailed Reasoning - Question 2: Not necessary to answer | Detailed Reasoning - Question 3: Not necessary to answer

Question 1: Do 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)? | Summary: Yes, the unitholders of the trust have a vested and indefeasible interest for the purpose of former subsection 160APHL of the ITAA 1936 as each Unit Holder has a fixed interest and entitlement in the Trust, and is entitled to the income and any distributions of capital made by the trustee in proportion to their Unit holding. In addition, clause 2.3(b) of the Trust Deed renders any clause that could cause the Unitholders interest to become defeasible inoperative, and therefore the Unitholders interests are indefeasible under the Deed.