Private ruling: Resident trust estates
Published: February 2015
Ruling period: Year ended 30 June 2015 to year ended 30 June 2020
Date scheme commenced: When the Establishment was registered.

Ruling: Q1: Is the X (the Establishment) a trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: If the answer to Question 1 is Yes, is the trust estate a resident trust estate pursuant to subsection 95(2) of the ITAA 1936? | A2: Yes | Q3: Can the Establishment make a family trust election under subdivision 272-D of Schedule F of the ITAA 1936? | A3: Yes, for a specified income year subject to it satisfying subsection 272-80(4A) of Schedule 2F of the ITAA 1936. This ruling applies to the beneficiaries of the trust and to the trustee and to any future trustees, for as long as the ruling remains current.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. The Establishment was registered in X in accordance with Art. 534 et seqq of the Personen und Gesellschaftsrecht, the Persons and Companies Act of X (PGR). This was done on the instructions of an individual. 2. The individual and their immediate family (spouse and children) are residents of Australia for taxation purposes. 3. Since registration, the Establishment's activities solely consisted of buying and selling shares and other investment products such as currencies, precious metals and financial derivatives either directly or indirectly (via investment in other vehicles). 4. The Articles of the Establishment name a X Trust Company as the fiduciary founder. 5. Article 2 states that the duration of the Establishment is unlimited. 6. Article 8 states: The supreme organ of the establishment is the founder, respectively his legal successor or successors. All rights and powers vested to the supreme organ by law and in accordance with these articles, fall within his competency, in particular: (a) the appointment and discharge of the board of directors and the auditing committee; (b) nomination of the beneficiaries and the determination of the nature and extent of their rights; (c) alterations and supplements to these articles, possibly through by-laws; (d) distribution of net profits; (e) dissolution of the establishment and disposition of the proceeds of a liquidation. 7. Article 4 states: Capital of the Establishment The capital of the establishment amounts to [specified amount of money]. It is fully paid up and not divided into shares. 8. The individual arranged for this sum to be paid to the Establishment by an associated entity. 9. Article 6 states: Beneficiaries The establishment's capital and its revenues as well as prospective net earnings of the establishment will flow to the beneficiaries, who are determined by the founder in a by-law. The designation of the original beneficiaries as well as their successors can be revocable or irrevocable. If for any reason the founder is not in a position to determine the beneficiaries, this power is transferred to the board of directors. 10. The beneficiaries of the Establishment are the individual and their immediate family. 11. Since the Establishment was first registered, it has only entered into transactions implemented by the individual, or under his direction. In the earlier years, it was the individual's usual practice to direct the X Trust Company to carry out the transactions she/he wished to make on behalf of the Establishment. The individual advised a member of the X Trust Company of his instructions. These instructions were always complied with. 12. Over time, the individual undertook the majority of the Establishment's activities himself. She/he would buy, sell and carry out other transactions electronically without any involvement from the X Trust Company or any of its staff. The only times the individual instructed the X Trust Company to implement transactions was in relation to foreign currency transactions. This was due to the complexity of completing such transactions, primarily due to restrictions with the online banking platforms. The X Trust Company always carried out the individual's instructions. 13. To the extent that offshore entities (such as the 'fiduciary founder') are involved in the administration or governance of the Establishment, these entities take directions from the individual and must comply with any directions given by the individual (subject to those directions complying with the relevant laws in X and other relevant jurisdictions).

Relevant legislative provisions: ITAA 1936 Subsection 6(1) | ITAA 1936 Division 6 Part III | ITAA 1936 Subsection 95(2) | ITAA 1936 Subdivision 272-D of Schedule 2F | ITAA 1936 Section 272-80 of Schedule 2F | ITAA 1936 Section 272-87 of Schedule 2F | Detailed reasoning | Question 1 | Is the X Anstalt (the Establishment) a trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)? Nature of X anstalt | 1. X anstalts (establishments) are a creature of the PGR. | 2. Under X law, an establishment comes into existence and acquires the right of legal personality through registration in the Public Register. | 3. An establishment may be formed by an individual person, a firm, a community, association of communes or a legal entity not otherwise registered under the PGR (referred to as the founder). | 4. Written articles signed by the founder are necessary for the formation of the establishment. The articles must provide for certain things which are deemed essential: | • the name, the domicile and the designation as 'Establishment'; | • the objects of the establishment; | • the estimated value of the establishment capital in the event it is not in cash; | • the powers of the supreme body; and | • the bodies for the administration and, if necessary, for the auditing and the manner in which representation is implemented. | 5. Shares of the establishment's assets for the founder or third parties only exist pursuant to the provisions of the articles. | 6. The bearer of the founder's rights forms the establishment's supreme body. The articles may also confer the powers on a board of directors. | 7. The articles shall determine in detail who shall benefit from the establishment and its possible net profit (beneficiaries); the manner in which these shall be determined specifically and whether and in what ways the beneficiaries shall be entitled to participate in the organisation. As long as no third parties have been appointed as beneficiaries, it shall be assumed that the bearer of the founder's rights is the beneficiary. The founder may amend the articles at any time. | 8. Only the establishment's assets shall be liable for the establishment's debts. The administration of the establishment has obligations to observe the law, articles and the like applicable to the establishment, to properly account for the business of the establishment, to preserve the capital and assets and to conduct the business with care and skill. | Trust estate under the ITAA 1936 | 9. Division 6 of Part III of the ITAA 1936 provides for the income tax treatment of the net income of trust estates. The term 'trust estate' is not defined in the ITAA 1936 but it is well accepted that the term refers to property held or controlled by a trustee as defined in subsection 6(1) of ITAA 1936: see The Registrar of the Accident Compensation Tribunal (Vic) v FC of T 93 ATC 4836 at 4853. The Full High Court in that case also found that the subsection 6(1) definition of trustee includes a trustee in the ordinary sense. | 10. A trust in the ordinary sense has been described in Jacob's Law of Trusts as follows: | A trust is an institution developed by equity and cognisable by a court of equity. A trust is not a juristic person with a legal personality distinct from that of the trustee and beneficiary, nor is it merely descriptive of an equitable right or obligation. Instead, it is a relation between trustee and beneficiary in respect of certain property . More particularly, a trust exists when the owner of a legal or equitable interest in property is bound by an obligation, recognised by and enforced in equity, to hold that interest for the benefit of others, or for some object or purpose permitted by law. | 11. The majority of the High Court in The Registrar of the Accident Compensation Tribunal (Vic) v FC of T said: | A trust may be created without use of the word "trust". And, unless there is something in the circumstances of the case to indicate otherwise, a person who has "the custody and administration of property on behalf of others" or who "has received, as and for the beneficial property of another, something which he is to hold, apply or account for specifically for this benefit" is a trustee in the ordinary sense. | 12. In Harmer & Ors v FC of T [1989] FCA 432; 89 ATC 5180, French J (in the first instance) identified the essential elements of a trust as: | • the existence of a trustee who holds a legal or equitable interest in the trust property, | • the existence of trust property which must be property capable of being held on trust and which includes a chose in action, | • the existence of one or more beneficiaries other than the trustee, and | 13. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries. In the present case: | • the Establishment is a legal entity in X which Australia is obliged to recognise: Chaff and Hay Acquisition Committee v Hemphill [1947] 74 CLR 375. | • the Establishment is the legal owner of assets; | • the Establishment holds its capital for the benefit of the beneficiaries (see Articles 6 and 8). | • the beneficiaries of the assets are the individual and their immediate family; and | • the activities of the establishment are carried out by the individual or under their instructions, which are always followed. | 14. All the elements of a trust are present. The tight control the individual has over the Establishment might actually make it a bare trustee. As Gummow J explained in Herdegen & Anor v FC of T 88 ATC 4995: | Today the usually accepted meaning of "bare'' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party (at ATC 5003). | 15. As the Establishment holds the property on trust for the individual and their immediate family, it is the trustee of a trust estate for the purposes of Division 6 of Part III of the ITAA 1936. | Question 2 | If the answer to Question 1 is Yes, is the trust estate a resident trust estate pursuant to subsection 95(2) of the ITAA 1936? | Resident trust estate | 16. Subsection 95(2) of the ITAA 1936 provides that a trust estate shall be taken to be a resident trust estate for the purposes of Division 6 of Part III of the ITAA 1936 in relation to an income year if: | (a) a trustee of the trust estate was a resident at any time during the year of income; or | (b) the central management and control of the trust estate was in Australia at any time during the year of income. | 17. Paragraph 48 of Taxation Ruling TR 2004/15 explains the nature of central management and control (CM&C) for a company in the following terms: | Determining CM&C involves a focus on the who, when and where of the strategic decision making of a company. CM&C includes the setting of directions and goals, and the evaluation of the company's performance measured against these benchmarks and emerging market risks and opportunities. Accordingly, the second statutory test focuses on management and control decisions made at the highest levels in the company: Koitaki Para Rubber Estates Ltd v. FCT (1941) 64 CLR 241 at 244; (1941) 6 ATD 82; (1941) 2 AITR 167. | 18. Example 4 of TR 2004/15 suggests that the CM&C of a pure investment vehicle lies where the decision on the investment strategy (as opposed to the actual trades) is made. | 19. In the present case, the Establishment's activities solely consist of buying and selling shares and other investment products such as currencies, precious metals and financial derivatives either directly or indirectly (via investment in other vehicles that carry out these activities). | 20. All transactions are carried out by the individual or under their instructions without input from the X Trust Company's personnel. The central management and control rests with the individual as they alone determines the investment strategy of the assets. As the individual resides in Australia, and is an Australian tax resident and the central management and control of the trust is in Australia. Consequently, the trust is a resident trust estate. | Question 3 | Can the Establishment make a family trust election under subdivision 272-D of Schedule F of the ITAA 1936? | Family Trust Election | 21. The trustee of a trust may make a family trust election (FTE) in accordance with section 272-80 of Schedule F of the ITAA 1936, that the trust is a family trust for the purposes of Schedule F at all times after the beginning of a specified income year. | 22. In order to make a FTE the trustee of a trust must: | (a) make the election in writing and in the approved form: subsection 272-80(2); | (b) specify an individual whose family group is to be taken into account in relation to the election: subsection 272-80(3); and | (c) pass the family control test at the end of the specified income year: subsection 272-80(4). | 23. As the Establishment is the trustee of a trust, it can make a family election provided that the requirements of section 272-80 of Schedule F of the ITAA 1936 are met. | 24. For the purposes of subsection 272-80(2) of Schedule F it is assumed that the election will be made in the approved form. | 25. The applicant has stated that the individual will be the specified individual for the purposes of subsection 272-80(3) of Schedule F. | 26. Pursuant to subsection 272-80(4A), the specified income year may be an income year before the one in which the election is made (but not earlier than the 2004/2005 income year) if: | (a) at all times in the period from the beginning of the specified income year until 30 June in the income year before the one during which the election is made, the trust passes the family control test; and | (b) any conferral of present entitlement, or any distributions of, income or capital of the trust made by the trustee during the period have been made on or to the individual specified in the election or members of that individual's family group. | 27. The family control test is set out in section 272-87 of Schedule F as follows: | (1) A trust in respect of which a family trust election or an interposed entity election is proposed to be made passes the family control test if: | (a) the requirement in any of the paragraphs of subsection (2) is satisfied in relation to a group consisting of: | (i) the individual (the primary individual) who is to be specified in the family trust election or, in the case of an interposed entity election, who is specified in the family trust election to which the interposed entity election will relate; or | (ii) one or more members of the primary individual's family (see section 272-95); or | (iii) the primary individual and one or more members of the primary individual's family; or | (b) the requirement in any of paragraphs (a) to (e) of subsection (2) is satisfied in relation to a group consisting of a person or persons covered by subparagraph (a)(i), (ii) or (iii) of this subsection and one or more legal or financial advisers to the primary individual or to a member of the primary individual's family; or | (c) the requirement in paragraph (f) of subsection (2) is satisfied in relation to a group consisting of: | (i) the trustees of one or more family trusts, provided the primary individual is specified in the family trust election of each of those family trusts; or | (ii) such trustees and a person or persons covered by subparagraph (a)(i), (ii) or (iii). | 28. Pursuant to subsection 272-87(2) of Schedule F, the requirements for the purposes of subsection (1) is as follows: | (a) the group has the power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the trust; or | (b) the group is able (directly or indirectly) to control the application of the capital or income of the trust; or | (c) the group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in paragraph (b); or | (d) the trustee of the trust is accustomed, under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the group; or | (e) the group is able to remove or appoint the trustee of the trust; or | (f) the group has more than a 50% stake in the income or capital of the trust; or | (g) persons in the group are the only persons who, under the terms of the trust, can obtain the beneficial enjoyment of the income and capital of the trust. | 29. In the present case, paragraphs 272-87(2)(a), (b) and (d) are satisfied (and therefore fulfilling the requirements of subsection 272-87(1)(a)) because: | • The founder of the Establishment, the X Trust Company, has the power to nominate beneficiaries and determine the nature and extent of their rights, distribute net profits, dissolve the establishment and dispose of the proceeds of liquidation: see Articles 6 and 8. | • The X Trust Company always complies with the directions and instructions of the individual. | 30. As a result the Establishment satisfies the family control test and is able to lodge a family trust election under subsection 272-80(1) of Schedule 2F of the ITAA 1936 for a specified income year subject to it satisfying subsection 272-80(4A).