ATO ID 2013/21: Interposed Entity Elections: trust in respect of which the relevant Family Trust Election was made ceases to exist
Date of decision: 11 December 2012
Year of income: Year ended 30 June 2012
Business line: Private Groups and High Wealth Individuals

Issue
Is an interposed entity election (IEE) still in force under subsection 272-85(6A) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) if the trust in respect of which the relevant family trust election (FTE) was made ceases to exist?

Decision
Yes, an IEE for a company is still in force under subsection 272-85(6A) of Schedule 2F to the ITAA 1936 despite the trust in respect of which the relevant FTE was made, ceasing to exist.

Facts
A discretionary trust had a valid FTE in force just prior to the trust being vested. The FTE was not revoked. A company had an IEE in force so that it was included in the family group of the discretionary trust. The IEE was not revoked at anytime before the vesting of the trust. The trust vested distributing all capital and income of the trust.

Reasons for decision
Summary: Subsection 272-85(1) of Schedule 2F to the ITAA 1936 allows a company to make an election to be included in the family group of the individual specified in the FTE. Such an election is in force at all times after the election commencement time if it is not revoked (paragraph 272-85(6A)(a) of Schedule 2F to the ITAA 1936). An IEE is generally irrevocable. An IEE can only be revoked in the limited situation where the entity was, or becomes, a member of the family group of the individual specified in the FTE (otherwise than by reason of the IEE) and subject to the four year rule in subsection 272-85(5C) of Schedule 2F to the ITAA 1936 (subsection 272-85(5A) of Schedule 2F to the ITAA 1936). This does not apply in the facts disclosed above. Furthermore, it is taken to be revoked where the FTE of the trust (to which the IEE of the company relates) is revoked pursuant to subsection 272-85(5B) of Schedule 2F to the ITAA 1936. (A trustee of a discretionary trust can only revoke an FTE where: (1) the FTE has not been utilised to recoup tax losses, claim deductions or access franking credits that would not have been claimable without the FTE in place (paragraphs 272-80(6A)(a), 272-80(6A)(b) and 272-80(6A)(c) of Schedule 2F to the ITAA 1936); and (2) the four year rule in subsection 272-80(6B) of Schedule 2F to the ITAA 1936 is met.) The trustee of the trust with the FTE did not revoke the FTE therefore the requirements of subsection 272-85(5B) of Schedule 2F to the ITAA 1936 are not met. As the requirements for revocation have not been satisfied, the IEE for the company remains in force at all times after its commencement time and will continue to remain in force after the trust with the FTE has vested. A family trust distribution tax liability will arise where the company makes a distribution outside the family group (see section 271-30 of Schedule 2F to the ITAA 1936).

Legislative references: Income Tax Assessment Act 1936 Schedule 2F section 271-30 section 272-80 subsection 272-80(6B) paragraph 272-80(6A)(a) paragraph 272-80(6A)(b) paragraph 272-80(6A)(c) subsection 272-85(1) subsection 272-85(5B) subsection 272-85(5C) paragraph 272-85(6A)(a)
Subject references: Family trust distribution tax Family trust election Family trusts Interposed entity election Trust loss tests