Private ruling: Commissioner's discretion - fixed trust
Date of advice: 16 March 2022
Published: May 2022
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: XX May 20XX

Ruling: Q1: Do the Unitholders of the Trust have fixed entitlements to the income and capital of the Trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 ( ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No | Q2: Will the Commissioner exercise his discretion under subsection 272-5(3) of Schedule 2F of the ITAA 1936 to treat all interests of the income and capital of the Trust as fixed entitlement for the purposes of the trust loss provisions? | A2: Yes

Relevant facts and circumstances: The following documents, or relevant parts of them, form part of the facts in this Ruling: • The Trust Deed, executed on a specified date, provided to the Commissioner at the time of your request. Background: The Trust is a Unit Trust that was established by the Trust Deed on a specified date. No amendments have been made to the Trust Deed since establishment. The Trustee does not have the power to reclassify income or capital of the fund. On establishment, there were two classes of units issued. You provided us with a list of the original Unit Holders. Your Trust Deed contained the differences the different types of units issued. The applicant has stated there is no intention to issue any other classes of units. The applicant has stated that there is no intention to issue any further units in specified Class shares. Since the establishment of the Trust, there have been changes to the Unit Holdings on two occasions. You provided us with the changes to the Unit Holdings. The Trustee is not associated with any of the Unit Holders. As at 30 June 20XX, the Trust had carried forward tax losses of a specified amount which have arisen since the 20XX income year. Each Unit Holder has an immediate beneficial interest vested absolutely in the Net Income to the extent of the Unit Holder's entitlement and is presently entitled to that share of the Net Income. The Trust Deed gives the Trustee powers to issue additional Units in the Trust with approval of special resolution. The intention was to establish a Fixed Trust, a notion which was outlined in the Trust Deed, as the Trustee wanted the ability to recoup tax losses carried forward and to reduce compliance costs. Trust Deed Features The Commissioner considers the following features present in the Trust Deed: • The Trustee may alter the Trust Deed with the consent of all Unit Holders, however there are restrictions that any variation or revocation must not: ­ prejudicially affect the rights of a Unit Holder to income or capital of the Fund previously set aside for it or held for its benefit; or ­ result in any benefit to the Trustee (other than in its capacity as a Unit Holder. • Additional units may be issued, or current units redeemed, however the issue price must be determined based on net asset value of the Trust according to Australian accounting principles. • The Trustee may enforce the forfeiture of partly paid units but only where a Unit holder does not comply with notice requiring payment. • All Unit Holders have equal rights to the share of the Net Income for each Accounting Period on a pro rate basis with all Units. • The Trustee must pay, apply or set aside any Net Income for each Accounting Period for the Unit Holders as at midnight on the last day of the Accounting Period in proportion to the number of Units held by the Unit Holders. • The specified Class Units are entitled to priority distributions of capital or corpus of the Fund up to the amount of subscriptions paid. The percentage holdings of each Unit Holder were stated. The ultimate economic beneficiary of greater than 50% was maintain through the specified by five of the original unit holders. Your tax agent advised us that: • Your ultimate economic beneficiaries have not changed more than 50% through the specified period. • The losses of the trust will be offset against the income of the trust. You expect that the losses will be offset against future specified income (subject to continuing to satisfy the relevant trust loss tests). The losses will not be made available to be otherwise utilised by unitholders against income of unitholders or associated entities. • Two of the Unit Holders were new Unit Holders at a specified date are expected to benefit from the losses in proportion to their entitlements to income from the trust. The Trust Deed does not allow the Trustee to: • reclassify income or capital of the Fund; or • accumulate income, and all receipts and outgoings will be classified in accordance with income tax principles. Assumptions Throughout the Ruling Period it is assumed: The Trust Deed will not be amended. Further units will not be issued other than the units issued on two specified dates. No units have been or will be redeemed. The Trustee has not and will not exercise any power under the Trust Deed that would defease the interests of any Unit Holders. The Trustee and the Unit Holders will continue to deal with each other on an arm's length basis. No arrangement will have been entered into that would result in: • section 272-35 having application, • the trafficking of the tax benefit of a tax loss, bad debt, deduction or debt/equity swap deduction, or • fraud or evasion. Existing units in the Trust will not be reclassified, nor will the Trustee issue a further Class of Units. The Trust will not be terminated.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 272-5 in Schedule 2F | Income Tax Assessment Act 1936 section 272-65 in Schedule 2F | Income Tax Assessment Act 1997 section 995-1(1) | Tax Administration Act 1953 section 359-30 in Schedule 1

Reasons for decision: Summary: The terms of the trust instrument do not provide the beneficiaries with vested and indefeasible interests in all of the income and capital of the Trust. | Detailed Reasoning - What is a fixed trust?: The term 'fixed trust' is defined the same in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936); that definition provides that: "A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust". | Detailed Reasoning - What constitutes a fixed entitlement?: 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". Broadly, a beneficiary has a fixed entitlement to the income or capital of a trust if they have a vested and indefeasible interest in the income or capital of the trust. | Detailed Reasoning - Vested interest: The term 'vested' is not defined in the tax legislation and takes on its ordinary meaning. Practical Compliance Guideline, PCG 2016/16: Fixed entitlements and fixed trusts ( the PCG ) provides further guidance on this issue. Paragraphs 13 and 14 of the PCG relevantly state: "In terms of the concept of 'fixed entitlement', an interest is 'vested' if it 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. The mere object of a discretionary trust does not have a vested interest in, and therefore does not have a fixed entitlement to, either the income or capital of the trust". | Detailed Reasoning - Indefeasible interest: The term 'indefeasible' is not defined in the tax legislation, however, broadly speaking, an interest is generally indefeasible where it cannot be terminated, invalidated or annulled (see Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16, paragraph 97). Paragraph 15 of the PCG provides that: '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 interest of a default beneficiary in the income or capital of the trust is an example of a defeasible interest". | Detailed Reasoning - Examples: The PCG (at paragraph 16) also identifies powers in modern trust instruments which cause a beneficiary's interest to be defeasible. Such powers include: • 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" . | Detailed Reasoning - Application to your circumstances: It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a fixed entitlement to a share of income or capital of a trust there must be a vested and indefeasible interest "under a trust instrument". In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question. For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument consists of the Trust Deed dated 16 May 2017. To that end, whilst it is accepted that the Trust Deed provides Unitholders with a vested interest in the income and capital of the Trust, this interest is not indefeasible. In particular, it noted that the Trust Deed contains several clauses, in accordance with paragraph 16 of the PCG, that may cause the beneficiary's interest to be defeasible, namely: • Issuing of new Units - the Trust Deed gives the Trustee powers to issue additional units are follows: ­ with approval of a Special Resolution for the relevant Class of Units, at a price that is determined on the basis of the net value at the time that the Units are issued, or ­ without approval of a Special Resolution the Trustee may issue additional Units, for an Issue Price determined on the basis of the net asset value of the Trust at the time of the issue. • Variation of Trust - the Trust Deed gives the Trustee power (with prior approval to all Unit Holders) to vary to revoke the provisions of the Trust Deed. The variation must not affect the Unit Holders right to the income or capital of the trust or give a benefit to the Trustee (unless in their power as a Unit Holder). • Redemption of Units - the Trust Deed provides for the redemption of Units of any Class at Market Value. | Detailed Reasoning - Conclusion: Subsection 272-5(1) of Schedule 2F to the ITAA 1936 stipulates that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest. As previously noted, there are certain clauses of the Deed that may cause the beneficiaries' interests to be defeasible. Whilst the applicant acknowledges that some of the Unit Holders may be considered to have indefeasible interests and capital of the Trust deed to the Trust Deed providing the Trustee with some defeasible powers. Whilst the applicant has stated that none of these powers have not or will not be acted upon, for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the fact that a power held by the Trustee has not yet been exercised is not relevant when determining if the power results in an interest being defeasible [see Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-335]. The key question is whether the power, if exercised, would result in a defeasance of some or all of a beneficiary's rights to the income and/or capital of the trust. As a result, given the clauses outlined above and their potential to cause defeasance, the Unitholders, as beneficiaries of the Trust, do not have a fixed entitlement to a share of the income or capital of the Trust for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936. | Summary: Based on the facts provided, it would be reasonable for the Commissioner to consider exercising his discretion in subsection 272-5(3) of Schedule 2F to the ITAA1936 to treat the beneficiaries as having fixed entitlements to a share of the income and capital of the trust | Detailed Reasoning - Commissioner's discretion: Subsection 272-5(3) of Schedule 2F to the ITAA 1936 contains a discretion, whereby in cases where beneficiaries do not have a fixed entitlement, the Commissioner may treat such beneficiaries as having a fixed entitlement, having regard to the factors prescribed in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936. Subsection 272-5(3) 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 in the income or capital of the trust • commitments are made in unit holder agreements, Product Disclosure Statements or other documents with legal consequences that the trustee of 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 the beneficiaries to receive the income and capital or 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 unit holders 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 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 specified 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 of manager deals with the beneficiaries of the trust on an arm's length basis • the trust would satisfy the basis 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 the PCG, which states: The Commissioner regards the following factors unfavourably when deciding whether to exercise the discretion: • 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 unit holder's stake is less than a minimum specified in the trust instrument, and the unit holder 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. | Detailed Reasoning - Paragraph 272-5(3)(a): Paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 appears satisfied. As stated above, the Deed provides the Unitholders with vested interests in a share of the income and capital of the Trust. However, each Unitholder of the Trust does not have a fixed entitlement to the share of income and capital in the trust, in line with the analysis in Question 1. | Detailed Reasoning - Paragraph 272-5(3)(b): Paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936 appears satisfied. Whilst there are clauses in the Trust Deed which give rise to circumstances of potential defeasance (see Question 1 for further details), and thus, suggests that subparagraph 272-5(3)(b)(i) is answered negatively, both the likelihood of the interests not vesting or being defeated and the nature of the Trust itself (discussed in detail below) suggests that both subparagraphs 272-5(3)(b)(ii) and 272-5(3)(iii) are satisfied. | Detailed Reasoning - Likelihood of the interest not vesting or being defeated: Despite the Trustee's powers to cause potential defeasance (as mentioned above), the Commissioner considers, based on the facts provided, the probability of defeasance happening is low. It is a material fact in this regard that the Trustee has not exercised a power capable of defeating a beneficiary's interest. In particular, the Trustee states: • There are very limited powers for the Trust Deed to be amended and the Trustee does not have plans to amend the Trust Deed. • Only two classes of units have been issued (and no other classes of units will be issued) and each unit has equal share in the Net Income for each Accounting Period of the Trust based on their proportionate Unit Holding interest. • The specified Class Unitholders of the Trust will receive priority for the capital of the Trust directly proportionate to their Unitholding. • The Trustee has never exercised any of the powers capable of defeating any of the Unit Holder's interests in the income or capital of the Trust. • The Trustee does not plan to issue any further units in the relevant period. | Detailed Reasoning - The nature of the Trust: Taking into account the factors mentioned in PCG (paragraph 34), it is noted that, based on the statement provided: • The Trust was established for a specific purpose which you provided to us. • The Unit Holders have no relationship to each other with the exception of four Unit Holders, whom two are each controlled by the same person. • Since its inception, there have been changes to the Unit Holders on two occasions. The modifications have not resulted in a change of more than 50% in the unit holding proportions since inception. • The Trustee has the power to amend the provisions of the Trust Deed, but this is only possible by way of Special Resolution. • The Trustee will not exercise its amendment power for the purpose of diluting or otherwise defeating the interests of any unitholders. | Detailed Reasoning - Losses: As per paragraph 35 of the PCG, the Commissioner must consider " whether the exercise of the discretion would allow a person to obtain a tax benefit from a trust claiming a deduction for a tax loss, bad debt deduction or debt/equity swap deduction when the person did not bear the economic loss incurred by the trust " when exercising the discretion. It states that these factors are still relevant " even when the reason for requesting that the Commissioner exercise the discretion is related to one of the other legislative provisions listed in Attachment A ". This indicates that when looking at the facts of a case, in the context of the criteria listed in subsection 272-5(3) of Schedule 2F to the ITAA 1936, unless the context of the provision for which fixed entitlement is required provides otherwise, the Commissioner should always have regard to whether the absence of a fixed entitlement, in these circumstances, could result in the trafficking (or transfer) of the tax benefit of any tax losses. With regards to above, it is noted that: • At the date of the ruling application, the Trustee does not forecast any tax losses for the Trust. • There appears to be no arrangements to date that would give or can give any benefits of tax losses to any of the Unitholders • Where Units in the Trust may be issued or transferred and/ or redeemed in the future (that is, during the ruling period), the Trustee have said they will do so satisfying the saving rule in paragraph 272-5(2)(d) of Schedule 2F to the ITAA 1936. • The Trustee has said it will not make further amendments to the Trust Deed during the Ruling period • At the time of the ruling, they have advised there is no plans to issue a further class of units. As such, it is considered that were the Commissioner to deem fixed entitlements to exist under subsection 272-5(3) of Schedule 2F to the ITAA 1936 this would not result in the integrity purpose of Schedule 2F to the ITAA 1936 being undermined. | Detailed Reasoning - Conclusion: It is accepted that under subsection 272-5(1) of Schedule 2F to the ITAA 1936 the unit holders of the Trust do not have fixed entitlements to any of the income and capital of the trust. Pursuant to paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936 and after looking at the requirements in subparagraphs 272-5(3)(b)(i), (ii) and (iii) of Schedule 2F to the ITAA 1936 it is considered that it is appropriate that the Trust should be treated as a fixed trust for income years beginning the income year ending 30 June 20XX to income year ending 30 June 20XX.

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