• Income injection test

    The income injection test applies where an 'outsider to the trust’ with allowable deductions seeks to take advantage of the deduction(s).

    For this to apply, the outsider must generally provide a benefit to the trustee or a beneficiary of the trust, and a return benefit must be given to the outsider. Such benefits must have been provided (or derived) wholly or partly, but not merely incidentally, because the deduction(s) would be allowable.

    The income injection test doesn't apply to income injection schemes that take place wholly within the family group of a trust that has made a family trust election.

    It also doesn't apply to complying superannuation funds, complying approved deposit funds, pooled superannuation trusts, deceased estates within a five year administration period, and unit trusts that are a fixed trust where all the unit holders are exempt from income tax.

    Conditions for income injection test to be applied

    The following conditions need to be met before the income injection test applies:

    • The trust must have an allowable deduction, whether a current year deduction or a carried forward loss, for the relevant income year.
    • There must be a scheme under which all the following things happen (in any order).
      • The trust must derive 'scheme assessable income'
      • A person not relevantly connected with the trust (an outsider to the trust) must directly or indirectly provide a benefit to the trustee or a beneficiary (or an associate of either)
      • The trustee or a beneficiary (or an associate of either) must directly or indirectly provide a benefit to the outsider to the trust (or an associate of the outsider to the trust). However, if the test is being applied to a family trust and this return benefit is being provided only to an associate who is not an outsider to the trust, this element will not be satisfied. This ensures that the income injection test will not apply where benefits only flow from the family trust to the entities listed in subsection 270-25(1).
       
    • It must be reasonable to conclude that any one or more of the following has happened under the scheme:
      • The trust derived the scheme assessable income wholly or partly, but not merely incidentally*, because the deduction would be allowable
      • The outsider to the trust provided the benefit to the trustee or a beneficiary (or an associate of either) wholly or partly, but not merely incidentally*, because the deduction would be allowable
      • The trustee or a beneficiary (or an associate of either) provided the benefit wholly or partly, but not merely incidentally*, because the deduction would be allowable.
       

    *Whether a benefit has been provided merely incidentally because a deduction is allowable to the trust depends on the particular facts and circumstances of the scheme.

    Consequences if test is failed

    Where the income injection test is failed, no deduction is allowable in the relevant income year against the scheme assessable income, with the result that the ‘net income’ of the trust for the income year is increased to equal the full amount of the scheme assessable income. In addition, to the extent the deduction may be related to the derivation of the scheme assessable income, the deduction is not allowable.

    However, any deduction not related to the derivation of the scheme assessable income is still allowable to the trust. For example, it can be deducted against other assessable income derived in the same income year or can be deducted in a later year of income in the form of a tax loss.

    For examples of how the income injection test applies, see Chapter 10 of the Explanatory Memorandum to Schedule 2F to the ITAA 1936, which was inserted by the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998.

    Meaning of terms

    Scheme

    For the purposes of this test, ‘scheme’ takes on the same meaning as in Part IVA of the ITAA 1936:

    (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.

    See also:

    Benefit

    ‘Benefit’ includes anything that is a benefit or advantage within the ordinary meaning of these words. However, it is defined to specifically include money, a dividend or property (whether tangible or intangible), a right or entitlement, services, or the extinguishment, forgiveness, release or waiver of a debt or other liability.

    The doing of anything that results in the derivation of assessable income is also specifically defined to be a ‘benefit’. For example, if the scheme's assessable income is derived by the trustee of the trust as a result of the transfer to, or conferral on, the trustee of an interest from which assessable income will be derived, the person who transferred or conferred that interest to or on the trustee will have provided a benefit to the trustee.

    A benefit includes all ways that value is given to the relevant parties.

    Outsider to a family trust

    An outsider to a trust that has validly elected to be a family trust is any person other than those set out in the table below. This means that the income injection test doesn't inhibit income injection schemes that take place wholly within groups with certain members.

    Person who is not an outsider

    Comments

    The trustee of the family trust

    The trustee must be acting in their capacity as trustee of the family trust

    A person with a fixed entitlement to a share of the income or capital of the trust

     

    The individual specified in the trust's family trust election or a member of his or her family

     

    A company, partnership or trust that has made an interposed entity election to be included in the family group of the individual specified in the trust's family trust election

    The interposed entity election must be in force when the scheme commenced. Note that an interposed entity election can be in force before it is actually made.

    A fixed trust, company or partnership if some or all of the following have fixed entitlements, directly or indirectly, and for their own benefit, to all the income and capital of the fixed trust, company or partnership:

    • the individual specified in the family trust election
    • the members of that individual’s family
    • the trustees of family trusts with the same specified individual. 
     

    The family members, etc. must hold the fixed entitlements for their own benefit at all times while the scheme is being carried out. This means the income injection test may operate if the family acquires interests in the trust as part of the scheme.

    A trust with the same individual specified in its family trust election.

     

    See also:

    Outsider to a non-family trust

    An outsider to a trust that is not a family trust is a person other than:

    • the trustee of the trust acting in their capacity as such, or
    • a person with a fixed entitlement to a share of the income or capital of the trust.
      Last modified: 22 Apr 2016QC 18663