ATO ID 2004/959: Consolidation: loss transfer testing - pattern of distributions test - a non-fixed trust holds fixed entitlements to 50% or more of the income or capital of a company
Date of decision: 2 December 2004
Year of income: Year ended 30 June 2004
Business line: Consolidation Centre of Expertise

Issue
Does section 707-130 of the Income Tax Assessment Act 1997 (ITAA 1997) apply in determining whether a non-fixed trust passes the pattern of distributions test where:

Decision
Yes. When Subdivision 165-F of the ITAA 1997 is applicable in determining whether the subsidiary member satisfies the COT in respect of the loss in the trial year, section 707-130 of the ITAA 1997 is applicable in determining whether the non-fixed trust passes the pattern of distributions test (as determined in section 269-60 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)) in respect of the loss.

Facts
Company A becomes a member of a consolidated group at a particular time (the joining time). At the joining time, a tax loss is available for transfer, under Subdivision 707-A of the ITAA 1997, from Company A to Head Co (the head company of the consolidated group). Head Co holds fixed entitlements to all of the income and capital of Company A at all times during the ownership test period. Trust B is a non-fixed trust that holds fixed entitlements to a 50% or greater share of the income of Head Co at all times during the ownership test period.

Reasons for decision
Summary: Subsection 707-120(1) of the ITAA 1997 provides that a loss is transferred from a joining entity to the head company of a consolidated group to the extent that the loss could have been utilised by the joining entity for an income year consisting of the trial year, assuming: The trial year is defined in subsection 707-120(2) of the ITAA 1997. It consists of the period generally starting 12 months before the joining time and ending just after the joining time. Paragraph 707-110(2)(a) of the ITAA 1997 provides that an entity utilises a tax loss to the extent that it is deducted from an amount of the entity's assessable or exempt income. Subdivision 165-A of the ITAA 1997 contains the conditions for determining if a company is able to deduct a tax loss under Division 36 of the ITAA 1997. Section 165-10 of the ITAA 1997 provides that a company cannot deduct a tax loss unless it meets the conditions in section 165-12 of the ITAA 1997 (that is, it satisfies the COT) or it meets the condition in section 165-13 of the ITAA 1997 (that is, it satisfies the same business test). Subdivision 165-F of the ITAA 1997 contains special provisions relating to situations where fixed entitlements to a share of the income or capital of a company are held by one or more non-fixed trusts. Section 165-215 of the ITAA 1997 provides that a company that does not meet the conditions in the COT in respect of a loss is nevertheless taken to satisfy the COT, if it meets all the relevant conditions contained in that section. These conditions relate broadly to situations where non-fixed trusts (other than family trusts) hold, directly or indirectly, fixed entitlements to a 50% or greater share of the income or capital of the company. Subsection 165-215(5) of the ITAA 1997 states: It must be the case that, for each non-fixed trust (other than an excepted trust) that, at any time during the *ownership test period, held directly or indirectly a fixed entitlement to a share of the income or capital of the company, section 267-20 of Schedule 2F to the Income Tax Assessment Act 1936 would not have prevented the non-fixed trust from deducting the *tax loss concerned if it, rather than the company, had incurred the tax loss. * denotes a term defined in section 995-1 of the ITAA 1997. In circumstances where Subdivision 165-F of the ITAA 1936 is applicable to determining if Company A satisfies the COT in respect of the loss in the trial year, it will be necessary to determine whether Trust B would have been able to deduct the tax loss had it incurred the loss instead of Company A (as specified in subsection 165-215(5) of the ITAA 1997). One of the requirements in section 267-20 of Schedule 2F to the ITAA 1936 to be met, to allow a non-fixed trust to deduct a tax loss, is that (if applicable) the trust passes the pattern of distributions test for the income year. Section 707-130 of the ITAA 1997 modifies the pattern of distributions test when determining whether a joining entity, that is a non-fixed trust, is able to transfer a loss to the head company of a consolidated group. These modifications ensure that the pattern of distributions test is able to be appropriately applied as a transfer test. Given that subsection 165-215(5) of the ITAA 1997 treats the non-fixed trust as having incurred the loss, it is appropriate that the modifications in section 707-130 of the ITAA 1997 will apply in determining if the non-fixed trust passes the pattern of distributions test, despite the fact that the non-fixed trust is not the joining entity. If the pattern of distributions test is relevant in determining whether Trust B could have deducted the loss, the modifications in section 707-130 of the ITAA 1997 will apply in determining whether Trust B passes the pattern of distributions test. This will ensure that the pattern of distributions test is appropriately applied to Trust B, despite the fact that Trust B is not a joining entity.

Legislative references: Income Tax Assessment Act 1936 Schedule 2F section 267-20 section 269-60
Related ATO interpretative decisions: ATO ID 2004/960
Subject references: Consolidation Consolidation - joining Consolidation - losses Consolidation - pattern of distributions test Continuity of ownership test Joining entity Joining time Non fixed trusts Transfer of losses Trial year Utilise a loss