Edited version of your private ruling

Authorisation Number: 1012453789150

Ruling

Subject: Income Injection Test

Issue 1

Provision of Benefit- Purpose

Question 1

For the purposes of subparagraph 270-10(1)(c)(i) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936), is it reasonable to conclude that Taxpayer Trust derived the scheme assessable income as a result of Scheme merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable?

Answer

Yes.

Question 2

For the purposes of subparagraph 270-10(1)(c)(ii) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936), is it reasonable to conclude that the trustee of Outsider Trust provided a benefit to the trustee, to a beneficiary, to an associate of the trustee or to an associate of a beneficiary of Taxpayer Trust as a result of the Scheme merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable?

Answer

Yes.

Question 3

For the purposes of subparagraph 270-10(1)(c)(iii) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936), is it reasonable to conclude that the trustee, a beneficiary, an associate of the trustee or an associate of a beneficiary of Taxpayer Trust provided a benefit to the trustee of Outsider Trust or to an associate of the trustee of Outsider Trust 1 as a result of the Scheme merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable?

Answer

Yes.

This ruling applies for the following periods:

01 July 2012 to 30 June 2014

The scheme commences during:

01 July 2012 to 30 June 2014

Relevant facts and circumstances

· Taxpayer Trust conducts an investment management business.

· Taxpayer Trust made tax losses in the income years ending 30 June 200X, 30 June 200Y, 30 June 200Z, 30 June 20VV and 30 June 20WW.

· The losses arose due to fluctuations in the investment and currency markets impacting the market values of its investments.

· Taxpayer Trust is not a "family trust" as defined in section 272-75 of Schedule 2F to the ITAA 1936.

· It is proposed that Taxpayer Trust will subscribe for new units in Outsider Trust. Taxpayer Trust will pay cash to the trustee of Outsider Trust for the new units. This proposal (the details of which follow) is referred to in this Ruling as the Scheme.

· This Ruling will not apply to the extent that Taxpayer Trust acquires existing units from the current unit holders of Outsider Trust.

· No units in Outsider Trust will be redeemed or cancelled before, or in connection with, the issue of new units in Outsider Trust to Taxpayer Trust.

· Taxpayer Trust will receive distributions of income from Outsider Trust in respect of the units it will own in Outsider Trust. This will be the "scheme assessable income" under subparagraph 270-10(1)(b)(i).

· The trustee of Outsider Trust is an "outsider to the trust" under subsection 270-25(2) of Schedule 2F to the ITAA 1936.

· The trustee of Outsider Trust will issue new units in Outsider Trust to Taxpayer Trust on an arm's length basis - the subscription price for units will be based upon the market value of Outsider Trust's net assets at a particular time. All unit holders in Outsider Trust will receive the same distribution of income per unit.

· Just before the commencement of this scheme, the trustee of Outsider Trust will own no units in Taxpayer Trust.

· The sale of any of Taxpayer Trust's investments will take place on an arm's length basis in the market which applies to the particular asset.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 Division 270 of schedule 2F

Income Tax Assessment Act 1936 subsection 270-10(1) of schedule 2F

Income Tax Assessment Act 1936 subparagraph 270-10(1)(b)(i) of schedule 2F

Income Tax Assessment Act 1936 subparagraph 270-10(1)(b)(ii) of schedule 2F

Income Tax Assessment Act 1936 subparagraph 270-10(1)(b)(iii) of schedule 2F

Income Tax Assessment Act 1936 subparagraph 270-10(1)(c)(i) of schedule 2F

Income Tax Assessment Act 1936 subparagraph 270-10(1)(c)(ii) of schedule 2F

Income Tax Assessment Act 1936 subparagraph 270-10(1)(c)(iii) of schedule 2F

Income Tax Assessment Act 1936 section 270-20 of schedule 2F

Income Tax Assessment Act 1936 paragraph 270-20(f) of schedule 2F

Income Tax Assessment Act 1936 paragraph 270-20(a) of schedule 2F

Income Tax Assessment Act 1936 paragraph 270-20(b) of schedule 2F

Income Tax Assessment Act 1936 subsection 270-25(2) of schedule 2F

Income Tax Assessment Act 1936 section 272-75 of schedule 2F

Income Tax Assessment Act 1936 section 272-140 of schedule 2F

Reasons for decision

Issue 1

Question 1

Division 270 of Schedule 2F to the ITAA 1936 applies to schemes to take advantage of tax losses and other deductions allowable to a trust. For Division 270 to apply to a scheme, the conditions in subsection 270-10(1) of Schedule 2F to the ITAA 1936 must be satisfied. It states:

270-10(1)  

The consequences set out in section 270-15 result if:

(a) a deduction is allowable to a trust for the income year; and

(b) under a scheme, the following happen (in any order):

(i) the trust derives an amount of assessable income (the scheme assessable income) in the income year; and

(ii) an outsider to the trust (see section 270-25) directly or indirectly provides a benefit (see section 270-20) to the trustee, to a beneficiary in the trust or to an associate of the trustee or of a beneficiary; and

(iii) the trustee, a beneficiary in the trust or an associate of the trustee or of a beneficiary, directly or indirectly provides a benefit to the outsider to the trust or to an associate of the outsider (other than an associate covered by any of paragraphs 270-25(1)(a) to (f)); and

(c) it is reasonable to conclude that:

(i) the trust derived the scheme assessable income; or

(ii) the outsider provided the benefit as mentioned in subparagraph (b)(ii); or

(iii) the trustee, beneficiary or associate provided the benefit as mentioned in subparagraph (b)(iii);

wholly or partly, but not merely incidentally, because the deduction would be allowable; and

(d) the trust is not an excepted trust under paragraph 272-100(b), (c) or (d).

A number of elements must be established under subsection 270-10(1) of Schedule 2F to the ITAA 1936.

Scheme

The required facts must happen under a "scheme". "Scheme" is defined in section 272-140 of Schedule 2F to the ITAA 1936 as having the same meaning as in subsection 177A(1) of the ITAA 1936:

scheme means:

(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.

Both the Commissioner and Taxpayer Trust accept that the Scheme (which is the subject of this Ruling) constitutes a "scheme" within the meaning of subsection 177A(1) of the ITAA 1936.

Meaning of "outsider to the trust"

As Taxpayer Trust is not a family trust, an "outsider to the trust" is a person other than the trustee of the trust or a person with a fixed entitlement to a share of the income or capital of the trust: subsection 270-25(2) of Schedule 2F to the ITAA 1936.

The trustee of Outsider Trust is an outsider to Taxpayer Trust as it is an entity/person other than the trustee of Taxpayer Trust, and (because it is not a unit holder of Taxpayer Trust) it does not have a fixed entitlement to a share of the income or capital of Taxpayer Trust.

Meaning of "benefit"

Section 270-20 of Schedule 2F to the ITAA 1936 defines a "benefit" as:

(a) money, a dividend or property (whether tangible or intangible); or

(b) a right or entitlement (whether or not property); or

(c) services; or

(d) the extinguishment, forgiveness, release or waiver of a debt or other liability; or

(e) the doing of anything that results in the derivation of assessable income; or

(f) anything that, disregarding the preceding paragraphs, is a benefit or advantage.

The meaning of "benefit" was considered by the Administrative Appeals Tribunal in Re Eldersmede Pty Ltd & Ors v Federal Commissioner of Taxation [2004] AATA 710; 2004 ATC 2129; 56 ATR 1179. In that case, the Tribunal held at paragraph 40 that the words "benefit or advantage" in paragraph 270-20(f) of Schedule 2F to the ITAA 1936:

should be given their ordinary meanings. That is to say, they should be read as anything that is for the good of a person or thing or that puts him, her or it in a better or more favourable position.

Furthermore, Example 3 in Chapter 10 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 states (at paragraphs 10.45 - 10.46) that the subscription price paid for units in a trust, and the units issued by and distributions of income from a trust, constitute benefits.

Paragraph 10.19 of the Explanatory Memorandum states that:

A benefit is intended to include all means whereby value is transferred between the relevant parties.

Assessable Income

Taxpayer Trust will derive assessable income from the distributions made by Outsider Trust ("the scheme assessable income") and accordingly sub-paragraph 270-10(1)(b)(i) of Schedule 2F to the ITAA 1936 will be satisfied.

However, having regard to all the facts and circumstances of the scheme, the Commissioner has concluded that, for the purposes of subparagraph 270-10(1)(c)(i) of Schedule 2F to the ITAA 1936, Taxpayer Trust will derive the scheme assessable income as a result of Scheme merely incidentally, and not wholly or partly, because the deduction for tax losses would be allowable to the Taxpayer Trust.

Question 2

According to the Scheme's facts, the trustee of Outsider Trust will issue new units in Outsider Trust to the trustee of Taxpayer Trust and this will entitle the trustee of Taxpayer Trust to various rights against Outsider Trust.

The issue of new units, the rights under those units and the associated distributions in respect of those units will constitute Outsider Trust directly providing a "benefit" to the trustee of Taxpayer Trust for the purposes of subparagraph 270-10(1)(b)(ii) of Schedule 2F to the ITAA 1936. This is because the trustee of Outsider Trust will be providing the trustee of Taxpayer Trust with:

· money, a dividend or property (being the units and associated distributions): paragraph 270-20(a) of Schedule 2F to the ITAA 1936; and

· rights or entitlements in relation to the units of Outsider Trust: paragraph 270-20(b) of Schedule 2F to the ITAA 1936.

The fact that the trustee of Outsider Trust will only issue new units in Outsider Trust in exchange for the trustee of Taxpayer Trust paying the subscription price for those units does not alter the fact that the provision of the units is a "benefit".

However, having regard to all the facts and circumstances of the scheme, the Commissioner has concluded that the benefits provided by Outsider Trust to Taxpayer Trust (the units and the distributions of income) are given merely incidentally, and not wholly or partly because the deduction for tax losses would be allowable to Taxpayer Trust. It is concluded that the value of the units and the income distributed in respect of the units would be the same if the units had been held by a person who did not have any allowable deduction in the income year for which a distribution is made by Outsider Trust.

Question 3

According to the Scheme's facts, the trustee of Taxpayer Trust will provide consideration for the purchase of new units in Outsider Trust. This will constitute Taxpayer Trust providing a "benefit" to the trustee of Outsider Trust , for the purposes of subparagraph 270-10(1)(b)(iii) of Schedule 2F to the ITAA 1936.

However, having regard to all the facts and circumstances of the scheme the Commissioner has concluded that, for the purposes of subparagraph 270-10(1)(c)(iii) of Schedule 2F to the ITAA 1936, the trustee, a beneficiary, an associate of the trustee or an associate of a beneficiary of Taxpayer Trust will provide a benefit to the trustee of Outsider Trust or to an associate of the trustee of Outsider Trust merely incidentally and not wholly or partly, because the deduction for tax losses would be allowable to Taxpayer Trust.

It is concluded that the price paid by Taxpayer Trust for the units is what would be paid by a person who did not have any prior year loss or any other allowable deduction and that the investment is made in the units because Taxpayer Trust has available funds to invest.

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