Private ruling: Fixed interests
Date of advice: 7 August 2020
Published: September 2020
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise the discretion pursuant to former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders, as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding? | A1: Yes

Relevant facts and circumstances: The Trust The Trust is an Australian unit trust that was established by deed of Trust dated xx/xxx/20XX. The units in the Trust are not listed on any stock exchange and are not anticipated to be in the foreseeable future. The Trust is not a Managed Investment Scheme (MIS) and is not a widely held unit trust. It is further noted that: · the Trustee deals with the beneficiaries of the Trust on an arm's length basis; · all beneficial interests in the income and capital of the Trust have vested; · all beneficial interests have had, and continue to have, the same rights to receive the income and capital of the Trust; · all beneficial interests in the income and capital of the Trust could be expressed as a percentage of the total income and capital of the Trust; · the Trust is not a discretionary trust or a trust with default income or capital beneficiaries; and · the Trustee has never exercised a power capable of defeating a Unitholder's interest to defeat a beneficiary's interest in the income or capital of the Trust. The Trustee The Responsible Entity is not the holder of an Australian Financial Services License for the purpose of Part 7.6 of the Corporations Act. The Units All Units in the Trust have the same entitlement (a single class). There are currently two Unitholders in the Trust, both of which are unrelated. The Trustee of the Trust does not intend to issue new Units of a separate class in the foreseeable future and has no intention to redeem Units in the foreseeable future. Tax Offsets The Trustee and beneficiaries apply for this PBR in order to seek clarity in relation to the ability of Unitholders to access franking credits on franked dividends received by the Trustee from the Company and distributed to its Unit Holders. The types of assessable income derived by the Trustee include dividends and capital gains. The types of assessable income derived will not change during the prospective part of the Ruling Period. Assumptions Throughout the Ruling Period: · Only one class of Units will be on issue in the Trust. · Any further Units will be issued or repurchased in accordance with the savings rule in former subsection 160APHL(13) of the ITAA 1936. · 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. · An arrangement has not been, and will not be, entered into which would result in: - a 'related payment' under former section 160APHN of the ITAA 1936; - a Unitholder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee (refer to former section 160APHM of the ITAA 1936); - a Unitholder not being 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; - the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936; - any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying; or - fraud or evasion.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 95A(2) | subsection 177EA(5) | paragraph 177EA(5)(b) | former section 160APHD | former section 160APHL | former subsection 160APHL(11) | former subsection 160APHL(13) | former subsection 160APHL(14) | former paragraph 160APHL(14)(a) | former paragraph 160APHL(14)(b) | former paragraph 160APHL(14)(c) | former subparagraph 160APHL(14)(c)(i) | former subparagraph 160APHL(14)(c)(ii) | former subparagraph 160APHL(14)(c)(iii) | former subparagraph 160APHL(14)(c)(iv) | former section 160APHM | former section 160APHN | Income Tax Assessment Act 1997 subsection 207-150(1) | paragraph 207-150(1)(c) | paragraph 207-150(1)(d) | paragraph 207-150(1)(e) | paragraph 207-150(1)(f) | paragraph 207-150(1)(g) | paragraph 207-150(1)(h)

Reasons for decision: Summary: The terms of the Trust Deed do not provide the Unitholders 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 Unitholders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding for the Ruling Period. | 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] (Note: The terms 'corpus' and 'capital' are considered to be synonymous for current purposes.) | Detailed Reasoning - No vested and indefeasible interest: The Trust Deed has several clauses that contain a power that may defease the interest of a Unitholder in the corpus of the Trust. These are: · Clause xx (The Trustee may issue new Units) effectively provides that Units additional to the Initial Units may be issued. The new Unit Price is to be calculated under Clause xx and is based upon the net asset value of the Trust Fund (but with no requirement that the valuation occur according to Australian accounting principles). Notwithstanding this, Clause xx provides that new Units can be issued for such consideration and on such terms and conditions as resolved. This will not satisfy the savings rule in former subsection 160APHL(13) of the ITAA 1936 such that this Trustee power will constitute a defeasible power. · Clause xx (Redemption of Units) provides that the Trustee may redeem Units based on the net asset value of the Units (but with no requirement that the valuation occur according to Australian accounting principles). This will not satisfy the savings rule in former subsection 160APHL(13) of the ITAA 1936 such that this Trustee power will constitute a defeasible power. · Clause xx (Amendments) provides that the Trustee may amend the Trust Deed with the unanimous approval of the Unitholders. As the Unitholders 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). The requirements to be satisfied in respect of the discretion are contained in former paragraphs 160APHL(14)(a), (b) and (c) of the ITAA 1936. | Detailed Reasoning - 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: Former paragraph 160APHL(14)(a) of the ITAA 1936 contains a 'threshold' condition that the taxpayer has an interest in the corpus of the Trust. An interest for these purposes is considered to be a 'vested interest' and not a 'contingent' interest. An example of a contingent interest is one that relies upon the exercise, or the non-exercise, of a trustee's discretion in relation to the income or capital of a trust. Former section 160APHL of the ITAA 1936 provides that in calculating the extent of a beneficiary's 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 a 'look through' approach 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. | Detailed Reasoning - Vested interests in the Trust Deed: Clause xx, Clause xx and Clause xx effectively provide that the beneficial interest in the capital of the Trust Fund shall be vested in the Units and that distributions thereof shall be to the Unitholders on a proportional basis. | Detailed Reasoning - Former paragraph 160APHL(14)(b): Apart from this subsection, the interest would not be a vested or indefeasible interest: As discussed above, although a Unitholder's interest in the corpus of the Trust is vested, the Trust Deed of the Trust contains certain clauses by which a Unitholder's interest in a share of the corpus of the Trust may be defeased. | Detailed Reasoning - Former paragraph 160APHL(14)(c): 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. | Detailed Reasoning - Clauses in the Trust Deed that contain powers which cause a Unitholder's interest in the capital of the Trust to be defeasible: The meaning of the term 'vested and indefeasible' (in the context of former section 16APHL of the ITAA 1936) has been judicially considered in Re Soubra and Federal Commissioner of Taxation - (8 October 2009) - [2009] AATA 775; 2009 ATC 10-113; (2009) 77 ATR 946. In that case the Tribunal referred to the meaning of the term 'vested and indefeasible' as follows (at 3154 and 3155): 32. Section 160APHL(11) provides that for the purposes of subsection (10), a taxpayer's interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding. 33. As Hill J explained in Dwight v Commissioner of Taxation 92 ATC 4192; (1992) 37 FCR 178, the words vested and indefeasible in the context of trust law are technical legal words of limitation, which have a well understood meaning to property conveyancers. He said, at 192: "... Estates may be vested in interest or vested in possession, the difference being between a present fixed right of future enjoyment where the estate is said to be vested in interest and a present right of present enjoyment of the right, where the estate is said to be vested in possession: Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 496 per Griffith CJ, at 501 per Isaacs J. A person with an interest in remainder, subject to a pre-existing life interest, has an interest which is vested in interest, but being a future interest is not yet vested in possession. That person's interest will vest in possession on the death of the life tenant. In the present context the word 'vested' is used in contradistinction to contingent. An interest is said to be defeasible where it can be brought to an end and indefeasible where it can not...." 34. As Mr Sest submitted, the use of the conjunctive phrase vested and indefeasible indicates the right must be absolute: see Saunders v Vautier (1841) 49 ER 282. Mr Sest submitted an interest is defeasible where it is subject to a condition subsequent. He cited the following examples where this may occur: (a) where that is the effect of the trust deed; (b) where a beneficiary interest is disposed of by the trustee in the course of administration of the trust prior to vesting day; (c) where there exists a contingency that the person may not be a beneficiary as at the vesting date; and (d) where the beneficiary's vested interest is able to be divested by the exercise of a power by the trustee (or any other person). In Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 the Federal Court considered the term in the limited context of amending the constitution of a registered managed investment scheme under section 601GC of the Corporations Act 2001 . The term 'vested and indefeasible' also appears 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 | Detailed Reasoning - Former subparagraph 160APHL(14)(c)(i): The circumstances in which the defeasance of the interest can happen (in respect of the particular clauses of the Trust Deed) are: · Clause xx (The Trustee may issue new Units) effectively provides that Units additional to the Initial Units may be issued. The new Unit Price is to be calculated under Clause xx and is based upon the net asset value of the Trust Fund (but with no requirement that the valuation occur according to Australian accounting principles). Notwithstanding this, Clause xx provides that New Units can be issued for such consideration and on such terms and conditions as resolved. This will not satisfy the savings rule in former subsection 160APHL(13) of the ITAA 1936 such that this trustee power will constitute a defeasible power. · Clause xx (Redemption of Units) provides that the Trustee may redeem Units based on the net asset value of the Units (but with no requirement that the valuation occur according to Australian accounting principles). This will not satisfy the savings rule in former subsection 160APHL(13) of the ITAA 1936 such that this trustee power will constitute a defeasible power. · Clause xx (Amendments) provides that the Trustee may amend the Trust Deed with the unanimous approval of the Unitholders. 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 could also permit the amendment of clauses which currently do not contain defeasible powers to do so. | Detailed Reasoning - Former subparagraph 160APHL(14)(c)(ii): The likelihood of the defeasance happening (in respect of the particular clauses of the Trust Deed discussed above): · Clause xx (The Trustee may issue new Units) effectively provides that Units additional to the Initial Units may be issued. - No new Units have been issued in the Trust. - The Trustee of the Trust has never exercised a power under the trust deed that is capable of defeating a unit holder's interest in respect of income or capital of the trust. - An Assumption will apply for the Ruling Period that any further Units will be issued or repurchased in accordance with the savings rule in former subsection 160APHL(13) of the ITAA 1936. - An Assumption will apply for the Ruling Period that 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. · Clause xx (Redemption of Units) provides that the Trustee may redeem Units. No new Units have been issued in the Trust. - No Units have been repurchased. - The Trustee of the Trust has never exercised a power under the trust deed that is capable of defeating a unit holder's interest in respect of income or capital of the trust. - An Assumption will apply for the Ruling Period that any further Units will be issued or repurchased in accordance with the savings rule in former subsection 160APHL(13) of the ITAA 1936. - An Assumption will apply for the Ruling Period that 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. · Clause xx (Amendments) provides that the Trustee may amend the Trust Deed with the unanimous approval of the Unitholders. - The Trust Deed has been amended once, this was done with the unanimous approval of the Unit Holders in order to confirm their fixed interest and ensure the efficient administration of the Trust. As a result of this modification no unit holder's interest was defeated. - An Assumption will apply for the Ruling Period that 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. | Detailed Reasoning - Former subparagraph 160APHL(14)(c)(iii): The nature of the trust: · The Trust is a closely-held trust that is investing a Company that owns shares in a trading company. | Detailed Reasoning - Former subparagraph 160APHL(14)(c)(iv): Any other matter the Commissioner thinks relevant: · The discretion in former subsection 160APHL of the ITAA 1936 (14) pertains to the utilisation of a tax offset for a share of the franking credit on a franked distribution. It was introduced as a part of integrity measures aimed at defeating franking credit trading schemes. · The EM which accompanied the introduction of former subsection 160APHL(14) of the ITAA 1936 outlined the purpose of the integrity measures: 4.6 One of the underlying principles of the imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves: a degree of wastage of franking credits is an intended feature of the imputation system. 4.7 In substance, the owner of shares is the person who is exposed to the risks of loss and opportunities for gain in respect of the shares. However, franking credit trading schemes allow persons who are not exposed, or have only a small exposure, to the risks and opportunities of share ownership to obtain access to the full value of franking credits, which often, but for the scheme, would not have been used at all, or would not have been fully used. Some of these schemes may operate over extended periods, and typically involve a payment related to the dividend which has the effect of passing its benefit in economic terms to a counterparty. The schemes therefore undermine an underlying principle of imputation. · As such, when considering the exercise of the discretion in former subsection 160APHL(14) of the ITAA 1936, the Commissioner must be mindful not to undermine the intended effect of the integrity measures themselves. · It is noted that certain Assumptions have been included which are aimed at preventing the purpose of the integrity measures from being undermined, namely: - Throughout the Ruling Period an arrangement has not been, and will not be, entered into which would result in: - a 'related payment' under former section 160APHN of the ITAA 1936; - a Unitholder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee (refer to former section 160APHM of the ITAA 1936); - a Unitholder not being 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; - the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936; - any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying; or - fraud or evasion. | Detailed Reasoning - Conclusion: The beneficiaries of the Trust do not have 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, pursuant to the requirements of former subparagraphs 160APHL(14)(c)(i), (ii) and (iii) of the ITAA 1936 it is considered appropriate that the Unitholders should be treated as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding. Relevantly: · the Trust Deed contains three Clauses that may constitute a defeasible power (that have not been used to defeat Unitholder's interest in the Corpus of the Trust); · the Trustee has not, and will not, exercise a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the capital of the Trust; · the likelihood of defeasance is low; and · there is little likelihood that a franking credit trading scheme exists in connection with the facts. Therefore, it is appropriate for the Commissioner to exercise the discretion under former subsection 160APHL(14) of the ITAA 1936 to treat the Unitholders as having a vested and indefeasible interest in so much of the corpus of the Trust as is comprised by the trust holding during the Ruling Period.