Private ruling: 'Fixed trust' for the purposes of section 855-40 of the Income Tax Assessment Act 1997
Date of advice: 22 August 2016
Published: September 2016
Ruling period: 2016 and 2017 income year
Date scheme commenced: 2016 income year

Ruling: Q1: Is the Trust a 'fixed trust' for the purposes of section 855-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The trust deed of, and relevant facts and circumstances related to, the Trust were provided to the Commissioner.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 272 of Schedule 2F | Income Tax Assessment Act 1936 subsection 272-5(1) of Schedule 2F | Income Tax Assessment Act 1936 subsection 272-5(3) of Schedule 2F | Income Tax Assessment Act 1997 section 855-40 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: A trust is a 'fixed trust' for the purposes of section 855-40 of the ITAA 1997, if entities have 'fixed entitlements' to all the income and capital of the trust (subsection 995-1(1) of the ITAA 1997). The definition of 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 states 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 Income Tax Assessment Act 1936 (ITAA 1936) defines a fixed entitlement in 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. Under the trust deed, the interest of the beneficiaries in the income and capital of the Trust is defeasible. Therefore, subsection 272-5(1) of Schedule 2F to the ITAA 1936 is not satisfied. Subsection 272-5(3) of Schedule 2F to the ITAA 1936 contains a discretion whereby, in cases where beneficiaries do not have a fixed entitlement, the Commissioner may treat such beneficiaries as having a fixed entitlement, having regard to the factors prescribed in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936. These factors are: (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. Having regard to the trust deed, the relevant facts and circumstances and the matters referred to in subparagraphs 272-5(3)(b)(i), (ii) and (iii) of Schedule 2F to the ITAA 1936, it is considered that there is a reasonable case for the Commissioner to exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the beneficiaries as having fixed entitlements to all of the income and capital of the Trust. Accordingly, on the basis that the Commissioner has exercised the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936, the Trust will be a 'fixed trust' for the purposes of section 855-40 of the ITAA 1997 for the period to which this Ruling applies.