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Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997

Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998

Family Trust Distribution Tax (Primary Liability) Bill 1997

Family Trust Distribution Tax (Primary Liability) Act 1998

Family Trust Distribution Tax (Secondary Liability) Bill 1997

Family Trust Distribution Tax (Secondary Liability) Act 1998

Medicare Levy Consequential Amendment (Trust Loss) Bill 1997

Medicare Levy Consequential Amendment (Trust Loss) Act 1998

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Appendix - Tables summarising the main provisions

Tables summarising the main provisions

Table 1 Definitions of trusts
Type of trust Description
Fixed trust Persons have fixed entitlements to all the income and capital of the trust
Widely held unit trust A fixed trust that is a unit trust
20 or less individuals between them do not beneficially hold, directly or indirectly, 75% or more of the fixed entitlements to income or capital of the trust
Unlisted widely held trust(1) A widely held unit trust
The units are not listed on an approved stock exchange
Listed widely held trust A widely held unit trust
The units are listed on an approved stock exchange
Unlisted very widely held trust(1) An unlisted widely held trust with at least 1,000 unit holders
Compliance with other conditions as specified in section 272-120
Wholesale widely held trust(1) An unlisted widely held trust where 75% or more of the units in the trust are held by certain bodies and the initial amount subscribed for units in the trust by each particular unit holder in the trust is at least $500,000
Compliance with other conditions as specified in section 272-125
Non-fixed trust A trust that is not a fixed trust
Family trust A trust that has made the election to be a family trust for the purposes of the trust loss measures
Excepted trust A family trust
A complying superannuation fund, complying approved deposit fund or pooled superannuation trust
A unit trust where tax exempt bodies have fixed entitlements, directly or indirectly, to all the income and capital of the trust
Certain deceased estates
(1) Note that the classification of a trust that meets the definition of unlisted widely held trust, unlisted very widely held trust or wholesale widely held trust may be affected by the nature of its parent (see section 272-127 discussed in paragraphs 13.91 and 13.92)

Table 2 Prior and current year losses and debt deductions - tests that apply to each type of trust for it to be able to deduct a loss or debt
Type of trust 50% stake test Same business test Pattern of distribution test Control test Income injection test
Fixed trust other than a widely held unit trust *(1) *
Unlisted widely held trust * *
Listed widely held trust * *(2) *
Unlisted very widely held trust * *
Wholesale widely held trust * *
Non-fixed trust * *(3) * *
Family trust *(4)
Excepted trust (other than a family trust)
(1) An alternate test is also available in certain cases where non-fixed trusts directly or indirectly hold fixed entitlements in the fixed trust
(2) This test can be applied if the 50% stake test is failed by a listed widely held trust
(3) This test does not apply for current year loss purposes
(4) The income injection test does not apply where entities and individuals within a family group inject income into a family trust with losses

Table 3 Current year losses - division of income year into periods
Type of Trust Events which result in the end of a period (1)
Fixed trust other than widely held unit trust Failure of 50% stake test
Failure of alternate condition
Unlisted widely held trust Failure of 50% stake test
(50% stake tested on abnormal trading)
Listed widely held trust Failure of 50% stake test (unless the same business test is satisfied)
(50% stake tested on abnormal trading)
Unlisted very widely held trust Failure of 50% stake test
(50% stake tested on abnormal trading)
Wholesale widely held trust Failure of 50% stake test
(50% stake tested on abnormal trading)
Non-fixed trust Failure of 50% stake test
Failure of continuity of control test
(1) A period will always end at the end of the year of income

Table 4 Tests that apply to limit deductibility of losses and debt deductions [F21]
What is the 50% stake test for fixed trusts? Applies to all fixed trusts other than excepted trusts The same individuals have fixed entitlements, directly or indirectly, to more than 50% of the income of the trust at the relevant times (1)
and
The same individuals (not necessarily the same as those that holdfixed entitlements to income) have fixed entitlements, directly indirectly, to more than 50% of the capital of the trust at the relevant times (1).
What is the 50% stake test for non-fixed trusts? Applies to non-fixed trusts other than excepted trusts If individuals have fixed entitlements to more than 50% of the income of the trust at any time in the test period, then at all times in the period from that time, the same individuals must hold more than a 50% stake in the income of the trust(2)
and
If individuals have fixed entitlements to more than 50% of the capital of the trust at any time in the test period, then at all times in the period from that time, the same individuals (not necessarily the same as those that hold fixed entitlements to income) must hold more than a 50% stake in the capital of the trust(2)
What is the alternate test for fixed trusts? Applies to fixed trusts (other than excepted trusts) that are not widely held unit trusts if:

•
at all times in the test period, 50% or more of the fixed entitlements to income or capital of the trust or a holding entity of the trust are directly held by a non-fixed trust(s) (other than a family trust)(3); and
•
individuals do not have more than a 50% stake in the income or capital of the trust at the start of the test period

 There is no change in the persons directly holding fixed entitlements to shares of the income or capital of the trust or holding entity nor the percentage of their shares
and
Every non-fixed trust (that is not a family trust or other excepted trust) that holds fixed entitlements in the fixed trust, directly or indirectly, would satisfy the relevant tests that apply to non-fixed trusts if they stood in place of the loss trust
What is the same business test? Applies to listed widely held trusts other than excepted trusts All the following are met:

•
the trust carried on the same business as it carried on before a particular time(4);
•
the trust did not derive income in the income year from:

-
a business of a kind that it did not carry on before a particular time(4); or
-
a transaction of a kind that it did not enter into in the course of its business operations before a particular time(4);

•
the trust did not do things for the purpose, or for purposes including the purpose, of being taken to have carried on the same business as it carried on before a particular time(4). The things are:

-
start to carry on a business of a kind it did not carry on before the particular time; or
-
enter into a transaction of a kind that it had not entered into in the course of its business operations before the particular time;

•
the trust does not incur expenditure in carrying on a business of a kind that it did not carry on before a particular time(4)(5);
•
the trust did not incur expenditure in entering into a transaction of a kind that it had not entered into in the course of its business operations before the particular time(4)(5)
What is the pattern of distributions test? Applies to non-fixed trusts other than excepted trusts More than 50% of the relevant distributions of the relevant income years (as specified in Subdivision 269-D) are distributed (directly or indirectly) to the same individuals(6)(7)
What is the control test? Applies to non-fixed trusts other than excepted trusts A group must not begin to control the trust, directly or indirectly, during the test period(8)
What is the income injection test? Applies to all fixed trusts (including widely held unit trusts) and non-fixed trusts Does not apply to excepted trusts other than family trusts The trust has a prior year loss deduction or a current year deduction and:

•
under a scheme, assessable income is derived by the trust, an outsider provides the trustee or a beneficiary (or an associate) with a benefit and the trustee, a beneficiary (or an associate) provide a benefit to the outsider or an associate of the outsider(9); and
•
the assessable income has been derived, or any of the benefits have been provided, wholly or partly, but not merely incidentally, because of the loss or other deduction in the trust
(1) If a trust is a widely held unit trust it is taken to pass the 50% stake test if it is reasonable for the Commissioner to assume that the test is passed
(2) Under subsections 267-40(3) and 267-70(3) the Commissioner may treat this test as not having been failed if he or she considers it fair and reasonable to do so having regard to certain matters
(3) A 'holding entity' is a trust or company that holds all of the fixed entitlements to income and capital of the trust (whether directly or indirectly)
(4) A particular time is a reference to the time immediately before the first abnormal trading in units of the trust and on testing at that time the trust fails the 50% stake test
(5) This test applies for current year loss purposes only
(6) The smallest percentage of any distribution to an individual is taken into account in determining whether this test has been satisfied. The combined smallest percentages for all beneficiaries must be greater than 50%
(7) This test only applies for prior year loss purposes
(8) The terms 'control' and 'group' are defined in section 269-95
(9) An associate of an outsider effectively does not include a member of the family group where the trust is a family trust (see subparagraph 270-10(1)(b)(iii))


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