Private ruling: Fixed trust
Date of advice: 13 March 2024
Published: 22 April 2024
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20YY | Year ended 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is the Trust a "fixed trust" under section 272-65 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936) and section 995-1 of the Income Tax Assessment Act 1936 (ITAA 1997)? | A1: No. | Q2: If the answer to Question 1 is no, can the Trust rely on safe harbour 6 in the Attachment B of Practical Compliance Guidance 2016/16 Fixed entitlements and fixed trusts (PCG 2016/16)? | A2: Yes. | Q3: If the answer to Questions 1 and 2 is no, will the Commissioner exercise his discretion to treat the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust under subsection 272-5(3) of Schedule 2F of the ITAA 1936? | A3: This answer is non applicable.

Relevant facts and circumstances: The Trust was established by the Trust Deed in the year ended 30 June 20YY. The Trust undertakes investment activities. The units issued by the Trust are not publicly listed on an approved stock exchange. A copy of the Trust Deed, a unit subscription list and the list of the current unit holders have been attached. The Trust and the Trustee are Australian residents for taxation purposes. The Trust is an unregistered managed investment scheme. The Trustee does not hold an Australian Financial Services Licence. The current unit holders are 2 companies. All unit holders have equal rights to receive the income and capital of the Trust. The Trust Deed In respect of each Unit, each unit holder is presently entitled, as at the end of the last day of each distribution period to the distributable income for that class of unit calculated under the Trust deed for the distribution period on a pro-rata basis under clause 17.3. The final distribution of net assets/proceeds of the Trust on vesting must be distributed to unit holders (as at the vesting date) on a pro rata basis under clause 17.3. The Trustee has powers to (among other things): • Under clause 5, issue new Units noting that the issue price of a unit: o Issued on the establishment of the Trust is XXX; and o Issued after the establishment of the Trust is equal to the NAV per Unit (calculated in accordance with clause 14.3) • Under clause 5.8, divide units into classes or vary the rights or restrictions attaching to Units or a class of units only with approval of unit holders by special resolution (75%) and subject to the prior consent of a unit holder whose unit is to be divided or varied (as the case may be) • Under clause 11, forfeit a unit in strictly limited circumstances • Under clause 13.2, redeem a unit for a price equivalent to the NAV per Unit • Under clause 17.1, determine the distributable income for each distribution period • Under clause 17.2, determine the source or character of income of the Trust • Under clause 17.5, make interim distributions to unit holders on a pro-rata basis • Under clause 24, amend the Trust Deed with the approval of unit holders by Special Resolution except where: o The amendment is made to correct what the Trustee considers to be a manifest error which is necessary to comply with the law o The Trustee reasonably considers the amendment as consequence of any amendment or enactment of any tax laws relating to the taxation of the Trust; or o The Trustees reasonably consider the amendment will not materially and adversely affect the rights of any unit holders and provided no unit holder objects in which case, a special resolution is not required for the amendment to be made. The Trustee has never exercised its power to amend the Trust Deed under clause 11 and does not intend to exercise such power. The Trustee has never redeemed any Units under clause 13.2 (noting that if a redemption was to occur, the redemption price must be equivalent to the NAV per unit calculated in accordance with clause 14.3). The Trustee has never exercised its power to amend the Trust Deed under clause 24. The Trustee has never exercised a power capable of defeating a unit holder's interest in the income or capital of the trust and does not intend to exercise such power. Further, no other trustee or manager of the Trust has ever exercised a power capable of defeating a unit holder's interest in the income or capital of the trust. All beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capital of the trust (noting that unit holders are presently entitled to the distributable income in each distribution period on a pro rata basis, as outlined above and in the Trust Deed). There is no power in the Trust Deed enabling the Trustee to appoint a Unit Holder's interest in the income or capital of the Trust to another unit holder. There is no power in the Trust Deed enabling the Trustee to settle or appoint any part of the corpus of the Trust to a new trust with different beneficiaries. According to the unit subscription agreement the Trustee agrees to issue, and the subscriber agrees to subscribe for the subscription units on the terms and subject to the conditions of this agreement. Clause 5 of the unit subscription agreement describes the subscription process and provides that the subscriber authorises its name to be placed in the register of unit holders of the Trust and its holding of subscription units to be recorded in that register. Furthermore, on each completion date, and subject to completion occurring on that completion date, the relevant subscription units will be issued: • on the issue date; • as unpaid; and • free from all encumbrances, and will work from their issue equally with the other units of the same class then on issue. Class B units have the same rights as ordinary units. Class C units have the same rights as ordinary units. The transfer of units between the beneficiaries During the income year ended 30 June 20YY, some ordinary units and some B class units were transferred from one beneficiary company to another. The transfer was agreed between the beneficiaries in accordance with the provided Unit Transfer Deed and not initiated by the Trustee of the Trust by using the Trustee's powers contained in the Trust Deed.

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

Reasons for decision: Summary: The Unit Holders of the Trust do not have fixed entitlements to all of 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 ITAA 1936 because the Trust Deed contains several clauses, which cause beneficiary's interests to be defeasible. | Detailed Reasoning - Detailed reasoning: The term 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936 to mean a trust in which entities or persons (respectively): ... have fixed entitlements to all of the income and capital of the trust. The definition of the term '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' 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. The concept of a 'fixed entitlement' is used to determine whether a trust is a fixed trust, whether a trust's beneficiaries have maintained the requisite proportion of ownership, and for tracing direct and indirect entitlements. A beneficiary will have a fixed entitlement to a share of the income or capital of the trust if, under a trust instrument, their interest in the income or capital is vested and indefeasible. An interest is 'vested' if the interest is vested in interest or vested in possession. An interest is vested in possession when it gives its holder a right of present enjoyment, whereas an interest is vested in interest if it gives its holder a present right to future enjoyment. An interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events. An example of a defeasible interest is an interest of a default beneficiary in the income or capital of the trust. 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 Unitholder, in the income or capital of the unit trust is defeasible. Practical Compliance Guideline PCG 2016/16 Fixed entitlements and fixed trusts (PCG2016/16) outlines the process for determining if beneficiaries have fixed entitlements to all of the income and capital of a trust. It also outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being entitlement. These factors are contained in subsection 272-5(3) of the Schedule 2F to ITAA1936. As per paragraph 16 of the PCG 2016/16, beneficiary's interests can be defeasible because of the following powers included in the trust deeds: • Broad powers to amend the trust instrument. • Powers to issue new units after the trust is settled, or to redeem existing units. • A power to reclassify existing units so that they do not all have equal rights to receive the income and capital of the trust. • A power to classify receipts as being on income or capital account where the units that have been issued do not all have the same rights to receive the income and capital of the trust. • A power to appoint a beneficiary's interest in the income or capital of the trust to another beneficiary. • A power to settle or appoint any part of the corpus of the trust to a new trust with different beneficiaries. • A power to enforce the forfeiture or cancellation of partly paid units due to the non-payment of a call except where such partly paid units would be void ab initio. Moreover, the Commissioner will disregard the following factors which may otherwise result in a different conclusion when working out whether all beneficial interests have the same rights to receive the income and capital of the trust: • fees or charges imposed by the trustee in relation to the beneficial interests • issue price and redemption price of the beneficial interests (provided that the savings rule in subsection 272-5(2) is satisfied as explained below), and • exposure of the beneficial interests to foreign exchange gains and losses. | Detailed Reasoning - Application to your circumstances: For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument consists of the Trust Deed. The beneficiaries have a vested interest in the Trust by way of a beneficial interest. Moreover, this interest is not contingent upon the event occurring as explained in ATO Interpretative Decision ATO ID 2002/676 Superannuation Trust - members fixed entitlements to all the income and capital of a superannuation fund . However, the Trust Deed contains several clauses, which cause beneficiary's interests to be defeasible, namely: • Issue of new Units Clause 5 of the Trust Deed provides that the Trustee may create and issue additional Units. The price of the Units is determined by Clause 6.6 and includes an issue price of a Unit, if the Units are issued on establishment of the Trust or is equal to the Net Asset Value (NAV) per unit issued after the establishment of the Trust in accordance with Clause 14.3. As per Clause 14.3, the NAV per Unit is calculated by using the following formula: A+B, where: A is the Net Asset Value of the Trust at the time of calculation; and B is the number of All Units on issue at the time of calculation • Redemption of Units Clause 13.2 allows the Trustee to redeem the units at request of a Unit Holder. • Amendments to Trust Deed Clause 24 provides that the Trust Deed may be varied if: (a) the amendment is made by Special Resolution; (b) the amendment is made to correct what the Trustee considers to be a manifest error or inconsistency which is necessary to comply with the provisions of any law; (c) the Trustee reasonably considers the amendment is in consequence of any amendment or enactment (or proposed amendment or enactment) of any laws relating to tax that has or may have the effect of altering the manner or basis of taxation of the Trust or of trusts similar to the Trust and which amendment the Trustee considers to be appropriate or expedient; or (d) the Trustee reasonably considers that the amendment will not materially and adversely affect the rights of any Unit Holders and provided no Unit Holder objects after 10 Business Days prior notice. Given the clauses outlined above and their potential to cause defeasance, the Unit Holders, as beneficiaries of the Trust, do not have a fixed entitlement to a share of the income or capital of the Trust for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936. | Detailed Reasoning - Question 2: If the answer to Question 1 is no, can the Trust rely on safe harbour 6 in the Attachment B of Practical Compliance Guidance 2016/16 (PCG 2016/16)? | Summary: The Trust can rely on safe harbour 6 in Attachment B of PCG 2016/16. | Detailed Reasoning - Detailed reasoning: The Trustee has self-assessed that the Trust can rely on safe harbour 6 in Attachment B of PCG 2016/16 by satisfying the following conditions. • the trust must have a trust instrument • all beneficial interests in the income and capital of the trust are vested • all beneficial interests have the same rights to receive the income and capital of the trust • all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capital of the trust • the trust is not a discretionary trust or a trust with default income or capital beneficiaries - that is, no beneficial interest in the income or capital of the trust is capable of being defeated, partly or wholly, by the exercise of a power of appointment of income or capital by the trustee or other donee • a trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust, and • an arrangement has not been entered into which would result in: (a) section 272-35 having application (b) the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or (c) fraud or evasion. Satisfying the above conditions results in ability of the Trustee to manage its tax affairs as if the Commissioner had exercised the discretion to treat the beneficiaries as having a fixed entitlement to the income and capital of the trust for the purposes of section 272-5 of Schedule 2F to the ITAA 1936. Moreover, a safe harbour only has application during the period in which the conditions for the relevant category are satisfied . | Detailed Reasoning - Application to your circumstances: The application of the above listed conditions contained in Attachment B of PCG 2016/16 to the applicant's circumstances is as follows: • the trust must have a trust instrument This condition is satisfied, as there is a Trust Deed. • all beneficial interests in the income and capital of the trust are vested Satisfied, as discussed in Question 1. • all beneficial interests have the same rights to receive the income and capital of the trust (see paragraph 17 of this Guideline) According to paragraph 17 of PCG 2016/16, the Commissioner will disregard the following factors which may otherwise result a different conclusion than all beneficial interests have the same rights to receive the income and capital of the trust: • fees or charges imposed by the trustee in relation to the beneficial interests • issue price and redemption price of the beneficial interests (provided that the savings rule in subsection 272-5(2) is satisfied) , and • exposure of the beneficial interests to foreign exchange gains and losses. Therefore, to confirm if this condition is satisfied, the savings rule contained in subsection 272-5 of Schedule 2F to ITAA 1936 must be satisfied. As per subsection 272-5 of Schedule 2F to ITAA 1936: The mere fact that a trustee has power to redeem units in a unit trust, or issue further units, for an appropriate value, being: • where the units are listed for quotation in the official list of an approved stock exchange - the same price as other units are offered for sale on that exchange at the time of the redemption or issue, or • where the units are not so listed - a price determined on the basis of the net asset value of the unit trust at the time of the redemption or issue according to Australian accounting principles does not mean that unit holders' interests in the income or capital of the unit trust are defeasible. In your case, all units were issued at the same price. In addition, some of the units issued, were issued prior to the relevant subscription agreement. As a result, this condition is not satisfied by strict application of subsection 272-5 of Schedule 2F to ITAA 1936 as the value of not all the units issued by the Trust was determined at the time of their issue. However, as per paragraph 19 of PCG 2016/16, the Commissioner considers that the savings rule is satisfied where further units may be issued for a price determined by reference to a value of the trust which is sufficiently close to its net asset value (allowing an adjustment for transaction costs). In your case, the Commissioner considers that the value of units issued was sufficiently close to its net asset value, Consequently, this condition is satisfied. • all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capital of the trust This condition is satisfied. • the trust is not a discretionary trust or a trust with default income or capital beneficiaries - that is, no beneficial interest in the income or capital of the trust is capable of being defeated, partly or wholly, by the exercise of a power of appointment of income or capital by the trustee or other donee This condition is satisfied. • a trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust, and This condition is satisfied as beneficiaries' interests were not defeated by Trustee powers contained in the Trust • an arrangement has not been entered into which would result in: (a) section 272-35 having application (b) the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or (c) fraud or evasion. This condition is satisfied as any of the above provisions do not apply to the Trust's circumstances. For example, section 272-35 can apply in circumstances where a person who holds a fixed entitlement in a trust enters into an arrangement before the end of the test period for the purposes of the 50% stake test to transfer their fixed entitlement to another person. The transfer is delayed until after the end of the test period to enable the tax benefit from the losses to be transferred to the person who has acquired the fixed entitlement. The person who held the fixed entitlement during the test period would be treated as not having held it in that period. Because all of the above presented conditions are satisfied by the Trust, the Trust can rely on safe harbour rule. As a result, the beneficiaries of the Trust have fixed entitlements in relation to the income and capital of the Trust. Consequently, the Trust is a fixed trust under safe harbour provisions.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.