Family trust elections (FTEs) and interposed entity elections (IEEs) - Question and answers
Family trust elections (FTEs) and interposed entity elections (IEEs) - Question and answers
Family trust and interposed entity elections
Q1.1
|
What is a family trust election (FTE)?
|
A
|
A family trust election is the election that is made in order to make the trust a family trust for taxation purposes. The election must specify a year of income from which it is to take effect. It must also specify one individual whose family group is to be taken into account. (See sections 272-75 and 272-80 of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q1.2
|
Is there an approved form?
|
A
|
Yes. The Commissioner of Taxation releases a form each year for the making of FTEs - for example, the approved form for the 2008 income tax return is the Family trust election, revocation or variation 2008 form. The election does not have to be made on the approved form - however, where it is not, it must contain all the information requested on that form.
|
Q1.3
|
Where can I get the approved form for the family trust election?
|
A
|
The approved form can be obtained through:
- our website ato.gov.au
- an ATO shopfront, or
- phoning the publications distribution service on 1300 720 092.
Registered tax agents can also:
|
Q1.4
|
Why would a trustee make a family trust election?
|
A
|
There are four reasons:
- The trust loss measures.
The trust has a tax loss, to be recouped in future years, or certain debt deductions, but the trust could not satisfy the required trust loss tests. For a non-fixed trust, the trust will need to satisfy the 50% stake test (if applicable), the pattern of distributions test (if applicable), and the control test, and not fail the income injection test, to claim a tax loss or certain debt deductions.
(See Summary of tests that apply for the purposes of the trust loss measures).
By becoming a 'family trust', the non-fixed trust is subject to concessional treatment and most of the trust loss tests do not apply, or apply in a modified way. The measures apply for trust tax losses for the 1995 and later income years, and for debt deductions for the 1997 and later income years.
- The company loss tracing measures.
Amendments to the company loss legislation allow a non-fixed trust to benefit from the family trust concession (sections 165-207 and 166-165 of the Income Tax Assessment Act 1997). The measures apply for 1997 and later income years.
Broadly, the concession applies for the purposes of the company loss recoupment rules so that where the relevant interests in a company are held by a 'family trust', a single notional entity will be taken to own the interests as an individual.
- The franking credit trading measures.
Amendments to the franking credit trading measures allow a non-fixed trust that receives a franked dividend (within the meaning of the former Part IIIAA of the Income Tax Assessment Act 1936) to benefit from the 'family trust concession'. The measures apply for 1998 and later income years.
Broadly, unless the trustee of a non-fixed trust has elected for it to be a 'family trust', a beneficiary with no fixed interest will not be a 'qualified person' for the purposes of the 45-day rule. Someone who is not a 'qualified person' is denied franking credits, in relation to dividends paid on shares, or interests in shares, acquired after 3pm on 31 December 1997.
- Trustee beneficiary reporting rules.
Following changes to Division 6D of Part III of the Income Tax Assessment Act 1936 effective 1 July 2008, trusts that have made an FTE or an interposed entity election (IEE) or who are covered by subsection 272-90(5) of Schedule 2F will be excluded from having to comply with the trustee beneficiary reporting rules (TB rules).
Generally, these reporting rules require the trustee of a closely held trust to advise the Commissioner of certain details about each trustee beneficiary that is presently entitled to a share of the trust's net income or tax-preferred amounts. This advice must be provided by the due date for lodgment of the closely held trust's tax return.
The exclusion of trusts that have made an FTE or IEE and trusts covered by subsection 272-90(5) of Schedule 2F from the TB rules applies from the start of the 2009 income year and to all later income years.
|
2005 changes to the law regarding the making of FTEs and IEEs
Q1.5
|
What changes were made in 2005 impacting the making of FTEs and IEEs?
|
A
|
In 2005, changes were made to the legislation regarding the making of family trust and interposed entity elections. Generally, the changes allow entities to make family trust elections and interposed entity elections at any time in relation to earlier years, provided certain conditions are met.
These conditions require that from the beginning of the specified income year until 30 June of the income year immediately preceding that in which the election is made:
- the entity passes the family control test, and
- any conferrals of present entitlement or any actual distributions of income or capital during that period have been made to the specified individual or members of that individual's family group.
This change applies to family trust elections and interposed entity elections specifying the 2005 or a later income year. The changes do not apply to elections specifying the 2004 or earlier income years.
|
Q1.6
|
When was the law enacted?
|
A
|
The Tax Laws Amendment (2004 Measures No. 7) Act 2005, Act No. 41 of 2005, received royal assent on 1 April 2005. These changes apply to elections specifying the 2005 income year or a later income year.
|
Q1.7
|
What has changed?
|
A
|
The new law provides taxpayers with the flexibility to make elections at any time, provided the conditions are met. Previously, elections were required to be made with the entity's return of income for the specified income year, or within two months of the end of the specified income year for entities not required to furnish a return. Under the previous law, the Commissioner had no discretion to allow late elections to be lodged other than for those entities not required to furnish a return.
|
Q1.8
|
When does this new law apply?
|
A
|
This change applies to family trust and interposed entity elections specifying the 2005 or a later income year. The change does not apply to elections specifying the 2004 or earlier income years.
|
Q1.9
|
What are the conditions to satisfy before making the earlier year elections?
|
A
|
These conditions require that from the beginning of the specified income year until 30 June of the income year immediately preceding that in which the election is made:
- the entity passes the family control test, and
- any conferrals of present entitlement or any actual distributions of income or capital during that period have been made to the specified individual or members of that individual's family group.
(Subsections 272-80(4A) and 272-85(4A) of Schedule 2F to the Income Tax Assessment Act 1936. See example at Q2.5).
|
Q1.10
|
What effect does this have on the lodgment opportunity under PS LA 2004/1 (GA)?
|
A
|
Clients wanting to have elections apply for the 2004 or earlier years can only achieve this by lodging in accordance with Practice Statement PS LA 2004/1 (GA) because the law changes will not allow them to specify an income year earlier than 2005.
Refer to:
|
2007 changes to the law
Q1.11
|
What are the details of the changes made in 2007?
|
A
|
The 2007 changes provide for a number of changes to further increase flexibility for family trusts.
The primary changes:
- allow family trust elections to be revoked in certain limited circumstances (that is, where the family trust election was not required for utilisation of tax losses, bad debt deductions or accessing franking credits) - subsection 272-80(6A)
- allow the 'specified individual' to be varied in certain circumstances - subsections 272-80(5A), (5B), (5C), (5D)
- allow two trusts that have the same specified individual in their FTEs to be members of the same family group without the need for an IEE - subsection 272-90(3A)
- allow interposed entity elections (IEEs) to be revoked where the election was made for an entity that was already, or subsequently becomes, a member of the family group - subsection 272-85(5A)
- deem IEEs to be revoked where the FTE to which it relates is revoked - subsection 272-85(5B)
- broaden the definition of 'family' to include lineal descendants of family members - section 272-95
- ensure that the death of a family member does not by itself result in another person ceasing to be a member of the family - subsection 272-95(2)
- exempt distributions to former spouses, former widows/widowers and former stepchildren of family members from family trust distribution tax by including them within the definition of 'family group' - subsection 272-90(2A).
Generally, revocations and variations will be able to be made until the end of the fourth income year after the income year that was specified in the original election (paragraphs 272-80(6B)(a) and 272-85(5C)(a)).
As a transitional rule, elections made since the commencement of the regime in 1995 could be revoked or varied until the end of the 2009 income year (paragraph 272-80(6B)(b) and 272-85(5C)(b)).
These revocations or variations must be made in the entity's return of income for the income year from which the variation or revocation is to be effective. If the entity is not required to give a return for the income year, the revocation or variation must be given to the Commissioner within two months of the end of that income year, or such later day as the Commissioner allows (subsections 272-80(7) and (8) and 272-85(6)).
|
Q1.12
|
When were these changes enacted?
|
A
|
The Tax Laws Amendment (2007 Measures No. 4) Act 2007, Act No. 143 of 2007, received royal assent on 24 September 2007. These changes apply to the 2008 income year and later income years.
|
Q1.13
|
When do these changes apply?
|
A
|
These changes apply to the 2008 and later income years.
|
2008-09 Federal Budget Announcement and Tax Laws Amendment (2008 Measures No.4) Bill 2008
Q1.14
|
What did the Government announce in the 2008-09 Federal Budget?
|
A
|
In the 2008-09 Federal Budget, the government announced its intention to reverse two of the family trust changes introduced by the previous government in Tax Laws Amendment (2007 Measures No. 4) Act 2007.
Details of the announcement are in the Assistant Treasurer's Media Release 34-2008, Family Trusts - Savings Measure, dated 13 May 2008.
|
Q1.15
|
Have these changes been enacted?
|
A
|
No. The above 2008-09 Federal Budget announced changes are no longer proceeding.
On the 26 June 2008, the Tax Laws Amendment (2008 Measures No.4) Bill 2008 was introduced into Parliament. Schedule 2 of the Bill contained the intended changes with one minor change to the 2008-09 Federal Budget announcement.
On 3 September 2008, the Bill was amended by the Senate to remove Schedule 2. The House of Representatives agreed to this amendment on 17 September 2008.
|
Q2.1
|
Are family trust and interposed entity elections required to be made with the tax return for the specified income year?
|
A
|
For 2005 and later income years
No. FTEs and IEEs can be made at any time, provided the relevant conditions are met. These conditions require that from the beginning of the specified income year until 30 June of the income year immediately preceding that in which the election is made:
- the entity passes the family control test, and
- any conferrals of present entitlement or any actual distributions of income or capital during that period have been made to the specified individual or members of that individual's family group.
(Subsections 272-80(4A) and 272-85(4A) of Schedule 2F to the Income Tax Assessment Act 1936. See example at Q2.5).
For 2004 and earlier income years
Yes. FTEs and IEEs were required to be made with the entity's return of income for the specified income year or within two months of the end of the specified income year for entities not required to furnish a return. Under the previous law, the Commissioner had no discretion to allow late elections to be lodged other than for those entities not required to furnish a return.
However, ATO Practice Statement Law Administration PS LA 2004/1 (GA) sets out the one-off opportunity to enable family entities to lodge a FTE and/or IEE that was required to have been lodged with a previous year's return, with their tax return for the 2004 income year.
Refer to:
For information on the transitional provisions for FTEs and IEEs made for the purposes of the Trust Loss measures, see Transitional and application provisions - family trust elections (FTEs) and interposed entity elections (IEEs).
|
Q2.2
|
Does a FTE and/or IEE have to be remade each year?
|
A
|
No. An election only has to be made once.
|
Q2.3
|
Does the trustee of a family trust have to notify the ATO of the trust's family trust election status each year?
|
A
|
Yes. The trustee is required to insert the income year specified in the family trust election on the trust tax return each year. The trustee does not need to continue inserting the specified income year on the trust return in the year after a family trust election has been revoked. (See Partnership and Trust or Fund tax return instructions).
|
Q2.4
|
Does an entity (trust, company, or partnership) have to notify the ATO of its interposed entity election status each year?
|
A
|
Yes. The entity is required to insert the income year specified in the IEE on the entity's tax return each income year. (See Company, Partnership and Trust or Fund tax return instructions).
|
Q2.5
|
What if an election is not made in the income tax return for the specified income year?
|
A
|
For 2005 and later income years
The election is no longer required to be made in the tax return for the specified income year. (See 1.5 and 2.1).
Example: Assume the 2008 income year has just ended. A trustee of a trust can make a 2008 FTE specifying the 2005 income year after the end of the income year ended 30 June 2008, provided:
- the trust passes the family control test from 1 July 2004 to 30 June 2008, and
- any conferrals of present entitlement or any actual distributions of income or capital during that period have been made to the specified individual or members of that individual's family group.
For 2004 and earlier income years
Subject to certain transitional rules, FTEs and IEEs can only be made for the earliest year for which a tax return has not yet been lodged. The election cannot be made for the specified income year if it is made after the entity's return for that year has been furnished.
However, ATO Practice Statement Law Administration PS LA 2004/1 (GA) sets out the one-off opportunity to enable family entities to lodge a FTE and/or IEE that was required to have been lodged with a previous year's return, with their tax return for the 2004 income year.
Refer to:
For information on the transitional provisions for FTEs and IEEs made for the purposes of the Trust Loss measures, see Transitional and application provisions - family trust elections (FTEs) and interposed entity elections (IEEs).
|
Q2.6
|
Can an extension be granted to allow the making of an election?
|
A
|
For 2005 and later income years
The election is no longer required to be made in the tax return for the specified income year. (See example at Q2.5).
For 2004 and earlier income years
No. There is no provision in the legislation to allow an extension of time to make a late election, or to allow extra time to provide details of elections where a tax return is required to be lodged. Where an election cannot be made in the tax return, an extension of time to lodge the return should be sought. An amended return including an FTE or IEE will not be accepted as lodging the election for the specified income year.
However, ATO Practice Statement Law Administration PS LA 2004/1 (GA) sets out the one-off opportunity to enable family entities to lodge a FTE and/or IEE that was required to have been lodged with a previous year's return, with their tax return for the 2004 income year.
Refer to:
For information on the transitional provisions for FTEs and IEEs made for the purposes of the Trust Loss measures, see Transitional and application provisions - family trust elections (FTEs) and interposed entity elections (IEEs).
|
Q2.7
|
Can I amend a tax return that has already been lodged to include a Family Trust Election, Revocation or Variation, OR an Interposed Entity Election or Revocation?
|
A
|
No. Refer to Q2.5 and Q2.6. This also applies to requests to amend the FTE & IEE status code box on the front cover of returns where the Election has not been lodged with the return - refer to Q2.3 and Q2.4.
|
Q2.8
|
How can I find out if I have lodged a FTE or an IEE?
|
A
|
Ideally, you should be able to determine if an election was lodged from your own records. However, if you are unable to do this, you can:
- phone 13 28 66 and ask for this information, or
- write to:
Micro Enterprises and Individuals
Provision of Advice
PO Box 1130
Penrith NSW 2740
and ask for this information.
You will need to provide the ABN/TFN of the trust, company or partnership in relation to which you are enquiring.
|
|
|
|
You should only request this information if you have identified that you need to make a FTE or an IEE.
|
Q2.9
|
I am a tax agent. How can I find out if my client has lodged a FTE or an IEE?
|
A
|
Details of clients that have family trust elections and/or interposed entity elections recorded with the ATO can be obtained from the Tax Agent Portal.
If you do not have access to the Tax Agent Portal, you can:
- phone 13 72 86 FKC 213 and ask for this information, or
- write to:
Micro Enterprises and Individuals
Provision of Advice
PO Box 1130
Penrith NSW 2740
and ask for this information. You will need to include your tax agent number and your client's ABN/TFN.
|
|
|
|
You should only request this information if you have identified that your client needs to make a FTE or an IEE.
|
Q3.1
|
Can more than one individual be specified in a family trust election?
|
A
|
No.
|
Q3.2
|
Can the individual specified in a family trust election be deceased when the election is made?
|
A
|
No.
|
Q3.3
|
Can the individual specified in a family trust election be changed?
|
A
|
Up until 30 June 2007, the specified individual could not be changed. However, following changes to the law that apply from 1 July 2007, the specified individual can now be varied in two situations.
In the first situation, the specified individual can be varied once only, subject to certain conditions.
Generally, these conditions require that:
- the new specified individual must be a member of the original specified individual's family at the election commencement time, and
- there have been no conferrals of present entitlement to, and distributions of, income or capital made (by the trust or an interposed entity) outside the new specified individual's family group during the period in which the election has been in force.
In the second situation, the specified individual can be varied if, as a result of a family law order, agreement or award arising from a marriage breakdown, the control of the trust passes to the new specified individual and/or members of their family.
The group consisting of the new specified individual and/or members of their family will have control of the trust if they satisfy any of the paragraphs in paragraph 272-87(2)(a) to (g) of Schedule 2F to the Income Tax Assessment Act 1936 - for example, if the group:
- is able (directly or indirectly) to control the application of the capital or income of the trust, or
- has more than a 50% stake in the income or capital of the trust.
A variation under subsection 272-80(5A) or (5C) must be made in the trust's return for the income year from which the variation is to be effective. If the trustee is not required to lodge a return for the income year, the variation must be given to the Commissioner within two months of the end of the income year from which the variation is to be effective, or such later day as the Commissioner allows.
(See subsection 272-80(8) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q3.4
|
What happens to a family trust election if the individual specified in it dies after it is made?
|
A
|
The FTE is not affected by the death of the individual - the members of the family group are still determined by reference to that individual.
|
Q3.5
|
Can the individual specified in the family trust election have a date of birth later than the commencement time for the family trust election?
|
A
|
No. The date of birth of the individual specified in the family trust election must be earlier than or equal to the election commencement time for the family trust election.
Example: An election made with the 2003 tax return for the 2003 income year where the family has passed the family control test from the commencement of the income year would require the specified individual's date of birth to be on or before 1 July 2002.
|
Q3.6
|
Can the individual specified in the family trust election have a date of birth later than the commencement time of a backdated family trust election?
|
A
|
No. The date of birth of the individual specified in the family trust election must be earlier than or equal to the beginning of the year specified for the commencement of the family trust election.
Example: An election made in 2008 for the 2005 income year where the family has passed the family control test from the commencement of the income year would require the specified individual's date of birth be on or before 1 July 2004.
|
Q4.1
|
Who is in the family of the individual specified in a family trust election?
|
A
|
The family of an individual (the test individual) consists of the test individual and all of the following (if applicable):
(a) any parent, grandparent, brother or sister of the test individual or the test individual's spouse
(b) any nephew, niece or child of the test individual or the test individual's spouse
(c) any lineal descendant of a nephew, niece or child referred to in paragraph (b)
(d) the spouse of the test individual or of anyone who is a member of the test individual's family because of paragraphs (a), (b) and (c).
(See section 272-95 of Schedule 2F to the Income Tax Assessment Act 1936. For a diagram, see 'Family' of Test Individual).
The definition of 'family' was expanded (effective 1 July 2007) to allow for changes in beneficiaries over time and now includes the lineal descendants of a nephew, niece or child of the test individual or the test individual's spouse.
The previous definition of 'family' applies from 7.30pm EST 13 May 1997. The new expanded definition applies from 1 July 2007.
For things done before 7.30pm EST 13 May 1997, a broader definition applies (see item 26 of Schedule 1 to the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998).
|
Q4.2
|
Is the spouse of the individual specified in a family trust election still a member of the family after the death of that specified individual?
|
A
|
Yes. The spouse of the deceased 'test individual' will continue to be a family member, provided they were the spouse at the time of death.
Under changes made to the definition of 'family' that apply from 1 July 2007, a person does not cease to be a family member merely because of the death of any other family member.
(See subsection 272-95(2) of Schedule 2F to the Income Tax Assessment Act 1936).
However, if the spouse of the deceased 'test individual' becomes the spouse of a person who is not a member of the deceased test individual's 'family', the spouse will cease to be a family member. Instead, the former spouse of the deceased test individual is a member of the deceased test individual's 'family group'. This means that the former spouse of the deceased test individual will not have concessionary treatment under the income injection test.
(See subsection 272-90(2A) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q4.3
|
If the individual specified in a family trust election who is legally married is separated from their spouse, is the spouse still a member of the family?
|
A
|
Yes.
In addition to this, under changes that apply from 1 July 2007, a person who was a spouse of the primary individual or a member of the primary individual's family, will remain in the 'family group' of the 'test individual' after a breakdown in the marriage.
As a result, while they are in the 'family group', they would no longer be a member of the 'family' -this is important when considering the income injection test and determining who is an 'outsider to the trust'.
(See subsection 272-90(2A) and section 272-95 of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q4.4
|
If the individual specified in a family trust election who was legally married is divorced, is their former spouse still a member of the family?
|
A
|
No.
However, under changes that apply from 1 July 2007, the former spouse will remain a member of the 'family group'.
As a result, while they are in the 'family group', they would no longer be a member of the 'family' - this is important when considering the income injection test and determining who is an 'outsider to the trust'.
(See paragraph 272-90(2A)(a) and section 272-95 of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q4.5
|
Is the spouse of a parent, grandparent, brother, sister, nephew, niece, child, or any lineal descendant of a nephew, niece or child of the specified individual still a member of the family after the death of the parent, grandparent, brother, sister, nephew, niece, child, or any lineal descendant of a nephew, niece or child?
|
A
|
Yes. Following changes to the definition of 'family' that apply from 1 July 2007, a person does not cease to be a member of the family merely because of the death of any other family member.
(See subsection 272-95(2) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q4.6
|
If a parent, grandparent, brother, sister, nephew, niece, child, or any lineal descendant of a nephew, niece or child who is legally married is separated from their spouse, is the spouse still a member of the family?
|
A
|
Yes.
In addition to this, under changes that apply from 1 July 2007, a person who was a spouse of a member of the family will remain in the 'family group' of the 'test individual' after a breakdown in the marriage.
As a result, while they are in the 'family group', they would no longer be a member of the 'family' - this is important when considering the income injection test and determining who is an 'outsider to the trust'.
(See paragraph 272-90(2A)(a) and section 272-95 of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q4.7
|
If a parent, grandparent, brother, sister, nephew, niece, child, or any lineal descendant of a nephew, niece or child who was legally married is divorced, is their former spouse still a member of the family?
|
A
|
No.
However, under changes that apply from 1 July 2007, the former spouse will remain a member of the 'family group'.
As a result, while they are in the 'family group', they would no longer be a member of the 'family'. This is important when considering the income injection test and determining who is an 'outsider to the trust'.
(See paragraph 272-90(2A)(a) and section 272-95 of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q4.8
|
Does the family include a de facto spouse of the individual specified in the family trust election or a de facto spouse of a parent, grandparent, brother, sister, nephew, niece, child, or any lineal descendant of a nephew, niece or child?
|
A
|
Yes. (See the definition of 'spouse' in subsection 6(1) of the Income Tax Assessment Act 1936).
|
Q4.9
|
Is a stepchild of the individual specified in the family trust election a member of the family?
|
A
|
Yes. (See the definition of 'child' in subsection 6(1) of the Income Tax Assessment Act 1936).
|
Q4.10
|
Will the stepchild of a test individual remain a member of the test individual's family pursuant to section 272-95 of Schedule 2F to the Income Tax Assessment Act 1936 after the test individual's spouse dies?
|
|
|
Yes. Following changes to the definition of 'family' that apply from 1 July 2007, a person does not cease to be a family member merely because of the death of any other family member.
(See subsection 272-95(2) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q4.11
|
Is a half-brother or a half-sister of the individual specified in the family trust election, or of the spouse of that specified individual, a member of the family (that is, someone with whom there is a common parent)?
|
A
|
Yes.
|
Q4.12
|
Is a stepbrother or a stepsister of the individual specified in the family trust election, or of the spouse of that specified individual, a member of the family (that is, someone with whom there is no common parent)?
|
A
|
No.
|
Q4.13
|
Are two non-fixed trusts, with family trust elections and the same specified individual, members of the same family group?
|
A
|
Yes. Following changes to the definition of 'family group' that apply from 1 July 2007, trusts with the same specified individual in their family trust election are members of the same family group without having to make interposed entity elections.
(See subsection 272-90(3A) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q4.14
|
Can the trustee of a family trust make an interposed entity election after the death of its test individual?
|
A
|
Yes. Once a valid family trust election is in force, it is not affected by the death of the test individual.
|
Q4.15
|
Can the trustee of a family trust make an IEE to be included in the family group of another family trust where the specified individuals are not the same (for example, where the specified individuals are brothers)?
|
A
|
Yes. The trustee of a family trust can make an IEE to be included in the family group of another family trust where the specified individuals are not the same, as long as it has not made another IEE to be included in the family group of a different specified individual and the respective family control test is passed. (See ATO ID 2005/174).
|
Q4.16
|
The new extended definition of 'family' in subsection 272-95(1) of Schedule 2F to the Income Tax Assessment Act 1936 now includes 'any lineal descendant of a nephew, niece or child' of the test individual or the test individual's spouse. What is the meaning of the term 'lineal descendants' in the 'family' definition?
|
A
|
In the context of paragraph 272-95(1)(c), the term 'any lineal descendent' includes any descendant (of an individual) in a direct line of relationship flowing downwards, starting with an individual's child [including an adopted child, stepchild or ex-nuptial child] and extending to include a grandchild, a great grandchild and so on. It is not restricted to a descendant on either a patriarchal or matriarchal basis.
|
Q5.1
|
Can a family trust election be revoked?
|
A
|
Yes, in certain circumstances.
A family trust election is revocable where the family trust is a fixed trust and certain other conditions are met (subsection 272-80(6)).
In addition to this, following legislative changes that apply from 1 July 2007, family trust elections can be revoked where the family trust election was not required for utilisation of tax losses, bad debt deductions or accessing franking credits (subsection 272-80(6A)).
(See subsections 272-80(6) and (6A) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q5.2
|
When and how does a family trust revoke a family trust election?
|
A
|
Where the trustee of a fixed trust is revoking a family trust election under subsection 272-80(6), the revocation must be made in the trust's return for the income year in which the change in fixed entitlement (the 'later time') occurs. If the trustee is not required to lodge a return for the income year, the revocation must be given to the Commissioner within two months of the end of the income year in which the 'later time' occurs, or such later day as the Commissioner allows.
The trustee of a trust cannot revoke a family trust election under subsection 272-80(6A) unless the revocation is in respect of an income year that occurs during the period:
- starting at the beginning of the specified income year and finishing at the end of the fourth income year after the specified year, or
- starting at the beginning of the 2008 income year (that is, 1 July 2007) and finishing at the end of the 2009 income year (that is, 30 June 2009).
A revocation under subsection 272-80(6A) must be made in the trust's return for the income year from which the revocation is to be effective. If the trustee is not required to lodge a return for the income year, the revocation must be given to the Commissioner within two months of the end of the income year from which the revocation is to be effective, or such later day as the Commissioner allows.
(See subsections 272-80(6), (6A), (6B), (7) and (8) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q5.3
|
Does subsection 272-80(11) of Schedule 2F to the Income Tax Assessment Act 1936 prevent the trustee of a trust making a family trust election (FTE) in respect of that trust after a FTE previously made in respect of the trust has been revoked?
|
A
|
Yes. Subsection 272-80(11) of Schedule 2F to the ITAA 1936 will prevent the trustee of a trust making a FTE in respect of that trust. Subsection 272-80(11) provides that, 'the trustee must not make more than one election under this section in relation to the trust'. As a result, the trustee is prevented from making a further FTE. (See ATO ID 2008/73).
|
Q6.1
|
What companies, partnerships and trusts are members of the family group of a family trust?
|
A
|
The companies, partnerships and trusts in the family group are:
- those that have made an election known as an interposed entity election
- those (other than non-fixed trusts) where certain members of the family group have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust, and
- family trusts with the same specified individual in their family trust elections.
(See subsections 272-90(3A), (4) and (5) of Schedule 2F to the Income Tax Assessment Act 1936. See ATO ID 2004/876).
|
Q6.2
|
Does a company, partnership or trust have to make an interposed entity election to be a family group member?
|
A
|
An interposed entity election only has to be made where the members of the family group listed in subsection 272-90(5) do not have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust. (See ATO ID 2004/876).
|
Q6.3
|
Are two family trusts that have specified the same test individual in their family trust elections, members of the same family group without making interposed entity elections?
|
A
|
Yes. Following legislative changes that apply from 1 July 2007, family trusts that have made a family trust election specifying the same 'test individual' are members of each other's family group.
Prior to 1 July 2007, each family trust needed to make an interposed entity election to become a member of each other's family group.
(See subsection 272-90(3A)).
|
Q7.1
|
What is an interposed entity election?
|
A
|
An interposed entity election is the election to make an entity (a company, partnership or trust) a member of the family group of the individual specified in a family trust election.
|
Q7.2
|
Why would an entity make an interposed entity election?
|
A
|
There are two reasons.
Firstly, to make an entity (in which the members of the family group listed in subsection 272-90(5) do not have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the entity) a member of the family group of the individual specified in a family trust election. (See ATO ID 2003/164).
Secondly, to exclude a trust from having to comply with the trustee beneficiary reporting rules. Following changes to Division 6D of Part III of the Income Tax Assessment Act 1936 made in 2007, trusts which have made an FTE or IEE, or who are covered by subsection 272-90(5) of Schedule 2F, will be excluded from having to comply with the trustee beneficiary reporting rules (TB rules). This exclusion applies from the start of the 2009 income year and to all later income years.
|
Q7.3
|
Is there an approved form?
|
A
|
Yes. The Commissioner releases a form each year for the making of IEEs. The election does not have to be made on the approved form - however, where it is not, it must contain all the information requested on that form.
|
Q7.4
|
Where can I get the approved form for the interposed entity election?
|
A
|
The approved form is available through:
Registered tax agents can:
|
Q7.5
|
Can a company, partnership or trust make more than one interposed entity election?
|
A
|
Yes, provided each family trust, with which the entity is interposed, has the same individual specified in its family trust election.
(See subsection 272-85(7) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q7.6
|
Can a trust make both a family trust election and an interposed entity election?
|
A
|
Yes, provided the respective family control test is passed for each election. (See ATO ID 2002/1082 and ATO ID 2005/174. See also Q7.11 and Q7.12).
|
Q7.7
|
Can a superannuation fund make an interposed entity election?
|
A
|
Yes, provided it passes the family control test. (See section 272-87 of Schedule 2F to the Income Tax Assessment Act 1936.)
|
Q7.8
|
Can a company, partnership or trust make an interposed entity election even if it cannot receive distributions from the family trust in relation to which the election is to be made?
|
A
|
Yes, provided it passes the family control test. (See section 272-87 of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q7.9
|
Can an interposed entity election be revoked?
|
A
|
Yes, in certain circumstances.
Prior to 1 July 2007, IEE's could not be revoked.
Following legislative changes that apply from 1 July 2007, an interposed entity election can be revoked where an entity was at the election commencement time, or becomes at a later time, a member of the family group of the specified individual:
- under subsection 272-90(5) - that is, where the entity is wholly owned (via fixed entitlements to all of the income and capital of the entity) by family members, or
- under subsection 272-90(3A) - that is, where a family trust has the same specified individual.
In addition to this, an interposed entity election is taken to be automatically revoked if the family trust election to which it relates is revoked.
(See subsections 272-85(5), (5A) and (5B) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q7.10
|
When and how does an entity revoke an interposed entity election?
|
A
|
Where an entity meets the conditions to revoke their interposed entity election under subsection 272-85(5A), the revocation must be made in the entity's return for the income year from which the revocation is to be effective. If the entity is not required to lodge a return for the income year, the revocation must be given to the Commissioner within two months of the end of the income year from which the revocation is to be effective, or such later day as the Commissioner allows.
An entity cannot revoke an interposed entity election under subsection 272-85(5A) unless the revocation is in respect of an income year that occurs during the period:
- starting at the later of:
- the beginning of the income year specified in the election, and
- the beginning of the income year in which the entity became a member of the family group
and finishing at the end of the fourth income year after the income year referred to in (1) or (2) (above), or
- starting at the beginning of the 2008 income year (that is, 1 July 2007) and finishing at the end of the 2009 income year (that is, 30 June 2009).
(See subsections 272-85(5), (5A), (5B), (5C) and (6) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q7.11
|
Can an entity make an interposed entity election in respect of two family trusts, where the individuals specified in the respective family trust elections are different?
|
A
|
No. An entity cannot make an interposed entity election in respect of two family trusts where the individuals specified in the respective family trust elections are different. (See ATO ID 2002/1082).
|
Q7.12
|
Can the trustee of a family trust make an IEE to be included in the family group of another family trust where the specified individuals are not the same (for example, where the specified individuals are brothers)?
|
A
|
Yes. The trustee of a family trust can make an IEE to be included in the family group of another family trust where the specified individuals are not the same, as long as it has not made another IEE to be included in the family group of a different specified individual and the respective family control test is passed for each election. (See ATO ID 2005/174).
|
Q8.1
|
Do the tax exempt bodies listed in paragraphs 272-90(7)(a) and (b) have to be listed in the gift deductibility provisions in order to be family group members?
|
A
|
No. Paragraphs 272-90(7)(a) and (b) of Schedule 2F to the Income Tax Assessment Act 1936 list certain tax exempt bodies (such as religious institutions) that can be family group members in relation to a conferral of present entitlement or distribution by a family trust or company, partnership or trust that has made an interposed entity election.
|
Q9.1
|
How do I pay family trust distribution tax?
|
A
|
Each payment of family trust distribution tax must be accompanied by the form Family Trust Distribution Tax Payment Advice (NAT 6175) and must be made by post. The Family Trust Distribution Tax Payment Advice form is available for download.
|
Q9.2
|
Does the family trust distribution tax apply to distributions of taxable income only?
|
A
|
No. The tax applies where a person outside the family group becomes presently entitled to, or receives a distribution of, income or capital according to ordinary concepts. Distributions of income or capital can also arise as a result of certain non-commercial transactions. Distributions of income and capital for these purposes are defined in sections 272-45 to 272-63 of Schedule 2F to the Income Tax Assessment Act 1936.
|
Q9.3
|
For the purposes of the expanded definition of distribution in section 272-60, is a reasonable salary, wage or other benefit (for example, superannuation contributions or fringe benefits) provided to, or for the benefit of, an employee for work performed considered to be a distribution?
|
A
|
No. Under subsection 272-60(2) of Schedule 2F to the Income Tax Assessment Act 1936, there is only a distribution, on which FTDT is liable, to the extent that it exceeds an amount commensurate with commercial rates for the type of work or services provided by the employee.
|
Q9.4
|
If a family trust election is made to enable franking credits to be passed through the trust or because the trust holds shares in a loss company or to avoid the trustee beneficiary reporting rules, is the trust subject to family trust distribution tax if it distributes outside the family group?
|
A
|
Yes. The same rules apply.
|
Q9.5
|
Is the trustee of a trust, which has made a family trust election, liable for FTDT on a distribution of income or capital to a superannuation fund that is not a member of the test individual's family group?
|
A
|
Yes. The trustee will have a liability for FTDT when the trust makes a distribution of income or capital to a superannuation fund that is not a member of the family group of the test individual. (See ATO ID 2002/746).
|
Q9.6
|
If the trustee of a superannuation fund makes an interposed entity election and distributes income or capital to a person outside the family group, will the trustee of the superannuation fund be liable for FTDT?
|
A
|
Yes. The trustee of the superannuation fund will be liable for FTDT where there is an interposed entity election and a distribution is made outside the family group. (See ATO ID 2002/748).
|
Q9.7
|
If the trustee of a family trust confers present entitlement or distributes income or capital to a former spouse (due to marriage breakdown), a former widow or widower, or a former stepchild, will the trustee of the family trust be liable for FTDT?
|
A
|
No. Following legislative changes that apply from 1 July 2007, a former spouse (due to marriage breakdown), a former widow or widower, or a former stepchild of the primary individual or of a member of the primary individual's family are now included in the 'family group' under section 272-90. As a result, any conferral of present entitlement or distribution of income or capital to these people will not be subject to FTDT.
(See subsection 272-90(2A) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q10.1
|
Is a family trust election for the 1994-95 income year valid if the trust did not pass the family control test from 1 July 1994?
|
A
|
No. Transitional provision sub item 22(2) of the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998 requires the trust to pass the family control test at all times from the beginning of an earlier year of income (1 July 1994 in this case) until the end of the 1997-98 year of income. (See ATO ID 2003/648).
|
Q11.1
|
Can a fixed trust make a family trust election or an interposed entity election?
|
A
|
Yes, provided that the trust, in respect of which a family trust election or an interposed entity election is proposed to be made, passes the family control test. (See subsection 272-87(1) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q12.1
|
Can a unit trust make a family trust election or an interposed entity election?
|
A
|
Yes, provided that the trust, in respect of which a family trust election or an interposed entity election is proposed to be made, passes the family control test. (See subsection 272-87(1) of Schedule 2F to the Income Tax Assessment Act 1936).
|
13. Where to find the law
Q13.1
|
Where are the trust loss measures located?
|
A
|
The main provisions are in Schedule 2F to the Income Tax Assessment Act 1936. The application and transitional provisions are contained in Division 3 of Schedule 1 to the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998.
|
14. Commencement dates
Q14.1
|
What is the commencement date of the trust loss measures?
|
A
|
For the purposes of the prior and current year loss rules, the general commencement date is 7.30pm EST 9 May 1995. For the purposes of the debt deduction rules, the commencement date is 7.30pm EST 20 August 1996. The provisions dealing with quarantined foreign losses apply from 2 October 1997. Various other dates and transitional rules are relevant. (See Division 3 of Schedule 1 to the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998, particularly items 14 to 21).
Changes to the rules around the making of elections contained in Tax Laws Amendment (2004 Measures No. 7) Act 2005, Act No 41 of 2005, commenced on 1 April 2005 for elections specifying the 2005 and later income years.
Further changes to the rules that increase flexibility for family trusts contained in Tax Laws Amendment (2007 Measures No. 4) Act 2007, Act No. 143 of 2007, received royal assent on 24 September 2007 and apply to the 2008 and later income years.
|
15. FTE and trust loss and debt deduction tests
Q15.1
|
Does the trustee of a non-fixed trust need to make a FTE to deduct a tax loss?
|
A
|
For trust loss purposes, the election only needs to be made if it cannot satisfy the tests for deducting its tax loss. (See Summary of tests that apply for the purposes of the trust loss measures).
|
Q15.2
|
If a non-fixed trust cannot meet the trust loss tests and has a tax loss in the 2002 income year which will be recouped in the 2005 income year, when does the trustee need to make the family trust election?
|
A
|
If the trust cannot meet the trust loss tests, the family trust election needs to be in force at all times in the 'test period', which is from the beginning of the loss year until the end of the income (loss recoupment) year. (See paragraphs 267-20(1)(a), (b) and (c) of Schedule 2F to the Income Tax Assessment Act 1936).
As a result:
- the family trust election needs to be in force from 1 July 2001 until 30 June 2005, and is required to be made with the 2002 income tax return when it is lodged (see subsection 272-80(2) of Schedule 2F to the Income Tax Assessment Act 1936 as it applied to elections specifying income years prior to the 2004-05 income year), or
- the trustee needs to take advantage of the one-off opportunity under Practice Statement PS LA 2004/1 (GA) with their 2004 tax return. If the trustee has lodged their 2004 income tax return, they should submit a 2004 FTE and one-off opportunity request in accordance with the practice statement. If the one-off opportunity request is submitted after 31 May 2010 they are also required to submit to the ATO reasons why they didn't lodge the 2004 FTE with their 2004 income tax return or prior to 31 May 2010 for consideration on a case-by-case basis.
|
Q15.3
|
Can the trustee of a trust make a FTE specifying the 2005 income year in a later year?
|
A
|
Yes, provided that:
- the trust passes the family control test from 1 July 2004 until 30 June of the income year immediately preceding that in which the election is made, and
- any conferrals of present entitlement or any actual distributions of income or capital during that period have been made to the specified individual or members of that individual's family group.
Example: Assume the 2008 income year has just ended. A trustee of a trust can make a 2008 FTE specifying the 2005 income year after the end of the income year ending on 30 June 2008 provided:
- the trust passes the family control test from 1 July 2004 to 30 June 2008, and
- any conferrals of present entitlement or any actual distributions of income or capital during that period have been made to the specified individual or members of that individual's family group.
(See subsection 272-80(4A) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q15.4
|
If the non-fixed trust cannot meet the trust loss tests and has a tax loss in the 2005 income year which will be recouped in the 2006 income year, when should the trustee make the family trust election?
|
A
|
The election should be made before the losses are recouped in the trust's 2006 tax return because the trust needs to be a family trust for the whole of the test period (from 1 July 2004 to 30 June 2006) at the time of claiming the tax loss. (See section 267-20 of Schedule 2F to the Income Tax Assessment Act 1936). This is provided the trust meets the conditions at this time to make an FTE.
|
Q15.5
|
If a non-fixed trust cannot meet the trust loss tests and has a tax loss in the 2002 income year which will be recouped in the 2004 income year, when does the trustee need to make the family trust election?
|
A
|
If the trust cannot meet the trust loss tests, the family trust election needs to be in force at all times in the 'test period', which is from the beginning of the loss year until the end of the income (loss recoupment) year. (See paragraphs 267-20(1)(a), (b) and (c) of Schedule 2F to the Income Tax Assessment Act 1936).
As a result, the family trust election needs to be in force from 1 July 2001 and is required to be made in the 2002 income tax return when it is lodged (see subsection 272-80(2) of Schedule 2F as it applied to elections specifying income years prior to the 2004-05 income year).
However, ATO Practice Statement Law Administration PS LA 2004/1 (GA) sets out the one-off opportunity to enable family entities to lodge a FTE and/or IEE that was required to have been lodged with a previous year's return, with their tax return for the 2004 income year. If the trustee has lodged their 2004 income tax return, they should submit a 2004 FTE and one-off opportunity request in accordance with the Practice Statement. If the one-off opportunity request is submitted after 31 May 2010, they are also required to submit to the ATO reasons why they didn't lodge the 2004 FTE with their 2004 income tax return or prior to 31 May 2010 for consideration on a case-by-case basis.
Refer to:
|
Q15.6
|
Does the trustee of a non-fixed trust need to make a FTE to deduct a bad debt?
|
A
|
For debt deduction purposes, the election only needs to be made if it cannot satisfy the tests for deducting certain debt deductions incurred in an earlier income year. (See Summary of tests that apply for the purposes of the trust loss measures).
|
Q15.7
|
If a non-fixed trust cannot meet the debt deduction tests and has a bad debt deduction in the 2005 income year for a debt incurred in the 2002 income year, when does the trustee need to make the family trust election?
|
A
|
If the trust cannot meet the debt deduction tests, the family trust election needs to be in force at all times in the 'test period', which begins on the day the debt was incurred and ends at the end of the income (deduction) year. (See paragraphs 267-25(1)(a), (b) and (c) of Schedule 2F to the Income Tax Assessment Act 1936).
As a result:
- the family trust election needs to be in force from the day the debt was incurred and is required to be made in the 2002 income tax return when it is lodged (see subsection 272-80(2) of Schedule 2F to the Income Tax Assessment Act 1936 as it applied to elections specifying income years prior to the 2004-05 income year), or
- the trustee needed to take advantage of the one-off opportunity under Practice Statement PS LA 2004/1 (GA) with their 2004 tax return. If the trustee has lodged their 2004 income tax return, they should submit a 2004 FTE and one-off opportunity request in accordance with the practice statement. If the one-off opportunity request is submitted after 31 May 2010, they are also required to submit to the ATO reasons why they didn't lodge the 2004 FTE with their 2004 income tax return or prior to 31 May 2010 for consideration on a case-by-case basis.
|
Q15.8
|
If the non-fixed trust cannot meet the debt deduction tests and has a bad debt deduction in the 2005 income year for a debt incurred in the 2005 income year, when should the trustee make the family trust election?
|
A
|
The election should be made no later than 30 June 2006 because the trust needs to be a family trust for the whole of the test period (from 1 July 2004 to 30 June 2005) at the time of claiming the debt deduction.
|
Q15.9
|
If a non-fixed trust cannot meet the debt deduction tests and has a bad debt deduction in the 2004 income year for a debt incurred in the 2002 income year, when does the trustee need to make the family trust election?
|
A
|
If the trust cannot meet the debt deduction tests, the family trust election needs to be in force at all times in the 'test period', which begins on the day the debt was incurred and ends at the end of the income (deduction) year. (See paragraphs 267-25(1)(a), (b) and (c) of Schedule 2F to the Income Tax Assessment Act 1936).
As a result, the family trust election needs to be in force from the day the debt was incurred and is required to be made in the 2002 income tax return when it is lodged (see subsection 272-80(2) of Schedule 2F as it applied to elections specifying income years prior to the 2004-05 income year).
However, ATO Practice Statement Law Administration PS LA 2004/1 (GA) sets out the one-off opportunity to enable family entities to lodge a FTE and/or IEE that was required to have been lodged with a previous year's return, with their tax return for the 2004 income year. If the trustee has lodged their 2004 income tax return, they should submit a 2004 FTE and one-off opportunity request in accordance with the practice statement. If the one-off opportunity request is submitted after 31 May 2010, they are also required to submit to the ATO reasons why they didn't lodge the 2004 FTE with their 2004 income tax return or prior to 31 May 2010 for consideration on a case-by-case basis.
Refer to:
|
Q15.10
|
If the non-fixed trust cannot meet the debt deduction tests and has a bad debt deduction in the 2004 income year for a debt incurred in the 2004 income year, when does the trustee need to make the family trust election?
|
A
|
If the trust cannot meet the debt deduction tests, the family trust election needs to be in force at all times in the 'test period', which is the income year in which the debt was incurred and the deduction is claimed. (See paragraphs 267-65(1)(a), (b) and (c) of Schedule 2F to the Income Tax Assessment Act 1936).
As a result, the family trust election needs to be in force from 1 July 2003 and is required to be made in the 2004 income tax return when it is lodged (See subsection 272-80(2) of Schedule 2F as it applied to elections specifying income years prior to the 2004-05 income year). If the trustee has lodged their 2004 income tax return, they should submit a 2004 FTE and one-off opportunity request in accordance with the practice statement. If the one-off opportunity request is submitted after 31 May 2010, they are also required to submit to the ATO reasons why they didn't lodge the 2004 FTE with their 2004 income tax return or prior to 31 May 2010 for consideration on a case-by-case basis.
|
16. Corporate unit trusts and public trading trusts
Q16.1
|
Do the trust loss measures apply to corporate unit trusts and public trading trusts that are dealt with under Divisions 6B and 6C of the Income Tax Assessment Act 1936?
|
A
|
Yes.
|
17. Pattern of distributions test
Q17.1
|
Does the pattern of distributions test (POD) apply to distributions of taxable income only?
|
A
|
No. The test applies to a distribution of income or capital within the meaning given by Subdivision 272-B. Under this Subdivision, distributions made by a trust will include both ordinary distributions of income or capital (see section 272-45) and distributions that fall within an extended meaning as specified in section 272-60 of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q17.2
|
If a non-fixed trust only distributes income in the recoupment year and not in any one of the six earlier income years, does it need to meet the POD test in order to deduct its prior-year losses?
|
A
|
No. A non-fixed trust that distributes income or capital or both during the income year in which the loss is recouped, and not in any one of the six earlier income years, does not need to meet the POD test. (See ATO ID 2003/174).
|
Q17.3
|
If a non-fixed trust fails the POD in a previous year, can it claim the tax loss in a later year?
|
A
|
No. The trust must not have been prevented from deducting the tax loss in an earlier year because of a failure to meet the POD. (See section 267-35 of Schedule 2F to the Income Tax Assessment Act 1936).
|
18. Fixed entitlements held by superannuation funds
Q18.1
|
If a superannuation fund holds fixed entitlements in a trust with losses, can the trust satisfy the 50% stake test?
|
A
|
A special tracing rule applies to facilitate compliance with the test where a complying superannuation fund, complying approved deposit fund, or foreign superannuation fund holds fixed entitlements in a trust. (See subsections 272-25(3) to (6) of Schedule 2F to the Income Tax Assessment Act 1936).
|
19. Income injection test
Q19.1
|
Does the income injection test (schemes to take advantage of deductions) apply to a trust that has made a family trust election?
|
A
|
Yes, but in a modified form. The income injection test does not apply to income injection schemes which only involve specified members of the 'family group' of the individual specified in the family trust election.
(See Division 270 of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q19.2
|
What is a 'scheme' for the purposes of the income injection test?
|
A
|
The term 'scheme' has the same meaning as in subsection 177A(1) of Part IVA of the Income Tax Assessment Act 1936. (See section 272-140 of Schedule 2F to the Income Tax Assessment Act 1936). That definition is as follows:
a. 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
b. any scheme, plan, proposal, action, course of action or course of conduct.
|
Q19.3
|
Is the trustee of a trust who holds a fixed entitlement to income or capital of a family trust an 'outsider' to the family trust?
|
A
|
No. (See paragraph 270-25(1)(b) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q19.4
|
A profitable trust injects income into a loss trust to use its losses, and the arrangement would result in the loss trust failing the income injection test because the profitable trust is an outsider to the loss trust. In this instance, which trust makes the family trust election and/or which trust makes the interposed entity election, to make the profitable trust no longer an outsider to the loss trust?
|
A
|
The loss trust makes the family trust election, and the profitable trust makes the interposed entity election.
In addition, following legislative changes effective 1 July 2007, the loss trust and the profitable trust can both make a family trust election specifying the same individual - this will ensure the profitable trust is no longer an outsider to the loss trust.
(See paragraphs 270-25(1)(da) & (e) of Schedule 2F to the Income Tax Assessment Act 1936).
|
Q19.5
|
Can the income injection test apply to tax losses where the loss year is prior to the date the scheme commenced?
|
A
|
Yes. The income injection test can apply to tax losses where the loss year is prior to the date the scheme commenced. (See ATO ID 2003/695).
|
Q19.6
|
Do the changes to the legislation that apply from 1 July 2007 mean that the former family members described in subsection 272-90(2A) that are now members of the 'family group' are no longer 'outsiders to the trust' for the purposes of the income injection test ?
|
A
|
No.
The former family members described in subsection 272-90(2A) are members of the 'family group' from 1 July 2007. However, they are not included in the narrower definition of 'family' (section 272-95) and, as a result, remain outsiders to a family trust for the purposes of the income injection test (refer section 270-25).
By including these former family members in the 'family group', any conferrals of present entitlement or distributions of income or capital to these people are exempted from family trust distribution tax - however, these people may still cause a family trust to fail the income injection test.
(See sections 270-25, 272-90 & 272-95 of Schedule 2F to the Income Tax Assessment Act 1936).
|
20. Deceased estates
Q20.1
|
Are prior-year losses of a deceased estate subject to the trust loss provisions where the year of the tax return lodged includes the fifth anniversary of the deceased's death or an earlier income period?
|
A
|
No. The trust loss provisions will not apply because the deceased estate will be an 'excepted trust' under paragraph 272-100(c) of Schedule 2F to the Income Tax Assessment Act 1936 for the years of income up to and including the year in which the fifth anniversary of the deceased's death occurs. (See ATO ID 2002/646).
|
Q20.2
|
Do the residuary beneficiaries of a deceased estate have fixed entitlements to all of the income and capital of the estate, for the purpose of determining whether the trust constituted by the estate is a fixed trust under section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936?
|
A
|
Yes - as long as the terms of the will governing the disposition of the property in the deceased estate confer fixed entitlements to all of the income and capital of the estate upon the residuary beneficiaries. (See ATO ID 2006/279).
|
21. Fixed trusts
Q21.1
|
Do individuals have to hold fixed entitlements to all the income and capital of a trust for it to be classified as a fixed trust?
|
A
|
No. It is necessary that 'persons' hold fixed entitlements to all the income and capital of a trust for it to be classified as a fixed trust. A 'person' includes a natural person, a company, a trustee or the partners in a partnership.
|
22. Where to find the law
Q22.1
|
Where are the company loss tracing measures located?
|
A
|
The main provisions are in Subdivision 165-D of the Income Tax Assessment Act 1997. The relevant provisions for FTE purposes are in section 165-207 of Subdivision 165-D and are listed in section 166-165 of Subdivision 166-D. Transitional provisions for the making of FTEs are contained in Schedule 1 to the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998.
|
23. Where to find the law
Q23.1
|
Where are the franking credit trading measures located?
|
A
|
The relevant provisions are in Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936. Transitional provisions for the making of FTEs are contained in Schedule 1 to the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998.
|
24. Where to find the law
Q24.1
|
Where are the trustee beneficiary reporting rules located?
|
A
|
The trustee beneficiary reporting rules (TB rules) are in Division 6D of Part III of the Income Tax Assessment Act 1936. The relevant provision for FTE and IEE purposes is subsection 102UC(4) of the ITAA 1936. These rules and hence the exclusion of family trusts, trusts with interposed entity elections and trusts covered by subsection 272-90(5) of Schedule 2F to the ITAA 1936 from having to comply with the TB rules apply to the 2009 (that is, from 1 July 2008) and later income years.
|
Summary of tests that apply for the purposes of the trust loss measures
The following table summarises the tests that apply to each type of trust.
Type of trust
|
50% stake test
|
Same business test
|
Pattern of distributions test
|
Control test
|
Income injection test
|
Fixed trust other than a widely held unit trust
|
 (1)
|
|
|
|
|
Unlisted widely held trust
|
|
|
|
|
|
Listed widely held trust
|
|
(2)
|
|
|
|
Unlisted very widely held trust
|
|
|
|
|
|
Wholesale widely held trust
|
|
|
|
|
|
Non-fixed trust
|
|
|
(3)
|
|
|
Family trust
|
|
|
|
|
(4)
|
Excepted trust (other than a family trust)
|
|
|
|
|
|
Notes to the summary table
(1) An alternate test is also available in certain cases where non-fixed trusts hold fixed entitlements in the fixed trust.
(2) This test can be applied if the 50% stake test is failed by a listed widely held trust.
(3) This test does not apply for current year loss purposes.
(4) The income injection test does not apply where entities and individuals within a family group inject income into a family trust with losses.
'Family' of test individual (section 272-95)
The diagram below shows the 'family' that applies up until 1 July 2007.
The diagram below shows the 'family' that applies from 1 July 2007.
Last Modified: Thursday, 23 May 2013
|