The Two Brother Unit Trust has assessable income in the 2006-07 income year, a tax loss in the 2007-08 income year and assessable income in the 2008-09 income year which is sufficient to recoup the tax loss.
One unit in the Two Brother Unit Trust is held by the Craig Discretionary Trust and the other unit by the Jim Discretionary Trust. No other units have been issued.
An examination of the Two Brothers Unit Trust trust deed reveals that it does not provide all of the unit holders (when their interests are combined) with a vested and indefeasible interest in all of the income that the trust derives from time to time and of all of the capital of the trust. Therefore, the trust is a non-fixed trust.
No income has been injected into the trust.
Craig and Jim have been joint trustees of the Two Brothers Unit Trust since the start of the 2006-07 income year and they controlled the trust from the start of the loss year (the 2007-08 income year) to the end of the recoupment year (the 2008-09 income year).
Craig and Jim, in their capacity as trustees of the Two Brothers Unit Trust, distributed the $2,000 income that was derived by the trust in both the 2006-07 and 2008-09 income years as $1,000 to each discretionary trust. Neither of these discretionary trusts had any other income.
Craig, as trustee of the Craig Discretionary Trust, distributed $200 of the Two Brother Unit Trust's distribution of income to his mother Julie and $800 to his father Paul in 2006-07; and $700 to Julie and $300 to Paul in 2008-09.
Jim, as trustee of the Jim Discretionary Trust, distributed $400 to his daughter Karmyn and $600 to his son Voytek in 2006-07; and $800 to Karmyn and $200 to Voytek in 2008-09.
The pattern of distributions for the Two Brother Unit Trust (when traced through the discretionary trusts) are set out below:
|
|
2006-07
|
2008-09
|
Minimum percentage
|
Julie
|
$200
|
10%
|
$700
|
35%
|
10%
|
Paul
|
$800
|
40%
|
$300
|
15%
|
15%
|
Karmyn
|
$400
|
20%
|
$800
|
40%
|
20%
|
Voytek
|
$600
|
30%
|
$200
|
10%
|
10%
|
Totals
|
$2,000
|
|
$2,000
|
|
|
Total of minimum test year distributions
|
55%
|
Is the Two Brother Unit Trust able to deduct tax losses in the 2008-09 income year?
As the Two Brother Unit Trust is considered to be a non-fixed trust, it will need to consider the following trust loss tests in order to deduct the tax loss in the 2008-09 year:
- 50% stake test
- pattern of distributions test
- control test, and
- income injection test.
The 50% stake test will not apply as there are no fixed entitlements to the income or capital of the trust. This is because, as stated earlier, the trust deed does not give each unit holder an indefeasible and vested interest in all the income and capital of the trust.
The control test is passed as no group has begun to control the trust during the ownership test period.
The pattern of distributions test requires a comparison of the distributions from the Two Brother Unit Trust in the 2006-07, 2007-08 (if any) and 2008-09 income years. The distributions trace the income (or capital) to individuals through two discretionary trusts. The 2006-07 income year is the closest year to the loss year in which distributions have occurred and is within six years of the 2008-09 income year in which the loss is to be recouped.
As the total of the minimum test year distributions is 55%, the pattern of distributions test is satisfied.
The income injection test is passed because there is no indication that the Two Brother Unit Trust deducted the 2007-08 tax loss under a scheme which was created due to the tax loss.
Therefore, the Two Brother Unit Trust satisfies the relevant trust loss tests and is able to deduct the tax loss in the 2008-09 year.
If the Two Brother Unit Trust had not passed the pattern of distributions test, control test or 50% stake test or the income injection test, the trustees may have decided to make a family trust election. The family trust election would be for the 2008-09 income year with a specified income year of 2008. This is because the loss was incurred in the 2008 year and the election must be in force throughout the loss test period from the beginning of the loss year until the end of the income year - that is, 1 July 2007 to 30 June 2009, (subsection 267-20(1) of Schedule 2F to the ITAA 1936).
Craig and Jim, as trustees of the Two Brothers Unit Trust, could make a family trust election because the unit trust is controlled by a family (as Craig and Jim control the trust and pass the conditions of section 272-80 of Schedule 2F to the ITAA 1936). They would need to choose a test individual.
Both Craig and Jim (as trustees) would need to make interposed entity elections for their respective discretionary trusts to allow those trusts to be included in the family group of the Two Brother Unit Trust, should the unit trust make a family trust election specifying their father as the test individual.
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Last Modified: Tuesday, 19 January 2010