• Pattern of distributions test

    (Subdivision 269-D of Schedule 2F to the ITAA 1936.)

    The pattern of distributions (POD) test, which applies to non-fixed trusts, is applied independently to both income and capital.

    The test applies if the non-fixed trust has distributed income or capital in the income year in which the deduction is claimed (or within two months after its end), and in at least one of the six earlier income years.

    If income or capital was not distributed in any one of the six earlier income years, the trust doesn’t have to pass the POD test.

    A trust passes the POD test for an income year if, within two months after the end of the income year:

    • the trust distributed directly or indirectly to the same individuals, for their own benefit, more than 50% of every 'test year distribution of income’ (see section 269-65), and
    • the trust distributed directly or indirectly to the same individuals, for their own benefit, more than 50% of every 'test year distribution of capital’ (see section 269-65).

    The individuals who meet the test in respect of capital distributions don’t have to be the same individuals that satisfy the test in respect of income distributions.

    The actual commencement of the period depends on when the trust has distributed income. If the trust distributed income before the loss year, the income year before the loss year that is closest to the loss year will be the commencement of the period, provided this is within the six year period mentioned above.

    Where different percentages are distributed to individuals over the relevant test years, the smallest percentage distributed in any one income year becomes the distribution percentage for the calculation. The total of the minimum distribution percentages of income or capital for each individual over the relevant years must be greater than 50% in order to pass the POD test.

    Example: Income distributed during prior six years

    A tax loss was incurred by the Ray Non-fixed Trust in the 2014-15 income year. The trust is seeking to deduct the tax loss in the 2015-16 income year. The trustee distributed income in the 2013-14 and 2015-16 income years as follows:

     

    2014

    2016

    Minimum percentage

    Mum

    80%

    20%

    20%

    Dad

    10%

    50%

    10%

    Ray

    10%

    30%

    10%

    Total of minimum test year distributions

    40%

    As income has been distributed in the income year, and in at least one of the six earlier income years, the condition of having to pass the POD test applies.

    The 2013-14 income year is the closest income year before the loss year in which distributions were made and is within six years of the 2015-16 income year in which the trust seeks to deduct the tax loss.

    The total of the minimum percentage of test year distributions of income is 40%. As this is not greater than 50%, the tax loss incurred in the 2014-15 income year can’t be deducted by the trustee of the Ray Non-fixed Trust.

    End of example

    For incomplete distributions where distributions are made to companies, partnerships or trusts that don’t distribute the income but in which individuals have fixed entitlements to income and capital of these entities, see section 269-75 of Schedule 2F to the ITAA 1936.

    Where an individual dies, or there is a breakdown in the marriage or relationship, see section 269-80 of the Schedule 2F of the ITAA 1936.

      Last modified: 22 Apr 2016QC 18663