Private ruling: Fixed entitlements and fixed interests
Date of advice: 13 August 2019
Published: October 2019
Ruling period: 1 July 2018 to 30 June 2020
Date scheme commenced: 1 July 2018

Ruling: Q1: Do the Unitholders of the Trust have fixed entitlements to all of the income and capital of Trust 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: Yes | Q2: Do the Unitholders of the Trust 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? | A2: Yes

Relevant facts and circumstances: In relation to the Trust: · It was established by deed of settlement on in mid-2018. · It is an Australian resident unit trust. · It has X Units on issue. · It has had one Unitholder throughout its existence. · The Trustee will not exercise a power in the foreseeable future that is capable of defeating a beneficiary's interest in respect of income or capital of the Trust. · All beneficial interests in the income and capital of the trust are vested. · The Trustee has no power to issue units of differing classes. · All beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income of the capital of the trust. · Unit issues and redemptions are done on the basis of the net asset backed value of the Units. · Net Trust Value means the total value of all Trust Property less all Trust Liabilities as determined by the Trustee in accordance with generally accepted Australian accounting principles. · The Trustee has no power to stream income or capital. · The power of amendment contains sufficient restrictions such that, of itself, it does not contain a power that would defease the interest of the Unitholders in the income and capital of the Trust for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936 and former subsection 160APHL(11). Assumptions: Throughout the Ruling Period: · Additional Units will be issued and Units will be redeemed on a basis that will satisfy subsection 272-5(2) of Schedule 2F to the ITAA 1936 and former subsection 160APHL(13) of the ITAA 1936. · Only a single class of Units will remain on issue. · The Trust will not be an AMIT. · 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. · In relation to section 272-5 of Schedule 2F to the ITAA 1936 an arrangement will not be entered into which would result in: ˗ section 272-35 having application; ˗ the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction; or ˗ fraud or evasion. · In relation to former section 160APHL of the ITAA 1936, an arrangement will not be entered into which would result in: ˗ a 'related payment' under former section 160APHN of the ITAA 1936; ˗ a Beneficiary of the Trust 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 Beneficiary 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; or ˗ any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 272-5 to Schedule 2F | Income Tax Assessment Act 1936 section 272-5(1) to Schedule 2F | Income Tax Assessment Act 1936 section 272-5(2) to Schedule 2F | Income Tax Assessment Act 1936 section 272-5(3) to Schedule 2F | Income Tax Assessment Act 1936 section 272-35 to Schedule 2F | Income Tax Assessment Act 1936 section 272-65 to Schedule 2F | Income Tax Assessment Act 1936 subsection 177EA(5) | Income Tax Assessment Act 1936 former section 160APHD | Income Tax Assessment Act 1936 former section 160APHL | Income Tax Assessment Act 1936 former subsection 160APHL(11) | Income Tax Assessment Act 1936 former subsection 160APHL(13) | Income Tax Assessment Act 1936 former subsection 160APHL(14) | Income Tax Assessment Act 1936 former section 160APHM | Income Tax Assessment Act 1936 former section 160APHN | Income Tax Assessment Act 1997 subsection 207-150(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated. It is reasonable to conclude, based on the "trust instrument" of the Trust, that for the purposes of subsection 272-5(1), the beneficiaries (Unitholders) of the Trust do have fixed entitlements to any of the income and capital of the Trust. | Detailed Reasoning - Detailed reasoning: Generally A 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997, and section 272-65. That definition 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 .' Meaning of the words 'vested and indefeasible' The terms 'vested and indefeasible' are not defined in the ITAA 1936 or ITAA 1997. The Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 ( EM ) discusses the nature of a 'vested interest': 13.4 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring. 13.5 In traditional legal analysis, a person can be said to be either 'vested in possession' or 'vested in interest'. A present interest, i.e. one that is being enjoyed, is said to be 'vested in possession'; a future interest, i.e. one which gives its holder a present right to a future enjoyment, is said to be a 'vested interest'. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, 'vested' includes both vested in possession and vested in interest. 13.6 Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until sometime in the future. This is reflected in paragraph 13 of the Practical Compliance Guideline PCG 2016/16 Fixed entitlements and fixed trusts ( PCG 2016/16 ). The EM also addresses when a vested interest is indefeasible: 13.7 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement. 'Vested and indefeasible', for the purposes of Schedule 2F to the ITAA 1936, has not been judicially considered, other than in the limited context of amending the constitution of a registered MIS under section 601GC of the Corporations Act: see Colonial First State Investments Ltd v. Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; ATC 20-235. | Detailed Reasoning - Vested interests: 'Trust instrument' It is an essential element of subsection 272-5(1) of that, in order to have a fixed entitlement to a share of income or capital, there must be a vested or indefeasible interest 'under a trust instrument'. The determining factor in deciding whether fixed entitlements exist 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. For the purposes of subsection 272-5(1), the Commissioner accepts that a 'trust instrument' includes: ...a deed or constitution as supported by documentation such as a Product Disclosure Statement, Investment Memorandum or other document that modifies or supplements the terms of the trust set out in the deed or constitution. For the purposes of subsection 272-5(1), the trust instrument consists of the unit trust deed of the Trust as amended. It is accepted that the Trust Deed provides Unitholders with a vested interest in the income and capital of the Trust. | Detailed Reasoning - No defeasible powers in the Trust Deed due to the 'savings rule' and Assumptions applying: Under subsection 272-5(1) a person will be taken to have a fixed entitlement to a share of the income or capital of a trust if they have a vested and indefeasible interest under the trust instrument. Under the Trust Deed, the Unitholders in the Trust are considered to have a vested and indefeasible interest in all of the income and capital of the Trust. This is because, although additional Units may be issued by the Trustee, and Units may be redeemed, these actions may only be taken in a manner that will comply with the requirements of the 'savings rule' in subsection 272-5(2). | Detailed Reasoning - Conclusion: For the reasons stated, above, it is reasonable to conclude, based on the "trust instrument" of the Trust, that for the purposes of subsection 272-5(1), the beneficiaries (Unitholders) of the Trust do have fixed entitlements to any of the income and capital of the Trust. This is due to the operation of the 'savings rule' in subsection 272-5(2) and the inclusion of the Assumptions. | Summary: The terms of the trust instrument do provide the beneficiaries 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. | 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] | Detailed Reasoning - Vested and indefeasible interest: It has already been determined, in relation to Question 1, that the Unitholders of the Trust do have a vested 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.) The 'savings rule' in former subsection 160APHL(13) will apply similarly to subsection 272-5(2) so that the ability of the Trustee to issue Units and redeem Units will not constitute powers that will defease the vested interests of the Unitholders in the capital of the Trust. Therefore, it follows that the Unitholders of the Trust do have a vested and indefeasible interest in so much of the corpus (capital) of the Trust as is comprised by the trust holding. | Detailed Reasoning - Conclusion: In view of the above the beneficiaries (Unitholders) of the Trust do 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). This is due to the operation of the 'savings rule' in former subsection 160APHL(13) and the inclusion of the Assumptions.