Colonial First State Investments Limited v Commissioner of Taxation

Counsel for the Respondent: A Robertson SC with DFC Thomas

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1190 of 2009

JUDGE: STONE J DATE OF ORDER: 18 january 2011 WHERE MADE: SYDNEY

1. The appeal against the Respondent's appealable objection decision, being the Notice of Objection Decision reference 1011260402281 dated 12 October 2009 (Objection Decision) is allowed in relation to Question 5(d) of the Application for a Private Ruling dated 9 June 2009.
2. The appeal against the Objection Decision is otherwise dismissed.
3. The answer to Question 5(d) of the Application for a Private Ruling dated 9 June 2009 be varied so as to substitute the answer, "Yes" for the answer "No".
4. The Applicant pay the Respondent's costs as agreed or taxed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1190 of 2009

JUDGE: STONE J DATE: 18 january 2011 PLACE: SYDNEY

Introduction 1 On 9 September 2009 the Commissioner of Taxation, the respondent in this proceeding, issued a private ruling at the request of the applicant, Colonial First State Investments Limited. The applicant had requested the ruling in its capacity as responsible entity (Responsible Entity) and, for present purposes, trustee, of Colonial First State Firstchoice Investments Property Securities Fund No. 1, a retail unit trust investment fund (the Retail Fund). The Retail Fund is a managed investment scheme within Part 5C.1 of the Corporations Act 2001 (Cth). The ruling was issued pursuant to s 359-10 of the Taxation Administration Act 1953 (Cth). In the ruling the Commissioner answered "No" to all questions. 2 By Notice of Objection lodged on 7 October 2009 the applicant objected to the ruling; s 359-60. The objection was disallowed on 12 October 2009 and the applicant now appeals against that decision. The applicant submits that, in accordance with the analysis it put forward in the application, the Commissioner's answers in the private ruling should have been "yes" to all questions. The issues raised in the application include the tax treatment of payments made to redeeming unitholders in the Retail Fund and other taxation issues relevant to the management of that Fund.

Background 3 In its capacity as trustee of the Retail Fund the applicant holds units in the wholesale unit trust fund known as the Commonwealth Property Fund 6 (Wholesale Fund). The applicant is also the trustee of the Wholesale Fund although that fact has no particular relevance for the issues in this proceeding. The terms of the Wholesale Fund are to be found in its Constitution. The assets of the Wholesale Fund are vested in Citicorp Nominees Pty Limited as custodian. Citicorp is also the custodian for the Retail Fund. The Funds make use of a custodian in order to comply with s 601FC(1)(i) of the Corporations Act which requires the responsible entity to ensure that the property of a managed investment scheme is clearly identified as such and "held separately from property of the responsible entity and property of any other scheme". 4 The application for a private ruling was made in the context of the applicant's proposal to amend the Constitution of the Wholesale Fund to alleviate what it sees as unfairness in the tax burdens imposed on unitholders by its current practices in allocating payments to redeeming unitholders. In its written submissions, the applicant refers to its duty as a trustee "to exercise its powers fairly and impartially as between different categories of beneficiaries" and says that "it is in exercise of that duty that it brings these proceedings". In the same vein the applicant elaborated on the perceived unfairness in setting out the background to its request for a private ruling as follows: Some unitholders in investment trusts invest for the long term and retain their units over an extended period. Others invest on a short term basis and redeem their units within (sometimes well within) 12 months according to short term fluctuations in unit values. The Applicant considers that in fairness among unitholders long term unitholders should have the benefit of the preferential tax treatment of discount (long term) capital gains of the fund, and that short term investors who redeem their units during a year should be allocated fully taxable short term gains, often made in consequence of realisations to meet redemption calls.2 The Applicant also considers that in fairness, unitholders who redeem their units during a year at a price which in part reflects the increase in asset value representing undistributed income should receive the part comprising that increase as income and bear the corresponding tax, which should not be imposed on the unitholders at year end, who do not receive a distribution of assets representing the whole of the year's income. The Applicant seeks by exercise of powers of appointment to manage distributions from unit trusts to achieve that fairness, and submits that its exercise of those powers has the tax consequences which are sought. 2Also in fairness, unitholders who redeem their units during a year at a price which reflects the increase in asset value representing undistributed income should receive that increase as income and bear the corresponding tax, which should not be imposed on the unitholders at year end, who do not receive a distribution of assets representing the whole of the year's income. 5 Division 6 of Part III of the Income Tax Assessment Act 1936 (Cth) (1936 Act) concerns the taxation of trust income. In Commissioner of Taxation v Bamford (2010) 240 CLR 481 (Bamford) the High Court, at [17], noted that whatever construction of Division 6 were to be accepted, "examples could readily be given of apparent unfairness in the resulting administration of the legislation". The Court referred to Hill J's observation in Davis v Federal Commissioner of Taxation (1989) 86 ALR 195 at 230 concerning the need for legislative clarification of the Division. Implicit in their Honours' comment was the recognition that it is for Parliament to address the unfairness issue. This is not to say that an unfair result is an irrelevant consideration for a court tasked with construing an ambiguous provision however it is not an independent ground on which the Court is entitled to determine an issue.

The proposed amendments to the Wholesale Fund Constitution 6 The applicant proposes to amend the Wholesale Fund Constitution to redress this unfairness if it can obtain a favourable ruling on its application. Clause 12 of the Constitution is as follows (the proposed amendments are marked up): REDEMPTION: A Holder may request the Responsible Entity to redeem the Holder's Units (Redemption Request) …Units the subject of a Redemption Request will be redeemed by the Responsible Entity (Redemption) while the Trust is liquid … if the Responsible Entity so elects, out of cash available from the Fund corpus, or if insufficient, Fund income. The price amount payable to a holder on Redemption of a Unit (Redemption Price Amount) is the amount derived by dividing Net Trust Value as at the first Valuation Time after the next applicable Time following communication to the Responsible Entity of a the Holder's Redemption Request, by the sum of the number of Units on issue at that Valuation Time and the number of Units represented by the Accrued Responsible Entity's Unit Entitlement (Redemption Unit Sum), then adjusting (or where the Redemption Price is satisfied by an in specie transfer of assets, adjusting the cash portion of the Redemption Price) for Redemption Transaction Costs (if any)… The Responsible Entity, in its absolute discretion, is at liberty to appropriate the Redemption Amount from such of the following accounts of the Trust as the Responsible Entity may elect, after having regard to the interests of the Holders as a whole and to the following extent: i. to the account representing the corpus of the Trust (Corpus Account), an amount not exceeding the Issue Price paid by the Holder on application for the Units being redeemed; ii. to the account to which are credited the Trust's short term capital gains (Short Term Capital Gain Account) an amount not exceeding the amount which the Responsible Entity determines to be the Notional Short Term Capital Gain of the Redeeming Holder in respect of Units being redeemed; iii. to the account to which are credited the Trust's long term capital gains (Long Term Capital Gain Account) an amount not exceeding the amount which the Responsible Entity determines to be the Notional Long Term Capital [Gain] of the Redeeming Holder in respect of the Units being redeemed; and iv. to the Corpus Account, the balance. So much of the redemption Amount per unit as is appropriated from the Corpus Account represents the consideration for redemption of the Unit. So much of the Redemption Amount per Unit as is appropriated from the Notional Short or Long term Capital Gains Account is a Distribution to the Redeeming Holder from the Relevant Account. 7 The proposed additions to cl 12 include additional explanation and elaboration as follows: References to Notional Short Term Gain in respect of a unit are references to the capital gain that would have arisen (for taxation purposes) in respect of the Unit if the Unit were acquired and disposed of within 12 months, calculated as if the entire Redemption Amount in respect of the Unit were proceeds of disposal of the Unit. References to the Notional Long Term Gain in respect of a unit are references to the capital gain that would have arisen (for taxation purposes) in respect of the Unit if the Unit were acquired and disposed of within a period longer than 12 months, calculated as if the entire Redemption Amount in respect of the Unit were proceeds of disposal of the Unit. … The Responsible Entity may decide to which accounts of the Trust a Redemption Amount should be debited after the end of the financial year during which the entitlement to that Redemption Amount arises and will notify each Redeeming Holder accordingly. 8 The amendments proposed to the Constitution also include the following definitions to be added to cl 46: Long Term Capital Gains Account means any account to which is credited capital gains (for taxation purposes) other than those gains credited to the Short Term Capital Gains Account. Short Term Capital Gains Account means any account to which is credited capital gains (for taxation purposes) in respect of assets which are disposed of within 12 months of acquisition. Presumably the fact that the definitions use the plural "Gains" and cl 12 uses the singular is an error and does not affect the application of the definitions in cl 46 to the accounts named in cl 12.

The application for a private ruling 9 In considering the present application it is important to bear in mind that it concerns the answers given by the Commissioner to the questions posed in the application for a private ruling. That application posed six questions, five of which have multiple parts. The questions take the form of asking whether, on the basis of postulated facts, the 1936 Act and the Income Tax Assessment Act 1997 (Cth) (1997 Act) operate in a specified way with regard to the redemption of units in the Wholesale Fund. All of the questions posed in the application for a private ruling were premised on the above amendments to the Constitution of the Wholesale Fund having been made. 10 The issue in this appeal is limited to whether the Commissioner's answers to the questions in the application for a private ruling were correct. It is not the role of the Court to engage in an exploration of what might be the correct answer to different or additional questions that the applicant might have posed or how the applicant might achieve the tax objectives it seeks. The Commissioner appended reasons for decision to the private ruling. The reasons were provided to assist the applicant in understanding how the Commissioner's decision was reached however they are not part of the private ruling. Accordingly, if I conclude that the Commissioner's answer to any question, or part of a question is correct but for reasons other than those advanced by the Commissioner, the appeal in relation to that question or part should nevertheless be dismissed.

Questions 1-4 11 Four of the questions in the application for a private ruling were premised on the applicant requesting redemption of a unit in the Wholesale Fund and, on redemption, being entitled to payment of an amount (Redemption Amount) greater than the amount subscribed by the applicant on issue of the unit (Subscription Amount). The amount by which the Redemption Amount exceeded the Subscription Amount was referred to as the Gain part. Thus, in each case the Redemption Amount was comprised of the Subscription Amount and the Gain part. Two of these questions postulated the unit having been held for less than 12 months (Short Term Unit); the other two postulated the unit having been held for more than 12 months (Long Term Unit). The scenario in each differed as to the source of the monies comprising the Redemption Amount and the question proffered a tax treatment in respect of each component and asked if the tax treatment was correct. 12 In each case the Commissioner responded in the negative. I shall consider each question in turn.

Question 1 13 The first question involved the redemption of a Short Term Unit and the assumption of the following facts: 1. Application for redemption of a Short Term Unit by the applicant in circumstances where the Redemption Amount exceeded the Subscription Amount; 2. Payment of the Redemption Amount to the applicant comprising (a) an amount equal to the Subscription Amount appropriated to the Redemption Amount from the Corpus Account of the Wholesale Fund; and (b) an amount equal to the Gain part appropriated to the Redemption Amount from the Short Term Capital Gains Account. 14 The first question asks if, in those circumstances, the operation of the 1936 Act and 1997 Act is as follows: (a) The gain part is included in the assessable income taken into the calculation of the net income of the trust estate of the Retail Fund, as being that part of the net income of the Wholesale Fund to which the Applicant is, in consequence of the redemption and the operation of clause 12 of the amended Constitution, presently entitled for the purposes of s 97 of the 1936 Act; (b) by reason of s 115-215(6) of the 1997 Act an allowable deduction in the same amount as included in the assessable income in (a) is taken into the calculation of the net income of the trust estate of the Retail Fund of which the Applicant is trustee; (c) by reason of Div 102 and subdiv 115-C of Part 3-1 of the 1997 Act which provisions provide for the attribution to beneficiaries of capital gains derived by trustees, the gain part is a capital gain to be taken into the calculation of the net income of the Retail Fund; and either (d) no gain is made by the Applicant upon the occurrence of CGT Event C2 on redemption of the unit, because the capital proceeds of the redemption comprise the corpus part which does not exceed the subscription amount, or (e) on redemption of the unit a CGT Event C2 occurs, the capital proceeds in respect of the CGT Event C2 comprise the Redemption Amount, a capital gain is made to the extent that the capital proceeds (assuming market value) exceed the subscription amount (viz, by the amount of the gain part), but the gain is reduced to zero under s 118-20 of the 1997 Act because, as it does not exceed the amount (the gain amount) included in the assessable income of the Applicant (in calculating the net income of the Retail Fund) by s 97 of the 1936 Act as in (a) above. 15 The Commissioner's answer to the first question was, "No" in respect of each part of Question 1. The private ruling links paragraph (c) with each of the alternatives in (d) and (e) above so that in the ruling there is no paragraph (e) and paragraphs (c) and (d) are as follows: (c) by reason of Div 102 and subdiv 115-C of Part 3-1 of the [1997 Act] which provisions provide for the attribution to beneficiaries of capital gains derived by trustees, the gain part is a capital gain to be taken into the calculation of the net income of the Retail Fund and no gain is made by the Applicant upon the occurrence of CGT Event C2 on redemption of the unit, because the capital proceeds of the redemption comprise the corpus part which does not exceed the subscription amount; and (d) by reason of Div 102 and subdiv 115-C of Part 3-1 of the 1997 Act which provisions provide for the attribution to beneficiaries of capital gains derived by trustees, the gain part is a capital gain to be taken into the calculation of the net income of the Retail Fund and on redemption of the unit a CGT Event C2 occurs, the capital proceeds in respect of the CGT Event C2 comprise the Redemption Amount, a capital gain is made to the extent that the capital proceeds (assuming market value) exceed the subscription amount (viz, by the amount of the gain part), but the gain is reduced under s 118-20 of the 1997 Act because, as it does not exceed the amount (the gain amount) included in the assessable income of the Applicant (in calculating the net income of the Retail Fund) by s 97 of the 1936 Act as in (a) above. 16 In oral submissions, senior counsel for the applicant, Mr Slater, observed that conflating the questions in this way had "somewhat altered the sense of the questions". He submitted that the way the questions are put in the ruling "is confusing and not very sensible" and that the reasons for judgment should address the questions as set out in the application. Mr Slater did not explain or illustrate the confusion to which he referred and I am unable to see that joining (c) to (d) and (c) to (e) as the Commissioner has done makes any difference to the sense or substance of the questions. I have considered whether my answers to the questions as formulated by the applicant would differ from my answers to the questions as formulated by the Commissioner and I have concluded that there would be no difference.

Question 1(a) - Is the applicant a beneficiary of the Wholesale Fund? 17 The Commissioner rejected the applicant's proposed analysis in relation to Question 1(a) above on a number of bases, the first of which is that the applicant is not a beneficiary of the Wholesale Fund. As indicated above, units in the Wholesale Fund are vested in Citicorp, in its capacity as custodian of the Retail Fund and are held on a sub-trust for the applicant. Accordingly, the Commissioner concluded, "the only amount that could be included in the section 95 net income of the Retail Fund is its share of the section 95 net income of the sub-trust". 18 For the purposes of Division 6 of the 1936 Act, s 95 relevantly defines 'net income in relation to a trust estate' as meaning "the total assessable income of the trust estate calculated … as if the trustee were a taxpayer in respect of that income … less all allowable deductions". Section 97(1)(a) provides as follows: a. Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate: (a) the assessable income of the beneficiary shall include: (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; … 19 The Commissioner's conclusion that the applicant is not a beneficiary of the Wholesale Fund because of the interposition of the custodian ignores equity's concern with substance rather than form: see Corin v Patton (1990) 169 CLR 540 at 579 per Deane J. It is undoubtedly the case that the structure of the Retail Trust requires payment of the Redemption Amount to be made to Citicorp, in its capacity as custodian of the Retail Fund. In that sense it is correct to say that Citicorp has "title" to the unit however the concept of title is of limited relevance in determining who is a beneficiary. Because of the legal arrangements pursuant to which the applicant, as trustee of the Retail Fund, has appointed Citicorp as the custodian, Citicorp is the conduit through which the payment must flow to the applicant but it is the applicant not Citicorp to whom the Redemption Amount must be paid. 20 As a unitholder in the Wholesale Fund, the applicant "is entitled to enforce the trustee's obligation to administer the trust according to its terms": Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 at [42] per Lindgren J. As such the applicant is a beneficiary of the Wholesale Fund and the relevant beneficiary for the purposes of s 97. As Lindgren J added at [43]: The word "beneficiary" reaches beyond a person who has a beneficial interest in the trust property. It is possible for the legal estate in land to be vested in "trustees" without equitable ownership being vested in someone else. The trustees must, however, owe fiduciary obligations in respect of the trust property to persons who, although they may have no interest in the trust property and may never have an interest in the trust property, are called "beneficiaries". In CPT Custodian Pty Ltd v Commissioner of State Revenue of the State of Victoria (2005) 224 CLR 98, the High Court rejected (at [25]): a "dogma" that, where ownership is vested in a trustee, equitable ownership must necessarily be vested in someone else because it is an essential attribute of a trust that it confers upon individuals a complex of beneficial legal relations which may be called ownership. That is to say, there can be a trustee who owes fiduciary obligations in respect of trust property to "beneficiaries" without any of the latter having a beneficial interest in the property. 21 For the reasons given above the Commissioner's view that the applicant is not a beneficiary of the Wholesale Fund must be rejected however that is not a sufficient ground for concluding that the Commissioner's answer to Question 1(a) is incorrect. For that to be established, it is also necessary that, on the facts as postulated, the applicant be shown to be "presently entitled to a share of the income of the trust estate".

Question 1(a) - 'presently entitled' within the meaning of s 97(1) of the 1936 Act 22 The second basis of the Commissioner's rejection of the applicant's analysis in Question 1(a) is that, even accepting that the applicant is the relevant beneficiary for the purposes of s 97, it is not "presently entitled to a share of the income" of the Wholesale Fund and therefore s 97(1) does not apply. The definitive statement on the meaning of 'presently entitled' is to be found in Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264. 23 Harmer concerned money paid into court by a company, Riverhall Pty Ltd, which itself made no claim to the money but which was faced with competing claims by parties with whom it had had previous dealings. Subsequent to the court order that Riverhall pay the money into court, a further order was made that the money be invested with a building society in the names of the solicitors for the respective claimants. The solicitors, in their capacity as trustees of the money, were assessed for tax on interest earned at a time prior to the resolution of the conflicting claims. The High Court held that at issue in the appeal was "whether the interest constituted income to which there was no beneficiary 'presently entitled' for the purposes of s 97(1)". If there were no such beneficiary then the trustees were liable to be taxed on the interest pursuant to s 99A. 24 The High Court accepted, at 271, that a beneficiary is 'presently entitled' to a share of the income if, and only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. The Court added that the question whether any of the claimants was presently entitled to the interest in this sense, or had a "vested and indefeasible interest" in it (see s 95A(2)), "must be answered as at the time when the interest was derived, that is to say, during the tax years". 25 In Harmer the interests of the competing claimants were contingent on orders resolving the dispute being made by the Supreme Court of Western Australia. Those interests vested only when the orders were made, which was after the relevant tax years. For that reason the High Court held that the claimants were not 'presently entitled' during those tax years, explaining: The fact that orders were subsequently made for payment of the interest earned in the tax years to one or other of the claimants does not assist the appellants unless those orders represented a judicial recognition of a present or relevantly vested beneficial entitlement to the interest which existed at the time when the interest was derived, that is to say, which existed independently of the actual order. 26 In Bamford the High Court was called on to construe the undefined expression, "the income of the trust estate" in s 97(1). The Court held that the content of the expression was to be found in the general law of trusts and affirmed the construction of 'presently entitled' given in Harmer. The High Court, at [37]-[39] also commented more generally on the opening words of s 97(1): The opening words of s 97(1) speak of "a beneficiary of a trust estate" who is "presently entitled to a share of the income of the trust estate". The language of present entitlement is that of the general law of trusts, but adapted to the operation of the 1936 Act upon distinct years of income. The effect of the authorities dealing with the phrase "presently entitled" was considered in Harmer v Federal Commissioner of Taxation1 where it was accepted that a beneficiary would be so entitled if, and only if, (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. … The identification in s 97(1) of "a trust estate" of which there is "a beneficiary" also bespeaks the general law of trusts. It is true that s 97(1) must be read with s 96. This is addressed to "a trustee", and the effect of the decisions to which reference has been made is that there may be a trustee of a trust created by the operation of a legislative regime not by settlement inter vivos or testamentary disposition. Nevertheless, there must be a "trust estate". Further, the phrase "presently entitled to a share of the income" directs attention to the processes in trust administration by which the share is identified and entitlement established. The relevant operation of those principles, supported by a review of the authorities, was described as follows by Bowen CJ, Deane and Fitzgerald JJ in Federal Commissioner of Taxation v Totledge Pty Ltd2. Their Honours said: A beneficiary under a trust who is entitled to income will ordinarily only be entitled to receive actual payment of the appropriate share of surplus or distributable income: the trustee will be entitled and obliged to meet revenue outgoings from income before distributing to a life tenant or other beneficiary entitled to income. Indeed, circumstances may well exist in which a trustee is entitled and obliged to devote the whole of gross income in paying revenue expenses with the consequence that the beneficiary entitled to income may have no entitlement to receive any payment at all. This does not, however, mean that a life tenant or other beneficiary entitled to income in a trust estate has no beneficial interest in the gross income as it is derived. He is entitled to receive an account of it from the trustee and to be paid his share of what remains of it after payment of, or provision for, the trustee's proper costs, expenses and outgoings. Reliance was placed by the Commissioner upon a passage in Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd3. There was, however, in that case no submission to the effect that the trust deed could operate to treat as capital receipts what otherwise might have been included as income of the trust estate. This is apparent from the argument in the Full Court of the Federal Court in that case4, and the argument there, as in this Court, was, as the Trustee submitted in this appeal, upon other issues. 1 (1991) 173 CLR 264 at 271. 2 (1982) 40 ALR 385 at 393. 3 (1998) 194 CLR 328 at 337 [15]; [1998] HCA 53. 4 Australian and New Zealand Savings Bank Ltd v Commissioner of Taxation [No 2] (1997) 75 FCR 25 at 32. 27 Bamford establishes that the provisions of the relevant trust deed may empower a trustee, for s 97(1) purposes, to characterise as "income of the trust estate" that which may not otherwise be so characterised. The Commissioner's reasons for the private ruling stated that, "even were the provisions of a trust instrument to seek to alter the character of amounts in the hands of the trustee for trust purposes, such a recharacterisation would not be effective for income tax purposes". In the light of the High Court's decision in Bamford this statement is clearly incorrect. Indeed, given that at the time it was made there was a Full Federal Court decision (which was later upheld in the High Court) to the same effect, it was not a position open to the Commissioner at that time; Bamford v Federal Commissioner of Taxation (2009) 176 FCR 250 (Bamford (FC)); see also Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd (2007) 158 FCR 325 at [3]-[7] per Allsop J. The proposition was not advanced at the hearing in this proceeding. 28 Before examining the submissions that were put forward by the Commissioner in this proceeding it is necessary to consider cl 12 of the Wholesale Fund Constitution (including the proposed amendments) which provides for the redemption of units and the calculation of the Redemption Amount. Clause 12 provides for the Redemption Amount payable to a unitholder on redemption of a unit to be calculated by dividing the Net Trust Value by the sum of the total number of Units (including those which have accrued to the Responsible Entity). The Net Trust Value is the total value of all Trust Property less all Trust Liabilities. Trust Property and Trust Liabilities are defined terms however their precise meaning is not of present concern. The amount calculated (or the cash portion of that amount if there is to be an in specie transfer of assets) is to be adjusted for Redemption Transaction Costs, if any. 29 Clause 12 provides that an entitlement to a Redemption Amount must be "satisfied within a reasonable time after the request for redemption is received". It also provides for the Responsible Entity, in its "absolute discretion" to appropriate the Redemption Amount as between the Corpus Account, the Short Term Capital Gain Account and the Long Term Capital Account as set out at [6] above. 30 Accepting that the Responsible Entity could validly allocate parts of the Redemption Amount to one or more of the accounts nominated in cl 12, the Commissioner nonetheless submits that the decision in Harmer applies to the circumstances postulated in Question 1(a) so that, on the facts postulated in Question 1(a) the applicant cannot be 'presently entitled' for the purposes of s 97(1). 31 This analysis relies on the fact that, as provided in the amended cl 12 of the Wholesale Fund Constitution, whether the Redemption Amount payable to the applicant is attributed in part to the Corpus Account and/or the Short Term Capital Gain Account is a matter for the Responsible Entity of the Wholesale Fund in the exercise of its discretion; (see [6] above). As cl 12 provides that this determination will be made "after the end of the financial year during which the entitlement to that Redemption Amount arises", the respondent submits that: It follows that the entitlement of the unit-holder to a Redemption Amount arises before the Responsible Entity is able to allocate retrospectively, the "Gain part" to the unit-holder. Bearing in mind that a present entitlement must exist at the time the income to be distributed is received by the trustee, it is impossible for the test in Harmer to be satisfied having regard to the manner in which, and the time at which, the source(s) of the Redemption Amount is determined. The applicant rejects this analysis, contending that the proposition is "unfounded in any precedent or relevant statutory provision". 32 In relation to Question 1(a) it is the appropriation of the Gain part of the Redemption Amount to the Short Term Capital Gain Account that is relied on to include the Gain part in the (distributable) income of the Wholesale Fund. Pursuant to the amended cl 12 this appropriation can only occur "after" the end of the relevant financial year. Given the Responsible Entity's discretion as to the allocation of the Redemption Amount between the relevant accounts, until that discretion is exercised and the allocation made, any capital gain realised by the Wholesale Fund could not have been included in the income of the trust estate to which the applicant was presently entitled. The difficulty for the applicant is that Harmer makes clear that for s 97(1) purposes, the applicant needs to be presently entitled "at the time when the interest was derived that is to say, during the tax years". I reject the respondent's submission that the beneficiary must be presently entitled "at the time" the income to be distributed is received by the trustee. It is clear from Harmer that it is "during the tax years" that the entitlement must arise. 33 The applicant's written submissions contend that once there has been an appropriation from the Short Term Capital Gain account and payment to the applicant, there has been an exercise of the trustee's discretion to pay income of the Wholesale Fund trust estate to the applicant as beneficiary and therefore s 101 of the 1936 Act applies to deem the unitholder to be presently entitled to that amount. This submission has the same flaw as the above analysis in that the beneficiary would not be presently entitled "at the time" as the income to be distributed is received by the trustee. 34 The facts postulated in Question 1(iv) do not include information as to when in relation to the relevant tax year the appropriation from the Short Term Gain Account was made. It must, however, be the case that it was made after the end of the tax year to which the Gain part relates; that is unless one were prepared to assume that the Responsible Entity had acted contrary to the provisions of the Wholesale Fund Constitution and without the benefit of the year end accounts. The applicant does not make such an assumption. Rather the applicant makes the following point: The "share" of the income of the trust estate (and in consequence of the sec 95 "net income") is the proportion which the amount to which the beneficiary is presently entitled bears to the whole of "the income of the trust estate," and that share is, and can only be, ascertained at the end of the year of income, when all the components of the calculation are ascertainable. 35 In its written submissions in reply the applicant submitted that the present entitlement of a beneficiary is relevant to the operation of the Act at the end of the year of income. It added that: The function of present entitlement in the statutory scheme is that it serves to fix the share of the net income of the trust estate which is included in the assessable income of a beneficiary or taxed to the trustee. 36 There is no disagreement about that. The position was put clearly by senior counsel for the Commissioner, Mr Robertson who said in oral submissions that the steps are: [Y]ou identify the share of the distributable income to which the beneficiary is presently entitled, that's step 1. Once you've identified that share then the notion of 'present entitlement' has served its purpose … Then the third step is you apply that proportion to the taxable income and then that gives you the beneficiary's assessable income. 37 As the above comments of each party recognise, s 97(1) clearly sets out as a precondition to the operation of the section that there be "a beneficiary of a trust estate who ... is presently entitled to a share of the income of the trust estate". Harmer establishes that the precondition will not be met unless the beneficiary has an interest in that share which is vested in interest and in possession. Without that, a share of the net income of the Wholesale Fund cannot, pursuant to s 97(1), be taken into the net income of the Retail Fund (and hence into the assessable income of the Retail Fund). 38 I have concluded that, having regard to the manner in which, and the time at which, any part of the Redemption Amount is allocated to one or other of the relevant accounts, and the fact that the allocation is in the discretion of the Responsible Entity, it is impossible to satisfy the Harmer requirement that the present entitlement arise within the relevant tax year. 39 The applicant submits that this proposition, advanced by the Commissioner, "mistakes the question on which the ruling requested was made" in that the factual premise of each of Questions 1 to 5 "is that the trustee's appropriation from the relevant account precedes or is concurrent with the payment". For reasons given in [34] that submission must be rejected. 40 The applicant refers to the proposition in the Commissioner's written submissions that "the extent to which [the Redemption Amount] will be sourced from the Short-Term Capital Gains Account, corpus or some other account will only be determined at the end of the financial year". The applicant submits that this argument ignores the fact that paragraph 47 of the private ruling application on which this proposition is based "in fact states (as part of the scheme for ruling) that the Applicant will make allocations at the time of redemption but inform unitholders of the character of their receipts at or after year end". That is not, however, what is postulated in the facts set out in the questions. The correctness of the Commissioner's ruling can only be assessed on the basis of the given facts and in the light of the terms of the Wholesale Fund Constitution as proposed to be amended. It is not necessary, therefore, to consider this submission further. 41 For the above reasons I find that the requirement of present entitlement in s 97(1) is not met on the facts as postulated in Question 1.

Question 1(a) - the income of the trust estate 42 The Commissioner submits that, "even if the applicant is presently entitled to the funds from which the "Gain part" is ultimately sourced, it does not follow that those funds formed part of the income of the trust estate for the purposes of s 97". According to the Commissioner no provision of the Constitution purports to treat what would otherwise be received as capital as income. On this basis the Commissioner distinguishes the Constitution of the Wholesale Fund from the trust deeds considered in Bamford and Cajkusic v Federal Commissioner of Taxation (2006) 155 FCR 430 both of which expressly gave the trustee power to determine amounts that would be treated as income or capital; see Bamford (FC) at [14] per Emmett J and Cajkusic at [19]. 43 Clause 32 of the Wholesale Fund Constitution is relevant to this issue. The clause concerns distributions to unitholders from the Fund and is as follows: Distributions: Before and after Termination, the Responsible Entity at any time may elect that any amount (capital or income) (Distribution) be distributed from the Trust to Holders pro rata to the number of Units on issue held as at a time (Accrual Time) determined by the Responsible Entity or in accordance with the provision of this Constitution. The Responsible Entity may decide which part of any Redemption Amount should properly be treated as a Distribution of the Redeeming Holder from the Short Term Capital Gain Account or from the Long Term Capital Gain Amount [sic] or is a Distribution of corpus, in accordance with this Constitution. Each Holder to whom a Distribution is made is thereby entitled to the amount of that Distribution, being corpus, or a short or long term capital gain according to the account of the Trust from which it is appropriated. Each Holder registered at midnight on the last Day of each year of income for purposes of the Income Tax Assessment Act 1936 or 1997, as applicable (Tax Act) is presently entitled to a share of Distributable Income for that year not previously distributed in the proportion of the number of Units held to all Units then in issue in the Trust. Distributable Income is at least the minimum amount which the Responsible Entity must distribute if it is not to be assessable or liable to pay more than the lowest amount of tax properly assessable in respect to that year of income under the Tax Act, unless before the end of the tax year the Responsible Entity determines in its discretion that the Distributable Income is any other amount which is equal to or greater than Net Income (being net income for the purposes of section 95 of the Income Tax Assessment Act 1936) and equal to or less than the income of the Trust for accounting purposes. Should there be a change in a law in respect of Taxes that results in the Trust or the Responsible Entity becoming subject to Tax on income and gains derived by the Trust even where all available income is distributed to Holders, or regardless of the present entitlement of the Holders, then it will no longer be necessary for the Responsible Entity to make distributions in accordance with this clause and instead the Responsible Entity, at its discretion, may choose when to make distributions of profits, income, capital or any taxation or imputation credits that have become available in relation to the Trust. [The proposed amendments to cl 32 are marked up for ease of identification.] 44 The applicant submits that the requirement that the Distributable Income be an amount that will lead to the lowest amount of tax means that it must include any amount of capital gain included in the net income of the trust estate pursuant to s 102-5 of the 1997 Act otherwise that amount would be taxable in the hands of the trustee. The applicant submits that as cl 32 "permits and requires" the trustee to treat assessable capital gains as income, such gains fall within "the income of the trust estate" for s 97 purposes. 45 The respondent makes a contrary submission. Although the Responsible Entity may allocate parts of the Redemption Amount to the Short Term Capital Gain Account or the Long Term Capital Gain Account or the Corpus Account, this does not entail that the Gain part is distributed out of income as opposed to capital. In its written submissions the respondent makes the following points: in referring to Distributions, the first sentence of cl 32 adopts the distinction between capital and income; it does not abrogate that distinction; while the clause confers on the Responsible Entity a discretion to decide which part of a Redemption Amount be allocated to one or other of the named accounts, it does not provide that any part of capital should be treated as income; rather in providing for part of the Redemption Amount to be treated as a Distribution it preserves the distinction between capital and income; similarly, in conferring an entitlement to the amount of the Distribution, the clause continues to preserve the distinction between capital and income; the fourth sentence, beginning, "Each Holder registered at midnight…", concerns end of year distributions to persons other than redeeming unit-holders and is irrelevant to the composition of Redemption amounts. 46 The last of these points, if correct, has far-reaching implications for the applicant's argument. "Distributable Income" is defined in cl 32 which, consistent with the practice with regard to definitions throughout the Constitution, has the term to be defined in bold. The sentence immediately preceding the definition is the only part of cl 32 that uses the concept of "Distributable Income". I accept the respondent's submission that the provision in the fourth sentence for the distribution to registered unitholders of income previously not distributed in the relevant year has no operation with respect to redemptions or the composition of a Redemption Amount. 47 There is a distinction to be made between the terms of the Wholesale Fund Constitution and those of the trust deed in Bamford. Clause 7(n) of the trust deed in Bamford expressly empowered the trustee to determine whether "any receipt, profit or gain or payment, loss or outgoing or any sum of money or investment is or is not to be treated as being on income or capital account". Clauses 4(a) and 4(b) of the trust deed provided respectively for the trusts upon which "the income arising from the Trust Fund" and "the capital of the Trust Fund" were to be held; see Bamford (FC) at [14]-[16]. Thus the trustee had the power to allocate receipts as between income and capital. Similarly in Cajkusic cl 8(u) of the trust deed, (set out at [19] of the Full Court's reasons) gave the trustee power to "determine what amount or amounts shall be treated as income of the Trust Fund and what amount or amounts shall be treated as capital". 48 In Bamford the High Court held that in its terms a trust deed could empower the trustee to allocate receipts to capital or to income even where such treatment did not correspond with statutory concepts of capital and income. The trust instruments in both Bamford and Cajkusic contained such terms. The High Court did not suggest that such a power would exist independently of the trust deed. The importance of a careful construction of the trust instrument is apparent in the comment that "the 'rules' which were developed in Chancery regarding apportionment between capital and income of receipts and outgoings and losses largely took the form of presumptions which would yield to provision made in the trust instrument"; at [17]. 49 The proper construction of the Wholesale Fund Constitution does not reveal any provision equivalent to the provisions in Bamford and Cajkusic. As indicated above, the provisions on which the applicant relies as implying such a power do not do so and are not relevant to the rights of a redeeming unitholder or to the composition of a redemption amount. Despite describing the respondent's submissions on the point as convoluted, the applicant has not offered a convincing alternative. I am therefore not satisfied that the Gain part forms part of the income of the trust estate for the purposes of s 97(1).

Question 1(a) - proportion 50 The Commissioner submits that even assuming that a redeeming unitholder was presently entitled to income from which the Gain part is sourced, it does not follow that the amount of the Gain part will be included in the s 95 net income of the Wholesale Fund. The submission relied on the meaning of "share" in s 97 accepted by the High Court in Bamford. 51 In Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 at 74 Sundberg J held that: The words "income of the trust estate" in the opening part of s 97(1) refer to distributable income, that is to say income ascertained by the trustee according to appropriate accounting principles and the trust instrument. That the words have this meaning is confirmed by the use elsewhere in Div 6 of the contrasting expression "net income of the trust estate". The beneficiary's "share" is his share of the distributable income. 52 In Bamford the High Court quoted the above with approval and also accepted Sundberg J's conclusion, at 75, that "share" in s 97(1) means "proportion" rather than "part": at [45]-[46]. Thus the share or proportion of the Wholesale Fund's net income that, by s 97(1)(a), is included in a redeeming unitholder's assessable income, is the same share or proportion of the Fund's distributable income to which the unitholder is presently entitled. As an example, the assessable income of a unitholder who is presently entitled to 5% of the distributable income of the Fund, will include 5% of the net income of the Fund. 53 Question 1(a) states that, on the postulated facts, the gain part is included in the assessable income taken into the calculation of the net income of the trust estate of the Retail Fund, as being that part of the net income of the Wholesale Fund…. 54 This is not correct. The Gain part is the amount by which the Redemption Amount exceeds the Subscription Amount. As explained above, pursuant to s 97(1), it is a share (that is, a proportion) of the net income of the Wholesale Fund that would be included in the assessable income of the Retail Fund. When applied to the whole of the net income of the Wholesale Fund that proportion (which corresponds to the proportion of the Fund's distributable income to which the Retail Fund is presently entitled) yields an amount. That amount includes, not the Gain part, but only so much of the Gain part as corresponds with a net capital gain. 55 The applicant attempted to distinguish Bamford because in that case the s 95 net income of the trust estate was greater than the amount of the distributable income of the trust. The applicant submitted that, the "proportional view endorsed by the court goes to the meaning of 'share of the net income' in such a case" and that "the courts did not consider, and the decision [in Bamford] has no bearing upon, "the ratio which the 'Gain part' bears to the total income available for distribution". The latter quote is from the Commissioner's submission on the point. Quoted in full, the statement was: It follows [from the meaning of 'share' as 'proportion'] that the unit-holder's liability under s 97, in respect of the s 95 net income of the Wholesale Fund, depends upon the ratio which the 'Gain part' bears to the total income available for distribution after provision for the trustee's proper revenue expenses in the income year … 56 Two comments may be made in respect of the applicant's submission. First, the difference between the facts in Bamford and in this case is irrelevant. There is no reason to suppose that the meaning of 'share' in s 97(1) would in any way be affected by the amounts in question. Secondly, as on the facts postulated in Question 1, the Gain part is the only part of the income of the Wholesale Fund that is distributed on redemption, the Commissioner's comment is correct. 57 It follows from the reasons given above that, although the Commissioner's conclusion that the applicant is not a beneficiary of the Wholesale Fund is incorrect, the Commissioner's answer to Question 1(a) is correct.

Question 1(b) 58 In the application for a private ruling the applicant contends that, on the facts as postulated, "an allowable deduction in the same amount as included in assessable income in (a) is taken into the calculation of the net income of the trust estate of the Retail Fund of which the Applicant is trustee". The amount of the allowable deduction is said to be the same as the amount of the Gain part. The claim relies on s 115-215(6) of the 1997 Act which allows the beneficiary of a trust estate to "deduct for the income year the part (if any) of the trust amount that is attributable to the trust estate's net capital gain mentioned in subsection 102-5(1)". Section 102-5(1) sets out the five steps necessary to calculate net capital gain. 59 The Commissioner rejects this contention for reasons that mirror the reasons for rejecting the contentions put by the applicant in relation to Question 1(a). I have already expressed my views in relation to those reasons and therefore will deal only briefly with Question 1(b). 60 Subdivision 115-C of the 1997 Act sets out rules about trusts with net capital gains. Section 115-200 provides the following summary of the Subdivision: This Subdivision sets out rules for dealing with the net income of a trust that has a net capital gain. The rules treat parts of the net income attributable to the trust's net capital gain as capital gains made by the beneficiary entitled to those parts. This lets the beneficiary reduce those parts by any capital losses and unapplied net capital losses it has. If the trust's capital gain was reduced by either the general 50% discount in step 3 of the method statement in subsection 102-5(1) or by the small business 50% reduction in Subdivision 152-C (but not both), then the gain is doubled. The beneficiary can then apply its capital losses to the gain before applying the appropriate discount percentage (if any) or the small business 50% reduction. If the trust's capital gain was reduced by both the general 50% discount and the small business 50% reduction, then the gain is multiplied by 4. The beneficiary can then apply its capital losses to the gain before applying the appropriate discount percentage (if any) and the small business 50% deduction. The rules also give the beneficiary a deduction if necessary to prevent it from being taxed twice on the same parts of the trust's net income. 61 The subdivision applies if the trust estate has a net capital gain that is taken into account in calculating the trust's net income for the income year; s 115-210. Consistent with the explanation in the outline above, s 115-215 is intended to ensure that appropriate amounts of the trust estate's net income attributable to the trust estate's capital gains are treated as a beneficiary's capital gains when assessing the beneficiary. It applies to the beneficiary of a trust estate whose assessable income includes, inter alia, an amount under s 97(1) of the 1936 Act. 62 As explained in relation to Question 1(a), the applicant is not presently entitled to the funds from which the Gain part was sourced at the time those funds were derived by the trustee and therefore the applicant's assessable income does not include an amount under s 97(1). Similarly, the Gain part of the Redemption Amount is not a distribution of income of the trust estate. 63 The Gain part is a particular amount, being the excess of the Redemption Amount over the Subscription Amount. In contrast, the amount of the net income of the Wholesale Fund which is taken into the assessable income of the Retail Fund would be calculated with respect to the share (or proportion) of distributable income of the Wholesale Fund to which the applicant is presently entitled. These quite different calculations may well yield entirely different amounts "the part … of the trust amount that is attributable to the trust estate's net capital gain" as referred to in s 115-215(6) would not be the same amount as the Gain part. 64 I therefore find that the Commissioner's answer to Question 1(b) is correct.

Question 1(c) (includes 1(c) and (d) of the application) 65 The applicant contends that the Gain part is "a capital gain to be taken into the calculation of the net income of the Retail Fund" and that "no gain is made by the Applicant upon the occurrence of a CGT Event C2 on the redemption of the unit". The CGT Event C2 is the redemption of an intangible CGT asset, ie the unit in the Wholesale Fund; s 104-25(1)(a) of the 1997 Act. The applicant submits that as the Gain part is taken into the net income of the Retail Fund and the capital proceeds included in the Redemption Amount do not exceed the Subscription Amount, there is no capital gain; s 104-25(3). 66 This analysis assumes that the Gain part is the relevant capital gain attributed to the applicant on redemption of a unit pursuant to Division 102 and Subdivision 115-C. For reasons given above in relation to Question 1(b), a trust amount attributable to the Wholesale Fund's net capital gain could not be included in the assessable income of either the Wholesale Fund or the Retail Fund and, if such an amount were so included it would not equate to the Gain part which is an amount not a proportion. For these reasons the Commissioner's answer to Question 1(c) is correct. As discussed above, the Commissioner has conflated the respective alternatives in (d) and (e) in the application with (c). In my view the correct answer to the questions as set out in the application would be "no" to each of (c), (d) and, for reasons that follow, also to (e). 67 In its written submissions, the respondent also argues that the applicant's suggestion that "the capital proceeds of the redemption comprise the corpus part" is not correct as it is the Redemption Amount in its entirety. The applicant is absolutely entitled to the unit as against the trustee, and more to the point, as against the custodian who has the legal title to the units. This is quite consistent with the view expressed in relation to Question 1(a) that the applicant is a beneficiary under the Wholesale Fund. Indeed, s 106-50 of the 1997 Act provides that where a person is absolutely entitled to a CGT asset as against the trustee (which for present purposes includes the custodian) acts done by the trustee in relation to the asset apply as if done by the unitholder for the purposes of Part 3-1 and Part 3-3 of Chapter 3 of the 1997 Act. 68 On redemption of a unit the unitholder receives an amount of money which cl 12 of the Wholesale Fund Constitution refers to as the Redemption Amount. The entirety of that amount, not just the Gain part, represents the capital proceeds from the CGT C2 Event that occurred when the unitholder's ownership of the unit (an intangible CGT asset) ended; s 104-25 1997 Act; see also s 106-50.

Question 1(d) (includes 1(c) and 1(e) of the application) 69 The contention in (d) as formulated by the Commissioner repeats the claim that the Gain part is a capital gain to be taken into the calculation of the net income of the Retail Fund and postulates the alternative that, on redemption, a capital gain is made "to the extent that the capital proceeds … exceed the subscription amount" by the Gain part. The applicant submits that in the circumstances the capital gain is reduced to zero pursuant to s 118-20 of the 1997 Act "because it does not exceed the amount (the gain part) included in the assessable income of the applicant (in calculating the net income of the Retail Fund) by s 97 of the 1936 Act" as in Question 1(a). 70 For reasons given in relation to Question 1(a), s 97 does not operate to include the Gain part in the calculation of the net income of the applicant (or the custodian if it had the beneficial interest). It follows that the amount of the Gain part is not included in the applicant's assessable income pursuant to s 97. Therefore the capital gain arising on the occurrence of the CGT C2 Event is not reduced by that amount. The Commissioner's answer to this question was correct.

Question 2 71 The facts postulated in Question 2 differ from those in Question 1 only in that in Question 2 the Gain part appropriated from the Short Term Capital Gain Account to payment of the Redemption Amount is less than the excess of the Redemption Amount over the Subscription Amount. In Question 1 the Gain part was equal to the excess of the Redemption Amount over the Subscription Amount. In Question 2 it is postulated that the balance of the Redemption Amount is appropriated from the Corpus Account. 72 The Commissioner submits that the difference in the postulated facts is not material. I agree and for the reasons given in relation to Question 1, each part of Question 2 should also be answered in the negative.

Question 3 73 This question involves the redemption of a unit that was acquired more than 12 months earlier. The only difference between the facts here and those postulated in Question 1 is that here the Gain part is appropriated from the Long Term Capital Gains Account. That is not a material difference and, for the reasons given in relation to Question 1, the answers to each part of Question 3 should be in the negative.

Question 4 74 Question 4 also concerns the redemption of a unit that was acquired more than 12 months earlier. The only other difference between the facts as postulated in Question 4 and those in Question 1 is that in Question 4 the Gain part is appropriated from the Long Term Capital Gains Account and is of an amount less than the difference between the Redemption Amount and the Subscription Amount. That difference is also not a material difference in relation to the answers to Questions 4(a)-(d) and for the reasons given in relation to Question 1, the answers to each part of Question 4 should be in the negative.

Question 5 75 Question 5 is not concerned with the tax treatment of redeeming unitholders but with those unitholders who retain their units in the Wholesale Fund. It assumes that the applicant retains its units but one or more units are redeemed by other unitholders. The Redemption Amount paid to the redeeming unitholders in satisfaction of their entitlements includes an amount equal to the excess of the Redemption Amount over the Subscription Amount that is appropriated from either the Short Term Capital Gain Account or the Long Term Capital Gain Account. The question asked is whether the 1936 Act and the 1997 Act operate as follows: (a) no element of the gain part comprising a part of the net income of the trust estate of the Wholesale Fund to which the holder of the redeemed unit is presently entitled, is included in the assessable income of the Applicant under Division 6 of Part III of the 1936 Act. (b) the part of the net income of the trust estate of the Wholesale Fund to a share of which the Applicant is entitled in respect of units held by the Applicant at the end of the year of income is that part ("the retained part") of the net income which has not been distributed to the holders of units redeemed during the year. (c) the amount included in the assessable income of the Applicant at the end of the year of income under s 97 of the 1936 Act is its share (determined by reference to the number of units held by it at that time) of the retained part of the net income of the Wholesale Fund. (d) to the extent that the Applicant's share of the net income is attributable to the otherwise unappropriated amounts standing to the credit of the Short-Term and Long-Term Capital Gains accounts, Div 102 and Subdiv 115-C will operate to provide an allowable deduction equal to that share included in assessable income under s 97 and to treat that attributable share as a capital gain or discount capital gain, as the case may be. In the private ruling the Commissioner answered each of 5(a)-(d) in the negative.

Question 5(a) 76 The respondent submits that, on the facts as postulated, its answer to Question 5(a) is correct because: the applicant and the redeeming unitholder are not beneficiaries of the Wholesale Fund (because of the interposition of the custodian); the applicant and the redeeming unitholder are not capable of being "presently entitled" to the income of the trust; the "Gain part" is not necessarily income of the Trust; the applicant's scenario assumes that the amount represented by the Gain part can not be isolated from the s 95 net income by reference to which the assessable income of the applicant would be determined under s 97. This assumption is inconsistent with Bamford and the High Court's rejection of the contention that "share" in s 97 means "portion" or "amount". 77 As to the first point, the conclusion, in relation to Question 1(a), that the applicant is a beneficiary of the Wholesale Fund applies equally to the question whether other unitholders are beneficiaries and for the same reasons. The interposition of the custodian does not prevent the unitholders being beneficiaries. 78 As to whether the applicant and any other unitholders are "presently entitled" to the income of the trust, I have concluded above that the applicant is not presently entitled to the income of the trust estate. That is, I have found that having regard to the manner in which, and the time in which any part of the Redemption Amount is allocated to one or other of the relevant accounts, and the fact that the allocation is in the discretion of the Responsible Entity, it is impossible for the requirements of Harmer to be satisfied. For the same reasons, any unitholder other than the applicant will similarly not be presently entitled. 79 The Commissioner's answer to Question 5(a) is correct for two further reasons. First, the portion of the Redemption Amount in excess of the Subscription Amount (the Gain part) is not necessarily sourced from income; see reasons above at [42] - [49]. Second, even if unitholders were presently entitled to income from which the Gain part is sourced, it does not follow that the amount of the Gain part will be included in the s 95 net income upon which the unitholder will be assessed; see reasons above at [50] - [56]

Question 5(b) 80 The applicant is a beneficiary of the Wholesale Fund. Its share of the distributable income of the Wholesale Fund is determined in accordance with the Constitution of that Fund, in particular with cl 32 of the Constitution. Clause 32 is set out in full at [43] above however, for convenience, that part which is relevant to Question 5(b) is repeated here as follows: Before and after Termination, the Responsible Entity at any time may elect that any amount (capital or income) (Distribution) be distributed from the Trust to Holders pro rata to the number of Units on issue held as at a time (Accrual Time) determined by the Responsible Entity or in accordance with the provisions of this Constitution. … Each Holder registered at midnight on the last Day of each year of income for purposes of the Income Tax Assessment Act 1936 or 1997, as applicable (Tax Act) is presently entitled to a share of Distributable Income for that year not previously distributed in the proportion of the number of Units held to all Units then in issue in the Trust. Distributable Income is at least the minimum amount which the Responsible Entity must distribute if it is not to be assessable or liable to pay more than the lowest amount of tax properly assessable in respect of that year of income under the Tax Act, unless before the end of the tax year the Responsible Entity determines in its discretion that the Distributable Income is any other amount which is equal to or greater than Net Income (being net income for the purposes of section 95 of the Income Tax Assessment Act 1936) … 81 A trustee, as trustee, can be liable to pay income tax on s 95 net income under ss 98, 99 or 99A of the 1936 Act. The apparent purpose of cl 32 is to ensure that the trustee of the Wholesale Fund is not liable to income tax on s 95 net income. The clause attempts to accomplish the purpose by providing that unitholders registered at the end of each year of income are 'presently entitled' to a share of Distributable Income as defined in the clause and by thus taking advantage of s 97 of the 1936 Act, ensure that the unitholders are liable to income tax on the net income and not the trustee. 82 Under cl 32 the Responsible Entity has discretion to make distributions of capital or income at any time. It is important to note that the clause maintains the distinction between the capital and income of the trust. The facts as postulated in Question 5(b) assume that there have been distributions during the income year but do not state whether the distributions were of capital or income or both. In so far as they were distributions of the income of the trust estate, the fact they were at the discretion of the trustee means that prior to distribution (or perhaps a binding resolution to make a distribution) no unitholder was 'presently entitled' to the income. Should such a distribution be made during an income year, s 101 of the 1936 Act would deem the unitholders to be presently entitled to the income. 83 Question 5(b) does not refer to the distribution of either the income or the capital of the trust estate; it refers to the part of the net income of the trust estate that has not been distributed during the year. The net income of the trust is "an artificial amount" which can only be calculated with precision once all allowable deductions have been made to the trust's assessable income; s 95. The s 97 income of the trust estate is "distributable income, that is to say income ascertained by the trustee according to appropriate accounting principles and the trust instrument"; Zeta Force at 74. As the High Court observed in Bamford at [43], the s 97 income of a trust estate and the s 95 net income of a trust estate are "subject matters which do not correspond". 84 As discussed in relation to Question 1(a), under s 97 trust beneficiaries who are presently entitled to a share or proportion of the income of the trust estate have included in their assessable income the same share or proportion of the net income of the trust estate. It does not follow from this that the amount or part of the net income can be equated to the amount or part of the trust income that has not been distributed. 85 Read literally, Question 5(b) does not attempt to compare the s 95 net income of the trust with the s 97 income of the trust estate. It equates "that part of the net income which has not been distributed … during the year" with "the part of the net income … to a share of which the Applicant is entitled". If both references are to s 95 net income then the statement is circular however it is clear from the respondent's written submissions that the Commissioner has interpreted the comparison as being between s 95 net income and s 97 income that has not been distributed at the end of the relevant year. As the applicant did not take issue with this interpretation either in its submissions in reply or in the oral argument, I assume that the respondent's construction is correct and have proceeded on that basis. 86 The Commissioner's rejection of the applicant's analysis is based on the unequivocal nature of that analysis. The applicant's analysis leaves no room for uncertainty. It states that, in the postulated circumstances, the tax treatment in 5(b) would apply whereas the Commissioner, in the reasons for the private ruling, says: The answer … will depend on whether clause 32 can be said to have created a presently existing legal right to demand and receive payment of income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment, and may depend on whether clause 32 can be said to have created an entitlement to that income as it is derived by the trustee. 87 The reasons also said that whether cl 32 has that effect of creating an entitlement to that income would depend on the competing interpretations of the definition of 'distributable income' and added that "for present purposes this is not a question that the Commissioner can determine". 88 The respondent's written submissions explain its position convincingly. Among the many sources of uncertainty to which the Commissioner refers is "a range of amounts" that may be included in s 95 income but which "are not capable of being recognized for accounting purposes, let alone founding an entitlement: eg franking credits, attributed foreign investment income, amounts included by operation of Pt IVA of the 1936 Act or deemed capital gains included by operation of the market substitution rule". The submissions also refer to differences in the time at which amounts are recognised for tax purposes as distinct from accounting purposes. Drawing on these and other examples the submissions conclude that "it is not conceptually possible for a trustee to determine, in every case and in every year, an amount of trust income equivalent to, or not less than, the Fund's s 95 net income". As an example of the difficulty of correlating two fundamentally different concepts, the respondent refers to the 2008 accounts for the Wholesale Fund which were included in the O 52B documents, as follows: The Fund returned an operating loss attributable to unit-holders of $163,960,000 … but still recorded distributions to unit-holders of [$17,441,000]. Note 4 … indicates that, consistently with cl 32, the "Responsible Entity adopts the policy of distributing as a minimum the net income for tax purposes." As a result, it may be appropriate to assume that the s 95 income of the Fund is something less than $17,441,000. However, both for accounting purposes and at general law, the existence of the $163,960,000 loss meant that there was no s 97 income available for distribution at that time. 89 For the reasons given above, I find that the answer to Question 5(b) in the private ruling is correct. Although the answer in the private ruling must be limited to the facts as postulated it is nevertheless not possible to say that the net income to which it refers and the retained part are the same.

Question 5(c) 90 The analysis in relation to Question 5(b) equally applies to Question 5(c) and for that reason the applicant's analysis must be rejected. The negative answer in the private ruling is correct.

Question 5(d) 91 Question 5(d) addressed the issue of allowable deductions under Division 102 and Subdivision 115-C of the 1997 Act. The applicant contends that the following will apply: To the extent that the Applicant's share of the net income is attributable to the otherwise unappropriated amounts standing to the credit of the Short-term and Long-term Capital Gains accounts, Div 102 and Subdiv 115-C will operate to provide an allowable deduction equal to that share included in the assessable income under s 97 and to treat that attributable share as a capital gain or discount capital gain, as the case may be. 92 Division 102 provides that a taxpayer's assessable income includes the taxpayer's net capital gain. Section 102-5 provides a step by step guide to calculating the taxpayer's net capital gain. Subdivision 115-C sets out the rules about trusts with net capital gains and s 115-200 summarises the subdivision; see [60]-[61] above. The combined effect of these provisions is to allow a beneficiary to reduce attributed capital gains by its capital losses and unapplied net capital losses (if any) and to apply any applicable discount. 93 The Commissioner submits that the applicant's analysis is incorrect because the applicant is not a beneficiary of the Wholesale Fund. For reasons given in relation to Question 1(a) I do not accept this proposition. No other basis for the rejection of the applicant's analysis is suggested. In fact, the Commissioner's reasons given in connection with the private ruling are consistent with the applicant's analysis except that the Commissioner applies the analysis to the position of the custodian as beneficiary of the Wholesale Fund. In my view the Commissioner's answer to Question 5(d) in the private ruling is incorrect. The correct answer is, "yes".

question 6 94 The sixth and final question posed by the applicant in its application for a private ruling related to whether the Wholesale Fund would be a fixed trust if the contemplated amendments were made. Whether it is a fixed trust has taxation consequences including in relation to the trustee's right to carry forward losses and the treatment of franking credits. A fixed trust is one in which persons have fixed entitlements to all of the income and capital of the trust; s 272-65 of Schedule 2F of the 1936 Act. Question 6 is in the following terms: Does the Applicant have a fixed entitlement to a share of income or capital of the Wholesale Fund under s 272-5 in schedule 2F in the [1936 Act]? 95 Division 272, Subdivision 272-A of Schedule 2F sets out the requirements for a "fixed entitlement". A beneficiary who, under the trust instrument has "a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust" has a "fixed entitlement" to that share of income or capital; s 272-5(1). Section 272-5(2) qualifies the meaning of "defeasible" in relation to unit trusts as follows: (2) If: (a) a person holds units in a unit trust; and (b) the units are redeemable or further units are able to be issued; and (c) if the units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and (d) if the units are not listed as mentioned in paragraph (c) - the units held by the person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue; then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a unit holder, in the income or capital of the unit trust is defeasible. 96 Subsection (2)(c) does not apply as the units in the Wholesale Fund are not listed on an approved stock exchange and therefore, because the units are redeemable, beneficiaries will not have a fixed entitlement unless the requirements of subsection (2)(d) are satisfied. That is, the price of units when redeemed or issued must be determined on the basis of the net asset value according to Australian accounting principles. 97 It was not contended by either party that the applicant's interest in a share of the income and capital of the trust was not vested. Both parties concentrated on the requirement that the interest be indefeasible. The Act does not define 'indefeasible' and therefore, subject to the qualification in s 272-5(2), it bears its ordinary meaning when applied to an interest, that is that the interest cannot be terminated, invalidated or annulled. Certainly this is the meaning to which the qualification in s 272-5(2) is directed. 98 The applicant says that, in the absence of s 272-5(2), the applicant's interest might be defeasible on the issue or redemption of units however the qualification in s 272-5(2) eliminates that possibility. It submits that the interests of unitholders are protected by the operation of cll 8, 10 and 12 of the Constitution which together require that the issue and redemption of units take place at "fair value" being a value fixed by reference to Australian Accounting Standards. 99 The respondent submits that s 272-5 is not satisfied in the present case because the applicant is not a beneficiary. I have rejected this submission in relation to Question 1(a) and the same position applies here. The respondent further submits that even assuming that the applicant is a beneficiary of the Wholesale Fund, its interest is not indefeasible because cl 43 of the Constitution permits the Responsible Entity, by supplemental deed, to make "any modification, addition or deletion" to the Constitution. The Commissioner submits that the terms of this clause are "clearly capable of being used to defease any interests in the income and capital of the Wholesale Fund which the unit-holders may enjoy". 100 The respondent's submission as to the effect of cl 43 fails to take into account s 601GC of the Corporations Act. That section permits a responsible entity to change its Constitution only if "the responsible entity reasonably considers the change will not adversely affect members' rights". The provision is not qualified by any reference to the terms of a particular constitution and thus restricts the operation of the Responsible Entity's powers under cl 43. The issue is therefore whether there is any circumstance in which the Responsible Entity could terminate, invalidate or annul the applicant's entitlement to a share of the income or capital of the Wholesale Fund and reasonably consider that the change would not affect members' rights. 101 Section 601GC was considered by Barrett J in ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444. The case concerned an attempt by a responsible entity to amend the constitutions of two managed investment schemes which had been established by deeds. His Honour held that the amending documents which were signed in November 2008, not being deeds, were not effective to amend the constitutions. In December 2008, the Responsible Entity had executed deeds however his Honour held, at [162], that it had not been established that the responsible entity "was of the reasonable opinion necessary to enable resort to the s 601GC(1)(b) power of modification". 102 Although not strictly necessary for his Honour's decision, Barrett J considered the meaning of "members' rights", "adversely affect" and "reasonably considers" as used in s 601GC(1)(b). His Honour referred to Smith v Permanent Trustee Australia Ltd (1992) 10 ACLC 906 at 913-914 where Young J accepted that the rights of unitholders referred to the "the contractual and equitable rights conferred on unitholders by the deed". Adopting this meaning, Barrett J said at [96]: The task of the responsible entity … is first to ascertain the rights of members created by the constitution, as they exist immediately before modification. The responsible entity must then decide whether those rights - as distinct from the enjoyment of them or their value - will be changed or impinged upon by the modification. If that question is answered in the affirmative, the responsible entity must undertake a process of comparison and assessment in order to decide whether the impact is within the "adversely affect" description. 103 In this case it is not necessary to ascertain all the rights of members; the Court is not concerned with members' rights other than the right to a share of income or capital of the Wholesale Fund. It is only this right that must be vested and indefeasible for the trust to qualify as a fixed trust. The question therefore is could there be an amendment to the Constitution of the Wholesale Fund that terminated, invalidated or annulled the above right in circumstances where the Responsible Entity reasonably considered that the amendment would not adversely affect the right in question. 104 The Commissioner submitted that s 601GC(1)(b) is not concerned with indefeasibility but with adverse effect. In oral submissions, senior counsel for the Commissioner, Mr Robertson, contended that a modification could bring about a change to a particular right of a member that would not adversely affect the member's right. For example a swap of interests would not be adverse to the members' rights if the first interest were replaced by another interest of equivalent or greater value however it would certainly make the first right defeasible. More particularly, even if the present right to a share of income and capital were to be replaced by a right of equivalent or greater value, it would still be the case that the first right had been terminated. For present purposes, the question is not, whether this would be adverse to the members' interests but whether the original right was defeasible. 105 Although the applicant focussed on s 601GC(1)(b), the more telling argument that the right in question is defeasible stems from s 601GC(1)(a), which empowers members to modify, repeal or replace the constitution of a unit trust by special resolution. In ING Funds Management Barrett J's commented that s 601GC(1)(a) is a plenary power vested in the members. As his Honour observed, at [60]: There is no kind of modification that cannot be made in exercise of the power and by the means it prescribes, although the power is no doubt subject to the implied limitations that generally attend any power enabling a majority to bind a minority. 106 It follows that the members could vote to terminate the present right to a share of income and capital. Although in some circumstances such an exercise of power might be subject to the implied limitations to which his Honour refers, there it no reason to believe that this would always be so. For that reason it must be concluded that the Wholesale Fund is not a fixed trust and the Commissioner's answer to Question 6 is correct. COSTS 107 Except in relation to the question of whether the applicant is a beneficiary of the Wholesale Fund, the Commissioner has been successful on all points. The issue on which the applicant has succeeded is a minor point in that it did not require major argument and would probably not have materially contributed to the costs of the proceeding. In the circumstances it is appropriate that the applicant pay the Commissioner's costs of the proceeding. I certify that the preceding one hundred and seven (107) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.