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Ruling

Subject: Trust losses

Question 1

Whether beneficiaries of the rulee have fixed entitlements to all the income and capital of the trust as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) to deem the beneficiaries of the rulee as having fixed entitlements?

Answer

No

Question 3

Will the trustee for Trust A and the trustee for Trust B be 'outsiders', as defined in subsection 270-25(2) of Schedule 2F to the ITAA 1936, if they make distributions to the rulee?

Answer

Yes

Question 4

Does the rulee meet the conditions in subsection 267-30(2) and section 267-35 of Schedule 2F to the ITAA 1936 in relation to the pattern of distributions tests?

Answer

Yes

Question 5

Does the rulee meet the conditions in section 267-45 of Schedule 2F to the ITAA 1936 in relation to the control test?

Answer

Yes

Question 6

Does the rulee meet the income injection test as defined in section 270-10 of Schedule 2F to the ITAA 1936?

Answer

No

Question 7

If by amendments to the trust deed the rulee changes from a non-fixed trust to a fixed trust will it meet the conditions in subsection 267-20(2) of Schedule 2F of the ITAA 1936?

Answer

Yes

Question 8

Following the change to a fixed trust, would the rulee meet the income injection test as defined in section 270-10 of Schedule 2F to the ITAA 1936?

Answer

No

Relevant facts and circumstances

The trust incurred tax losses for two income years.

The corporate trustee of the Unit Trust is company A.

As of a certain date, the directors of the trustee company were A, B and C.

As of a later date, the directors of the trustee company were A and B.

As of a certain date, the unit holders were the trustee of family trust A (quarter of the units), the trustee of family trust B (quarter of the units) and C (half the units).

The trustee of family trust A is company B. B and B's spouse are the directors of company B. A family trust election was made nominating B as the specified individual.

The trustee of the family trust B is company C. A and A's spouse are the directors of company C. A family trust election was made nominating A as the specified individual.

At a later date the trustee of family trust A and the trustee of family trust B each acquired 50% of C's units, giving them half of the total units each.

The trustee intends to issue one additional unit to a family member of the trustee for family trust A and one additional unit to a family member of the trustee for family trust B.

The trust deeds of both family trusts allow income distributions to the unit trust. The family trusts may distribute income to the unit trust for the relevant income year.

The unit trust deed provides that unit holders have beneficial interests in the trust fund in proportion to their registered units. All units are of equal value and cannot be divided into fractions. The trustee holds the trust fund on trust for unit holders in proportion to the number of units they hold.

Units are to be allotted in accordance with accepted accounting principles based on the valuation of assets, including goodwill, at current market value and the amount by which the value of the assets exceeds that of the liabilities shall be divided by the number of units already issued, and the sum will be the allotment price for each new unit. This clause gives the trustee the power to allot units at such price (if any) and for such premium (if any) and upon such terms and conditions as the trustee in its absolute discretion sees fit.

The trust deed also gives the trustee absolute discretion to redeem any unit at the request of the registered holder in consideration for such payment as the trustee thinks fit, as long as it does not exceed the allotment price which would be determined if an allotment was made on that date.

The trust deed states that every unit holder is entitled to transfer units.

The trust deed requires that no unit or interest therein shall be sold or transferred until the rights of pre-emption have been exhausted, namely any vendor who desires to sell or transfer a unit shall give notice in writing to the trustee and such notice shall constitute the trustee its agent for the sale of such units to other holders of units at a price to be agreed upon between the trustee and the vendor, or if there is no agreement, to be determined by the Trustee as being the value of the units calculated by dividing the value of the trust fund and dividing the value by the number of existing units. If the units are not sold to existing unit holders, the vendor may sell or transfer the units to any person at the price already determined by the trustee.

The trust deed states that the trustee shall pay and apply for the holders of units issued subject to special conditions such part of the trust's net income as those special conditions require, or as the trustee in exercise of any discretion given by those conditions shall determine. After this has been done, the trustee shall pay and apply the net income of the fund during the year to the unit holders in proportion to the number of units they hold.

The trust deed gives the trustee the power to determine whether a particular receipt is capital or income.

Both beneficiary trusts have made family trust elections with different test individuals. Those individuals are not related. The unit trust has not made an interposed entity election.

Although the unit trust is currently a non-fixed trust, that clauses would be inserted in the deed so that it would become an ordinary fixed trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 266-25,

Income Tax Assessment Act 1936 Section 267-20,

Income Tax Assessment Act 1936 Section 267-35,

Income Tax Assessment Act 1936 Section 267-40,

Income Tax Assessment Act 1936 Section 267-45,

Income Tax Assessment Act 1936 Section 269-95,

Income Tax Assessment Act 1936 Section 270-10,

Income Tax Assessment Act 1936 Section 270-15,

Income Tax Assessment Act 1936 Section 270-25,

Income Tax Assessment Act 1936 Section 272-5,

Income Tax Assessment Act 1936 Section 272-85 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Question 1

All references are to the ITAA 1936 unless otherwise stated.

Summary

The terms of the trust instrument do not provide the beneficiaries with vested and indefeasible interests in the income and capital of the trust.

Detailed reasoning

A 'fixed trust' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), and section 272-65 of Schedule 2F; that definition provides that:

A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust.

The definition of 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that 'an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F.'

Subsection 272-5(1) of Schedule 2F defines a fixed entitlement in a trust:

If, under a trust instrument, a beneficiary 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, the beneficiary has a fixed entitlement to that share of the income or capital.

In addition, subsection 272-5(2) states that:

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 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.

The term 'vested and indefeasible' is not defined in the taxation legislation. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 does discuss its ordinary meaning at paragraphs 13.4 to 13.9.

Although the meaning of the term 'vested and infeasible' (in the context of Schedule 2F to the ITAA 1936) has not been judicially considered, the term does appear in subsection 95A(2) of the ITAA 1936 and has been considered in that context by the courts - refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 173 CLR 264; 91 ATC 5000.

Also relevant are MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v Commissioner of Stamp Duties (1952) 88 CLR 54; Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

It is an essential element of subsection 272-5(1) of Schedule 2F that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest "under a trust instrument". In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

The first step in determining whether a beneficiary has a vested and indefeasible interest in a share of the income or capital of a trust is to ascertain the terms of the trust upon which the relevant trust property is held. As the High Court recently stated in CPT Custodians Pty Ltd v Commissioner of State Revenue (Vic); Commissioner of State Revenue (Vic) v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [15], in taking this step:

'…a priori assumptions as to the nature of unit trusts under the general law and principles of equity [will] not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2), upon the terms of the particular trust. The term "unit trust" is the subject of much exegesis by commentators. However, "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which dictate the application to particular facts of the [relevant statutory definition]…'

There will be some circumstances in which a trust instrument must be read subject to the operation of a particular legal rule, whether by common law, statute or statutes. See, for example, the provisions of Chapter 5C of the Corporations Act 2001 which, if inconsistent with the constitution of a registered managed investment scheme, can have the effect of altering or modifying the scheme's constitution. It is possible for a constitution to be altered or modified by operation of law irrespective of whether the trust instrument itself expressly recognises the relevant common law rule or statute, and the entitlements of a beneficiary under the trust instrument are those as so altered or modified by operation of law.

For the purposes of subsection 272-5(1) of Schedule 2F, the trust instrument consists of the trust deed of the unit trust. It is accepted that the trust deed provides unit holders with a vested interest in the income and capital of the unit trust.

The trust deed of the unit trust contains certain clauses by which a unit holder's interest in a share of the income or capital of the trust may be defeased. We have identified the following clauses which may contain defeasible powers.

· Allotment of units: despite the terms of a clause, another clause gives the trustee an absolute discretion to allot units at any price and for a premium and upon such terms and conditions as it deems fit. The trustee can also ignore the right of the unit holders to vote at meetings.

· Redemption of units: a clause allows for the redemption at a value calculated at arms-length but which does not prevent a calculation under another clause. There is nothing to prevent redemptions at less than an arm's-length value.

· Special conditions to income: a clause requires the trustee to make payment to those unit holders who have special conditions attached to their units. Potentially this could defease the interest in income of the other unit holders given the definition of unit 'means an undivided share in the fund.'

· Classification of receipts: a clause permits the trustee to determine if a receipt is income or capital.

· Variation of deed: a clause permits a unit holder to consent to changes to the deed which may affect benefits accrued before the change.

Therefore, it is considered reasonable to conclude, in accordance with subsection 272-5(1) of Schedule 2F, that all unit holders (or beneficiaries) do not have fixed entitlements to all of the income and capital of the unit trust.

Question 2

Summary

The Commissioner considers that it is not reasonable to exercise his discretion to treat the beneficiaries as having fixed entitlements to a share of the income and capital of the trust.

Detailed reasoning

Subsection 272-5(3) of Schedule 2F contains a discretion, whereby in cases where beneficiaries do not have a fixed entitlement, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed entitlement where it is reasonable to do so based upon the factors prescribed in paragraph 272-5(3)(b). Paragraph 272-5(3)(b) stipulates that the Commissioner may treat a beneficiary as having a fixed entitlement (in cases where in fact beneficiaries do not have a fixed entitlement) having regard to:

(i) the circumstances in which the entitlement is capable of not vesting or the defeasance can happen; and

(ii) the likelihood of the entitlement not vesting or the defeasance happening; and

(iii) the nature of the trust.

Thus, in applying the discretion, the ATO would have regard to what the Office understands was the policy that underlay the provisions at the time they were enacted. The Commissioner would also have to apply the statutory tests having regard to the terms of the particular trust deeds and the surrounding circumstances.

Circumstances in which the entitlement is capable of not vesting or the defeasance can happen: subparagraph 272-5(3)(b)(i)

The unit trust is not listed and is not a registered managed investment scheme for the purposes of the Corporations Act 2001 so there is no external supervision of the operations of the trust. This increases the chance of a defeasance happening resulting from the decisions of the trustee in relation to a number of clauses (listed above).

Likelihood of the entitlement not vesting or the defeasance happening: subparagraph 272-5(3)(b(ii)

As mentioned in the previous paragraph, there are a number of clauses in the deed which potentially could cause the vested entitlements to be defeased. The likelihood of this happening depends on commercial imperatives of the business of the trustee and the need for flexibility in the business.

The nature of the trust: subparagraph 272-5(3)(b)iii)

The trust is unlisted and is closely held. Therefore there are no extra 'checks and balances' placed upon the trustee which would give comfort in respect of the unit holders' interests.

For all intents and purposes the trust is a private trust and not subject to any fiduciary controls above those which apply generally to trustees in accordance with the relevant state trustee legislation.

The concept of a 'fixed entitlement' to the income and capital of a trust was introduced in the context of the trust loss measures and should primarily be interpreted in that context. The trust loss measures are an important integrity measure, removing a structural flaw in the tax system. The concept of a 'fixed entitlement' is fundamental to the structure and effectiveness of the trust loss measures.

The EM to the trust loss measures states (at paragraph 13.13) in respect of the Commissioner's power in subsection 272-5(3) that:

This provision is to provide for special circumstances where there is a low likelihood of a beneficiary's vested interest being taken away or defeated and, having regard to the scheme of the trusts loss provisions to prevent the transfer of the tax benefit of losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement.

This passage indicates that when looking at the facts of a case in the context of the criteria listed in subsection 272-5(3) regard should always be had to whether the absence of a fixed entitlement in these circumstances could result in the transfer of the benefit of tax losses.

Conclusion

Consistent with the reasons stated earlier it is reasonable to conclude that, pursuant to the trust deed; the unit holders (beneficiaries) in the unit trust do not have fixed entitlements to all of the income and capital of the trust.

Furthermore, after having regard to the factors in subparagraphs 272-5(3)(b)(i), (ii) and (iii) it is considered that the facts of the current case do not warrant the exercise of the Commissioner's discretion to deem the unit holders (beneficiaries) have fixed entitlements to all of the income and capital of the trust.

In summary, it is submitted that the rulee has been unable to provide the necessary evidence to establish a reasonable case for the Commissioner to exercise the discretion pursuant to subsection 272-5(3) to treat the interests of the unit holders as fixed entitlements.

Question 3

Summary

The trustee of family trust A and the trustee of family trust B are considered to be 'outsiders' to the unit trust.

Detailed Reasoning

As the unit trust is not a family trust, the definition of 'outsider' in paragraph 270-25(2)(b) of Schedule 2F needs to be considered. Applying that provision, it has been concluded in answering questions 1 and 2 that there is no person with a fixed entitlement to the income or capital of the trust for the purposes of the income injection test.

The trustee of the unit trust itself is not an 'outsider' within the terms of paragraph 270-25(2)(a) of Schedule 2F, but only acting in the capacity as trustee of that trust. In other words, if the trustee also acted as trustee of another trust or in its own right, then it is an outsider. Refer to paragraph 10.13 of the EM to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997.

The trustee of family trust A and the trustee of family trust B are therefore considered to be 'outsiders' as defined in subsection 207-25(2) of Schedule 2F to the unit trust.

Additional matter

The rulee states that both beneficiary trusts have made a family trust election with different individuals specified in the respective elections. However the unit trust has not made an interposed entity election. Any distribution by the beneficiary trusts to the unit trust will therefore be outside the family group of the individuals specified in the family trust elections of each family trust. Those distributions will be subject to family trust distribution tax.

While it is possible for the trustee of the unit trust to make an interposed entity election, subsection 272-85(7) of Schedule 2F restricts it to a single election unless the specified individual in both family trust elections is the same person. It is not possible to make a second election to cater for the other unit holder.

Questions 4 and 5

Summary

The unit trust is able to deduct a tax loss as it meets the conditions in subsection 267-20(2) of Schedule 2F. However, the deduction of tax losses is also subject to the income injection test as discussed later.

Detailed reasoning

Under subsection 267-20 of Schedule 2F, a trust that was a non-fixed trust at any time during the period from the beginning of the loss year until the end of the income year (the test period) cannot deduct a tax loss unless it meets the following conditions in subsection 267-20(2) of Schedule 2F:

· the pattern of distributions test in section 267-30 (if applicable)

· the trust has not previously failed to meet the pattern of distributions test (section 267-35)

· the 50% stake test in section 267-40 ( if applicable)

· the control test in section 267-45.

Under section 270-15 of Schedule 2F, a trust may be denied a deduction for a tax loss or other deductions if there is an income injection scheme designed to take advantage of the deductions.

Pattern of distributions test  

The pattern of distribution test applies if the trust distributed income in the income year or within 2 months after its end; and in at least one of the 6 earlier income years (subsection 267-30(1) of Schedule 2F to the ITAA 1936). For this purpose, the term distribution of income or capital of a trust has been given wide meaning in sections 272-45 and 272-60 of Schedule 2F.

In this case, the relevant income year is the current year. No distributions of income or capital, within the wide meaning of that term, were made by the trustee in the relevant year. Therefore, the pattern of distributions test in section 267-30 of Schedule 2F is not applicable.

As the trust has not previously failed the pattern of distribution test, the condition is section 267-35 of Schedule 2F is met.

The 50% stake test

The 50% stake test applies if individuals have fixed entitlements to more than 50% of the income or the capital of the trust at any time during the test period (subsection 267-40(2) of Schedule 2F).

Under section 272-5 of Schedule 2F, a beneficiary has a fixed entitlement to a share of the income or capital of a trust if the beneficiary has a vested and indefeasible interest in a share of income that the trust derives from time to time or in the capital of the trust.

In this case, the trust is a non-fixed trust. Under the terms of the trust deed no beneficiary has an indefeasible interest in a share of the income derived by the trust or in the capital of the trust. Therefore, no beneficiary has a fixed entitlement to more that 50% of the income or capital of the trust.

As neither of the family trusts held more than 50% of the units during the test period, consequently, no individual held more that 50% of the units throughout the test period, directly or indirectly.

As no individual had a fixed entitlement to more that 50% of the income or capital of the trust at any time during the test period, the 50% stake test is not applicable.

Control test

Under section 267-45 of Schedule 2F, a group must not begin to control the trust directly or indirectly during the test period.

A group is defined in subsection 269-95(5) of Schedule 2F as a person; or a person and one or more associates; or 2 or more associates of a person.

Under subsection 269-95(1) of Schedule 2F, a group controls a non-fixed trust if:

(a)    the group has power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the trust; or

(b)   the group is able (directly or indirectly) to control the application of the capital or income of the trust;

(c)    the group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in Paragraph (b);

(d)   the trustee is accustomed, under an obligation or might reasonable be expected to act in accordance with the directions, instructions or wishes of the group;

(e)    the group is able to remove or appoint the trustee; or

(f)     the group acquires more than a 50% stake in the income or capital of the trust.

At the beginning of the test period there were three unit holders of the unit trust with a quarter of the units held by the trustee for family trust A, a quarter of the units held by the trustee for family trust B and half the units held by C. In addition, from the beginning of the test period there were three directors of trustee company A being A, B and C.

It is considered that the directors had the ultimate control according to the trust deed. As directors of the trustee company, the trustee might reasonably be expected to act in accordance with their wishes. The directors are the individuals who make decisions on behalf of the trustee. They are the persons who determine how the trustee will exercise its powers. On the facts presented, as they are not associates, three possible control groups existed at the beginning of the test period. These groups are A, B and C.

At a later date in the test period the family trusts acquired 50% each of C's units, giving them half of the total units each. From this time A and B remained as the two directors of trustee company A. Therefore, the remaining two control groups were A and B.  

This means that A and B continued to make decisions on behalf of the unit holders and that no new group began to control the unit trust in the way set out in paragraph 269-95(1) of Schedule 2F to the ITAA 1936 during the test period.

Therefore, the conditions in section 267-45 of Schedule 2F are satisfied.

Summary of tests in section 267-20

The unit trust satisfies all of the tests in subsection 267-20(2) of Schedule 2F in the relevant income year, therefore it is not denied a deduction for prior year tax losses under section 267-20 of Schedule 2F.

Question 6

Summary

The unit trust has failed the income injection test, and therefore would be denied a deduction in the relevant income year for prior year tax losses, according to section 270-15 of Schedule 2F.

Detailed reasoning

Under section 270-15 of Schedule 2F, a trust may be denied a deduction for a tax loss or other deductions if there is an income injection scheme designed to take advantage of the deductions.

Under subsections 270-10(1) of Schedule 2F, the income injection test applies where:

(a)   a deduction is allowable to the trust in the income year (including a prior year loss);

(b)   there is a scheme under which:

(i)    the trust derives assessable income (the scheme assessable income); and

(ii)   an outsider to the trust, directly or indirectly, provides a benefit to the trustee or a beneficiary or an associate of the trustee or of a beneficiary; and

(iii)  a return benefit is provided to the outsider; and

(c)    it is reasonable to conclude that the trust derived the assessable income or the benefits have been provided, wholly or partly (but not merely incidentally) because the deduction is allowable; and

(d)   the trust is not an excepted trust under paragraph 272-100(b),(c), or (d) of Schedule 2F.

Deduction is allowable to the trust in the income year (including a prior year loss: paragraph 270-10(1)(a));

In this case, the unit trust can claim a deduction in the relevant income year, for prior year tax losses and is not denied any part of this deduction under section 267-20 of Schedule 2F, therefore meeting paragraph 270-10(1)(a) of Schedule 2F.

There is a scheme under which the trust derives assessable income (the scheme assessable income: subparagraph 270-10(1)(b)(i);

The unit trust would derive assessable income for the relevant income year, being the income distributions from family trust A and family trust B and any other income it may derive.

An outsider to the trust, directly or indirectly, provides a benefit to the trustee or a beneficiary or an associate of the trustee or of a beneficiary: subparagraph 270-10(1)(b)(ii) a return benefit is provided to the outsider: subparagraph 270-10(1)(b)(iii);

Section 270-20 of Schedule 2F covers what is considered to be a benefit under the division. Section 270-20 provides:

A benefit is:

(a) money, a dividend or property (whether tangible or intangible); or

(b) a right or entitlement (whether or not property); or

(c) services; or

(d) the extinguishment, forgiveness, release or waiver of a debt or other liability; or

(e) the doing of anything that results in the derivation of assessable income; or

(f) anything that, disregarding the preceding paragraphs, is a benefit or advantage

The definition of benefit in section 270-20 is very wide. The Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 describes "benefit" in the following terms:

10.17 The term benefit is broadly defined and will include any benefit or advantage within the ordinary meaning of those expressions. However, it is defined to specifically include money or other property (whether tangible or intangible), rights or entitlements (whether proprietary or not), services and the extinguishment, forgiveness, release or waiver of a debt or other liability.

10.18 The doing of anything that results in the derivation of assessable income by the trust is also specifically defined to be a benefit. For example, if the scheme assessable income is derived by the trust as a result of the transfer, under an agreement, to the trustee of an interest from which assessable income will be derived, the person who transferred that interest to the trustee will have thereby provided a benefit to the trustee, even if the interest is not a benefit other than by reason of satisfying paragraph 270-20(e). [Section 270-20]

10.19 A benefit is intended to include all means whereby value is transferred between the relevant parties.

It is not strictly necessary to refer to the Explanatory Memorandum as paragraph (f) of the definition of benefit in section 270-20 defines it as "anything that, disregarding the preceding paragraphs, is a benefit or advantage." It is clear that it is intended to be all encompassing. 

Advantage is not defined so it takes on its ordinary meaning. The Macquarie Dictionary describes it as:

1. any state, circumstance, opportunity, or means specially favourable to success, interest, or any desired end: 2. Benefit; gain; profit:

In short it means a person who has gained a benefit is placed in a better financial position than previously as a result of dealing with the trust. 

In all cases the beneficiary has received something from the trust or has a present entitlement to receive something. The creation of a present entitlement to income results in a vested and indefeasible right to that income. Clearly this is an advantage.

In this case the unit trust (loss trust) will be the beneficiary of family trust A and family trust B for relevant year and is entitled to the income appointed to it. Clearly this is a benefit.

The trustee for family trust A and family trust B and its associates are outsiders in relation to the unit trust and must also receive a benefit for the income injection test to apply. In effect the amount of the income that was distributed in the relevant years has provided a benefit to those trusts and their associates. If it had not been distributed to the loss trust, the trusts themselves or their associates would have been subjected to tax on the income. Again this is a benefit.

In this case, it is reasonable to assume that the income has been derived, or the benefits have been provided, wholly or partly, (but not merely incidentally) because the deduction was available. It is unlikely the benefit provided to the unit trust, being the entitlement to receive income, would have been made if it did not have losses available to deduct against that income.

The unit trust is therefore denied a deduction, in the relevant income year, for prior year tax losses under the provisions in section 270-15 of Schedule 2F as it has failed the income injection test, notwithstanding that is has satisfied the conditions of subsection 267-20(2) of Schedule 2F.

Question 7

Summary

If the unit trust became a fixed trust during the test period the provisions in Division 267 of Schedule 2F would continue to apply. As previously determined all the tests in subsection 267-20(2) of Schedule 2F were satisfied.

Detailed Reasoning

When a non-fixed trust changes to a fixed trust during a test period the provisions Subdivision 266-B of Schedule 2F will not apply. According to subsection 266-25(1) to Schedule 2F, for section 266-25 to apply, the trust must be a fixed trust at all time in the test period. In this case, the unit trust was not a fixed trust at all times during the test period. Therefore, the tests in subsection 267-20(2) of Schedule 2F will apply.

The question of the satisfaction of the tests in subsection 267-20(2) of Schedule 2F was previously determined in the answers to questions 4 and 5. Therefore, as the unit trust satisfies all of the tests in subsection 267-20(2) of Schedule 2F in the 2010-11 income year, it is not denied a deduction for prior year tax losses under section 267-20 of Schedule 2F.

Question 8

Summary

If the unit trust changes to a fixed trust during the test period, it would fail the income injection test, and therefore be denied a deduction in the relevant income year for prior year tax losses according to section 270-15 of Schedule 2F.

Detailed reasoning

Division 270 deals with situations where a trust may be prevented from making use of deductions or full use of deductions in an income year, if a scheme to take advantage of deductions exist. The test to apply to determine whether a trust is denied deductions under this division is called the income injection test.

The unit trust would fail the income injection test for the same reasons provided in the answer to Question 6 if it were to become a fixed trust during the test period. Even though the trustee for family trust A and trustee for family trust B will cease to be 'outsiders' to the unit trust, by virtue of subsection 270-25(2) of Schedule 2F when it becomes a fixed trust; in accordance with subsection 270-10(2) of Schedule 2F, subsection (1) will still be satisfied as the two family trusts did not cease to be outsiders before the scheme was entered into.

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