ATO ID 2006/317: Trust Losses: unlisted widely held trust - whether classification affected by a higher level trust
Date of decision: 11 October 2006
Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007
Business line: Public Groups and International

Issue
Does a trust have to be wholly owned, directly or indirectly, by another trust in order to satisfy section 272-127 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. Fixed entitlements to all of the income and capital of a trust must be held, directly or indirectly, by another trust in order to meet the requirement in paragraph 272-127(1)(b) of Schedule 2F to the ITAA 1936.

Facts
Trust A is classified as an unlisted widely held trust under section 272-110 of Schedule 2F to the ITAA 1936. Trust A has issued 1 million units, which comprise all of the fixed entitlements to the income and capital of the trust. All but one of the units are owned by Trust B. The remaining unit is owned by Trust C. Trust B and Trust C are trusts whose units are listed for quotation on the Australian Stock Exchange. Both trusts are classified as listed widely held trusts under section 272-115 of Schedule 2F to the ITAA 1936. Trust A wishes to be classified as a listed widely held trust, pursuant to section 272-127 of Schedule 2F to the ITAA 1936.

Reasons for decision
Summary: Section 272-127 of Schedule 2F to the ITAA 1936 provides that the classification of a trust can be affected by a trust of a 'higher level'. Subsection 272-127(1) of Schedule 2F to the ITAA 1936 states: If: (a) apart from this Subdivision, a trust is an unlisted widely held trust, an unlisted very widely held trust or a wholesale widely held trust; and (b) each of one or more trusts of a higher level (see subsection (3)) has, directly or indirectly, fixed entitlements to all of the income and capital of the trust; the trust is instead a trust of the same kind (see subsection (2)) as the trust of the highest level. For the purposes of subsection 272-127(3) of Schedule 2F to the ITAA 1936, a listed widely held trust is a trust of a higher level to an unlisted widely held trust. One of the requirements that must be met before section 272-127 of Schedule 2F to the ITAA 1936 can be applied is contained in paragraph 272-127(1)(b). This is that 'each of one or more trusts of a higher level (see subsection (3)) has, directly or indirectly, fixed entitlements to all of the income and capital of the trust'. The requirement in paragraph 272-127(1)(b) of Schedule 2F to the ITAA 1936 means that there must be at least one trust (of a 'higher level') that owns all of the fixed entitlements of a lower level trust (whether directly or indirectly), in order for the lower level trust to be classified as a trust of the same kind as the trust of the highest level. This is confirmed in paragraphs 13.91 and 13.92 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997. As no trust has, directly or indirectly, fixed entitlements to 100% of the income and capital of Trust A, paragraph 272-127(1)(b) of Schedule 2F to the ITAA 1936 is not satisfied. As a result, Trust A is not able to take advantage of section 272-127 of Schedule 2F to the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 Schedule 2F section 272-110 section 272-115 section 272-127 paragraph 272-127(1)(b) subsection 272-127(3)
Other references: Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 Decision Impact Statement DIS as Trustee for the ConnectEast Investment Trust 2 VID 347 ConnectEast Management Ltd v. FC of T [2009] FCAFC 22
Subject references: Fixed entitlements Widely held trust