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Edited version of private ruling
Authorisation Number: 1011822998884
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Ruling
Subject: Trust losses - application of control test and 50% stake test
Question 1
Will the control test be breached if the trustee of the trust is changed to a corporate trustee?
Answer
No.
Question 2
Will the 50% stake test be breached if the trustee of the trust is changed to a corporate trustee?
Answer
No.
This ruling applies for the following period:
Financial year ended 30 June 2011.
Relevant facts and circumstances
The current trustee is an individual.
The trust currently has tax losses which are yet to be recouped.
The trust is not an excepted trust for the purposes of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936).
The trust is not a family trust for the purposes of Schedule 2F of the ITAA 1936.
The trust is a non-fixed trust for the purposes of Schedule 2F of the ITAA 1936.
The trustee of the trust is considering replacing the trustee of the trust with a corporate entity for asset protection purposes.
The individual will be the sole director and public officer of the corporate entity.
The individual will be the sole shareholder of the corporate entity.
There will be no changes to the current list of trust beneficiaries.
The trust deed was requested and provided. It has been attached to the case.
The clause of the trust deed that deals with the distribution of income indicates that no parts of this clause provide any beneficiary with a fixed entitlement to income.
The clause of the trust deed that deals with the distribution of capital indicates that no parts of this clause provide any beneficiary with a fixed entitlement to capital.
Relevant legislative provisions
Income Tax Assessment Act 1936 Schedule 2F Section 267-20
Income Tax Assessment Act 1936 Schedule 2F Section 267-40
Income Tax Assessment Act 1936 Schedule 2F Section 267-45
Income Tax Assessment Act 1936 Schedule 2F Section 269-95
Income Tax Assessment Act 1936 Schedule 2F Section 269-50
Reasons for decision
Question 1
Summary
The individual is the only person who has control over all actions of the trustee, including the application of the income or capital of the trust. At present the individual has direct control.
Once the trustee is changed to the corporate trustee, the individual will be the sole public officer, director, or shareholder of the corporate trustee. Therefore the individual will be the sole person who has indirect control over all actions of the trustee, including the application of income and capital of the trust.
The legislation allows the control to be either direct or indirect, so the control test will not be activated.
Therefore the trust will continue to be able to use its tax losses after the change of the trustee to a corporate trustee with the individual as the sole controller.
Detailed reasoning
Section 267-20 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936) allows non-fixed trusts that are not excepted trusts to deduct a tax loss, provided that some conditions are satisfied.
Sub-section 267-20(2) of Schedule 2F of the ITAA 1936 (Schedule 2F) lists those conditions. The relevant condition here is the condition in section 267-45 of Schedule 2F, which is the control test.
Section 267-45 of Schedule 2F requires that a group must not begin to control a trust during the test period. The test period starts at the beginning of the year when the tax loss was incurred, and ends at the end of the income year where the tax loss is allowed as a deduction.
The definition for 'control a trust' is under subdivision 269-E of Schedule 2F.
Sub-section 269-95(1) of Schedule 2F provides the basic meaning of the phrase 'control a trust'. The most relevant parts of the definition is that the group directly or indirectly controls the application of the income or capital of the trust, and the trustee is accustomed, or obligated, to act in accordance with the directions of the group.
Sub-section 269-95(3) of Schedule 2F defines a group to be a person, a person and one or more associates, or two or more associates of a person.
In your case, you are currently the trustee, so you have direct control over the application of income or capital of the trust. As the trustee, you are able to influence the actions of the trustee.
The change contemplated will result in a change to the trustee. Therefore there will be a change in the control over the general operations of the trust.
The individual is currently the trustee, so the individual is the person with control over all actions of the trustee, including application of the income or capital of the trust.
Therefore the individual is the 'group' as defined by sub-section 269-95(3) of ITAA 1997.
The control test will fail if any other group gets control of the trust. That would be so even if the individual is still a member of the new group, but not the sole member.
Therefore, the 'group' controlling the trust after the change of trustee must be exactly the same as the 'group' controlling the trust before the change of trustee.
The facts indicate that the individual will be the sole public officer, director, and shareholder of the new corporate trustee. This would mean that the only person who would be able to have control over all actions of the trustee, including the application of income and capital of the trust is the individual. The only change is that the control has changed from direct control to indirect control. There has been no change to the 'group' controlling the trust.
Therefore the control test will not prevent the trust from utilising its tax losses once the change of trustee is made.
Question 2
Summary
The 50% stake test applies to ensure that a trust with fixed entitlements must maintain 50% entitlement for the entire test period - that is from the time that the loss is incurred until the time that the loss is claimed.
The trust deed of this trust shows that this trust is a fully discretionary trust which means that no beneficiaries have a fixed entitlement to either the income or capital of the trust. As there are no fixed entitlements, the 50% stake test has no application, so it will not prevent the tax losses from being deducted in future years.
Detailed reasoning
Section 267-20 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936) allows non-fixed trusts that are not excepted trusts to deduct a tax loss, provided that some conditions are satisfied.
Sub-section 267-20(2) of Schedule 2F of the ITAA 1936 (Schedule 2F) lists those conditions. The relevant condition here is the condition in section 267-40 of Schedule 2F, which is the 50% stake test.
Section 267-40 of Schedule 2F sets out the 50% stake test. The basic requirement is that if individuals have an entitlement to more than 50% of the income or capital of the trust, this entitlement must continue for the test period, which is the start of the income year when the loss is incurred and the end of the income year in which the tax loss is claimed.
Section 269-50 of Schedule 2F set out the requirements in more detail. The basic requirement is that if individuals have fixed entitlements to more than 50% of the trust income or capital, then those individuals have more than a 50% stake in the trust and are then required to pass the 50% stake test by maintaining this stake during the test period.
In this case, the facts indicate that this is a fully discretionary trust, and a review of the trust deed shows that there are no fixed entitlements to either income or capital. As this is the case, the 50% stake test has no application as there is not any person or persons who have a fixed entitlement to any of the income or capital of the trust at any time before the vesting date.
Therefore the 50% stake test will not be activated, which means that the trust will still be entitled to deduct its tax losses.
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