Private ruling: Requirement to lodge income tax returns
Date of advice: 24 July 2018
Published: September 2018
Ruling period: 1 July 2017 to 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the Trustee under the Master Trust and Series Trust Notice exempt from lodging a tax return because the trust arrangement is a transparent trust? | A1: No | Q2: Is the Trustee under the Master Trust and any future Series Trust Notices that are on substantially the same basis as the current arrangement exempt from lodging a tax return because the trust arrangement will be a transparent trust? | A2: Not applicable

Relevant facts and circumstances: A Master Trust Deed (Master Deed) was entered into. The parties to the Deed include a Trust Manager (Manager) and a Trustee (Trustee). The Master Deed outlines the framework for the Trust Manager to establish separate trusts (Series Trusts), without the requirement of preparing individual trust documents for each Series Trust. It is the intention of the parties that the Master Trust is a bare trust and that the trustee does not derive any income or expenses. Rather, it is the intention of the parties that any income or expenses are derived by the Beneficiaries under the Series Trusts. The Manager and the Trustee may enter into a Series Trust Notice to specify the provisions which are to apply to any Series Trust. The purpose of the Series Trust Notice is to specify the beneficiary or beneficiaries of a Series Trust and the terms and conditions that apply to that trust. Under the Series Trust, specified beneficiaries provide Loans to borrowers in the amounts and proportions specified in the Series Trust Notice (Loan). A separate Series Trust will be established for each Loan, and the beneficiaries under each Series Trust may differ. In relation to each Loan, a loan agreement will be entered into between the Trustee and the borrower. A Series Trust Notice evidences the intention that funds loaned under a loan agreement are advanced by the Trustee on behalf of the beneficiaries severally as to each beneficiary’s Funding Commitment as set out in the Series Trust Notice. The Manager is appointed as the manager of the Series Trust pursuant to a Management Deed (Management Deed), under which the Manager is required to administer and service the assets, borrowings and other liabilities of the Series Trust and to conduct the day to day operations of the Series Trust as agent of the beneficiaries. The Manager will receive a management fee under the Series Trust in the amounts specified in the Series Trust Notice. It is intended that the Trustee does not have any active duties under the Master Deed or the Management Deed other than to deal with the Trust assets as the beneficiaries (or the Manager as agent of the beneficiaries) direct. The Manager and the Trustee entered into the Series Trust Notice to clarify the rights and entitlements of the beneficiaries. In accordance with the Series Trust Notice, a loan agreement was entered into between a borrower and a lender. Each beneficiary of the Series Trust Notice is an Australian resident, and not under any legal disability. It is intended that future Series Trust Notices will be entered into on substantially the same terms as the current Series Trust Notice, although the beneficiaries may be different. The Master Trust Deed has relevant provisions regarding beneficiary entitlements, the Manager, income and capital, termination dates, the Series Trust Notices etc. The Series Trust Notice has relevant provisions regarding payments and beneficial interests.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 161(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that Every person must, if required by the Commissioner by notice published in the Gazette , give to the Commissioner a return for a year of income within the period specified in the notice. In accordance with section 161 and related provisions of the ITAA 1936 the Commissioner requires every person described in Tables A, B, C, D, E, F, G, H, I, and J of the current lodgment legislative instrument issue by the Commissioner to give the Australian Taxation Office a return of income for the year. The current legislative instrument regarding lodgment of returns (TPAL 2018/1) lists the lodgment obligations of different entities. Table E relevantly states: Every trustee of a trust estate not covered by Tables K, L, M, or O that derived income (including capital gains) during the *income year. The return must be lodged by the trustee resident in Australia. If there is no trustee resident in Australia, the return must be lodged by the trust's public officer or, if no public officer is appointed, by the trust's agent in Australia. Under the Trust, the trustee will derive income from the Facility Agreement, and the Trustee is not covered by Tables K, L, M, or O of the current legislative instrument. Therefore the Trustee will have a requirement to lodge a Trust taxation return under section 161 of the ITAA 1936 and the current legislative instrument. Practice Statement Law Administration PS LA 2000/2 provides that a trustee of a ‘transparent trust’ is granted an exemption from lodging a tax return on behalf of the trust estate, provided that the trustee is not liable to pay tax under section 98, 99 or 99A of the ITAA 1936. A ‘transparent trust’ is a trust in which the beneficiary of the trust estate has an absolute, indefeasible entitlement to both the capital and the income of the trust. | Detailed Reasoning - Absolute and indefeasible entitlement: The concept of absolute entitlement is discussed in detail in Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) in relation to the capital gains tax provisions. The test of absolute entitlement looks to whether the beneficiary can direct the trustee to transfer the trust property to them or at their direction. This is not the same as determining whether the trust is a bare trust. The concept of a bare trust looks to the trustee’s duties, rather than whether the beneficiary has absolute entitlement to the trust property. The key requirements of absolute entitlement are that the: ● beneficiaries must have an interest in the trust assets, and ● the beneficiaries’ interests must be vested and indefeasible. Where there is a trust with one beneficiary only, one principle of ‘absolute entitlement’ is the ability of a beneficiary who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction (based on the rule in Saunders v. Vautier ). Interest in the trust assets Under the Master Trust Deed, the beneficial interest in each Trust is vested in the beneficiaries of the Trust in accordance with the relevant Series Trust Notice. The Series Trust Notice specifies the funding commitment of each beneficiary and the lending provisions being the amount of funds each beneficiary will provide on settlement. It is accepted that each beneficiary has an interest in the Trust assets proportionate to the amount of funds contributed, as specified in the Series Trust Notice. Vested and indefeasible To be vested, each beneficiary’s interest in the Trust assets must be bound to take effect in possession at some time and not be contingent upon an event occurring that may or may not take place. An indefeasible interest is one that is not able to be defeated by the actions of any person or the occurrence of any subsequent event. The Trust documentation specifies that each beneficiary is entitled to a proportion of the trust income and capital in the same proportion as the amount of funds contributed. Basically, after payment of all outstanding liabilities, the balance is to be distributed to the beneficiaries in the proportion in which they are presently entitled under the Trust. Absolute entitlement It is accepted that the beneficiaries have an absolute entitlement to the income of the Trust, however, to be considered a transparent trust the beneficiaries must also have an absolute entitlement to the assets of the trust. In circumstances where there are more than one beneficiary with a vested and indefeasible interest in the trust assets, each beneficiary can only be considered absolutely entitled to a specific number of the trust’s assets if: ● the assets are fungible, ● equity permits the beneficiary to have their interest in all those assets satisfied by a distribution or allocation in their favour of a specific number of them, and ● there must be a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to a specific number of the trust’s assets. To be fungible, an asset must be easily divisible with the individual units being indistinguishable from each other. Money is a fungible asset because one dollar is indistinguishable from another. In the current case, each beneficiary contributes a specified sum of money to the Trust. At that point it is accepted that those funds constitute a common pool of funds that could be considered fungible in the hands of the Trustee. However, the Trustee has used that common pool of funds to enter into the Facility Agreement with the third party borrower. As a result, the Trust assets are no longer a common pool of funds (cash) but a loan with a fixed term. A mortgage debt is not considered to be a fungible asset because it cannot be easily divided. It is considered that the loan created and is similar to a mortgage debt (not fungible) and is not the same as a pool of cash (fungible). It should be noted that the principle of absolute and indefeasible entitlement is concerned with whether a beneficiary has the ability to terminate the trust in respect to an asset, and not whether the beneficiary actually terminates the trust, or even whether they might seek to terminate it. Under the terms of the Trust, during the term of the loan, the beneficiaries have no ability to call on any of the funds that they have contributed to the Trust. Therefore it is not accepted that the beneficiaries are absolutely and indefeasibly entitled to the capital of the Trust, and therefore PSLA 2000/2 will not provide an exemption to the Trustee from lodging income tax returns for the Trust.