Private ruling: Income Injection Test
Published: December 2011
Ruling period: 01 July 2011 to 30 June 2012 | The scheme will commence on: | 01 July 2011 to 30 June 2012 financial year | Relevant facts and circumstances | Taxpayer Trust conducts an investment management business. | The unit holders in Taxpayer Trust as at 26 September 2011 are as follows: | Unit holders | Percentage | Unit Holder 1 | 80% | Unit Holder 2 | 1% | Unit Holder 3 | 19% | Taxpayer Trust made tax losses in the income years ending 30 June 2003, 30 June 2004 and 30 June 2009. | The losses arose due to fluctuations in the investment and currency markets impacting the market values of its investments. | Taxpayer Trust is not a "family trust" as defined in section 272-75. | Taxpayer Trust will have funds to invest due to Unit Holder 1 making an application to subscribe for additional units in Taxpayer Trust. | It is proposed that Taxpayer Trust will subscribe for new units in Outsider Trust 1. Taxpayer Trust will pay cash to the trustee of Outsider Trust 1 for the new units. This proposal (the details of which follow) is referred to in this Ruling as Scheme Three. | This Ruling will not apply to the extent that Taxpayer Trust acquires existing units from the current unit holders of Outsider Trust 1. | No units in Outsider Trust 1 will be redeemed or cancelled before, or in connection with, the issue of new units in Outsider Trust 1 to Taxpayer Trust. | Taxpayer Trust will receive distributions of income from Outsider Trust 1 in respect of the units it will own in Outsider Trust 1. This will be the "scheme assessable income" under subparagraph 270-10(1)(b)(i). | The trustee of Outsider Trust 1 is an "outsider to the trust" under subsection 270-25(2). | The trustee of Outsider Trust 1 will issue new units in Outsider Trust 1 to Taxpayer Trust on an arm's length basis - the subscription price for units will be based upon the market value of Outsider Trust 1's net assets at a particular time. All unit holders in Outsider Trust 1 will receive the same distribution of income per unit. | Just before the commencement of this scheme, the trustee of Outsider Trust 1 will own no units in Taxpayer Trust. | The sale of any of Taxpayer Trust's investments will take place on an arm's length basis in the market which applies to the particular asset.

Ruling: Q1: Does Scheme Three result in a "benefit" being provided by the Outsider Trust 1, to the trustee, to a beneficiary, to an associate of the trustee or to an associate of a beneficiary of Taxpayer Trust for the purposes of subparagraph 270-10(1)(b)(ii)? | A1: Yes. | Q2: Does Scheme Three result in a "benefit" being provided by the trustee, a beneficiary, an associate of the trustee or an associate of a beneficiary of Taxpayer Trust to the trustee of Outsider Trust 1 or to an associate of the trustee of Outsider Trust 1 for the purposes of subparagraph 270-10(1)(b)(iii)? | A2: Yes. Issue 2 Purpose | Q3: For the purposes of subparagraph 270-10(1)(c)(i), is it reasonable to conclude that Taxpayer Trust derived the scheme assessable income as a result of Scheme Three merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable? | A3: Yes. | Q4: For the purposes of subparagraph 270-10(1)(c)(ii), is it reasonable to conclude that the trustee of Outsider Trust 1 provided a benefit to the trustee, to a beneficiary, to an associate of the trustee or to an associate of a beneficiary of Taxpayer Trust as a result of Scheme Three (as considered in question 1 of Issue 1) merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable? | A4: Yes. | Q5: For the purposes of subparagraph 270-10(1)(c)(iii), is it reasonable to conclude that the trustee, a beneficiary, an associate of the trustee or an associate of a beneficiary of Taxpayer Trust provided a benefit to the trustee of Outsider Trust 1 or to an associate of the trustee of Outsider Trust 1 as a result of Scheme Three (as considered in question 2 of Issue 1) merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable? | A5: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 Division 270 to schedule 2F | Income Tax Assessment Act 1936 subsection 270-10(1) to schedule 2F | Income Tax Assessment Act 1936 subparagraph 270-10(1)(b)(i) to schedule 2F | Income Tax Assessment Act 1936 subparagraph 270-10(1)(b)(ii) to schedule 2F | Income Tax Assessment Act 1936 subparagraph 270-10(1)(b)(iii) to schedule 2F | Income Tax Assessment Act 1936 subparagraph 270-10(1)(c)(i) to schedule 2F | Income Tax Assessment Act 1936 subparagraph 270-10(1)(c)(ii) to schedule 2F | Income Tax Assessment Act 1936 subparagraph 270-10(1)(c)(iii) to schedule 2F | Income Tax Assessment Act 1936 section 270-20 to schedule 2F | Income Tax Assessment Act 1936 paragraph 270-20(f) to schedule 2F | Income Tax Assessment Act 1936 paragraph 270-20(a) to schedule 2F | Income Tax Assessment Act 1936 paragraph 270-20(b) to schedule 2F | Income Tax Assessment Act 1936 subsection 270-25(2) to schedule 2F | Income Tax Assessment Act 1936 section 272-75 to schedule 2F | Income Tax Assessment Act 1936 section 272-140 to schedule 2F

Reasons for decision: Detailed Reasoning - Question 1: Division 270 applies to schemes to take advantage of tax losses and other deductions allowable to a trust. For Division 270 to apply to a scheme, the conditions in subsection 270-10(1) must be satisfied. It states: 270-10(1) The consequences set out in section 270-15 result if: (a) a deduction is allowable to a trust for the income year; and (b) under a scheme, the following happen (in any order): (i) the trust derives an amount of assessable income (the scheme assessable income ) in the income year; and (ii) an outsider to the trust (see section 270-25) directly or indirectly provides a benefit (see section 270-20) to the trustee, to a beneficiary in the trust or to an associate of the trustee or of a beneficiary; and (iii) the trustee, a beneficiary in the trust or an associate of the trustee or of a beneficiary, directly or indirectly provides a benefit to the outsider to the trust or to an associate of the outsider (other than an associate covered by any of paragraphs 270-25(1)(a) to (f)); and (c) it is reasonable to conclude that: (i) the trust derived the scheme assessable income; or (ii) the outsider provided the benefit as mentioned in subparagraph (b)(ii); or (iii) the trustee, beneficiary or associate provided the benefit as mentioned in subparagraph (b)(iii); wholly or partly, but not merely incidentally, because the deduction would be allowable; and (d) the trust is not an excepted trust under paragraph 272-100(b), (c) or (d). A number of elements must be established under subsection 270-10(1). | Detailed Reasoning - Scheme: The required facts must happen under a "scheme". "Scheme" is defined in section 272-140 as having the same meaning as in subsection 177A(1) of the ITAA 1936: scheme means: · 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 · any scheme, plan, proposal, action, course of action or course of conduct. Both the Commissioner and Taxpayer Trust accept that Scheme Three (which is the subject of this Ruling) constitutes a "scheme" within the meaning of subsection 177A(1) of the ITAA 1936. Meaning of "outsider to the trust" As Taxpayer Trust is not a family trust, an "outsider to the trust" is a person other than the trustee of the trust or a person with a fixed entitlement to a share of the income or capital of the trust: subsection 270-25(2). The trustee of Outsider Trust 1 is an outsider to Taxpayer Trust as it is an entity/person other than the trustee of Taxpayer Trust, and (because it is not a unit holder of Taxpayer Trust) it does not have a fixed entitlement to a share of the income or capital of Taxpayer Trust. | Detailed Reasoning - Meaning of "benefit": Section 270-20 defines a "benefit" as: (a) money, a dividend or property (whether tangible or intangible); or (b) a right or entitlement (whether or not property); or (c) services; or (d) the extinguishment, forgiveness, release or waiver of a debt or other liability; or (e) the doing of anything that results in the derivation of assessable income; or (f) anything that, disregarding the preceding paragraphs, is a benefit or advantage. The meaning of "benefit" was considered by the Administrative Appeals Tribunal in Re Eldersmede Pty Ltd & Ors v Federal Commissioner of Taxation [2004] AATA 710; 2004 ATC 2129; 56 ATR 1179. In that case, the Tribunal held at paragraph 40 that the words "benefit or advantage" in paragraph 270-20(f): should be given their ordinary meanings. That is to say, they should be read as anything that is for the good of a person or thing or that puts him, her or it in a better or more favourable position. Furthermore, Example 3 in Chapter 10 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 states (at paragraphs 10.45 - 10.46) that the subscription price paid for units in a trust, and the units issued by and distributions of income from a trust, constitute benefits. Paragraph 10.19 of the Explanatory Memorandum states that: A benefit is intended to include all means whereby value is transferred between the relevant parties. Under Scheme Three, Outsider Trust 1: (a) will issue new units in Outsider Trust 1 to Taxpayer Trust; (b) by issuing units in Outsider Trust 1 has made Taxpayer Trust entitled to receive distributions of income in respect of those units (being the same distribution that other unit holders in Outsider Trust 1 will receive). Each of these will constitute an outsider to the trust (the trustee of Outsider Trust 1) directly providing a "benefit" to Taxpayer Trust for the purposes of subparagraph 270-10(1)(b)(ii). This is because the trustee of Outsider Trust 1 is providing Taxpayer Trust with: · property (being the units) (paragraph 270-20(a)); and · a right or entitlement to distributions of income from the trustee of Outsider Trust 1 in respect of those units (paragraph 270-20(b)). The fact that the trustee of Outsider Trust 1 will only issue new units in Outsider Trust 1 in exchange for Taxpayer Trust paying the subscription price for those units does not alter the fact that the provision of the units is a "benefit". Under subparagraph 270-10(1)(b)(ii), an outsider to the trust must directly or indirectly provide a benefit to the trustee, to a beneficiary in the trust, or to an associate of the trustee or of a beneficiary. The issuance of new units in Outsider Trust 1 by the trustee of Outsider Trust 1 to Taxpayer Trust, and the corresponding income entitlements, amounts to the trustee of Outsider Trust 1 (an outsider to Taxpayer Trust) directly providing a "benefit" to Taxpayer Trust, and thus satisfies the requirements of subparagraph 270-10(1)(b)(ii). | Detailed Reasoning - Question 2: Under subparagraph 270-10(1)(b)(iii), the trustee, a beneficiary in the trust, or an associate of the trustee or of a beneficiary, must directly or indirectly provide a benefit to an outsider to the trust or to an associate of the outsider. For the reasons given above in Question 1, the payment by Taxpayer Trust to the trustee of Outsider Trust 1 of the subscription price for the new units in Outsider Trust 1 amounts to Taxpayer Trust directly providing a "benefit" to the trustee of Outsider Trust 1 (an outsider to Taxpayer Trust), and thus satisfies the requirements of subparagraph 270-10(1)(b)(iii). | Detailed Reasoning - Question 1: Having regard to the facts and circumstances of the scheme and the applicant's assertion that the scheme will be entered into for commercial reasons, i.e. to generate investment returns on funds that have come to Taxpayer Trust and would otherwise be unutilised, the Commissioner has concluded that, for the purposes of subparagraph 270-10(1)(c)(i), Taxpayer Trust will derive the scheme assessable income as a result of Scheme Three merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable to Taxpayer Trust. | Detailed Reasoning - Question 2: Having regard to the facts and circumstances of the scheme and the applicant's assertion that the scheme will be entered into for commercial reasons, i.e. to generate investment returns on funds that have come to the Taxpayer Trust and would otherwise be unutilised, the Commissioner has concluded that, for the purposes of subparagraph 270-10(1)(c)(ii), the trustee of Outsider Trust 1 will provide a benefit to the trustee, to a beneficiary, to an associate of the trustee or to an associate of a beneficiary of Taxpayer Trust as a result of Scheme Three merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable to Taxpayer Trust. | Detailed Reasoning - Question 3: Having regard to the facts and circumstances of the scheme and the applicant's assertion that the scheme will be entered into for commercial reasons, i.e. to generate investment returns on funds that have come to Taxpayer Trust and would otherwise be unutilised, the Commissioner has concluded that, for the purposes of subparagraph 270-10(1)(c)(iii), the trustee, a beneficiary, an associate of the trustee or an associate of a beneficiary of Taxpayer Trust will provide a benefit to the trustee of Outsider Trust 1 or to an associate of the trustee of Outsider Trust 1 as a result of Scheme Three merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable to Taxpayer Trust.

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