Private ruling: Family trust tax losses
Date of advice: 29 May 2021
Published: August 2021
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: If XXXX becomes the sole shareholder of your corporate trustee and your sole controller and if you continue to be used for investment activities, will you be able to deduct your prior year tax losses against future income? | A1: Yes

Relevant facts and circumstances: You are a discretionary family trust, which lodged a family trust election, commencing on 1 July XXXX. Between XXXX and XXXX, you engaged in both primary production activity and shares investment activity. Commencing in the year ended 30 June XXXX, you declared tax losses in your tax returns for each financial year to 30 June XXXX. The main source of your losses was the primary production activity. Your trustee is private company, whose sole shareholder is a family member A. Family member A wishes to transfer the shares and control of the trustee company to family member B. Family member B has been a director of your trustee since 1 July XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Schedule 2F Section 267-20 | Income Tax Assessment Act 1936 - Schedule 2F Section 267-25 | Income Tax Assessment Act 1936 - Schedule 2F Section 267-30 | Income Tax Assessment Act 1936 - Schedule 2F Section 267-40 | Income Tax Assessment Act 1936 - Schedule 2F Section 269-60 | Income Tax Assessment Act 1936 - Schedule 2F Section 269-65 | Income Tax Assessment Act 1936 - Schedule 2F Section 269-70 | Income Tax Assessment Act 1936 - Schedule 2F Section 269-90 | Income Tax Assessment Act 1936 - Schedule 2F Section 272-75 | Income Tax Assessment Act 1936 - Schedule 2F Section 272-80

Reasons for decision: Detailed Reasoning - Division 267: Division 267 of the Income Tax Assessment Act 1936 sets out the circumstances in which a non-fixed trust will not be able to deduct a prior year loss or debt deduction. A trust is a non-fixed trust if it is not a fixed trust (section 272-70). Since non-fixed trusts are different in nature to fixed trusts, different rules apply to determine whether a non-fixed trust can deduct a prior year or current year loss or debt deduction. Non-fixed trusts are different to fixed trusts because it is not possible to determine who has a vested and indefeasible interest in all the income and capital of the trust. This is because the trustee or some other person will generally have a discretion as to who will benefit under the trust and/or what the amount of the benefit will be. It follows, under Division 267, the pattern of distributions or control of the trust are tested to give a picture of the individuals who benefit from the trust. In your case, you are non-fixed trust because you have always been a discretionary trust. | Detailed Reasoning - Family trusts: A trust is a family trust at any time when a family trust election in respect of the trust is in force (section 272-75). Subsection 272-80(6B) provides the trustee of a trust cannot vary or revoke the election unless the variation or revocation is in respect of an income year that occurs during the period beginning at the beginning of the income year specified in the election and finishing at the end of the fourth income year after the income year specified in the election. Although a family trust is a non-fixed trust, subsection 267-20(1) classes a family trust as an 'excepted trust', for which Division 267 does not apply. In other words, the rules in Division 267 do not prevent a family trust from deducting prior or current year losses or debt deductions. In your case, since you have been a family trust since 1 July XXXX, your tax losses incurred from 1 July XXXX can be deducted by your family trust for as long as your family trust election remains in place. However, since you cannot vary or revoke your election so as to include the year ended 30 June XXXX in a new family trust election, the rules in Division 267 need to be considered for your losses incurred in the year ended 30 June XXXX. | Detailed Reasoning - Four conditions to meet for deducting tax loss: Subsection 267-20(1) provides Subdivision 267 will apply to a trust that: (a) can deduct in the income year a tax loss from a loss year; and (b) was a non-fixed trust at any time in the period (the test period) from the beginning of the loss year until the end of the income year; and (c) was not an excepted trust at all times in the test period. Subsection 267-20(2) states a non-fixed trust cannot deduct a tax loss unless it meets: • the condition in subsection 267-30(2) (if applicable); and • the condition in section 267-35; and • the condition in subsection 267-40(2) (if applicable); and • the condition in section 267-45. In your case, since you were not an excepted trust in respect to your loss in the year ended 30 June XXXX, the four conditions in Subdivision 267 must be met if you are to deduct, in a future year ('the income year') your tax loss incurred in the year ended 30 June XXXX. | Detailed Reasoning - Condition 1: Subsection 267-30(2): Subsection 267-30(1) states the trust must meet the condition in subsection (2) if either or both of the following happened: (a) the trust distributed income: (i) in the income year or within 2 months after its end; and (ii) in at least one of the 6 earlier income years; or (b) the trust distributed capital: (i) in the income year or within 2 months after its end; and (ii) in at least one of the 6 earlier income years. The condition in subsection 267-30(2) is the trust must pass the pattern of distributions test (detailed below) for the income year. The pattern of distributions test is contained in Subdivision 269-D. In your case, the condition in subsection 267-30(2) is not applicable since you have not distributed income or capital since the year ended 30 June XXXX. | Detailed Reasoning - Condition 2: Section 267-35: Previously failed subsection 267-30(2): To be allowed to deduct a prior year loss in a current income year, section 267-35 states the trust must not have been prevented from deducting the tax loss in an earlier income year because of a failure to meet the condition in subsection 267-30(2). The condition in subsection 267-30(2) is the trust must pass the pattern of distributions test for the income year. In summary, the pattern of distributions test essentially examines the pattern of income and capital distributions of the trust over a period to determine whether there has been an effective change in those who benefit under the trust. The pattern of distributions test is contained in Subdivision 269-D, where section 269-60 states a trust passes the pattern of distributions test for an income year if, before the end of 2 months after the end of the income year: (a) the trust distributed directly or indirectly to the same individuals, for their own benefit, a greater than 50% share of all test year distributions of income (see subsection 269-65(1)); and (b) the trust distributed directly or indirectly to the same individuals (who may be different from those in paragraph (a)), for their own benefit, a greater than 50% share of all test year distributions of capital (see subsection 269-65(3)). Subsection 269-65(1) states a test year distribution of income is the total of all distributions of income made by the trust in any of the following periods, provided the period does not begin more than 6 years before the beginning of the income year: (a) the period from the beginning of the income year until 2 months after its end; (b) if the trust distributed income before the trigger year (see subsection (2)) - the income year, before the trigger year, that is closest to the trigger year; (c) if paragraph (b) does not apply and the trust distributed income in the trigger year - the trigger year; (d) if neither paragraph (b) nor paragraph (c) applies - the income year, closest to the trigger year, in which the trust distributed income; (e) each intervening income year (if any) between the one in paragraph (a) and the one in paragraph (b), (c) or (d). For tax loss deductions, the trigger year is the relevant earliest loss year to be recouped. For debt deductions, the trigger year is the year (beginning on the day the debt was incurred) in which the relevant bad debt to be recouped was incurred. Subsection 269-65(3) states subsection (1) applies in the same way to distributions of capital made by the trust, to determine what is a test year distribution of capital. Importantly, section 269-70 states, for the purposes of section 269-60, if the trust does not distribute to an individual the same percentage of income or capital for every test year distribution, the trust is taken to have distributed to the individual, for every test year distribution, the smallest percentage that it distributed to the individual for any of the test year distributions. The following is an example (from the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998) of how the test and the smallest percentage are used: Year 7 is the current income year. A trust has a loss incurred in Year 6. The trust has made one distribution of income for Years 1, 2, 3 and 4 and two distributions for Year 7. No distributions of capital have been made for Year 7. This means it is not possible to apply the test for any distributions of capital by the trust. In accordance with the test discussed...the end year is Year 7 (i.e. the current income year) and the start year is Year 4. Year 4 is the start year because it has a distribution made before the loss year that is closest to that loss year. To work out the test year distribution for each year, each distribution of income for the year made to any person is totalled. The percentage of the total distributed to each individual is that individual's share of the test year distribution. The test year distributions made by the trust are as set out in Table... 20XX 20XX Smallest percentage Jack 50% 10% 10% Jill 40% 10% 10% Mary 10% 10% 10% Bill 0% 70% 0% In this example, the trust does not satisfy the pattern of distributions condition. This is because only 30% of each test year distribution has been distributed to the same individuals, having regard to the fact that each individual is taken to have received the smallest percentage for each test year distribution. In essence, if the total worked out by adding the smallest percentage of each individual is more than 50%, the test is passed (in the above example, the smallest percentages are those in the far right column). In your case, you meet the condition in section 267-35 because you have never previously failed subsection 267-30(2). In the past, when you recouped tax losses, the family father was always your primary beneficiary, where you distributed to him in the test years greater than 50% of distributed income. For example, in the 1995 financial year, you claimed a tax loss. Here, 1994 was the trigger year. In the year before closest to the trigger year (1993), the father received 98.6% of the distribution. In the income year (1995), he received 99.9% of the distribution. For the test, the small percentage is chosen (98.6%), which satisfies the test amount of greater than 50% of distributions to the same individuals. | Detailed Reasoning - The condition in subsection 267-40(2): In subsection 267-40(2), the condition is that, during the period beginning at the test time and finishing at the end of the test period, the same individuals (who must be some or all of the threshold group) must have had more than a 50% stake in the income or the capital, respectively, of the trust. The meaning of a 50% stake is explained in section 269-50 as follows: If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the income of a trust, those individuals have more than a 50% stake in the income of the trust. If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the capital of the trust, those individuals have more than a 50% stake in the capital of the trust. In your case, the condition in subsection 267-40(2) is not applicable since you do not have any beneficiaries with fixed entitlements. | Detailed Reasoning - Condition in section 267-45: The condition in section 267-45 is a group must not, during the test period, begin to control the trust, directly or indirectly. In summary, the control test must be passed for all non-fixed trusts in order to claim a deduction for a prior year or current year loss or debt deduction. This is in contrast to the pattern of distributions test and 50% stake test, which only need to be applied if certain conditions are met. The control test essentially measures whether a group began to control the trust, either directly or indirectly during the test period. A group is taken to be a person and/or their associates. Subsection 269-95(5) defines a group as: (a) a person; or (b) a person and one or more associates; or (c) 2 or more associates of a person. Section 318 includes as associates of an entity ('the primary entity') that is a natural person (otherwise than in the capacity of trustee) a relative of the primary entity. For example, Trust B has a tax loss in the 2007-08 income year which it seeks to deduct in the 2008-09 income year. At the start of the 2007-08 income year the trustee of Trust B is AusCo. During the 2008-09 income year the trustee of Trust B changes to SubCo (a 100% owned subsidiary of AusCo). The directors of AusCo and SubCo are the same. In this case, even though there is a change in the corporate trustee, there is no change in the control of Trust B as the individuals who make the decisions have not changed. Section 269-95 explains a group (see subsection (5)) controls a non-fixed trust if: (a) the group has the power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the trust; or (b) the group is able (directly or indirectly) to control the application of the capital or income of the trust; or (c) the group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in paragraph (b); or (d) the trustee is accustomed, under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the group; or (e) the group is able to remove or appoint the trustee; or (f) the group acquires more than a 50% stake in the income or capital of the trust. For example, Trust A has a tax loss in the 20XX-XX income year which it seeks to deduct in the 2008-09 income year. At the start of the 20XX-XX income year Trust A is a non-fixed trust. During the 2008-09 income year, under an arrangement between the original settlor of the trust and a group, 60% of the income of the trust becomes the subject of a fixed entitlement held by the group. Here, the group begins to control the trust in the test period and the control test is not satisfied. The prior year loss is not deductible. In your case, a group will not, during the test period, begin to control you directly or indirectly since your controller will be from the original controlling group, namely, the family. As stated in paragraph 269-95(d), a trustee per se does not control a trust but, instead, the group that controls the trustee controls the trust. In short, you will meet the condition in section 267-45 because you will continue to be controlled by the same group, namely, members or associates of the family. | Detailed Reasoning - Conclusion: As previously stated, the control test must be passed for all non-fixed trusts in order to claim a deduction for a prior year or current year loss or debt deduction. This is in contrast to the pattern of distributions test and 50% stake test, which only need to be applied if certain conditions are met. In your case, as long as the family son remains your controller, you will be able to deduct your prior year tax losses because the 50% stake test and the pattern of distributions test will not apply (since the distributions made to father or mother, over 6 years ago, will not be used to determine the pattern of distributions test in the future income year if and when you first seek to deduct the prior year losses).

This ruling applies for the following period periods :