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Selwyn Black, Esq. and Nicholas Huang, Esq.
Carroll & O’Dea Lawyers
Sydney, Australia

  1. Whether a trust qualifies as a fixed trust is important for tax reasons including the ability of the trust to:
    • use tax losses; and
    • pass on franking credits to beneficiaries.
  2. In order to qualify as a fixed trust, the beneficiaries must have fixed entitlements to all of the income and capital of the trust. This means the beneficiaries must have a vested and indefeasible interest in the income and capital of the trust, under the terms of the trust instrument (see subsection 272-5(1) and 272-65 of Schedule 2F to the Income Tax Assessment Act 1936).
  3. If a trust does not satisfy the technical criteria to qualify as a fixed trust, it can still be treated as a fixed trust for tax purposes in certain circumstances.
  4. Practical Compliance Guideline 2016/16 has been released outlining:
    • the factors the Commissioner will consider when deciding whether to exercise the discretion in subsection 272-5(3) to deem an interest in the income or capital of a trust as being a fixed entitlement (Discretion); and
    • a safe harbour compliance regime for trustees of certain trusts that allows them to manage the trust’s tax affairs as if the Commissioner had exercised the Discretion.
  5. If the Discretion or safe harbour regime is applied with respect to a trust, this can result in that trust being treated as though it is a fixed trust.

The Safe Harbour Approach

  1. The trustee of a trust can manage the trust’s tax affairs as if the Commissioner has exercised the Discretion in the following circumstances:
    • the units of the trust are listed on an approved stock exchange;
    • the trust is a registered managed investment scheme;
    • the trust is a widely held trust that satisfies specified criteria, including licensing requirements;
    • the trust is an unregistered managed investment scheme that satisfies licencing requirements;
    • the trust is a specific single interest holder trust; or
    • the trust satisfies seven specified criteria.

The Discretion

  1. If a trust is not a fixed trust and does not satisfy the requirements for a safe harbour (or the trustee is uncertain whether the trust satisfies a safe harbour requirement), the trustee may request that the Commissioner exercise the Discretion.
  2. PCG 2016/16 clarifies that in deciding whether to exercise the discretion, the Commissioner must consider:
    • the circumstances in which the interest is capable of not vesting or being defeated;
    • the likelihood of the interest not vesting or being defeated; and
    • the nature of the trust.
  3. The Commissioner will also consider factors relevant in the context of the trust loss provisions, in particular the intent that the tax benefit of the losses be prevented from being transferred.
  4. PCG 2016/16 sets out a non-exhaustive list of factors that the Commissioner will consider in deciding whether to exercise the discretion. Some criteria include:
    • whether a beneficiary’s interest in the income or capital of the trust has ever been defeated before by a trustee exercising the trustee’s power;
    • whether all beneficiaries have the same rights to receive income and capital of the trust;
    • whether units can be redeemed, or issued, on non-arm’s length terms;
    • in what circumstances the trust instrument can be amended; and
    • whether the trustee deals with the beneficiaries on an arm’s length basis.


  1. PCG 2016/16 helps to clarify whether a trust qualifies as a fixed trust, and what options are available to trusts that don’t. Many trusts expressed to be fixed trusts may not satisfy the legal criteria, and may need to be amended in order to achieve the intended result.