Private ruling: Recalculation of the available fraction of losses
Date of advice: 18 September 2025
Published: 1 December 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will a trust distribution received by ET-1 Co from the trustee for the Trust constitute an event under subsection 707-325(4) of the Income Tax Assessment Act 1997 (ITAA 1997) that would require a recalculation of the fraction of losses available to Head Co, pursuant to item 4 of the table in subsection 707-320(2) of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: 1. Head Co is the provisional head of a Multiple Entry Consolidated Group (MEC Group). An individual (the Individual) is the sole director of Head Co. 2. The MEC Group had carried forward losses as of 30 June 20XX. These losses were carried forward on the basis that the Continuity of Ownership Test had been satisfied at all times since the losses were incurred or transferred. 3. The Trust is a discretionary investment trust. 4. The Individual is the sole director for the corporate trustee of the Trust. 5. The Trust made a family trust election (FTE) pursuant to section 272-80 of the Income Tax Assessment Act 1936 (ITAA 1936) commencing in 20XX, with the Individual as the primary individual. The FTE remains in force as at the date of this ruling and is expected to remain in force at the time of a proposed distribution in the 20XX income year. 6. The proposed distribution will be made to an eligible tier-1 company (ET-1). ET-1 Co is an ET-1 within the MEC Group. The Individual is the sole director of ET-1 Co. 7. The proposed distribution will be cash funded. The purpose is to fund active businesses and investments within the MEC Group. 8. ET-1 Co is not currently a beneficiary of the Trust under its Trust Deed. The Trust may resolve to make it a beneficiary in the future. 9. ET-1 companies within the MEC Group are wholly and beneficially owned by Company 1. Company 1 is a foreign incorporated company. 10. Company 1 is wholly and beneficially owned by Company 2. Company 2 is a foreign incorporated company. 11. Company 2 is wholly and beneficially owned by Trust 2. Trust 2 is an Australian resident discretionary investment trust. The sole director of the corporate trustee of Trust 2 is the Individual. Trust 2 has made an FTE with the Individual as the primary individual.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 272-80 | Income Tax Assessment Act 1936 section 273 | Income Tax Assessment Act 1997 subsection 165-210(2) | Income Tax Assessment Act 1936 section 318 | Income Tax Assessment Act 1997 Division 707 | Income Tax Assessment Act 1997 Subdivision 707-A | Income Tax Assessment Act 1997 Subdivision 707-C | Income Tax Assessment Act 1997 subsection 707-320(2) | Income Tax Assessment Act 1997 section 707-325 | Income Tax Assessment Act 1997 subsection 707-325(2) | Income Tax Assessment Act 1997 subsection 707-325(4) | Income Tax Assessment Act 1997 paragraph 707-325(4)(a) | Income Tax Assessment Act 1997 paragraph 707-325(4)(b) | Income Tax Assessment Act 1997 subsection 719-2(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The proposed distribution from the Trust to ET-1 Co is not an injection of capital for the purposes of paragraph 707-325(4)(a). However, it is a transaction that will not take place at arm's lengthand involves entities that are associates at the time of the transaction. Consequently, it will satisfy the requirements of paragraph707-325(4)(b) and constitute an event under subsection 707-325(4). | Detailed Reasoning - Detailed Reasoning: 1. Subdivision 707-C provides a legislative framework for the utilisation of losses that are transferred to the head company of a consolidated group under Subdivision 707-A. [1] An entity is required to work out its modified market value at the time it becomes a member of a consolidated group for the purpose of calculating the available fraction for a bundle of losses the entity transfers to the head company under Subdivision 707-A. 2. However, subsection 707-325(4) describes events that, if one or more happens, require a recalculation of the modified market value [2] and available fraction for a bundle of losses. [3] Subsection 707-325(4) states: These are the events: (a) an injection of capital into the entity or an entity that was an * associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the injection; (b) a transaction that: (i) did not take place at *arm ' s length; and (ii) involved the entity or an entity that was an associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the transaction. 3. These events will be examined in relation to the proposed distribution. | Detailed Reasoning - Paragraph 707-325(4)(a) - the capital injection test: 4. The expression 'injection of capital' is not defined for the purposes of paragraph 707-325(4)(a). Accordingly, it has its ordinary meaning consistent with the purposes of the provision. 5. The Commissioner provides guidance on the expression 'injection of capital' in Taxation Ruling TR 2004/9 Income tax: consolidation: what is meant by 'injection of capital' in section 707-325 of the Income Tax Assessment Act 1997? 6. Paragraph 9 of TR 2004/9 states that, for the purposes of paragraph 707-325(4)(a), the expression 'injection of capital' covers transactions and acts with the following inter-related characteristics: • Wealth introduced from outside • Enhanced net assets • Equity interests affected • Not related to earnings and profit • External party required • Of a capital nature. 7. These characteristics are examined below. | Detailed Reasoning - Wealth introduced from outside: 8. The proposed distribution will be an introduction of funds (wealth) into the MEC Group from the Trust, which is an outside source and not from the MEC Group's own resources. Therefore, the proposed distribution meets this characteristic. | Detailed Reasoning - Enhanced net assets: 9. The proposed distribution will enhance the net asset position of the MEC Group by enhancing its cash position with no corresponding change in liabilities. Therefore, the proposed distribution meets this characteristic. | Detailed Reasoning - Equity interests affected: 10. The proposed distribution will not result in a change to the equity account of the MEC Group, as the net impact to the balance sheet will be an increase in the assets. As the proposed distribution will not affect the equity interests of the MEC Group, it does not meet this characteristic. | Detailed Reasoning - Not related to earnings and profit: 11. A transaction or act that contributes to, or is part of the entity's profit, is not an injection of capital. The proposed distribution will form part of the profit of ET-1 Co as it will be part of the income received. Therefore, the proposed distribution does not meet this characteristic. | Detailed Reasoning - External party required: 12. The proposed distribution will be made by an entity external to the MEC Group (being the Trust). It is not an enhancement in the net asset position from the entity's own activities. Therefore, the proposed distribution meets this characteristic. | Detailed Reasoning - Of a capital nature: 13. On the basis that the proposed distribution should be on profit account, and not on capital account, it does not meet this characteristic. | Detailed Reasoning - Conclusion: 14. On balance, the characteristics at paragraph 9 of TR 2004/9 indicate that the proposed distribution will not be an injection of capital for the purposes of paragraph 707-325(4)(a). | Detailed Reasoning - Paragraph 707-325(4)(b) - the non-arm's length test: 15. To meet this test the proposed distribution would need to be a transaction that did not take place at arm's length and involved the entity or an entity that was an associate of the entity (or of the trustee of the entity, if the entity is a trust) at the time of the transaction. | Detailed Reasoning - Transaction: 16. 'Transaction' is not defined in the ITAA 1997 and there are no identified court or tribunal cases that have considered the meaning or interpretation for the purposes of paragraph 707-325(4)(b). Accordingly, it has its ordinary meaning consistent with the purposes of the provision. 17. In Grimwade v. Federal Commissioner of Taxation (1949) 78 CLR 199 ( Grimwade ) the meaning of 'transaction' was discussed by the High Court. Latham CJ and Webb J, delivering the majority judgment, held that a transaction must be bilateral (that is, to be a transaction at least 2 parties must be involved): ... A transaction by a person must be a transaction with some other person. In the circumstances mentioned there is no transaction with any person. ... It was suggested that even to abstain from voting against a resolution beneficial to a class of shareholders amounted to entering into a transaction within par. (f). All these contentions interpret the words "enter into a transaction" as if they had the same meaning as "do an act or abstain from doing an act." Such an interpretation gives no real effect to the words "enter" and "transaction." (at p220) 18. Allen & Anor v Federal Commissioner of Taxation [2011] FCAFC 118 ( Allen ) considered Grimwade in the context of section 237. It was noted at paragraph 71: Grimwade v Federal Commissioner of Taxation (1949) 78 CLR 199 at 220, Latham CJ and Webb J observed: "A transaction by a person must be with some other person". While a transaction requires mutual dealings between parties, [s 273(7)] refers to dealing, not to a transaction. Indeed, the use of "dealing" in s 273(7)(a) is to be contrasted with the use of "transaction" in s 273(4). In using "dealing" in s 273(7)(a) the Parliament must be taken to have intended to cast a wider net than is necessary to catch only those dealings which answer the description of transaction. And that broader approach is hardly surprising in a measure directed at arrangements where it was to be expected likely that there might be no quid pro quo moving from the recipient party to the others. 19. While the Judgment made a distinction between 'dealings' and 'transaction' and concluded 'transaction' required mutual dealings while, in reference to the provision it was considering, 'dealings' did not, it made the following relevant points about trust entitlements: • a beneficiary need not, and usually will not, play an active role in acquiring an entitlement from a trust estate. [4] • the beneficiary had not been entirely passive, because it had received a distribution it had chosen not to disclaim. [5] 20. Based on the above, where a trustee makes a distribution of income to a beneficiary and the beneficiary accepts the distribution, there has been a bilateral dealing such that a transaction has taken place. Consequently, the proposed distribution from the Trust to the Group would constitute a bilateral dealing such that a transaction will have taken place. 21. Taxation Ruling TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132 expresses the Commissioner's view on how the transaction test at subsection 165-210(2) should be interpreted and seeks to define 'transaction' while noting that the meaning is dependent on its context and is not confined to bilateral dealings: | Detailed Reasoning - 'Transaction', 'entered into' and 'business operations' have a broad meaning: 82. In the new transactions test 'transaction' has a broad meaning. The meaning of the word 'transaction' depends upon its context. It is clear that, in the context of the second limb of sections 165-13 and 165-210, 'transaction' refers to every means or event by which the taxpayer derives income, for the word appears in association with the expression 'business operations' as the last of a descending hierarchy of tests that examines, first, the overall business of the company, then its component undertakings or enterprises and, finally, the individual acts by which the business is carried on. The new transactions test is concerned to ensure that a company deducts losses from income from transactions of the same kind as the operations by which it generated income before the change-over. 83. But the test is not concerned to distinguish income-producing activities of a bilateral kind from those of a unilateral kind. As Lord Reid noted in a case on English anti-avoidance provisions, Greenberg v. IRC [6] : 'The word "transaction" is normally used to denote some bilateral activity but it can be used to denote an activity in which only one person is engaged. It would not be wrong to say of a person doing office work that he is transacting business.' The payment of a dividend was held to be a transaction in that case. 'Transaction' has also been said in another context to be "a comprehensive word which includes any dealings with property": Barron v. Littman [7] per Lord Normand. To allow the injection of income into a loss company from unilateral dealings would defeat the purpose of the test, and the existence or otherwise of another party in relation to a dealing is not germane to the real issue, which is the way in which the taxpayer conducts business so as to produce income. Accordingly, the new transactions test is not confined to bilateral dealings. Appointment of the taxpayer as an object of a discretionary trust and appointment of income to the taxpayer pursuant to a discretionary trust are transactions for the purposes of subsections 165-210(2) and (4). 22. In determining the meaning of 'transaction' in the context of paragraph 707-325(4)(b), the Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002 (the EM), which enacted Division 707, provides guidance via the use of examples that the provision could apply to: 8.99 Examples of transactions that may lead to an increase in value of an entity or group are: • transferring an asset to the entity or group for less than market value consideration; • forgiving a debt owed by the entity or group; • lending money to the entity or group on non-commercial terms; and • paying the entity or group an inflated price for goods or services. 23. Based on the examples in the EM, it is evident that the meaning of 'transaction' in the context of paragraph 707-325(4)(b) is intended to capture scenarios that involve one party making a unilateral decision. For example, transferring an asset for no consideration or forgiving a debt for no consideration. Both examples could involve a unilateral decision by the transferee or forgiver of the debt. 24. Similar to the statement in TR 1999/9, to exclude unilateral dealings in the context of paragraph 25. 707-325(4)(b) would defeat the purpose of an anti-avoidance test for income injection. Regardless, the acceptance of the trust entitlement nonetheless constitutes a bilateral dealing between the trustee for the Trust and ET-1 Co and is considered a transaction. The actions of the trustee making the ET-1 Co entitled to a trust distribution, and ET-1 Co accepting the trust distribution will therefore constitute a transaction for the purposes of paragraph707-325(4)(b). | Detailed Reasoning - Did not take place at arm's length: 26. The expression 'take place at arm's length' is not defined within the context of Subdivision 707-A, as noted in the EM. It is noted that the examples provided in the EM do not include distributions made by a trustee of a trust to a beneficiary, however this is not indicative that Parliament intended for these distributions to not be captured. 27. Subsection 995-1(1) provides the following in relation to the concept of 'arm's length': in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance. 28. The phrase 'at arm's length' has been considered in many courts and used in various legislative contexts. These concepts are considered by the Commissioner in Taxation Ruling TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income which deals with what amounts are considered to be 'special income' under section 273 of the ITAA 1936. 29. Relevantly, section 273 of the ITAA 1936 deals with income from a transaction where the parties are not dealing at arm's length. TR 2006/7 summarises the Commissioner's view of an arm's length dealing: 199. ... If the relationship of the parties is such that one party has the ability to influence or control the other, this will suggest that the parties may not be dealing with each other at arm's length, but it will not be determinative. The Commissioner will only be satisfied that the parties are not dealing with each other at arm's length in relation to a transaction if it is established that the independent minds and wills of the parties are not applied to the transaction such that their dealing is not a matter of real bargaining. 30. The Trust and ET-1 Co are associates as defined in section 318 of the ITAA 1936. The Individual is also the sole director of the corporate trustee for the Trust, ET-1 Co and Head Co and is the controlling mind of all parties. This suggests that the parties may not be dealing at arm's length, but it is not determinative. 31. The proposed distribution will be made to an entity that has not previously benefited from the Trust. The proposed distribution will be made to ET-1 Co to fund the MEC Group's businesses and investments. 32. ET-1 Co will provide no valuable consideration for the interest in the Trust or for the receipt of the money. 33. Example 6 of TR 2006/7 involves parties that are controlled by the same individuals and through a series of transactions trust distributions are made to the SMSF. The ruling concludes the trust distribution is not a matter of real bargaining because it involves the distribution of an amount for no valuable consideration. For this reason, the parties are concluded to not be dealing at arm's length. Example 10 makes similar conclusions about trust distributions for no valuable consideration not being the result of real bargaining where it is received for no valuable consideration. 34. Similarly in this case the proposed distribution to ET-1 Co is not a matter of real bargaining because it involves the distribution of cash for no valuable consideration. 35. In short, the proposed distribution will be between associated entities and will not take place at arm's length for the purposes of paragraph707-325(4)(b). | Detailed Reasoning - Conclusion: 36. The proposed distribution from the Trust to ET-1 Co meets the definition of a transaction. It will not take place at arm's lengthand involves entities that are associates at the time of the transaction. Consequently, it will satisfy the requirements of paragraph707-325(4)(b) and constitute an event under subsection 707-325(4). [1] Subsection 719-2(1) states that Part 3-90 has effect in relation to a MEC group in the same way in which it has effect in relation to a consolidated group. [2] Subsection 707-325(2) [3] Item 4 of the table in subsection 707-320(2) [4] Paragraph 68 Allen [5] Paragraph 73 Allen [6] [1972] AC 109 at 136f; [1971] 3 All ER 136 at 149; (1972) 47 TC 240 at 271 [7] [1953] AC 96 at 113; [1952] All ER 548 at 555; (1952) 33 TC 373 at 405

Reasons for decision: All legislative references are to the ITAA 1997 unless otherwise stated. | Question: Will a trust distribution received by ET-1 Co from the trustee for the Trust constitute an event under subsection 707-325(4) that would require a recalculation of the fraction of losses available to Head Co, pursuant to item 4 of the table in subsection 707-320(2)?