On 13 September 2017, the Australian Taxation Office released it’s finalised Practical Compliance Guideline (PCG or Guideline) 2016/16 on fixed entitlements and fixed trusts. The PCG can be accessed by clicking here.
The Guideline provides tax payers with guidance on the factors that the Commissioner of Taxation will consider when deciding whether he will exercise his discretion to treat the income or capital of a trust as being a fixed entitlement.
The Guideline also outlines a safe harbour compliance approach allowing trustees of certain trusts to manage the compliance of the trust as if the Commissioner had treated the trust’s beneficiaries as having fixed entitlements. This approach is an attempt to better address the practical uncertainties in determining the fixed nature of the trust. These uncertainties have been of particular focus by trustees since Colonial first State Investments Ltd v Commissioner of Taxation [2011] FCA 16.
The determination of a trust being treated as fixed has important tax ramifications, which includes the consideration of trust loss provisions (the trust’s ability to carry forward and utilise tax losses), capital gains tax provisions and beneficiary reporting. Generally, for a trust to be considered fixed, the beneficiaries of the trust should have a vested and indefeasible interest in all of the income and the capital of the trust. In the event that a beneficiary’s interest do not meet this rule, the trustee has other rules or provisions to rely upon to determine if the trust can be considered fixed. This includes applying for the Commissioner to exercise his discretion.
The Guideline should prove to be a positive release from the ATO for beneficiaries and trustees. For further discussion as to how this may affect you or your business, please contact Vincent Elias of our office.