Private ruling: Fixed entitlements
Date of advice: 26 September 2017
Published: February 2018
Ruling period: 1 July 2018 to 30 June 2020
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the beneficiaries of the Fund have fixed entitlements to all of the income and capital of Fund 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 the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the beneficiaries of the Fund as having fixed entitlements to all of the income and capital of Fund? | A2: Yes Issue 2 Will the beneficiaries of the Fund have a fixed interest in the trust holding for the purposes of former section 160APHL of the ITAA 1936? | Q3: Will the beneficiaries of the Fund have a vested and indefeasible interest in so much of the corpus of the Fund as is comprised by the trust holding, for the purposes of former subsection 160APHL(11) of the ITAA 1936? | A3: No | Q4: Will the Commissioner exercise the discretion in former subsection 160APHL(14) of the ITAA 1936 to treat the beneficiaries of the Fund as having a vested and indefeasible interest in so much of the corpus of the Fund as is comprised by the trust holding? | A4: Yes

Relevant facts and circumstances: In relation to the Fund: ● it was settled in mid-2017; ● it will not be listed on the Australian Securities Exchange (ASX); ● it is a registered managed investment scheme (MIS) under Chapter 5C of the Corporations Act 2001 (Corporations Act; ● it is intended that the Fund will remain a MIS at least until the end of the ruling period; ● the Trustee and Responsible Entity (RE) holds an Australian Financial Services License; ● the RE will offer Units in the Fund to Australian investors who are wholesale clients under section 761G of the Corporations Act ; ● no Units will be offered at a discount; ● Units will always be redeemed at the unit price determined on the basis of the net asset value, according to Australian accounting principles, of the Fund; ● the RE will not issue any options or rights and there is no proposal to do so; ● the RE will not issue any partly paid Units and there is no proposal to do so; ● It is intended that only one class of Units will be issued in the Fund; ● there is no provision in the Constitution of the Fund to re-classify Units of a particular class to a different class; ● it is intended that no income or capital be streamed to beneficiaries of the Fund.

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: Detailed Reasoning - Question 1: Section 272-65 of Schedule 2F to the ITAA 1936 provides that a trust is a 'fixed trust' if persons have fixed entitlements to all of the income and capital of the trust. Subsection 272-5(1) of Schedule 2F to the ITAA 1936 provides that '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'. It is accepted that unitholders in the Fund have an interest, by way of their entitlement as unitholders, in the trust. The Constitution contains certain clauses by which a beneficiary's interest in a share of the income or capital of the trust may be defeased. Therefore, it is considered reasonable to conclude, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, that all Unit Holders in the Fund do not have fixed entitlements to all the income and capital of the Fund. | Detailed Reasoning - Question 2: In view of the decision that unit holders in the Fund do not have fixed entitlements pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, subsection 272-5(3) may be applied where, among other things, '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.' Subsection 272-5(3) of Schedule 2F to the ITAA 1936 provides that: 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; the beneficiary has the fixed entitlement. Having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) of Schedule 2F to the ITAA 1936 there is a reasonable case for the Commissioner to exercise the discretion pursuant to subsection 272-5(3) to treat the interests of the unitholder in the income and capital of the Fund as fixed entitlements. As such, persons have fixed entitlements to all of the income and capital of the Fund and the Fund will be a 'fixed trust' for the purposes of section 272-65 of Schedule 2F to the ITAA 1936. | Detailed Reasoning - Question 3: 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." 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, and the interest of a beneficiary in shares held by other trusts. The Fund is not a 'widely held trust' for the purposes of former section 160APHD of the ITAA 1936. It has already been determined, in relation to Question 1, that the Unit Holders of the Fund do have a vested interest in a share of the capital of the Fund 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 Fund do not have a vested and indefeasible interest in so much of the corpus (capital) of the Fund as is comprised by the trust holding. | Detailed Reasoning - Question 4: In view of the conclusion above that the beneficiaries (Unit Holders) of the Fund do not have a vested and indefeasible interest in so much of the corpus (capital) of the Fund 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 - In terms of former paragraph 160APHL(14)(a) –: The taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding: As discussed above, the Unit Holders in the Fund will have an interest in so much of the corpus of the trust as is comprised by the trust holding. | Detailed Reasoning - In terms of former paragraph 160APHL(14)(b) –: 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 Fund is vested, the Constitution of the Fund contains certain clauses by which a Unit Holder’s interest in a share of the capital of the trust may be defeased. | Detailed Reasoning - In terms of former paragraph 160APHL(14)(c) –: Having regard to the factors prescribed in former paragraph 160APHL(14)(c) of the ITAA 1936: 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. Having regard to the factors in former paragraph 160APHL(14)(c) of the ITAA 1936, the Commissioner will, pursuant to subsection 160APHL(14) of the ITAA 1936, treat all of the Unit Holders as having a vested and indefeasible interest in so much of the corpus of the Fund as is comprised by the trust holding.

Issue 1: Is the Fund a fixed trust for the purposes section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?