ATO ID 2007/59: Trust Losses: control test - whether a group begins to control a trust after the death of an individual
Date of decision: 14 March 2007
Year of income: 30 June 2006
Business line: Private Groups and High Wealth Individuals

Issue
Does a 'group' begin to control a trust for the purposes of section 267-45 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) immediately after the death of the individual who was a co-director of the trustee company and the co-appointor and co-guardian of the trust?

Decision
No. Provided the death of the individual does not trigger the materialisation of a 'new' group that begins to control the trust directly or indirectly.

Facts
Since the establishment of the trust, Trustee Company Pty Ltd (Trustee Co), as the trustee of a non-fixed trust, had three directors: A, B and C. Those same individuals acted as the appointors and guardians of the trust. The shareholders of Trustee Co throughout the test period have been X and Y. Shareholders have the power to appoint and remove directors. Decisions by the directors of Trustee Co are on the basis of a majority vote, in accordance with the Constitution of Trustee Co. Decisions by the appointors and guardians of the trust require unanimous agreement under the Trust Deed of the trust. The three individuals A, B and C did not at any time constitute a 'group' for the purposes of paragraphs 269-95(5)(b) and 269-95(5)(c) of Schedule 2F to the ITAA 1936 because none of them were associates under section 318 of the ITAA 1936. During the 2005-06 income year, C died and was not replaced as a director of Trustee Co. The Trust Deed permits the trust to continue with only two appointors and two guardians, so the deceased was also not replaced in those offices. Prior to the death of C, neither A, B or C satisfied any of the control conditions in subsection 269-95(1) of Schedule 2F to the ITAA 1936 in their respective capacities as directors, appointors or guardians. This was due to the inability of the individuals to achieve either a majority vote or a unanimous vote (as the case required) in their own right. The trust is seeking to deduct a prior year tax loss in the 2005-06 income year.

Reasons for decision
Summary: Section 267-45 of Schedule 2F to the ITAA 1936 provides that a group must not begin to control the trust directly or indirectly during the test period. A group controls a non-fixed trust pursuant to subsection 269-95(1) of Schedule 2F to the ITAA 1936. The individuals A, B and C each constituted a separate group, as a person, in accordance with paragraph 269-95(5)(a) of Schedule 2F to the ITAA 1936, up until the death of C. After the death of C, the remaining two 'groups' (A and B as persons in their roles as directors, appointors and guardians) arguably have altered capacities in their respective individual roles. For example, the voting arrangements as directors of Trustee Co now require both A and B to unanimously agree to all decisions, rather than the previous situation where a majority of any two (of the three) directors could have made decisions. However, as neither A nor B can achieve either a majority vote or a unanimous vote (as the case requires) by themselves, no group begins to control the trust during the test period and section 267-45 of Schedule 2F to the ITAA 1936 will not apply.

Legislative references: Income Tax Assessment Act 1936 section 318 Schedule 2F section 267-45 section 269-95 subsection 269-95(1) subsection 269-95(5) paragraph 269-95(5)(a) paragraph 269-95(5)(b) paragraph 269-95(5)(c)
Subject references: Change in control Control of a non-fixed trust Control test Deductions & expenses Losses Trust loss tests Trust losses