Private ruling: Transfer of trust losses
Published: May 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: Year ending 30 July 2014

Ruling: Q1: Can losses from Trust A, which you are also trustee, be transferred to Trust B? | A1: No.

Relevant facts and circumstances: You are the trustee for Trust A (that has a sole beneficiary) and Trust B (that has two beneficiaries, including the aforementioned sole beneficiary). Trust A previously carried on a business (that failed) and has tax losses. Trust B currently carries on another business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 36-10 | Income Tax Assessment Act 1936 Section 95

Reasons for decision: Detailed Reasoning - Tax losses: Section 36-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides how to calculate a tax loss for an income year. It states: (1) Add up the amounts you can deduct for an income year (except tax losses for earlier income years). (2) Subtract your total assessable income. (3) If you derived exempt income, also subtract your net exempt income (worked out under section 36-20). (4) Any amount remaining is your tax loss for the income year, which is called a loss year. Amounts you can deduct are those such as explained in section 8-1 of the ITAA 1997, which states you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. Your total assessable income consists of ordinary income and statutory income. Section 6-5 of the ITAA 1997 states if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 6-10 of the ITAA 1997 states if you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia. | Detailed Reasoning - Trust income and losses: Section 95 of Income Tax Assessment Act 1936 (ITAA 1936) provides a beneficiary of a trust estate has a percentage of the income of the trust estate equal to the share (expressed as a percentage) of the income of the trust estate to which the beneficiary is presently entitled and the trustee of a trust estate has a percentage of the income of the trust estate equal to the share (expressed as a percentage) of the income of the trust estate to which no beneficiary is presently entitled. Section 95 of the ITAA 1936 further provides that if the income of a trust estate is nil, a beneficiary of a trust estate has a percentage of the income of the trust estate of 0% and the trustee of a trust estate has a percentage of the income of the trust estate of 100%. It follows that section 95 of the ITAA 1936 operates so that only the income (and not the loss) of a trust estate can be distributed (to a beneficiary) out of a trust estate. Rather, the losses of the trust remain within the trust and may only be carried forward and claimed as a deduction against its assessable income in future years (provided the trust satisfies the trust loss recoupment rules in Schedule 2F to the ITAA 1936). | Detailed Reasoning - Application of law in your case: In your case, the losses from Trust A cannot be transferred to Trust B for the following reasons: • Under section 36-10 of the ITAA 1997, your tax loss must be comprised of your deductions subtracted from your total assessable income. Since the tax losses of Trust A are not the tax losses of Trust B, that is, "your tax losses", they cannot be included as the tax losses of Trust B. • Section 95 of the ITAA 1936 operates to prevent the distribution of tax losses to beneficiaries or any other entity.