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Ruling

Subject: Interposed Entity Election

Question

Is Company A able to make an Interposed Entity Election (IEE) to be included in the family group of the specified individual in the Family Trust Election (FTE) for Trust B?

Answer: No

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2012

Relevant facts

FTEs were made in prior years under subsection 272-80(1) of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936) for Trust B. Those elections remain in force.

Trust A owns all of the shares in Company A. Company A is a private company in its own right and not a trustee of a trust.

Trust A is a discretionary trust. The Trust Deed gives the Trustees powers to make distributions of income and capital to beneficiaries who are members of the specified individual's direct family.

An IEE under section 272-85 of Schedule 2F of the ITAA 1936 has not been made by Company A to be included in the family group of the specified individual of Trust B.

It is proposed that distributions will be made by Trust B to Company A for the relevant and subsequent years.

In the event that such distributions are made it is proposed that an IEE would be made effective from the beginning of the relevant financial year and subsequent years by Company A in relation to Trust B.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F section 272-85

Income Tax Assessment Act 1936 Schedule 2F section 272-95

Income Tax Assessment Act 1936 Schedule 2F subsection 272-85(4)

Income Tax Assessment Act 1936 Schedule 2F subsection 272-87(3)

Income Tax Assessment Act 1936 Schedule 2F subsection 272-87(7)

Income Tax Assessment Act 1936 Schedule 2F subsection 272-90(5)
Income Tax Assessment Act 1936 Schedule 2F subsection 272-90(4)

Reasons for decision

Subsection 272-90(4) of Schedule 2F to the ITAA 1936 states that:

However, pursuant to subsection 272-90(5) of Schedule 2F to the ITAA 1936, a company, partnership or trust will be regarded as a member of the primary individual's family group where:

The term 'family' of the individual specified in the family trust election (the 'test individual'), as defined in section 272-95 of Schedule 2F to the ITAA 1936 includes:

The relevant group for testing whether Company A is regarded as a member of the specified individual's family group without an IEE are the beneficiaries of Trust A which is itself the beneficiary of the company. None of those beneficiaries have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of Company A. Therefore Company A cannot be considered to be a member of the family group for the purposes of subsection 272-90(5) of Schedule 2F to the ITAA 1936 unless it is able to make an interposed entity election.

Interposed Entity Election

The requirements for making an IEE are contained in section 272-85 of Schedule 2F of ITAA 1936

Company A may make an IEE to be included in the family group of the specified individual being the individual specified in the FTE of the family trust after a specified day in a specified income year. For this to occur the company must pass the family control test at the end of the income year (subsection 272-85(4) of the ITAA 1936). Subsection 272-85(7) goes on to affirm that the entity making interposed entity election cannot make multiple interposed entity elections, unless the individual specified in each of the family trust elections is the same.

Requirements for passing family control test

Subsection 272-87(3) of Schedule 2F of ITAA 1936 lists the requirements for a company to pass the family control test. It requires the members of the family of the specified individual to have fixed entitlements to a greater than 50% share of the income or capital of the company, the company passes the family control test.

As Trust A is a discretionary trust, there are no members of the family of the specified individual who have a direct or indirect fixed entitlement to the income and capital of the company.

Therefore it is not possible for the company to make an IEE.

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