Private ruling: Control test
Published: October 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: 1. Does the Trust meet the conditions in section 267-45 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the control test for the test period 1 July 2005 to 30 June 2014? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1936 - Division 267 of Schedule 2F | Income Tax Assessment Act 1936 - Section 267-20 of Schedule 2F | Income Tax Assessment Act 1936 - Section 267-45 of Schedule 2F | Income Tax Assessment Act 1936 - Section 269-95 of Schedule 2F | Income Tax Assessment Act 1936 - Section 272-70 of Schedule 2F | Income Tax Assessment Act 1936 - Section 272-140 of Schedule 2F

Reasons for decision: Summary: Division 267 of Schedule 2F to the ITAA 1936 sets out the income tax consequences where there is a change in ownership or control of a non-fixed trust. A 'non-fixed trust' is defined in section 272-70 of Schedule 2F to the ITAA 1936 to mean a trust that is not a fixed trust. You have stated that the Trust is a hybrid trust, therefore, it is categorised as a non fixed trust. Subsection 267-20(1) of Schedule 2F to the ITAA 1936 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) of Schedule 2F to the ITAA 1936 then sets out the conditions that must be met if a non-fixed trust is to deduct the tax loss. One of these conditions is the 'control test' which is set out in section 267-45 of Schedule 2F to the ITAA 1936. Section 267-45 of Schedule 2F to the ITAA 1936 states that: A group must not, during the test period, begin to control the trust directly or indirectly. [Emphasis added] Subsection 269-95(1) of Schedule 2F to the ITAA 1936 provides that a group controls a non-fixed trust if: Subject to this section, a group (see subsection (5)) controls a non-fixed trust if: (1) 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 (2) the group is able (directly or indirectly) to control the application of the capital or income of the trust; or (3) the group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in paragraph (b); or (4) 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 (5) the group is able to remove or appoint the trustee; or (6) the group acquires more than a 50% stake in the income or capital of the trust. A group is defined in subsection 269-95(5) of Schedule 2F to the ITAA 1936 as: (a) a person; or (b) a person and one or more associates; or (c) 2 or more associates of a person. An associate, as referred to in subsection 269-95(5) of Schedule 2F to the ITAA 1936, is defined in section 272-140 of Schedule 2F to the ITAA 1936 as having the same meaning as in section 318 of the ITAA 1936. In this case, the Trust has incurred losses in each year from the 200X financial year and expects to produce a profit in the 20XX financial year. For the purposes of the control test, the test period is from the start of the loss year (1 July 200V) to the end of the income year you are seeking to deduct the loss (30 June 20XX. During the test period, no group had the power to obtain beneficial enjoyment or control of the income or capital of the trust. In addition, no group was able to remove or appoint the trustee or acquired more than a 50% stake in the income or capital of the trust. The control conditions in subsection 269-95(1) of Schedule 2F to the ITAA 1936 also includes the ability of a group to, essentially, control the actions of the trustee of a trust. As such, in this case, the directorship in the Trustee Company, whose directions effectively amount to those of the trustee, is crucial to determining whether any group began to control the Trust during the test period. Working backwards: 1 July 2012 to 30 June 2013 · Individual Z was re-appointed as a director of the Trustee Company along side Individuals X and Y. No group is considered to have been able to control the directors or the director voting at this point. There is no evidence that Individual Z had again been given the prevailing vote in the case of equal voting and decision making among the other directors and any previous agreement would have ceased when he/she was no longer a director. · Individual W ceased his position as a director of the Trustee Company and Individuals X and Y were appointed as directors on the same day. No group is considered to have been able to control the directors or the director voting at this point. Individuals X and Y are not associates and would have equal voting rights. There is no evidence that either party had the power to control the Trustee Company in their own right. 1 July 2011 to 30 June 2012 · Individual Z ceased his/her position as sole director of the Trustee Company in the relevant financial year and Individual W was appointed as the sole director on the same day. Individual W is a 'group' for the purposes of subsection 269-95(1) of Schedule 2F of the ITAA 1936. As sole director, he/she commenced to control the Trust as the Trustee Company was accustomed, under an obligation or might reasonably be expected, to act in accordance with his/her directions, instructions or wishes. Although it has been stated that Individual Z provided guidance and direction during this period, Individual W, as sole director of the Trustee Company, controlled the Trust for the purposes of subsection 269-95(1) of Schedule 2F to the ITAA 1936. | Detailed Reasoning - Conclusion: The Trust does not meet the conditions in section 267-45 of Schedule 2F of the ITAA 1936 in relation to the control test for the test period 1 July 200V to 30 June 20XX, however does meet the conditions for the reduced test period 1 July 20YY to 30 June 20XX

2. Does the Trust meet the conditions in section 267-45 of Schedule 2F of the ITAA 1936 in relation to the control test for the test period 1 July 2012 to 30 June 2014? | Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | The Trustee Company is an Australian incorporated, resident company which acts as trustee for the Trust. | The Trust was established by a Deed of Trust, executed on in the 200X financial year. | The Trust is a hybrid unit trust as stated in the trust deed. | The initial ordinary unit holders of the Trust were: | · Company A as trustee for Trust A - one third of the units | · Company B as trustee for Trust B - one third of the units; and | · Company C as trustee for Trust C- one third of the units. | Company C as trustee for Trust C redeemed all ordinary units in the relevant financial year. | The current ordinary unit holders of the Trust are: | · Company A as trustee for Trust A - 50% of the units; and | · Company B as trustee for Trust B -50% of the units. | The details of the Trustee Company are as follows: | · Individual X appointed in the subsequent financial year | · Individual Y appointed in the subsequent financial year; and | · Individual Z appointed in the subsequent financial year | Current shareholders (holding equal shares): | Previous directors include: | · Individual Z - sole director when resigned in the relevant financial year; and | · Individual W - sole director from the resignation of Individual Z to the appointment of Individuals X, Y and Z in the subsequent financial year. | At the time Individual Z was appointed as director initially in the 200X financial year, it was agreed that as he/she had an extensive range of commercial and corporate governance experience gained through his personal career and held positions as a director of Australian companies, Individual Z would have the prevailing vote in the case of equal voting and decision making among the other directors of the trustee and was held to be the Chairman of the Board. | Individual Z formally ceased to be listed as a director in the relevant financial year and Individual W was appointed as sole director at that time. It was not Individual Z's nor the Trust's intention to be removed from the operations of the Trust and upon his/her resignation as a director, it was agreed by the Trust that Individual Z would still be used in an external capacity by the Trust and the directors of the trustee would seek his/her guidance and direction thereby providing Individual Z with the same level of influence he/she held during his/her time as a director. | Individual W ceased to be a director of the Trustee Company in the subsequent financial year and Individual X and Individual Y were appointed as directors on the same day. Individuals X and Y are both associates of Company B as trustee for Trust B. | Individual Z was also re-appointed as a director in the subsequent financial year. | The Trust has incurred losses since the 200X financial year. | The trust expects to produce a tax profit in the 20XX financial year.