PCG 2016/16: Fixed entitlements and fixed trusts
Document type: Final PCG
Status: Current
Date of issue: 13 September 2017

1. This Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion [1] to treat an interest in the income or capital of a trust as being a fixed entitlement. This can result in a trust being treated as a fixed trust under the trust loss provisions and is also relevant when applying other provisions in the tax legislation which rely on the concept of 'fixed entitlement' (listed in Attachment A of this Guideline). [2] 2. In practice, it may be difficult for many trusts to satisfy the definition of 'fixed trust' unless the Commissioner exercises his discretion to treat the beneficiaries' interests as fixed entitlements. 3. This Guideline also outlines (at Attachment B) a safe harbour compliance approach for trustees of certain trusts that allows them to manage the trust's tax affairs as if the Commissioner had exercised the discretion to treat beneficiaries as having fixed entitlements to income and capital of the trust. 4. This Guideline does not apply: 5. Law Administration Practice Statement PS LA 2002/11 Issues concerning fixed entitlements to a share of the income or capital of a trust continues to instruct ATO officers about how to ensure that such issues are decided consistently. Structure of this Guideline 6. The structure of this Guideline is represented in the following flowchart which outlines the process for determining if beneficiaries have fixed entitlements to all of the income and capital of a trust.



Attachment B: 23. The trustee of a trust described in can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust. 24. The 'safe harbours' in this Guideline can only be satisfied in relation to known facts. A trustee that requires certainty as to whether or not the beneficiaries of the trust have fixed entitlements in relation to a future time must request the exercise of the Commissioner's discretion. | Discretion to treat an interest as a fixed entitlement in subsection 272-5(3): 25. Where a trust is not a fixed trust, because all of the beneficiaries' interests in the income and capital of the trust are not fixed entitlements, and the trust does not satisfy the requirements for a 'safe harbour' in this Guideline, the trustee may request that the Commissioner exercise the discretion to treat beneficiaries' interests as being vested and indefeasible. Note: the Commissioner is not able to exercise the discretion in relation to: 26. A trust can both rely on the savings rule in relation to some trustee powers in a trust instrument (the power to issue or redeem units), and request that the Commissioner exercise the discretion in the context of other powers that may defeat a beneficiary's interest (such as in relation to a power to amend). 27. In deciding whether or not to exercise the discretion, the Commissioner must consider: [19] 28. The Commissioner will also consider factors relevant in the context of the trust loss rules. | Circumstances in which the interest is capable of not vesting or being defeated: 29. When examining the circumstances in which a beneficiary's interest is capable of not vesting or being defeated, the Commissioner will have regard to any factor that may affect the defeasance of any beneficiary's interest, including: 30. This includes having regard to: | The likelihood of the interest not vesting or the defeasance happening: 31. When considering the likelihood of the interest not vesting or being defeated, the Commissioner must form a view as to the probability that the contingency or defeasance will happen. Where the likelihood of the contingency or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion. 32. Where the trustee or manager of the trust has a particular power to defeat a beneficiary's interest, it is relevant to consider how often, if at all, they have exercised that power over a relevant period. 33. Any preconditions or caveats that affect the likelihood of a beneficiary's interest not vesting or being defeated are also relevant. | The nature of the trust: 34. The nature of the trust refers to its basic legal characteristics and its economic function, both actual and intended. The ability of the trustee or manager of the trust to adversely affect the interests of beneficiaries could be limited where: | Other contextual factors: 35. Having regard to the subject matter, scope and purpose of the trust loss rules, it is relevant for the Commissioner to consider whether the exercise of the discretion would allow a person to obtain a tax benefit from a trust claiming a deduction for a tax loss, bad debt deduction or debt/equity swap deduction when the person did not bear the economic loss incurred by the trust. 36. The concept of a fixed entitlement is central to the operation of the trust loss rules, the purpose of which is to prevent the transfer of the tax benefit of those losses or deductions. The tax benefit of a loss is transferred when a person who did not bear the economic loss at the time it was incurred by the trust obtains a benefit from the trust being able to deduct the loss. [21] | Attachment A.: 37. Because the discretion to treat beneficiaries' interests as being a fixed entitlement is part of the trust loss rules, and because of the resultant consequences of being treated as a fixed trust, these contextual factors are also relevant even when the reason for requesting that the Commissioner exercise the discretion is related to one of the other legislative provisions listed in | Attachment C: 38. to this Guideline contains a non-exhaustive list of the factors that the Commissioner will consider when deciding whether or not to exercise the discretion. 39. In each case the Commissioner will weigh up all factors (favourable and unfavourable) in the context of the facts and circumstances of the case. The presence of more favourable factors will increase the likelihood that the Commissioner will exercise the discretion. 40. However, a single power in a trust instrument may pose such a serious threat to beneficiaries' interests that, in the absence of any mitigating factors, the Commissioner will not exercise the discretion. | Attachment C: 41. Conversely, the absence of some or all of the favourable factors described in does not necessarily preclude the exercise of the discretion.

Example s: 42. The following examples illustrate the application of the savings rule and how the Commissioner would consider the exercise of the discretion in various situations. | Example 1: savings rule applies 43. The interests in the income and capital of a trust are defeasible only because the trustee may issue or redeem units for a price determined on the basis of the net asset value of the trust. The savings rule will apply in this circumstance to ensure that the beneficiaries' interests are not defeasible, and are fixed entitlements. | Example 2: savings rule applies 44. The trustee of a trust issues units for a price that is higher than a price determined on the basis of the net asset value of the trust. The higher price is attributable to transaction costs associated with the issue of the units. The savings rule will apply in this circumstance to ensure that the beneficiaries' interests are not defeasible and are fixed entitlements. | Example 3: savings rule and a safe harbour apply 45. If, in relation to the trust in Example 1, the trustee also had an unlimited power to amend the trust deed, the beneficiaries' interests would be defeasible and would not constitute fixed entitlements. However, if the requirements of one of the safe harbours in the compliance approach in Attachment B are satisfied, the trustee can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust. | Example 4: savings rule does not apply but a safe harbour applies 46. The beneficiaries' interests in the trust are not fixed entitlements, and the savings rule does not apply, because the trustee may issue or redeem units for a price not determined on the basis of the net asset value of the trust. If the requirements of one of the safe harbours in the compliance approach in Attachment B are satisfied, the trustee can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust. | Example 5: exchange of interests in a trust under Subdivision 124-M of the ITAA 1997 47. Two trustees are contemplating a transaction whereby all of the units in one trust (the selling trust) will be acquired by the trustee of the other trust (the acquiring trust) in return for new units in the acquiring trust. The scrip for scrip roll-over provisions require that entities have fixed entitlements to all of the income and capital of each trust immediately before, during and immediately after the exchange of units. 48. The beneficiaries' interests in the selling trust are not fixed entitlements, and because of the prospective nature of the proposed transaction, the safe harbours in the compliance approach cannot be relied upon. 49. Accordingly, before entering into the transaction, the trustee of the selling trust applies to the Commissioner for a ruling in relation to whether the requirements of scrip for scrip roll-over will be satisfied, including whether fixed entitlements will exist at a future date. The trustee asks the Commissioner to exercise the discretion if the beneficiaries' interests at the future date are not fixed entitlements. Attachment A - Other provisions 50. Other provisions that, directly or indirectly, rely upon the meaning of 'fixed entitlement' in section 272-5 Attachment B - Compliance approach - safe harbours Safe harbour - Administration 51. The trustee of a trust that satisfies the conditions for one of the categories below can 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. 52. Accordingly, other than ensuring that a trust satisfies the relevant conditions of the category relied upon, the Commissioner will not allocate compliance resources to determine whether beneficiaries have fixed entitlements in cases where one of the categories below is met. A safe harbour only has application during the period in which the conditions for the relevant category are satisfied. A trustee that requires certainty as to whether or not the beneficiaries of the trust have fixed entitlements in relation to a future time must request the exercise of the Commissioner's discretion. 53. Taxpayers should maintain relevant records that support their claim that they meet the relevant conditions being relied on. Safe harbour - Conditions 54. To qualify for access to a safe harbour, a trust must, at all relevant times, satisfy the conditions of one of the categories below: Attachment C - Relevant factors in the exercise of the Commissioner's discretion to treat an interest in a trust as being a fixed entitlement Factors favourable to the exercise of the Commissioner's discretion 55. The Commissioner regards the following factors favourably when deciding whether to exercise the discretion: Factors adverse to the exercise of the Commissioner's discretion 56. The Commissioner regards the following factors unfavourably when deciding whether to exercise the discretion:



A comparison table which provides the replacement provisions in the A New Tax System (Goods and Services Tax) Regulations 2019 for regulations which are referenced in this Guideline is available. | What this Guideline is about | Fixed entitlements under subsection 272-5(1) | Satisfaction of the 'savings rule' in subsection 272-5(2) | Reference to units includes interests in percentage shares | Reference to Australian accounting principles | Discretion to treat interest as a fixed entitlement in subsection 272-5(3) | Factors influencing the exercise of the Commissioner's discretion | This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this guideline in good faith, the Commissioner will administer the law in accordance with this approach. | Date of effect: 7. This Guideline applies both before and after its date of issue. | Fixed entitlements under subsection 272-5(1): 8. The concept of a 'fixed entitlement' is central to the trust loss provisions. [4] It 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. | 9. 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. [5] | 10. A trust is a fixed trust if the beneficiaries have fixed entitlements to all of the income and capital of the trust. [6] | Under a trust instrument: 11. For these purposes, 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. | 12. The beneficiaries of a trust [7] that does not have a 'trust instrument' are not capable of having fixed entitlements in the absence of the exercise of the Commissioner's discretion. Trustees of such trusts cannot rely on the safe harbour compliance approach in managing the trust's tax affairs. | Vested interests: 13. In terms of the concept of 'fixed entitlement', an interest is 'vested' if it is vested in interest or vested in possession. [8] 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. | 14. The mere object of a discretionary trust does not have a vested interest in, and therefore does not have a fixed entitlement to, either the income or capital of the trust. [9] | Indefeasible interests: 15. 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 interest of a default beneficiary in the income or capital of the trust is an example of a defeasible interest. | 16. Powers in modern trust instruments which cause a beneficiary's interests to be defeasible include: | 17. For the purposes of working out whether all beneficial interests have the same rights to receive the income and capital of the trust (sometimes referred to as establishing whether or not there are different classes of interests in the trust), the Commissioner will disregard the following factors which may otherwise result in a different conclusion: [12] | Satisfaction of the 'savings rule' in subsection 272-5(2): 18. The mere fact that a trustee has power to redeem units in a unit trust, or issue further units, for an appropriate value, being: | does not mean that unit holders' interests in the income or capital of the unit trust are defeasible. [13] For the purposes of this Guideline, this is referred to as the 'savings rule'. | 19. The Commissioner considers that the savings rule is satisfied where further units may be issued [14] or existing units redeemed [15] in any of the following situations: | Reference to units includes interests in percentage shares: 20. The Commissioner considers that a reference to 'units' in the savings rule includes a class of vested interest which can be expressed as being a beneficial interest in a percentage share of the total income or capital of the trust. The interest must also be capable of being measured as a percentage of the total beneficial interest in the income or capital of the trust enjoyed by the holders of that same class of interest in the trust. | Reference to Australian accounting principles: 21. The reference to 'Australian accounting principles' [17] means the accounting standards, statements of accounting concepts or authoritative pronouncements of the Australian Accounting Standards Board, as applicable to the trust that seeks to satisfy the requirements of the savings rule. | Partly paid units: 22. Partly paid units are capable of satisfying the savings rule. In this regard, the relevant price per unit should be adjusted to reflect the proportion of the paid up amount. | 23. The trustee of a trust described in Attachment B can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust. | 37. Because the discretion to treat beneficiaries' interests as being a fixed entitlement is part of the trust loss rules, and because of the resultant consequences of being treated as a fixed trust, these contextual factors are also relevant even when the reason for requesting that the Commissioner exercise the discretion is related to one of the other legislative provisions listed in Attachment A. | Factors influencing the exercise of the Commissioner's discretion: 38. Attachment C to this Guideline contains a non-exhaustive list of the factors that the Commissioner will consider when deciding whether or not to exercise the discretion. | 41. Conversely, the absence of some or all of the favourable factors described in Attachment C does not necessarily preclude the exercise of the discretion. | Income Tax Assessment Act 1936 | Trustee beneficiary reporting | Income Tax Assessment Act 1997 | Foreign or temporary residents - individuals with trust gains | Capital proceeds - market value substitution rule | Capital gains and scrip-for-scrip rollover | Company tax losses - ownership of a company by non-fixed trusts | Company as a member of a linked group | Small business restructure roll-over - ultimate economic ownership of a non-fixed trust | Designated infrastructure entity | Consolidation: treating entities held through non-fixed trusts as wholly-owned subsidiaries | Consolidation: modified market value of an entity becoming a member of a consolidated group | Consolidation: determining destination of distribution by non-fixed trust | Direct value shifting: cause of the value shift | Indirect value shifting: common ownership nexus test | sections 727-360; 727-365; 727-400; 727-410 | Indirect value shifting: control, common ownership and ultimate stake tests | Capital gains or losses of foreign residents | A New Tax System (Goods and Services Tax) Regulations 1999 | Regulations 48-10.01 and 48-10.03A | Schedule 1 to the Taxation Administration Act 1953 | Trust income included in instalment income of a beneficiary | Commissioner of Taxation 13 September 2017 | Deleted 'When finalised'. | Legislative References: ITAA 1936 ITAA 1936 102UC ITAA 1936 160APA ITAA 1936 160APHD ITAA 1936 160APHDL(14) ITAA 1936 273 ITAA 1936 Sch 2F ITAA 1936 Sch 2F 272-5 ITAA 1936 Sch 2F 272-5(1) ITAA 1936 Sch 2F 272-5(2) ITAA 1936 Sch 2F 272-5(2)(d) ITAA 1936 Sch 2F 272-5(3) ITAA 1936 Sch 2F 272-35 ITAA 1936 Sch 2F 272-65 ITAA 1936 Sch 2F 275-10(2) ITAA 1997 ITAA 1997 104-72 ITAA 1997 115-50 ITAA 1997 115-110 ITAA 1997 116-35 ITAA 1997 118-510 ITAA 1997 Subdiv 124-M ITAA 1997 124-781 ITAA 1997 Subdiv 165-F ITAA 1997 170-265 ITAA 1997 275-15 ITAA 1997 275-20(4) ITAA 1997 275-35 ITAA 1997 276-10 ITAA 1997 276-15(2) ITAA 1997 276-55(a) ITAA 1997 295-550 ITAA 1997 328-440 ITAA 1997 415-20 ITAA 1997 703-40 ITAA 1997 707-325 ITAA 1997 713-50 ITAA 1997 719-35 ITAA 1997 725-65 ITAA 1997 727-110 ITAA 1997 727-360 ITAA 1997 727-365 ITAA 1997 727-400 ITAA 1997 727-410 ITAA 1997 855-40 ITAA 1997 995-1(1) TAA 1953 TAA 1953 Sch 1-45-287 ANTS(GST) Regs 1999 48-10.01 ANTS(GST) Regs 1999 48-10.03A Corporations Act 2001 Corporations Act 2001 Chapter 5C Corporations Act 2001 9 Corporations Act 2001 601EB Corporations Act 2001 601ED Corporations Act 2001 601GC Corporations Act 2001 793C Corporations Act 2001 1101B

Related rulings and determinations: PS LA 2002/11 | TR 2006/7
Legislative references: Case References: Colonial First State Investments Ltd v. Commissioner of Taxation [2011] FCA 16 (2011) 192 FCR 298 2011 ATC 20-235 (2011) 81 ATR 772 Gartside v. Inland Revenue Commissioners [1968] AC 553 [1968] 1 All ER 121 [1968] 2 WLR 277 [1967] TR 309 Queensland Trustees Ltd v. Commissioner of Stamp Duties (Queensland) (1952) 88 CLR 54
Other references: ASIC Corporations (Managed investment product consideration) Instrument 2015/847 ASIC Class Order CO 13/655 ASIC Class Order CO 13/657 ASIC Class Order CO 13/762 ASIC Class Order CO 13/763 Market valuation for taxation purposes (NAT 72508) Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997. Law Administration Practice Statement PS LA 2002/11