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Amendment to convert unit trust deed to a fixed trust for tax purposes

Amendment to convert unit trust deed to a fixed trust for tax purposes

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This precedent has been authored by Selwyn L Black and Peter D Carroll, Carroll & O’Dea, updated by Jane Garber-Rosenzweig, Gable Lawyers and then by Selwyn L Black and Peter D Carroll. This document is prepared with the assistance of Specialist Editor Stephen Newman, Executive Counsel, Ponte Earle. Introductory note This precedent is to be read with the unit trust deed precedent “Unit trust deed” and sets out changes to be made to “Unit trust deed” so the unit trust will be treated as a fixed trust for income tax purposes. Following the decision of the court in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16 (Colonial Case), the ATO in its Decision Impact Statement stated that the Colonial Case confirmed the ATO view that very few trusts satisfy the definition of “fixed trust” in section 272-65 of schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) in the absence of the exercise of the Commissioner's discretion under section 272-5(3) (essentially because beneficiary entitlements to income or capital are generally liable to be defeated by the exercise of a power in the deed or by a statutory power). On 13 September 2017 the ATO, pursuant to the Commissioner's powers under section 272-5(3), issued Practical Compliance Guideline PCG 2016/16 (Guideline) to assist businesses and investment vehicles which operate under unit trusts ascertain whether their unit trust deed was a fixed trust for tax purposes. The Guideline outlines the factors the Commissioner will consider when deciding whether to exercise the discretion the Commissioner has to treat an interest in the income or capital of a trust as being a fixed entitlement and in Annexure B offers a "safe harbour" for unit trusts subject to complying with a list of conditions. Fixed trust for tax purposes Even though the entitlements of unit holders under the precedent unit trust deed “Unit trust deed” may appear to be "fixed", the precedent unit trust deed “Unit trust deed” is not a fixed trust for tax purposes. There are several consequences if a unit trust is not a fixed trust for tax purposes: first under schedule 2F to ITAA 1936 which relates to the ability of a trust to utilise tax losses; secondly whether franking credits flow through to trust beneficiaries and thirdly when applying other provisions in the tax legislation which rely on the concept of “fixed entitlement” (listed in Attachment A of the Guideline including the availability of CGT rollovers). Amending unit trust “Unit trust deed” in the manner set out below creates a unit trust with only one class of units and incorporates the safe harbour changes set out in paragraph 54(6) of Attachment B of the Guideline. However, there are a number of rules to be observed on an ongoing basis which are set out in paragraph 53 and the 6th and 7th bullet points of paragraph 54(6) in Attachment B of the Guideline. Paragraph 52 of the Guideline states that a safe harbour only has application during the period in which the relevant conditions are satisfied and a trustee that requires certainty as to whether or not the beneficiaries of the trust have fixed entitlements in