Practical Compliance Guideline 2016/D16, released last week, outlines the factors that the commissioner will consider when deciding whether to exercise the discretion to treat an entitlement as being a fixed entitlement. The decision to treat it as a fixed entitlement results in a trust being treated as a fixed trust under the trust loss provisions.
The ATO said the guidelines will provide taxpayers with greater certainty about when the commissioner will exercise this discretion.
If an SMSF invests in a unit trust that is not a fixed trust, “on first blush it could be that the [SMSF trustee] is paying 47 per cent tax under the non-arm’s length provisions”, DBA Lawyers director Daniel Butler told SMSF Adviser.
In this recent guidance, Mr Butler said the ATO has confirmed its earlier view on fixed entitlements and fixed trusts outlined in TR 2006/7.
“The ATO takes a liberal view of fixed entitlement: what they say is that it’s fixed from the point of view that it’s not totally discretionary,” he said.
A family discretionary trust, for example, is not a strict fixed trust but it may still qualify as a fixed trust provided that it is capable of measurement.
“The ATO basically says provided that dividend distributions are proportionate to unit holdings in that trust, then there’s no discretion and the distributions from the unit trust should not be subject to 47 per cent tax or NALI,” Mr Butler said.
He said this latest draft guidance is confirmation that the ATO's view is being consistently applied from its previous ruling.
“So the old ruling TR 2006/7 was developed under the older provisions prior to the changes that came in in mid-2007. So we haven’t had a lot of confirmation of TR 2006/7 for the last 10 years, so it’s good to see that the ATO is confirming their view in TR 2006/7.”
However, Mr Butler warned SMSF practitioners that under tax law ITAA 1936 section 272-65, a trust is defined as a fixed trust if “persons have fixed entitlements to all of the income and capital of that trust”, which is stricter than the ATO’s definition.
Mr Butler said it is best practice to rely on the definition of a fixed trust in ITAA 1936 section 272-65.
“The ATO view could change, so you don’t want to get a deed today which could be rendered ineffective tomorrow,” he said.