Private ruling: Income injection test
Published: March 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: Year ended 30 June 2014

Ruling: Q1: If the ABC Family Trust makes an interposed entity election, to be included in the XYZ family group, can the carried-forward losses in the ABC Family Trust be used to offset assessable income distributed to it from the XYZ Family Trust? | A1: Yes.

Relevant facts and circumstances: The ABC Family Trust lodged a family trust election in its tax return for the year ended 30 June 19XX, where ABC was/is the primary individual. XYZ, a child of ABC and a member of the ABC family group, has also established the XYZ Family Trust, where XYZ was/is the primary individual. The ABC Family Trust currently has significant carry forward tax losses.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 270-10 | Income Tax Assessment Act 1936 Section 270-15 | Income Tax Assessment Act 1936 Section 270-25

Reasons for decision: Summary: Where the requirements of subsection 270-10(1) of the Income Tax Assessment Act 1936 (ITAA 1936) are satisfied, section 270-15 of the ITAA 1936 operates to disallow deductions related to scheme assessable income where a scheme exists to take advantage of those deductions. The requirements of subsection 270-10(1) are: (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). Subsection 270-25(1) provides if the trust mentioned in paragraph 270-10(1)(a) is a family trust, an 'outsider' to the trust is a person other than: (da) a trust with the same individual specified in its family trust election; (e) a…trust that made an interposed entity election to be included in the individual's family group, where the election was in force (including before it was made) when the scheme mentioned in paragraph 270-10(1)(b) commenced… In your case, the same primary individual is not specified in both relevant family trust elections. It follows the prohibition in section 270-15 will apply in your case unless an interposed entity election is made to include the ABC Family Trust in the XYZ family group. The interposed entity election should cover the period when the relevant scheme commences.