Private ruling: Discretionary trust - subsidiary member
Date of advice: 2 February 2023
Published: 20 March 2023
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the Trust eligible to be a subsidiary member of the Head Company consolidated group under item 2 of paragraph 703-15(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: 1. Head Company is the head company of a tax consolidated group. 2. Subsidiary Company is a subsidiary member of Head Company. 3. Head Company owns 100% of the shares in Subsidiary Company. 4. The Trust was settled on DD Month 20xx. 5. The Trust is a resident trust estate. 6. At all relevant times, the Trust will not be a complying superannuation entity, non-complying approved deposit fund, or a non-complying superannuation fund. 7. At all relevant times, the Trust will not be exempt from tax under Division 50 of the ITAA 1997. 8. The Trust Deed names Head Company and Subsidiary Company as beneficiaries of the Trust. 9. The Trust Deed also identifies classes of objects from whom the Trustee may nominate to benefit under the Trust Deed. The Trustee has not nominated any further beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 6 | Income Tax Assessment Act 1997 Division 50 | Division 703 | section 703-10 | section 703-15 | subsection 703-15(1) | paragraph 703-15(2)(b) | section 703-20 | section 703-25 | section 703-30 | section 703-45 | Division 711 | paragraph 711-15(1)(d) | subsection 711-65(8) | subdivision 960-G | section 960-100 | section 960-130 | subsection 960-130(1) | section 960-135 | paragraph 960-135(b) | section 995-1

Reasons for decision: Summary: 1. Division 703 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the rules regarding consolidated groups and their members. Subsection 703-15(1) of the ITAA 1997 provides that an entity is a member of a consolidated group while the entity is the head company of the group or a subsidiary memberof the group. 2. "Entity" is defined at section 995-1 of the ITAA 1997 to have the meaning given by section 960-100 of the ITAA 1997 which includes a trust. 3. Paragraph 703-15(2)(b) of the ITAA 1997 provides that an entity that: At a particular time in an income year, ... is: (a) ... (b) a subsidiary member of a *consolidated group or *consolidatable group if all the requirements in item 2 of the table are met in relation to the entity: 4. Those requirements are: (a) the trust cannot be a trust covered by section 703-20 of the ITAA 1997; that is, it cannot be a complying superannuation entity, non-complying approved deposit fund, or a non-complying superannuation fund. [1] The trust also cannot be a subsidiary member of a group at a time if at that time the total ordinary income and statutory income of the trust is exempt from income tax under Division 50 of the ITAA 1997 [2] ; and (b) the trust must comply with section 703-25. In the case of a trust, except a unit trust or a public trading trust for the income year, the trust must be a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 [3] ; and (c) the trust must be a wholly-owned subsidiary of the head companyof the consolidated group and, if there are interposed between them any entities, the set of requirements in section 703-45 of the ITAA 1997 or sections 701C-10 or 701C-15 of the Income Tax (Transitional Provisions) Act 1997 must be met. Section 703-45 provides this condition will be met only if each interposed entity is a subsidiary memberof the relevant consolidated group. 5. Section 995-1 of the ITAA 1997 states that a "wholly-owned subsidiary" of the head company of the consolidated group is determined by section 703-30 of the ITAA 1997. 6. Section 703-30 of the ITAA 1997 provides that: One entity (the subsidiary entity ) is a wholly-owned subsidiary of another entity (the holding entity ) if all the *membership interests in the subsidiary entity are beneficially owned by: (a) the holding entity; or (b) one or more wholly-owned subsidiaries of the holding entity; or (c) the holding entity and one or more wholly-owned subsidiaries of the holding entity. 7. "Membership interest " in an entity is defined at section 995-1 of the ITAA 1997 to have the meaning given by section 960-135 of the ITAA 1997. Section 960-135 of the ITAA 1997 provides that: If you are a *member of an entity: (a) each interest, or set of interests, in the entity; or (b) each right, or set of rights, in relation to the entity; by virtue of which you are a member of the entity is a membership interest of yours in the entity. 8. Subdivision 960-G of the ITAA 1997 determines who are members of an entity for tax purposes. Subsection 960-130(1) of the ITAA 1997 provides: The following table sets out who is a member of various entities. | Detailed Reasoning - 1: company a member of the company or a stockholder in the company | Detailed Reasoning - 2: partnership a partner in the partnership | Detailed Reasoning - 3: trust (except a *public trading trust) a beneficiary, unitholder or object of the trust | Detailed Reasoning - 5: *public trading trust a unitholder of the trust In your circumstances 9. To determine if the Trust is eligible to be a subsidiary member of the consolidated group, it is necessary to ascertain: • who are the members of the Trust; • what are the membership interests of those members; • whether all of the membership interests are beneficially owned by Head Company, or any of its wholly-owned subsidiaries, and • whether any of the requirements in columns 2 or 3 of item 2 of paragraph 703-15(2)(b) preclude the Trust from being a member of the consolidated group. | Detailed Reasoning - Who are the members of the Trust?: 10. Item 3 of section 960-135 of the ITAA 1997 includes in the definition of a member of a trust, a beneficiary, a unitholder or an object of the trust. In the case of a discretionary trust (at least prior to the exercise of the discretion in favour of a particular person) the relevant phrase in the definition is 'object of the trust'. 11. In determining who is considered an object of a discretionary trust, it is important to distinguish between an object of the trust and an object of a power given to the trustee under the Trust Deed. In cases such as In re Beckett's Settlement [1940] Ch 279, and Gartside v Inland Revenue Commissioners [1968] AC 553 the phrase 'objects of a discretionary trust' was used to refer to the class of persons in respect of whom the power to distribute income or capital could be exercised at any particular point in time. 12. A similar approach was taken by the Commissioner in Taxation Determination TD 2003/28 (TD 2003/28) in defining who were mere objects of a discretionary trust. It states (at paragraph 2) that: ... a mere object refers to a member of the class of beneficiaries of the trust who is an object of a power of appointment vested in the trustee (i.e. a discretionary beneficiary). 13. When you consider the phrase 'object of the trust' in the context of the entire definition of member of a trust (ie 'a beneficiary, unitholder or object of the trust') it seems clear that the definition is concerned with persons who are currently capable of benefiting from the trust, not with persons who might at some future date become capable of benefiting from the trust as a consequence of being appointed or nominated by the Trustee under a separate power. 14. While the trustee may have power under the deed to appoint or nominate persons as possible beneficiaries, it is the Commissioner's view that such persons are not objects of the trust but rather objects of a power under the terms of the trust. The objects of the trust are those persons in respect of whom the power to distribute income or capital can currently be exercised. 15. To identify the objects of the Trust, one needs to examine the relevant clauses under the Trust Deed; those detailing the Beneficiaries. Those clauses have been detailed in the relevant facts and circumstances and will not be repeated here. 16. The Trustee has a power to appoint additional Beneficiaries in the future from a pre-defined list of objects described in the Trust Deed. 17. As at the date of this ruling request, the Trustee has not appointed any Beneficiaries and has no specific plans to appoint any Beneficiaries. 18. Therefore, the Commissioner considers that the current objects or beneficiaries of the Trust are Head Company and Subsidiary Company. | Detailed Reasoning - What are the membership interests of the members of the Trust?: 19. Section 960-135 of the ITAA 1997 provides that, if you are a member of an entity, each interest or set of interests in the entity or each right, or set of rights, in relation to the entity, by virtue of which you are a member of the entity is a membership interest of yours in the entity. 20. As can be seen from this definition, the 'membership interests' in the consolidation provisions refer not only to interests in the trust fund, but also rights in relation to the entity. Thus, while a discretionary object may not have an interest in the trust, they are capable of having membership interests in the trust by virtue of the rights they hold in relation to the entity. 21. This wider scope of 'membership interest' in the consolidation regime is consistent with the recognition by the Courts that even though the discretionary object may not have an interest in the trust estate, they do have a number of rights enforceable against the trustee. These include the right to ensure the proper administration of the trust estate and to be considered by the trustee when they exercise certain discretionary powers under the trust. In the consolidation regime, it is these rights that amount to the membership interests in the trust. 22. Accordingly, the Commissioner considers that the rights conferred on Head Company and Subsidiary Company under the Trust Deed are sufficient to constitute a membership interest for the purposes of paragraph 960-135(b) of the ITAA 1997. | Detailed Reasoning - Are all of these membership interests beneficially owned as required by section 703-30 of the ITAA 97?: 23. For the purposes of ascertaining whether or not the Trust would be a wholly-owned subsidiary of Head Company all of the membership interests in the trust must be beneficially owned by: • Head Company, • one or more wholly-owned subsidiaries of Head Company; or • Head Company and one or more of its wholly-owned subsidiaries. 24. The term 'beneficially owned' is not defined in the ITAA 1997 so accordingly, it takes its ordinary legal meaning. In broad terms it means ownership for one's own benefit. For the purposes of the consolidation provisions, the Commissioner is not looking for the beneficial owner of the trust property but rather the beneficial owner of the rights that the objects of the trust have. 25. Accordingly, the Commissioner considers the rights held by Head Company and Subsidiary Company are beneficially owned and the Trust is a wholly-owned subsidiary of Head Company as determined under section 703-30 of the ITAA 1997. | Detailed Reasoning - Do columns 2 or 3 of item 2 of paragraph 703-15(2)(b) of the ITAA 1997 preclude the Trust from being a member of the consolidated group?: 26. The Trust is a resident trust estate and is not the trustee of a superannuation fund or exempt from taxation pursuant to Division 50 of the ITAA 1997. 27. Accordingly, the Trust meets the requirements of column 2 and 3 of item 2 of paragraph 703-15(2)(b). | Detailed Reasoning - Conclusion: 28. The Commissioner considers the Trust is eligible to be a subsidiary member of the Head Company consolidated group under item 2 of the table in paragraph 703-15(2)(b) of the ITAA 1997. [1] Item 7 of the table, section 703-20(2) of the ITAA 1997. [2] Item 1 of the table, section 703-20(2) of the ITAA 1997. [3] Item 1 of the table, section 703-25 of the ITAA 1997.