Private ruling: Fixed trust
Published: March 2012
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: The scheme will commence upon implementation of proposed amendments to the Trust Deed.

Ruling: Q1: Will the trust be a "fixed trust" as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if the Trust Deed is amended in the manner specified in the scheme description? | A1: Yes.

Relevant facts and circumstances: The trust was settled in the early 2000s. The trustee is, and has always been, a corporate trustee. The Trust Deed provides the trustee with the power to amend the Trust Deed. The trustee wishes to amend the trust deed to remove certain elements. On settlement of the trust, an individual acquired units in the trust. This individual has always been the sole unit holder, and the sole recipient of distributions from the trust.

Relevant legislative provisions: Income Tax Assessment Act 1936 , section 272-5 of Schedule 2F, | Income Tax Assessment Act 1936 , subsection 272-5(1) of Schedule 2F, | Income Tax Assessment Act 1936 , subsection 272-5(2) of Schedule 2F, | Income Tax Assessment Act 1936 , subsection 272-5(3) of Schedule 2F, | Income Tax Assessment Act 1936 , section 272-65 of Schedule 2F and | Income Tax Assessment Act 1997, subsection 995-1(1).

Reasons for decision: Summary: The terms of the trust instrument do not provide the sole unit holder with a vested and indefeasible interest in (and hence a fixed entitlement to) all of the income and capital of the trust as defined in subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936). However, the Commissioner will exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the sole unit holder as having a fixed entitlement to all of the income and capital of the trust. Therefore, the trust will be a fixed trust as defined in section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Fixed Trust: A 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997 as: a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust. This is consistent with section 272-65 of Schedule 2F to the ITAA 1936, which 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 . Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement to a share of the income or capital of 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. In addition, subsection 272-5(2) states that: If: (a) a person holds units in a unit trust; and (b) the units are redeemable or further units are able to be issued; and (c) if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and (d) if the units are not listed as mentioned in paragraph (c) - the units held by the person 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. The word 'interest' is a word that is capable of many meanings. In the absence of a definition, one must infer its meaning from the context in which it is found (see Gartside v Inland Revenue Commissioners [1968] AC 553 at 602-603 and 617-618; Commissioner of Stamp Duties (Queensland) v Livingston (1964) 112 CLR 12 at 28-29; and CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98). There may be circumstances in which the word 'interest' could be interpreted broadly to include any right or advantage that a person might be able to claim with respect to the income or capital of the trust and/or in respect of the trustee, whether present or future, ascertained or potential. In the context of Schedule 2F to the ITAA 1936, however, it is clear that for an interest to be recognised as a fixed interest it must be a right with respect to a share of the income or of the capital of the trust that is susceptible to measurement. To adopt the words of Lord Wilberforce in Gartside v Inland Revenue Commissioners , the right must have 'the necessary quality of definable extent'. The term 'vested and indefeasible' is also not defined in the taxation legislation, and to date there is no "ATO view" which defines or clarifies the term. 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 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 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 Federal Commissioner of Taxation 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 Federal Commissioner of Taxation (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; Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490. It is an essential element of subsection 272-5(1) of Schedule 2F that, in order to have a fixed entitlement to a share of the income or capital of a trust estate, there must be a vested or indefeasible interest 'under a trust instrument'. In all cases, the determining factor in deciding if a fixed entitlement exists 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. The first step in determining whether a beneficiary has a vested and indefeasible interest in a share of the income or capital of a trust is to ascertain the terms of the trust upon which the relevant trust property is held. As the High Court stated in CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic); Commissioner of State Revenue (Vic) v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [15], in taking this step: … a priori assumptions as to the nature of unit trusts under the general law and principles of equity [will] not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2) , upon the terms of the particular trust. The term "unit trust" is the subject of much exegesis by commentators. However, "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which dictate the application to particular facts of the [relevant statutory definition]… There will be some circumstances in which a trust instrument must be read subject to the operation of a particular legal rule, whether under the general law or statute. See, for example, the provisions of Chapter 5C of the Corporations Act 2001 which, if inconsistent with the constitution (being the trust instrument) of a registered managed investment scheme, can have the effect of altering or modifying the scheme's constitution. It is possible for a constitution to be altered or modified by operation of law irrespective of whether the trust instrument itself expressly recognises the relevant general law or statutory rule, and the entitlements of a beneficiary under the trust instrument are those as so altered or modified by operation of law. | Detailed Reasoning - Application to your circumstances: For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the "trust instrument" of the trust consists of the draft amended Trust Deed (referred to immediately below). It is accepted that the draft amended Trust Deed provides the sole unit holder with a vested interest in all of the income and capital of the trust. For the purposes of the "vested and indefeasible" definition in subsection 272-5(1) of Schedule 2F, the fact that a power held by the trustee or manager has not yet been exercised is not relevant when determining if the power results in an interest being defeasible. The exercise of the power is relevant to determining whether an interest has in law been defeased, not to whether the interest is defeasible. The key question is whether the power, if exercised, would result in a defeasance of some or all of a unit holder's (or beneficiary's) rights to the income and/or capital of the trust. The draft amended Trust Deed of the trust contains certain clauses by which the sole unit holder's interest in a share of the income or capital of the trust may be defeased. Therefore, it is reasonable to conclude, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, and taking into account subsection 272-5(2) of Schedule 2F to the ITAA 1936, that the sole unit holder (or beneficiary) does not have a fixed entitlement to all of the income and capital of the trust. Subsection 272-5(3) of Schedule 2F to the ITAA 1936 Subsection 272-5(3) of Schedule 2F to the ITAA 1936 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; the beneficiary has the fixed entitlement. Having regard to the draft amended Trust Deed of the trust and the factors enumerated in paragraph 272-5(3)(b), 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 sole unit holder of the trust as having a fixed entitlement to all of the income and capital of the trust. Therefore, the trust will be a fixed trust as defined in section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997.

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