Private ruling: Fixed entitlements and fixed interests
Date of advice: 19 July 2018
Published: September 2018
Ruling period: 1 July 20xx to 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the beneficiaries of the Trust as having fixed entitlements to all of the income and capital of Trust? | A1: Yes Issue 2 Will the beneficiaries of the Trust have a fixed interest in the trust holding for the purposes of former section 160APHL of the ITAA 1936? | Q2: Will the Commissioner exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the beneficiaries 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? | A2: Yes

Relevant facts and circumstances: In relation to the Trust: ● It was settled on 1 July 20xx. ● The Trust is not required to be a registered MIS because all unitholders will be wholesale clients under the Corporations Act. ● The Trustee is the authorised representative of an AFSL holder with appropriate authorisations. On this basis the Trustee is not required to hold an AFSL. ● It is anticipated that the Trust may qualify, as an MIT at some stage in the future, depending upon the investor mix of the Trust at the relevant time. The Trust Deed contains provisions to facilitate the administration of the Trust under the AMIT regime. ● The Trust does not currently have any carried forward tax losses. ● At present, there is no expectation that the Trust will make a tax loss during any of the income years during the Ruling Period, but it is possible that a tax loss may be made depending on the performance of the market. ● The Trustee currently does not forecast any deductions to be claimed for bad debts or debt/equity swap losses. Assumptions

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 272-5 of Schedule 2F | Subsection 272-5(1) of Schedule 2F | Subsection 272-5(2) of Schedule 2F | Subsection 272-5(3) of Schedule 2F | Section 272-65 of Schedule 2F | former section 160APHL | former subsection 160APHL(11) | former subsection 160APHL(14) | Income Tax Assessment Act 1997 Subsection 995-1(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. However, the Commissioner considers that it is reasonable to exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the beneficiaries of the Trust as having fixed entitlements to all of the income and capital of the Trust. | Detailed Reasoning - Generally: A ‘fixed trust’ is defined in subsection 995-1(1) of the ITAA 1997, and section 272-65 of Schedule 2F to the 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. The definition of ‘fixed entitlement’ in subsection 995-1(1) of the ITAA 1997 provides that ‘an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936 .’ | Detailed Reasoning - Specifically: 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, for the purposes of the Act, treat such beneficiaries as having a fixed entitlement where it is reasonable to do so based upon the factors prescribed in paragraph 272-5(3)(b). Paragraph 272-5(3)(b) stipulates that the Commissioner may treat a beneficiary as having a fixed entitlement (in cases where in fact beneficiaries do not have a 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. Therefore, it is a pre-condition of the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 that a beneficiary does not have a requisite fixed entitlement under subsection 272-5(1). Although the PBR applicant does not argue that subsection 272-5(1) of Schedule 2F to the ITAA 1936 is satisfied in respect of the Trust Deed, for the purposes of the matters that the Commissioner is required to consider in deciding whether to exercise the discretion in subsection 272-5(3) it is necessary to identify powers which may defease a vested interest in the income or capital of the Trust. The term ‘vested and indefeasible’ is not defined in the taxation legislation. Practical Compliance Guideline 2016/16 (PCG 2016/16) does discuss the meaning of the terms ‘vested’ and ‘indefeasible’ in the context of section 272-5 of Schedule 2F to the ITAA 1936. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 does discuss its ordinary meaning at some length, at paragraphs 13.4 to 13.9. The meaning of the term ‘vested and indefeasible’ (in the context of Schedule 2F to the ITAA 1936) has not been judicially considered, other than a discussion in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 in the limited context of amending the constitution of a registered managed investment scheme under section 601GC of the Corporations Act 2001 . However, the term ‘vested and indefeasible’ does appear in subsection 95A(2) of the ITAA 1936 and has been considered in that context by the courts – refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 173 CLR 264; 91 ATC 5000. Also relevant are MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v Commissioner of Stamp Duties (1952) 88 CLR 54; and Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490. 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 there must be a vested or 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 is the Trust Deed settled on 6 July 2018. It is accepted that the Trust Deed provides members with a vested interest in the income and capital of the Trust. As per paragraph 16 of PCG 2016/16, the Trust Deed contains certain clauses by which a Unit Holder’s interest in a share of the income or capital of the Trust may be defeased. Therefore, it can be concluded, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, that all beneficiaries (Unit Holders of the Trust) do not have fixed entitlements to all of the income and capital of the Trust. | Detailed Reasoning - Issue of Units: The saving rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 provides that where units held by a person in a unlisted unit trust are redeemable or further units are able to be issued, the units will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust 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 person’s interest, as a unit holder, in the income or capital of the unit trust is defeasible. As the price of further Units issued will not be determined on the basis of the net asset value of the Trust according to Australian accounting principles, the saving rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 will not be satisfied by Units whose Issue Price is determined under clause 7. As such, this power constitutes a defeasible power. | Detailed Reasoning - Classification of receipts: The combined effect of these powers could enable the Trustee to stream income or capital (or a greater proportion of income or capital) to particular Unit Holders, with the effect that other Unit Holders will not receive income or capital to which they would otherwise be entitled. This constitutes a defeasible power. | Detailed Reasoning - Redemption procedures: For similar reasons as outlined in relation to the calculation of the Issue Price of Units, the savings rule will not apply in relation to this defeasible power. | Detailed Reasoning - Amendments to the Trust Deed: The Trust Deed may be amended by the Trustee subject to the Corporations Act. Any ability to amend the Trust Deed, whether requiring unanimous approval or not, will constitute a power capable of defeating a beneficiary’s interest in the income or capital of the Trust. As noted by Stone J in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 at [106]: it follows [from unit holders’ ability to amend the Constitution] that the members could vote to terminate the present right to a share of income and capital. An amendment, whether approved by Unit Holders or effected by the Trustee's own act, could also permit the amendment of clauses which currently do not contain defeasible powers to do so. | Detailed Reasoning - Consideration of the exercise of the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936: 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). In view of the conclusion above that the beneficiaries (Unit Holders) of the Trust do not have a vested and indefeasible interest in the income and capital of the Trust, and hence do not have a fixed entitlement pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, the only way that the beneficiaries can have a fixed entitlement is if the Commissioner exercises the discretion in subsection 272-5(3). | Detailed Reasoning - In terms of paragraph 272-5(3)(a):: The beneficiaries (Unit Holders) of the Trust have a vested interest in the income and capital of the Trust, as detailed above. Further, as per paragraph 25 of PCG 2016/16 the trust is not a discretionary trust or a trust with default income or capital beneficiaries - that is, no beneficial interest in the income or capital of the trust is capable of being defeated, partly or wholly, by the exercise of a power of appointment of income or capital by the trustee or other donee. However, the beneficiaries (Unit Holders) do not have an indefeasible interest in the income and capital of the Trust. | Detailed Reasoning - In terms of subparagraph 272-5(3)(b)(i) –: The circumstances in which the defeasance of the interest can happen (in respect of the particular clauses of the Trust Deed) have been discussed above. | Detailed Reasoning - In terms of subparagraph 272-5(3)(b)(ii) –: The likelihood of the defeasance happening (in respect of the particular clauses of the Trust Deed discussed above): | Detailed Reasoning - Issue of Units: The Assumptions that will apply throughout the Ruling Period for the purposes of the scheme facts include that: ● The application and redemption price of Units in the Trust will be determined on the basis of the valuation of the assets and liabilities of the Trust in accordance with Australian accounting principles. ● The Trustee will not exercise a power capable of defeating a Unitholder’s interest to defeat a Unitholder’s interest in the income or capital of the trust. This will cause the savings rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 to be satisfied in respect of the issue of Units. | Detailed Reasoning - Classification of receipts: The Assumptions that will apply throughout the Ruling Period for the purposes of the scheme facts include that: ● No further classes of Units in the Trust will be issued. ● The Trustee will not exercise a power capable of defeating a Unitholder’s interest to defeat a Unitholder’s interest in the income or capital of the trust. As such, it is considered unlikely that a defeasance of Unit Holder's interests will occur as the result of the existence of the powers contained within these clauses of the Constitution. | Detailed Reasoning - Redemption procedures: The Assumptions that will apply throughout the Ruling Period for the purposes of the scheme facts include that: ● The application and redemption price of Units in the Trust will be determined on the basis of the valuation of the assets and liabilities of the Trust in accordance with Australian accounting principles. ● The Trustee will not exercise a power capable of defeating a Unitholder’s interest to defeat a Unitholder’s interest in the income or capital of the trust. This will cause the savings rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936 to be satisfied in respect of the redemption of Units. | Detailed Reasoning - Amendments to the Trust Deed: The Trustee must treat Unitholders who hold Units of the same Class equally and Unitholders who hold Units of different Classes fairly. The Trust Deed may only be amended by all Unitholders passing a unanimous resolution if: (i) the amendment would materially adversely impact a Class of Unitholders or the Unitholders as a whole; (ii) the amendment would be a material change to the Deed; or (iii) the Trustee believes the amendment would impact its status as a “fixed trust” for the purposes of the Tax Act. The Assumptions included for the purposes of this Ruling include that: The Trustee will not exercise a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust. As such, it is considered unlikely that a defeasance of Unit Holder's interests will occur as the result of the existence of the powers contained within this clause of the Trust Deed. | Detailed Reasoning - The nature of the trust:: ● The Trust is not required to be a registered MIS because all unitholders will be wholesale clients under the Corporations Act. ● The Trustee is the authorised representative of an AFSL holder with appropriate authorisations. On this basis the Trustee is not required to hold an AFSL. | Detailed Reasoning - Schedule 2F to the ITAA 1936 and tax losses: The concept of a 'fixed entitlement' was originally introduced in the context of the trust loss measures and should primarily be interpreted in that context (in the absence of any express provision or explanatory guidance that indicates a different context is relevant). The trust loss measures are an important integrity measure, removing a structural flaw in the tax system. The concept of a 'fixed entitlement' is fundamental to the structure and effectiveness of the trust loss measures. The EM to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 states (at paragraph 13.13) in respect of the Commissioner’s power in subsection 272-5(3) of Schedule 2F to the ITAA 1936 that: This provision is to provide for special circumstances where there is a low likelihood of a beneficiary's vested interest being taken away or defeased and, having regard to the scheme of the trusts loss provisions to prevent the transfer of the tax benefit of the losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement. This passage 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. It is noted that: ● The Trust does not currently have any carried forward tax losses. ● At present, there is no expectation that the Trust will make a tax loss during any of the income years during the Ruling Period. ● The Trust currently does not forecast any deductions to be claimed for bad debts or debt/equity swap losses. On balance, it is reasonable to conclude that the transfer of the tax benefit of the tax loss deductions does not constitute a material risk. | Detailed Reasoning - Recommendation: As stated above, it is reasonable to conclude, based on the “trust instrument” of the Trust, that for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the beneficiaries (Unit Holders) of the Trust do not have fixed entitlements to any of the income and capital of the Trust. However, pursuant to paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, and after having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) and submissions from the applicant, it is submitted that it is appropriate that the Unit Holders of the Trust should be treated as having fixed entitlements to all of the income and capital of the Trust for the relevant income years. In summary, as: ● the Trustee will not exercise a power capable of defeating a Unitholder’s interest to defeat a Unitholder’s interest in the income or capital of the trust; ● the Trust is not required to be a registered MIS because all unitholders will be wholesale clients under the Corporations Act; ● the Trustee is the authorised representative of an AFSL holder with appropriate authorisations. On this basis the Trustee is not required to hold an AFSL; ● the likelihood of defeasance is low; and ● there is little likelihood that a tax benefit of the Trust will be transferred, there is a reasonable case for the Commissioner to exercise the discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat all of the Unit Holders of the Trust as having a fixed entitlement to their share of the income and capital of the Trust for the relevant income years. | Summary: The terms of the trust instrument do not provide the beneficiaries with 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 ITAA 1936. However, the Commissioner considers that it is reasonable to exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the beneficiaries 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. | Detailed Reasoning - Detailed reasoning: A "fixed interest" in the trust holding is defined in former subsection 160APHL(11) of the ITAA 1936 as "a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding ." [emphasis added] | Detailed Reasoning - No vested and indefeasible interest: It has already been determined, in relation to Question 1, that the Unit Holders of the Trust do have a vested interest in a share of the capital of the Trust but not an indefeasible interest in a share of the capital of the trust, i.e. an interest in a share (or proportion) of all of the capital of the trust. (Note: The terms 'corpus' and 'capital' are considered to be synonymous for current purposes.) Therefore, it follows that the Unit Holders of the Trust do not have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding. In view of the conclusion above that the beneficiaries (Unit Holders) of the Trust do not have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding (being the Trustee's ownership of shares) pursuant to former subsection 160APHL(11) of the ITAA 1936, the only way that the beneficiaries can have such a vested and indefeasible interest is if the Commissioner exercises the discretion in former subsection 160APHL(14). Former subsection 160APHL(14) of the ITAA 1936 contains a discretion, whereby in cases where beneficiaries do not have a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding, the Commissioner may determine that the interest is to be taken to be vested and indefeasible. The requirements to be satisfied in respect of the discretion are contained in former subsections 160APHL(14)(a), (b) and (c) of the ITAA 1936. | Detailed Reasoning - The taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding:: Former section 160APHL of the ITAA 1936 provides that in calculating the extent of a beneficiaries interest, it is necessary to distinguish between the interest of a beneficiary in shares held by a widely-held trust (as defined below), and the interest of a beneficiary in shares held by other trusts. The Trust is not a 'widely held trust' for the purposes of former section 160APHD of the ITAA 1936. This necessitates that a 'look through' approach will be required to determine the interest that a beneficiary has in each of the underlying shares in the fund [refer to paragraphs 4.26, 4.77 and 4.88 of the EM which accompanied the Taxation Laws Amendment Bill (No. 2) 1999.] Although the method of calculating the interest that a beneficiary has in the trust holding differs as between widely-held trusts and trusts other than widely-held trusts, the beneficiaries of both types of trusts are capable of having an interest in the trust holding. The Trust Deed effectively defines ‘Assets’ as 'all the property and rights of the Trust’. As such, any shares held by the Trustee of the Trust would constitute form a part of the capital of the Trust which equates to the 'corpus' of the trust for current purposes. The Trust Deed relevantly provide that, '…each Unit confers an equal undivided interest in the Assets as a whole, subject to the Liabilities … and a Unit does not confer an interest in a particular Asset…’ The undivided equitable interest in the Assets that Unit Holders have constitutes the requisite interest in the corpus of the trust as is comprised by the trust holding for current purposes. Further, interests of the Unitholders are not contingent. That is, the trust is not a discretionary trust or a trust with default capital beneficiaries – such that, no beneficial interest in the capital of the trust is capable of being defeated, partly or wholly, by the exercise of a power of appointment of capital by the trustee or other donee. | Detailed Reasoning - Apart from this subsection, the interest would not be a vested or indefeasible interest:: As discussed above, although a Unit Holder's interest in the capital of the Trust is vested, the Trust Deed of the Trust contains certain clauses by which a Unit Holder’s interest in a share of the capital of the trust may be defeased. | Detailed Reasoning - Having regard to the factors prescribed in former paragraph 160APHL(14)(c):: These factors are: (i) the circumstances in which the interest is capable of not vesting or the defeasance can happen; and (ii) the likelihood of the interest not vesting or the defeasance happening; and (iii) the nature of the trust; and (iv) any other matter the Commissioner thinks relevant. It has already been determined, above, that the Commissioner should exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 so that the Unit Holders of the Trust will be treated as having a fixed entitlement to (being a vested and indefeasible interest in) all of the capital of the Trust. The factors in former paragraph 160APHL(14)(c) are identical, mutatis mutandis , to the factors in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, except for an additional factor in subparagraph (iv) of former paragraph 160APHL(14)(c). The saving rule in former subsection 160APHL(13) of the ITAA 1936 is identical, mutatis mutandis , to the saving rule in subsection 272-5(2) of Schedule 2F to the ITAA 1936. Also, the assumptions made in relation to this ruling application include that throughout the Ruling Period: ● The assets of the Trust will include shares in an Australian listed company for at least some of the period. ● The Trustee will not exercise a power capable of defeating a Unitholder’s interest to defeat a Unitholder’s interest in the income or capital of the trust. ● The Unitholders will be sufficiently exposed to the risk of loss or opportunity for gain in respect of the shares in the Trust as explained by ATO Interpretative Decision ATO ID 2014/10. Therefore, for the reasons given in relation to Issue 1, the Commissioner will exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the Unit Holders of the Trust as having a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding.

Is the Trust a fixed trust for the purposes section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)? | ● The Trust will not be an AMIT.