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The ATO on 13 September 2017 released its finalised guidance on fixed trusts (released as a draft on 26 October 2016). Practical Compliance Guideline PCG 2016/16 sets out the factors the ATO takes into account in deciding whether to exercise the Commissioner's discretion to treat a trust as a fixed trust for tax purposes. It also includes a safe harbour that allows certain trustees to manage a trust's tax affairs as though the Commissioner had exercised the discretion.Anna Ziaras
By way of background, a "fixed trust" is defined in the trust loss rules (Schedule 2F of the ITAA 1936) as a trust where persons have fixed entitlements to all of the income and capital of the trust. A "fixed entitlement" means a vested and indefeasible interest in a share of the income or capital of a trust under its trust deed. The Commissioner has a discretion (under section 272-5(3) of Schedule 2F) to treat an interest as a fixed entitlement in certain circumstances. This discretion cannot be exercised in relation to default beneficiaries and mere objects of discretionary trusts.
The guideline notes that various powers typically found in modern trust instruments may cause a beneficiary's interest to be defeasible (that is, capable of being defeated by the actions of persons or by the occurrence of events). These powers include:
Accordingly, it can be difficult to satisfy the statutory definition of a fixed trust unless the Commissioner exercises the discretion to treat the beneficiaries' interests as vested and indefeasible.
The ATO says it takes 3 key matters into account in deciding whether to exercise the Commissioner's discretion to treat an interest as a fixed entitlement:
Another relevant factor noted in the guideline is whether the exercise of the discretion would enable a taxpayer to obtain a tax benefit from a trust with a tax loss in circumstances where the economic loss incurred was not borne by the taxpayer.
Attachment B to PCG 2016/16 allows the trustees of the following trusts to manage the trust's tax affairs on the assumption that the Commissioner's discretion has been exercised:
PCG 2016/16 applies both before and after its date of issue.
You can read earlier ClearLaw articles on a range of trust topics.
Andrew is a Partner in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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