By Stuart O’Neill, Special Counsel
The final version of the ATO guidance on what constitutes a “fixed trust” for tax purposes has been released. It provides safe harbour rules to assist practitioners and taxpayers in applying the “fixed entitlement” requirements.
Why bother with “fixed trusts”?
There can be tax problems if “fixed trusts” are incorrectly characterised including:
- no flow through of franking credits to trust beneficiaries;
- potentially more complex rules in order to be able to utilise carry forward trust losses; and
- for SMSF unitholders, any income will be non-arm’s length income taxed at the top marginal rates.
When will the Commissioner treat a trust as a “fixed trust”?
A trust will be a “fixed trust” if the beneficiaries hold, under the deed, fixed entitlements to all trust income and capital in accordance with the legislation, requiring that the beneficiary’s interest must be vested and indefeasible.
If a trust does not qualify as a “fixed trust” and does not satisfy the “safe harbour”, there is discretion to treat it as if it were one. Of course, the facts and circumstances of each case are taken into account.
The following are some indicators of a “fixed trust” that should be reflected in the deed:
- unanimous consent of all unitholders is required to vary the trust deed;
- prohibition on variation of the trust terms at the trustee’s discretion;
- all units issued attach the same entitlement to receive income and capital;
- all income and capital of the trust are distributed to unitholders in proportion to their respective unitholdings;
- the allotment or redemption of fully paid units completed for market value;
- prohibition on the allotment of other classes of units or the reclassification of units;
- prohibition on the trustee to make gifts; and
- valuations of the trust fund and units completed in accordance with Australian accounting standards.
What are the safe harbours under the guidelines?
The safe harbours can be only satisfied in relation to known facts. If one of the following is satisfied, the trustee can manage its tax affairs as though the trust is a “fixed trust”:
- the units are listed;
- trusts that are registered managed investment schemes are compliant with all requirements relating to the scheme;
- satisfaction of licensing requirements for certain widely held trusts;
- satisfaction of licensing requirements for unregistered managed investment schemes; and
- specific single interest holder trusts (conditions in guidelines); and
- “other trusts” that are compliant with conditions set out in the guidelines.
What actions should you take?
Review the trust deed and arrangements:
- does it fit within any of the safe harbours – document this; and
- are amendments to the deed necessary?
Trustees should be acting now. In our experience given that the ATO has now issued a definitive guideline, you can expect to encounter more reviews and stricter scrutiny of fixed trust arrangements. Act now.
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