Legislation contained in Schedule 2F to the ITAA 1936 affects the deductibility by trusts of prior year losses, debt deductions (bad debts and debt and equity swap amounts) and other current year amounts. For more information on the trust loss provisions, family trust elections or interposed entity elections, phone 13 28 66.
All references to provisions in this appendix are to Schedule 2F to the ITAA 1936.
Types of trust for the purposes of the legislation
The legislation applies to two broad categories of trusts, referred to in the measures as:
- fixed trusts, where persons have fixed entitlements to all of the income and capital of the trust, see section 272-65, and
- non-fixed trusts (including discretionary trusts) defined in section 272-70.
Excepted trusts (defined in section 272-100) include:
- family trusts (as defined in Subdivision 272-D, see Family trust election status and Interposed entity election status)
- complying superannuation funds, complying approved deposit funds, pooled superannuation trusts
- deceased estates administered within five years
- fixed unit trusts if all of the direct or indirect fixed entitlements to income and capital of the trust are held by tax exempt entities, and
- first home saver account trusts.
Ownership and control tests
If a trust fails a test relating to ownership or control that applies to it under the legislation, the trust may:
- be prevented from deducting its tax losses of earlier income years
- have to work out its net income and tax loss in a special way
- be prevented from deducting certain amounts in respect of debts, that is, debt deductions, incurred in the income year or earlier income years.
Fixed trusts that are not excepted trusts are subject to the 50% stake test, which tests for continuity of majority underlying beneficial ownership of the trust during the relevant periods, see section 269-55. Fixed trusts that are listed widely held trusts (as defined in section 272-115) that fail the 50% stake test, but pass the same business test (see section 269-100) may avoid the above consequences. See Division 266 for the ownership tests that apply to fixed trusts.Non-fixed trusts that are not excepted trusts are subject to:
- the 50% stake test, if applicable
- the control test, see section 269-95, and
- the pattern of distributions test, see section 269-60, if applicable.
See Division 267 for the ownership and control tests that apply to non-fixed trusts.
These ownership and control tests do not apply to excepted trusts, including family trusts, as defined.
Tracing concessions where fixed entitlements are held by certain kinds of companies, funds or trusts
For the purpose of applying the 50% stake test or the pattern of distribution test to a trust under the legislation, there are concessional tracing rules for fixed entitlements that are held directly or indirectly by:
- a government body
- a special company, (as defined in section 272-140)
- certain kinds of funds
- a family trust, (as defined in Subdivision 272-D)
- a listed public company, or
- a widely held unit trust.
See Division 272-25 and 272-30.
Income injection test
Under the legislation, a trust, including a family trust, involved in a scheme to take advantage of deductions to the trust may be prevented from making full use of the deductions under the income injection test contained in Division 270.
In general terms, the income injection test applies if under a scheme an ‘outsider’ to the trust (see section 270-25) provides a benefit to the trust, a benefit is provided to the outsider by the trust, and either of those benefits was provided, or assessable income was derived by the trust, wholly or partly (but not merely incidentally) because a deduction was allowable to the trust.
For the definition of a ‘benefit’, see section 270-20.