1 Are the interests of the Unit Holders in the capital of the Trust 'fixed interests' under former subsection 160APHL(11) of the Income Tax Assessment Act 1936 (ITAA 1936)?
1 No Question 2 If the answer to Question 1 is no, will the Commissioner determine, under former subsection 160APHL(14) of the ITAA 1936, that the interests of the Unit Holders in the capital of the Trustare to be taken to be vested and indefeasible? Answer 2 Yes This ruling applies for the following periods : Income years ending 30 June 2026 to 20XX
1. The Trust was established by the Deed. There have been no amendments to the Deed since the establishment of the Trust. 2. The trustee of the Trust has at all relevant times been the Trustee. 3. The Trustee is an Australian resident for tax purposes. 4. The directors of the Trustee are Australian residents for tax purposes. 5. The Trust is not a family trust pursuant to its meaning in Schedule 2F of the ITAA 1936 or a 'widely held trust' pursuant to the former section 160APHD of the ITAA 1936. 6. The Trust owns shares (the Shares) in a company that has paid and will continue to pay franked distributions. 7. The only activity of the Trust since inception has been the holding of the Shares. 8. Since the establishment of the Trust, the Unit Holders (all holding Ordinary Units) and their proportionate holdings have not and will not change. 9. None of the Unit Holders are related. 10. No class of units other than Ordinary Units have ever been issued. 11. No partly paid units have ever been issued.
12. No partly paid units have been forfeited due to non-payment of any instalment. 13. No units have been compulsorily sold or redeemed. 14. No units have been issued at a discount by the Trustee. 15. All income and capital distributions were made to each Ordinary Unit Holder in proportion to their Ordinary Unit holdings. 16. The Trust had no losses carried forward. 17. No arrangement has been entered into which resulted in: a. a 'related payment' under former section 160APHN of the ITAA 1936 being made b. the Unit Holders having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee in its capacity as trustee for the trust (refer to former section 160APHM of the ITAA 1936) c. the Unit Holders not being sufficiently exposed to the risk of loss or opportunity for gain in respect of the units in the Trust d. the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936 e. any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying; or
f. fraud or evasion. 18. The Deed relevantly contains clauses to the following effect: a. Special Resolution means a resolution passed at a meeting of unit holders by a majority of at least 75% of votes cast at the meeting b. The quorum for a meeting is 2 unit holders holding between them at least 10% of the units on issue c. Trustee may issue additional units of any class in a manner and price approved by a Special Resolution d. The redemption of units can occur at a price not determined in accordance with Australian accounting principles e. The deed can be changed with approval of a Special Resolution. 19. The Trust will not be terminated. 20. Only one class of units will be on issue in the Trust. 21. The Trust will not be listed on any approved stock exchange. 22. No amendments will be made to the Deed. 23. The value of the interests of the Unit Holders will not be materially reduced by the issue of further units. a. No units will be reclassified. The rights attached to units already in existence will not be modified.
b. Units will only be transferred or redeemed at the request of a Unit Holder. 24. Units will be issued or redeemed for a price determined on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 and in former subsection 160APHL(13) of the ITAA 1936 - i.e., based on the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16. This means that: a. No units will be issued or redeemed at a discount. b. No partly paid units will be issued. 25. No streaming of income or capital will occur. 26. The Trustee will not exercise, or seek to exercise, a power to amend or vary the Trust Deed to defeat the interest or change the fixed entitlements of Unit Holders to the income and capital of the Trust. 27. No arrangement will be entered into that would result in: a. section 272-35 having application b. a 'related payment' under former section 160APHN of the ITAA 1936
c. a Unit Holder having materially diminished risks of loss or opportunities for gain of less than 30% in respect of shares held by the Trustee of the Trust (refer to former section 160APHM of the ITAA 1936) d. a Unit Holder 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 e. the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction f. the stripping of company profits, manipulation of franking credits or debits or other arrangement involving interests in shares to obtain a tax benefit. This includes arrangements that would result in: i. the Commissioner making a determination under paragraph 177EA(5)(b) of the ITAA 1936 ii. the Commissioner making a determination under subsection 177EB(5) of the ITAA 1936 iii. the Commissioner making a determination under subsection 204-30(3) of the ITAA 1997 iv. section 177E of the ITAA 1936 applying
v. any of paragraphs 207-150(1)(c) to (h) of the ITAA 1997 (inclusive) applying; or g. fraud or evasion.
References to legislation are to the ITAA 1936 unless otherwise indicated. Question 1 Summary The interests of the Unit Holders in the capital of the Trust are not fixed interests under former subsection 160APHL(11). Detailed reasoning Relevant legislation 1. To be entitled to a franking credit refund, a beneficiary of a non-widely held trust must be a qualified person. This will only be satisfied where, amongst other things, the beneficiary has a fixed interest in the shares held by the trust. 2. Former section 160APHL of the relevantly states: (11) A vested and indefeasible interest constitutes a fixed interest For the purposes of subsection (10), the taxpayer's interest in the trust holding is a fixed interest to the extent that the interest is constituted by a vested and indefeasible interest in so much of the corpus of the trust as is comprised by the trust holding. (12) Certain interests in trust holding taken to be defeasible Subject to subsection (13), if the taxpayer has an interest in the trust holding and either: (a) the interest may be redeemed under the terms of the trust for less than its value; or
(b) the value of the interest may be materially reduced by: (i) if the trust is a unit trust--the issue of further units; or (ii) otherwise--the creation of other interests under the trust; the interest is taken to be defeasible. (13) Case where interest not defeasible If: (a) the trust is a unit trust and the taxpayer holds units in the unit trust; and (b) the units are redeemable or further units are able to be issued; and (c) where units in the unit trust are listed for quotation in the official list of an approved stock exchange ...; and (d) where the units are not listed as mentioned in paragraph (c)--the units held by the taxpayer will be redeemed, or any further units will be issued, for a price determined on the basis of the unit trust's net asset value, according to Australian accounting principles, 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 taxpayer's interest, as a unit holder, in so much of the corpus of the trust as is comprised by the trust holding is defeasible. Application to your circumstances
3. The Deed contains a number of clauses that could cause the interest of a Unit Holder in the corpus of the Trust to be defeated, including clauses that allow: a. the issuing of new units in a way that will materially reduce the value of the existing Units (and the issue price of new units is not required to be calculated as required by former paragraph APHL(13(d)) b. the redemption of existing units without the Unit Holders consent and the redemption price of existing Units to be less than their value (and the price is not required to be determined as required by former paragraph APHL(13)(d)). c. the variation of the Trust Deed in a way that will materially reduce the value of existing Units. 4. As the Unit Holders do not have an indefeasible interest in the corpus of the Trust, they do not hold fixed interests in the Trust pursuant to subsection 160APHL(11). Question 2 Summary The Commissioner has determined, under former subsection 160APHL(14) of the ITAA 1936, that the interests of the Unit Holders in the capital of the Trust are to be taken to be vested and indefeasible. Detailed reasoning Relevant legislation
5. Former subsection 160APHL(14) states: If: (a) the taxpayer has an interest in so much of the corpus of the trust as is comprised by the trust holding; and (b) apart from this subsection, the interest would not be a vested or indefeasible interest; and (c) the Commissioner considers that the interest should be treated as being vested and indefeasible, having regard to: (i) the circumstances in which the interest is capable of not vesting or the defeasance can happen; and (ii) the likelihood of the interest not vesting or the defeasance happening; and (iii) the nature of the trust; and (iv) any other matter the Commissioner thinks relevant; the Commissioner may determine that the interest is to be taken to be vested and indefeasible. 6. The discretion in former subsection 160APHL(14) of the ITAA 1936 relates to the utilisation of a tax offset for a share of the franking credit on a franked distribution. It was introduced as a part of integrity measures aimed at defeating franking credit trading schemes.
7. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1999, which accompanied the introduction of former subsection 160APHL(14) of the ITAA 1936, outlined the purpose of those integrity measures: 4.6 One of the underlying principles of the imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves: a degree of wastage of franking credits is an intended feature of the imputation system.
4.7 In substance, the owner of shares is the person who is exposed to the risks of loss and opportunities for gain in respect of the shares. However, franking credit trading schemes allow persons who are not exposed, or have only a small exposure, to the risks and opportunities of share ownership to obtain access to the full value of franking credits, which often, but for the scheme, would not have been used at all, or would not have been fully used. Some of these schemes may operate over extended periods, and typically involve a payment related to the dividend which has the effect of passing its benefit in economic terms to a counterparty. The schemes therefore undermine an underlying principle of imputation. 8. In exercising the discretion, the Commissioner must ensure that the purpose of the integrity measures is not undermined. 9. Part IVA contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit or imputation benefit in connection with an arrangement. If Part IVA applies the tax benefit or imputation benefit can be cancelled Application to your circumstances
10. Former paragraphs 160APHL(a) and (b) are satisfied, leaving the Commissioner to consider whether the interests should be treated as being vested and indefeasible (former paragraph (c)). The circumstances in which the interest is capable of not vesting or the defeasance can happen 11. The powers contained in the Deed that may defease a Unit Holder's interest in the corpus of the Trust are noted above at paragraph 2. The likelihood of the interest not vesting or the defeasance happening 12. In terms of the likelihood of the powers that may defease a Unit Holder's interest in the corpus the following is noted that in relation to: a. Issuing of new Units i. The issue must be approved by a Special Resolution and any additional units must first be offered to existing Unit Holders in proportion to their existing holdings. ii. Special Resolution requires a majority consisting of at least 75% of the votes cast at the meeting. The quorum for a meeting is two Unit Holders with at least 10% of the Units held between them.
iii. A Special Resolution can only pass by the two largest Unit Holders voting together (or only one of them if the other is not represented at the meeting). iv. As such, the two largest Unit Holders will only have their interest diminished by the issue of new units if they agree to the issue (or aren't represented at a meeting that allows the issue of new units) and/or don't take up their offer of additional units. v. The other smaller Unit Holders are subject to decisions made by the two largest (either together or individually, as the case may be) but will only have their interests diminished where they don't take up any additional units initially offered to them - this could be the case, for example, where they don't have the financing available to purchase the additional units. vi. However, given the assumption made for this ruling that the issue of any further Units will not materially reduce the value of the existing Units, there is no risk of any issue of new Units diminishing the interests of existing Unit Holders.
vii. No new units have been issued or are any intended to be issued during the ruling period. b. Redemption of Units i. Redemption may occur without request of a Unit Holder. ii. Although it is not specifically mandated by the Deed that the valuation of Units adhere to Australian accounting principles, the assumption made under paragraph 24 ensures that for this ruling to apply any such redemption will adhere to these principles (thus satisfying subsection 160APHL(13)). iii. No units have been redeemed or are intended to be redeemed during the Ruling Period. c. Variation of the Deed i. No amendment of the Deed has occurred since the establishment of the Trust. ii. As no amendments will be made to the Deed over the ruling period, there is no chance that the Unit Holders' interests will be affected by such an amendment over the ruling period. Nature of the Trust 13. The Unit Holders who hold all units in the Trust are unrelated. The Trust's sole activity is owning the Shares. Other matters the Commissioner thinks relevant:
14. The purpose of the integrity measures will not be undermined according to the Facts and Assumptions forming part of this ruling. 15. At the time of issuing this Ruling, the Commissioner has not made a determination that Part IVA has applied to the Trust. Conclusion 16. Considering the above, the Commissioner has determined, under former subsection 160APHL(14) of the ITAA 1936, that the interests of the Unit Holders in the capital of the Trust are to be taken to be vested and indefeasible.