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Edited version of your private ruling
Authorisation Number: 1012437978148
Ruling
Subject: Control of a trust - Schedule 2F to the ITAA 1936
Question 1
During the test period did a group begin to control the trust for the purposes of the 'control test' in section 267-45 of Schedule 2F to the Income Tax Assessment Act 1936 ('ITAA 1936')?
Answer
No
This ruling applies for the following periods:
1 July 2010 to 30 June 2012
The scheme commences on:
1 July 2010
Relevant facts and circumstances
Trustee Company has been the trustee of the Trust at all relevant times.
The Trust was established on 1 July 20XX.
The Trust is a unit trust.
Initially there were three equal unitholders in the Trust; individuals A, B and C.
Individuals A, B and C were also equal unitholders in Trustee Company.
The Trust incurred a tax loss during the income year ended 30 June 20YY.
On 1 July 20ZZ individual D became a unitholder in the Trust via a subscription of units at market value such that each of the unitholders held a 25% stake.
Individual D also became a shareholder in Trustee Company such that individuals A, B, C and D each held a 25% stake.
The constituent document of the Trust provides that:
- decisions relating to the ability to appoint and revoke the appointment of the trustee; and
- a decision to vest, or to refrain from vesting, an interest in the trust property;
- require 75% approval of unitholders of the Trust
The constituent document of Trustee Company provides:
- that decisions of the board of directors require a 75% approval; and
- directors are appointed via a shareholder vote requiring a 75% approval.
The Trust is a non-fixed trust for the purposes of section 272-75 of Schedule 2F to the ITAA 1936.
Individuals A, B, C and D each constitute separate groups for the purposes of subsection 269-95(5) of Schedule 2F to the ITAA 1936.
Relevant legislative provisions
Income Tax Assessment Act 1936
Schedule 2F
Division 267
Section 267-20
Subsection 267-20(1)
Subsection 267-20(2)
Section 267-45
Division 269
Subdivision 269-E
Subsection 269-95(1)
Subsection 269-95(5)
Division 272
Section 272-70
Section 272-140
Part X Division 1
Section 318
Reasons for decision
Division 267 of Schedule 2F to the ITAA 1936 sets out the income tax consequences where there is a change in ownership or control of a non-fixed trust.
A 'non-fixed trust' is defined in section 272-70 of Schedule 2F to the ITAA 1936 to mean a trust that is not a fixed trust. The Trust is a non-fixed trust.
Subsection 267-20(1) of Schedule 2F to the ITAA 1936 will apply to a trust that:
(a) can deduct in the income year a tax loss from a loss year; and
(b) was a non-fixed trust at any time in the period (the test period) from the beginning of the loss year until the end of the income year; and
(c) was not an excepted trust at all times in the test period.
Subsection 267-20(2) of Schedule 2F to the ITAA 1936 then sets out the conditions that must be met if a non-fixed trust is to deduct the tax loss. One of these conditions is the 'control test' which is set out in section 267-45 of Schedule 2F to the ITAA 1936.
Section 267-45 of Schedule 2F to the ITAA 1936 states that:
A group must not, during the test period, begin to control the trust directly or indirectly. [Emphasis added]
Subsection 269-95(1) of Schedule 2F to the ITAA 1936 provides that a group controls a non-fixed trust if:
Subject to this section, a group (see subsection (5)) controls a non-fixed trust if:
(a) the group has the power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the trust; or
(b) the group is able (directly or indirectly) to control the application of the capital or income of the trust; or
(c) the group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in paragraph (b); or
(d) the trustee is accustomed, under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the group; or
(e) the group is able to remove or appoint the trustee; or
(f) the group acquires more than a 50% stake in the income or capital of the trust.
A group is defined in subsection 269-95(5) of Schedule 2F to the ITAA 1936 as:
(a) a person; or
(b) a person and one or more associates; or
(c) 2 or more associates of a person.
An associate, as referred to in subsection 269-95(5) of Schedule 2F to the ITAA 1936, is defined in section 272-140 of Schedule 2F to the ITAA 1936 as having the same meaning as in section 318 of the ITAA 1936.
The addition of individual D as a unitholder of the Trust and as a shareholder of Trustee Company has effectively reduced the respective:
- unitholdings of individuals A, B and C in the Trust to 25% each; and
- shareholdings of individuals A, B and C in Trustee Company to 25% each.
ATO Interpretative Decision ATO ID 2007/59, which concerns a change to the appointors and guardians of the trustee, and the directors of the trustee company, effectively provides that the terms of the constituent documents of the trust and the trustee company are essential to determining whether any of the control conditions in subsection 269-95(1) of Schedule 2F to the ITAA 1936 are satisfied.
ATO ID 2007/59 also effectively provides that, notwithstanding that a change can occur to the appointors and guardians of a trust, and the directors of the trustee company, it is possible that no group satisfies any of the control conditions in subsection 269-95(1) of Schedule 2F to the ITAA 1936 either before or after the change. What is of importance is the effect of the change in the context of the terms (particularly the terms of the voting or decision making mechanisms) of the constituent documents of the trust and the trustee company.
In accordance with the relevant terms of the constituent documents of the Trust and Trustee Company, a 25% stake would be insufficient for a group to satisfy any of the control conditions in subsection 269-95(1) of Schedule 2F to the a ITAA 1936.
Therefore, the introduction of D as a unitholder in the Trust and as a shareholder in Trustee Company caused no group to begin to control the Trust for the purposes of section 267-45 of Schedule 2F to the ITAA 1936.
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