Consider the same facts as Example 21 except that, on examination of the trust deed, it is determined that the Two Brother Unit Trust is a fixed trust.
Is the Two Brother Unit Trust able to deduct tax losses in the 2008-09 income year?
The Two Brother Unit Trust has two options that can be considered in order to deduct the tax loss in the 2008-09 income year.
The first option is for the two unit holders to lodge a family trust election and the second option is for the trust to satisfy the trust loss tests that apply to it. These two options are considered as follows.
Family trust election
If both Craig and Jim had made family trust elections for their respective discretionary trusts, the discretionary trusts would be treated as individuals holding the fixed entitlements to income and capital for their own benefit (subsection 272-30(2) of Schedule 2F of the ITAA 1936).
The family trust elections would need to be made for the 2008-09 income year specifying the 2008 income year or an earlier income year (earliest year that can be specified is 2004-05). The discretionary trusts are then considered to hold the fixed entitlements as individuals throughout the test period which would allow the tax loss of the Two Brother Unit Trust to be deducted in the 2008-09 year.
Trust loss tests that apply to fixed trusts
The Two Brother Unit trust is an ordinary fixed trust. This is because it does not meet the criteria required for it to be a widely held trust.
The tests which apply to a fixed trust are:
- the 50% stake test, or
- the alternative 50% stake test.
The income injection test
The 50% stake test is satisfied if there are individuals who have directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the income or of the capital of the Two Brother Unit Trust during the test period.
If the brothers do not wish to make family trust elections for their respective discretionary trusts, the Two Brother Unit Trust could not satisfy the 50% stake test as the unit holders are non-fixed trusts.
Therefore, the Two Brother Unit Trust would need to meet the alternative 50% stake test in section 266-45 of Schedule 2F of the ITAA 1936 in order to be able to deduct the loss.
The alternative 50% stake test can be applied if:
- non-fixed trusts (other than family trusts) hold fixed entitlements to 50% or more of the income or capital of the fixed trust, or
- non-fixed trusts (other than family trusts) hold fixed entitlements to 50% or more of the income or capital of a company or a fixed trust (the holding entity) which holds all of the fixed entitlements to income and capital of the fixed trust.
These fixed entitlements must have been held continuously during the test period - that is, 1 July 2007 to 30 June 2009.
At the beginning of the test period, individuals do not have more than a 50% stake in the income or capital of the trust.
Each non-fixed trust is able to deduct the tax loss as though it had incurred the tax loss.
In this situation, the Two Brother Unit Trust had non-fixed trusts that held fixed entitlements to 50% or more of the income or capital of the trust. In addition, the two non-fixed trusts were unit holders that held the fixed entitlements continuously for the test period. Therefore, the Two Brother Unit Trust is able to apply the alternative 50% stake test.
The alternative 50% stake test is passed if:
- interests in the Two Brothers Unit Trust are held directly by non-fixed trusts and there are no changes in the persons directly holding fixed entitlements to the income or capital of the fixed trust or the percentage of their interests. In this situation, the trustees of the Craig and Jim discretionary trusts are the persons who directly hold the fixed entitlements to the income or capital of the fixed trust
- where interests in the Two Brothers Unit Trust are held, directly or indirectly, by a holding entity, there must be no changes in the persons directly holding fixed entitlements to the income or capital of the holding entity. This does not apply in this situation as the units are not held by a holding entity
- the Craig Discretionary Trust and the Jim Discretionary Trust must pass the control, 50% stake and pattern of distributions tests as though these trusts rather than the Two Brother Unit Trust had incurred the loss. That is, the control, 50% stake and pattern of distributions tests will need to be applied to the Craig Discretionary Trust and the Jim Discretionary Trust as though these trusts had incurred the tax loss in the 2007-08 year. Further information would be needed to determine whether these tests could be met.
Therefore, if the Craig Discretionary Trust and the Jim Discretionary Trust can pass the control, 50% stake and pattern of distributions tests, the Two Brother Unit Trust can deduct its tax loss incurred in the 2007-08 income year.
Sections within Further examples
Last Modified: Tuesday, 19 January 2010