The term ‘fixed trust’ is used in a variety of contexts in our tax legislation, most importantly in the trust loss, franking, CGT rollover and value-shifting rules. Unfortunately, the definition in the Act is so strict that almost no trust could ever satisfy it, a conclusion which was unhappily confirmed in a 2011 decision. In that case, the Federal Court held that a wholesale fund was not a fixed trust today because the members had the power to amend the constitution tomorrow.
Fortunately, in recent times the ATO has mostly taken the practical position that this was not a matter which warranted serious audit attention, at least for listed trusts and wholesale trusts, especially since the attribution managed investment trust (AMIT) regime makes the issue irrelevant for those trusts that elect into the regime.
Now that the AMIT regime has been enacted, the ATO has decided it is time to clarify the ‘fixed trust’ test for trusts which are not AMITs and has issued a draft Practical Compliance Guideline (PCG) outlining the factors the ATO will examine in deciding whether to exercise its discretion in the legislation to treat a trust as a fixed trust. That is the good news.
While the ATO is to be applauded for trying to address this issue, the PCG is disappointing in a number of ways.
First, it says it is only purporting to interpret the meaning of ‘fixed trust’ for the purpose of the trust loss provisions even though the same term is used in many other provisions. Why the ATO wants to quarantine their views just to this topic is not clear.
Secondly, the ATO has decided to issue a Guideline, not a Ruling. Guidelines are not binding on the ATO.
But the most disappointing aspect of the PCG is that it is written to be non-definitive: the reader is reminded that there are many factors in play, and individual factors only ‘weigh towards …’ a position, that a view might be abandoned ‘in exceptional circumstances’. It is difficult to know how much reliance taxpayers can place on the PCG given these caveats and cautions.
As to the substance of the PCG, it attempts to elaborate the notion of a fixed trust looking at several variables (i) provisions in the trust’s constitution, (ii) provisions in the regulatory environment and (iii) the prior administration of the trust and (iv) whether the trust is a ‘private trust’ or not. The examples fall into four groups:
Presumption that the trust is fixed: the PCG says if units in the trust are listed, the ATO will treat the trust as a fixed trust unless there are ‘exceptional circumstances …’. Given that these trusts will most likely elect to be AMITs, this is not especially helpful – they are already deemed to be fixed trusts;
Favourably disposed: the ATO will look ‘favourably’ on a trust that is a managed investment scheme (MIS) (but not a registered MIS) if it has a single class of units, provided the terms for the issue and redemption of units are fair to all, and there have not been partial amendments to the constitution in the past;
Factors that are unfavourable: the sole example of a trust the PCG implies will not be a fixed trust is one where the trust’s constitution allows the trustee to redeem units at a price that departs significantly from current market value;
Factors that are neutral: everything else mentioned in the PCG falls into the ‘neutral impact’ class. These matters are apparently not fatal or helpful – they are just ‘neutral.’ The matters examined involve (i) issuing new interests, (ii) redeeming existing interests, (iii) amending the constitution and (iv) streaming income.
Other matters that might suggest ‘there is nothing to see here’ haven’t been examined; for example, the PCG does not express a view on whether a bare trust is a fixed trust, or whether a trust with just a single unitholder can be treated as a fixed trust while that situation exists.
For a MIS, it is ‘neutral’ if –
- the responsible entity (RE) of a MIS can issue further units at a discount of up to 10% below the current trading price, provided the RE is regulated under the Corporations Act;
- the PDS prevents the RE issuing additional units without the consent of all unitholders;
- the RE can redeem units only where the redemption price is approved by a special resolution of at least 75% of members;
- the RE has the power to sell or redeem unmarketable parcels (and must compensate unitholders appropriately);
- the RE has an unfettered power to amend the constitution but it is regulated under the Corporations Act 2001 and required to act in the best interests of the unit holders and changes must not adversely affect members’ rights;
- the unregistered MIS has a large number of sophisticated investors and is managed by an AFSL holder and the trustee has a wide power to amend the constitution subject to approval of 75% of unit holders.
For private trusts, it is ‘neutral’ if –
- units can be issued by a private trust at a price based on the net asset value of the trust, the value being determined by the trustee rather than a licensed valuer. However, there might be a problem if it turns out the trustee has not made, ‘an honest assessment of that value’;
- the trustee can only issue additional units or redeem units if all of the beneficiaries agree and agree with the price;
- units can be redeemed for a price based on net asset value;
- the trustee has powers to amend the terms of the trust but only with consent or provided the amendment does not adversely affect beneficiaries’ rights;
- the deed of a private trust confers wide ranging powers on the trustee with respect to issues, redemptions income characterisation, retention and streaming but the trustee has never exercised such powers and there are circumstances which indicate it will not exercise those powers in the future.
The list of factors that are ‘neutral’ is long, when compared with the relatively few factors that are cited as being favourable or unfavourable which brings into question the degree of utility of the draft PCG.