Private ruling: Fixed entitlements
Published: February 2012
Ruling period: Income years ended 2010, 2011, 2012, 2013, 2014 and 2015.
Date scheme commenced: 1 July 2009

Ruling: Q1: Does the unit holder (beneficiary) of the trust have fixed entitlements to all the income and capital of the trust as defined in subsection 995-1(1) of the ITAA 1997 and subsection 272-5(1) of Schedule 2F to the ITAA 1936? | A1: Yes. | Q2: Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the beneficiary of the trust as having fixed entitlements? | A2: The Commissioner is not required to consider this question as it has been concluded that the requisite fixed entitlements exist for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. In relation to the trust: · it was settled in the 2010 income year; · it is an Australian unit trust; · its units are not quoted on the official list of any stock exchange; · it will only have one unit holder · in Australia, the trustee operates multiple trusts; · it is not registered as a managed investment scheme under Chapter 5C of the Corporations Act 2001 ; · as at 30 June 2011 it had no carry forward losses; · 100% unit holder approval is required by the trustee to amend the trust deed; and · for the purposes of determining the application price and redemption price of units the trustee will value the assets and liabilities in accordance with Australian accounting principles.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 272-5 of Schedule 2F | Subsection 272-5(1) of Schedule 2F | Subsection 272-5(2) of Schedule 2F | Subsection 272-5(3) of Schedule 2F | Section 272-65 of Schedule 2F | Income Tax Assessment Act 1997 Subsection 995-1(1) | Corporations Act 2001 Chapter 5C

Reasons for decision: Summary: The terms of the trust instrument provide the beneficiaries with vested and indefeasible interests in all of the income and capital of the trust. | Detailed Reasoning - Generally: A 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936. 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 .' In this regard, subsection 272-5(1) of Schedule 2F to the ITAA 1936 states: 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 person holds units in a unit trust; and · the units are redeemable or further units are able to be issued; and · 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 · 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. Although the meaning of the term 'vested and indefeasible' (in the context of Schedule 2F to the ITAA 1936) has not been judicially considered, 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 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; Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490. It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 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'. In all cases, the determining factor in deciding if 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. 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 Custodians 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]…' | Detailed Reasoning - Specifically: For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument consists of the trust deed of the trust. It is accepted that the trust deed provides the unit holder with an 'interest' in the income and capital of the trust. The trust deed contains no other clauses by which the unit holder's interest in a share of the income or capital of the trust may be defeased. Therefore, it can be concluded, 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 unit holder (or beneficiary) does have fixed entitlements to all of the income and capital of the trust.

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