Private ruling: Trust losses
Published: December 2012
Ruling period: Year ended 30 June 1999
Date scheme commenced: 1 July 1995

Ruling: Q1: Will the appointment of a receiver manager to the incorporated trustee of the family trust extinguish the prior year trust tax losses? | A1: No | Q2: Are you entitled to claim a deduction for pre-receivership tax losses against income earned since the discharge from receivership? | A2: No | Q3: Will the sale of most, but not all, of the fixed and floating assets of the trust by the receiver manager constitute a complete vesting or winding up of the trust? | A3: Yes

Relevant facts and circumstances: A Trust is a fixed trust. The unit holdings of A Trust consists of Z units, all held by Company B. There was no change in the ownership at any relevant time. The share structure in Company B consists of X ordinary shares: · X held by X · X held by X · X held by Company C The shares have voting rights, but no right to capital or income of the company. Company A is the trustee for A Trust. The share structure in Company A consists of X ordinary shares: · X held by X · X held by Company B The shares have voting rights, but no right to capital or income of the company. Company A was placed in receivership in the late 1990's. Company B was placed in receivership in the late 1990's. The receiver sold most, but not all, of the trust's fixed and floating assets. The business of the trust was principally that of a producer, trader, wholesaler, and retailer. You state that Company A was not liquidated; its only asset was the chose in action. You state that there have not been any material changes of ownership of the trust that would affect its liability or rights in respect of tax law. The trustee submits that the ownership tests in section 125-60 of the ITAA 1997 (about ownership interests for demerger relief), section 94G of the ITAA 1936 (about continuity of ownership for corporate limited partnerships) and schedule 2F of the ITAA 1936 (about trust losses) has been passed by the entity. The trust deed has not been amended. A Trust ceased in June 1999.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 165-208 | Income Tax Assessment Act 1936 Schedule 2F | Income Tax Assessment Act 1936 Subdivision 269-C of Schedule 2F | Income Tax Assessment Act 1936 Division 270 of Schedule 2F

Reasons for decision: Summary: The appointment of a receiver manager to the incorporated trustee of the trust will not extinguish prior year trust tax losses. However, while you pass the necessary trust loss tests to allow you to claim a deduction for prior year tax losses against income earned since the discharge from receivership, as the trust no longer exists, the accrued prior year losses can not be utilised and are lost. | Detailed Reasoning - Will the appointment of a receiver manager to the incorporated trustee of the family trust extinguish the prior year trust tax losses?: Section 165-208 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that for the purposes of the primary continuity of ownership test or the alternative continuity of ownership test, an entity is not prevented from: a) beneficially owning shares in a company; or b) having the right to exercise, controlling, or being able to control, voting power in a company; or c) having the right to receive any dividends that a company may pay; or d) having the right to receive any distribution of capital of a company; merely because: e) the company is or becomes: i. an externally-administered body corporate within the meaning of the Corporations Act 2001 ; or ii. an entity with a similar status under a foreign law to an externally-administered body corporate; or f) either: i. a provisional liquidator is appointed to the company under section 472 of the Corporations Act 2001 ; or ii. a person with a similar status under a foreign law to a provisional liquidator is appointed to the company. Accordingly, even though Company A and Company B were in receivership during the late 1990's, the shareholders of the company still maintain continuity of ownership, the shareholders of the company still maintain continuity of ownership for the purposes of claiming prior year tax losses. It is a similar case with trusts; however, there are further tests that need to be passed to ensure that a trust can claim a prior year tax loss. | Detailed Reasoning - Are you entitled to claim a deduction for pre-receivership tax losses against income earned since the discharge from receivership?: Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) contains measures referred to as the trust loss measures. These measures are designed to restrict the recoupment of prior and current year losses and debt deductions of trusts and to prevent the transfer of the tax benefit of those losses or deductions. The tax benefit of losses is transferred where a person, who did not bear the economic loss at the time it was incurred by the trustee, obtains a benefit from a trust by being able to deduct the loss. The measures imposed to restrict the use of losses and the claiming of debt deductions generally revolve around a change in ownership or control of the trust. There are certain tests that must be satisfied if a trust wishes to deduct a tax loss and/or certain debt deductions, the tests are: · control test · 50% stake test · pattern of distributions test · income injection tests Certain tests only apply to certain types of trust. A trust will be able to deduct a tax loss and/or certain debt deductions if it satisfies the trust loss tests that apply to it. The following table summarises the tests that apply to each type of trust. | Detailed Reasoning - Income injection test: Fixed trust other than a widely held unit trust X (1) X Unlisted widely held trust X Listed widely held trust X X (2) X Unlisted very widely held trust X X Wholesale widely held trust X X Non-fixed trust X X (3) X X Family trust X (4) Excepted trust (other than a family trust) (1) An alternate test is also available in certain cases where non-fixed trusts hold fixed entitlements in the fixed trust. (2) This test can be applied if the 50% stake test is failed by a listed widely held trust. (3) This test does not apply for current-year loss purposes. (4) The income injection test does not apply where entities and individuals within a family group inject income into a family trust with losses. The A Trust is a fixed trust for the purposes of the trust loss tests. Accordingly, the trust is subject to the 50% stake test and the income injection test. | Detailed Reasoning - The 50% stake test: Subdivision 269-C of Schedule 2F to the ITAA 1936 contains the requirements that must be satisfied to pass the 50% stake test. The 50% stake test is used to determine whether there has been a change in ownership of a trust with fixed entitlements. The test does not apply to a discretionary trust where there are no fixed entitlements to the income and/or capital of the trust. The 50% stake test is applied to all trust types, with the exception of the family trust and other excepted trusts. However, the 50% stake test will only apply to a non-fixed trust where, at any time in the test period, individuals have more than a 50% stake in income or capital or both of the trust. If there is not a time in the test period that individuals have more than a 50% stake in the income or capital of the trust, the 50% stake test is 'not applicable' and, therefore, does not need to be considered by the non-fixed trust to determine if it can deduct a loss or debt deduction. A trust must pass the 50% stake test for the period from the start of the loss year to the end of the income year in which the loss is recouped, or from the time when individuals began to have more than a 50% stake in the income or capital of the trust to the end of the income year in which the loss is recouped. The 50% stake test applies by determining if there are individuals who (between them), directly or indirectly, and for their own benefit, have fixed entitlements to: · more than a 50% stake in the income of the trust · more than a 50% stake in the capital of the trust. The individuals with fixed entitlements to income and those with fixed entitlements to capital do not have to be the same persons. The 50% stake test applies independently to both income and capital. The 50% stake test requires that at all times from the start of the loss year to the end of the recoupment year (or from the time in this period when individuals have more than a 50% stake in the income or capital of the trust until the end of the recoupment year), the same individuals must have had (between them) more than a 50% stake in the income or capital of the trust. In your case, the A Trust consists of Z units, all held by Company B. The share structure in Company B consists of less than 2500 ordinary shares: · A held by X · B held by Y · C held by Company C The share structure of Company C consists of 2 ordinary shares: · 1x held by X · 1x held by X and Y as executors of the Estate. In addition, you advise that there has been no change in the unit holdings of the trust and no change in the shareholdings for Company C. You advise that X shares in Company B had been transferred to X during the relevant period. Further, you state that the shares in both Company B and Company C have voting rights but no rights to income and capital of the company. Therefore, based on the information provided, the same individuals, directly or indirectly, had fixed entitlements to more than 50% of the income and capital of the trust at all times in the relevant period. Accordingly, the A Trust has passed the 50% stake test and is only no subject to the income injection test. | Detailed Reasoning - The income injection test: Division 270 of Schedule 2F to the ITAA 1936 discusses the requirements for the income injection test. If a trust is involved in a scheme to take advantage of losses or other deductions, it may be prevented from making full use of those losses or deductions under the income injection test. Under these schemes, income is injected into trusts with losses or other deductions so that no tax is payable on the income. The income injection test will apply where an 'outsider' to the loss trust seeks to take advantage of the deduction(s). In general terms, the outsider must provide a benefit to the trust and a return benefit must be given to the outsider. Also, either of the benefits (or the income injected under the scheme), must have been provided or derived wholly or partly, but not merely incidentally, because of the deduction(s). The income injection test does not apply to income injection schemes that take place wholly within a family group. It also does not apply to complying superannuation funds, complying approved deposit funds, pooled superannuation trusts, fixed unit trusts where all direct or indirect unit holders are exempt from income tax, and deceased estates within a reasonable administration period. The income injection test applies to all trusts, including excepted trusts. For the purposes of this test, a 'scheme' takes on the same meaning as in Part IVA of the ITAA 1936. 'Scheme' means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, and (b) any scheme, plan, proposal, action, course of action or course of conduct. 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. The income injection test applies where the person who has provided, directly or indirectly a benefit to the trustee or beneficiary of the trust (or an associate), is an outsider to the trust. The meaning of 'outsider' depends on whether or not the trust is a family trust. Generally, in the case of family trusts, members of the defined 'family' or other trusts, companies or partnerships in the defined family group are not 'outsiders' for the purposes of the test. In your case, any income received by the trust during the period of receivership was that of income from the sale of the trust's assets and those of related trusts. The proceeds from these sales were used by the receiver to repay the debt owing to the trust's lender, the proceeds were not used in order to claim a deduction for the available tax losses held in the trust prior to receivership, the trust losses still remain. No further income was received by the trust in relation to the deed of settlement entered into between the trusts and the lender and receiver, as this money was paid to a related trust. Therefore, it is reasonable to conclude that the benefit received by the trust was not wholly or partly because a possible deduction was available. Accordingly, the A Trust passes the income injection test. While the A Trust passes the required tests to be able to deduct prior year tax losses, the fact remains that you have advised that the trust is no longer in existence as it ceased in June 1999. Accordingly, as the A Trust no longer exists, the trust's accrued losses can not be utilised and are lost. Will the sale of most, but not all, of the fixed and floating assets of the trust by the receiver manager or controller constitute a complete vesting or winding up of the trust (including any un-recouped tax losses)? On 21 January 2011, the Full Federal Court (Edmonds and Gordon JJ, Dowsett J dissenting) handed down its judgment in Commissioner of Taxation v. David Clark ; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 ( Clark ). That case raised squarely for consideration the circumstances in which the nature of a trust has so changed that it might be concluded that the trust that originally incurred capital losses is not the same trust for income tax purposes as that which has derived gains against which the losses are sought to be recouped. Clark was decided adversely to the Commissioner. Special leave sought by the Commissioner to appeal the decision to the High Court was rejected on 2 September 2011. In light of this, the Commissioner issued Taxation Determination TD 2012/21 in which he explains his view on the administrative impact of the Court's decision in the following terms: The Commissioner considers that the decision of the Full Federal Court in Clark does not change the basic proposition that, based on the authority in Commercial Nominees , the relevant focus is on whether continuity of the trust estate has been maintained. That this is so is confirmed by the High Court's language in disposing of the Commissioner's application for special leave where the High Court noted that the decision of the Full Federal Court involved 'characterisation and evaluation of the continuity of the trust estate'. As decided by the High Court in Commercial Nominees , the Commissioner considers that the test to be applied looks to whether changes to one or more of the trust's constituent documents, the trust property, and the identity of those with a beneficial interest in the trust property are such as to terminate the existence of the trust. To the extent that the High Court in Commercial Nominees left open the possibility that there might be a loss of continuity in circumstances short of the existence of the trust having come to an end, the Commissioner acknowledges that in Clark there were significant changes to the property, membership and operation of the [the relevant trust in that case] without any finding by the courts that there was a loss of continuity such as to deny the trust access to the losses being carried forward. Relevantly, in disposing of the Commissioner's special leave application, the High Court noted that the application raised the question: Whether a trustee of a unit trust could set-off, against capital gains, capital losses incurred some years before under a different trustee with different unit holders, with an intervening excess of liabilities over assets, subsequent recapitalisation of the trust and a waiver by the original trustee of its right to be indemnified from the assets of the trust. Accordingly, following Clark, there will not be a loss of continuity sufficient to deny a trustee access to any capital losses being carried forward without a termination of the existence of the trust estate. It is clear following Clark that, at least in the context of recoupment of losses, continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purposes. As such, in the absence of termination, tax losses being carried forward by a trustee will as a general rule remain available to be recouped against relevant trust income derived in future years of income. In your case, you advise that the A Trust is no longer in existence as it ceased in June 1999, therefore, it is not necessary to establish whether a trust continues to exist for income tax purposes The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.