Edited version of your private ruling

Authorisation Number: 1012580493076

Ruling

Subject: Trust losses

Question 1

Has Trust 1 provided a "benefit" to Company 2 in its capacity as trustee for Trust 2 for the purposes of section 270-10(1)(b)(iii) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

The relevant facts set out below relate to the proposed deduction of tax losses by Company 1 as trustee for Trust 1 and the application of Division 270 of the ITAA 1936.

· Trust 1 was established in 200X.

· Trust 2 was established in 19XX.

· There has not been a family trust election for either Trust 1 or Trust 2 for the financial years ended 30 June 200Y, 20XX, 20YY and 20ZZ.

· Trust 1 became a member of the Eligible Classes of beneficiary of Trust 2 in 20YY.

· During the financial year ended 30 June 20XY Trust 2 appointed in favour of Trust 1 in its capacity as a beneficiary, income as a UPE (unpaid present entitlement).

· It is intended that the UPE in favour of Trust 1 is paid by Trust 2.

· Trust 1 has applied Tax Losses as an allowable deduction pursuant to section 8-1 of the ITAA 1997 in respect of the income year ended 30 June 20XY.

· Trust 1 currently has a debt owing to Trust 2. This debt accumulated from financial years ended 30 June 200X through to 200Y

· Trust 1 proposes to repay the debt. The funds available to Trust 1 in order to repay the debt are those available through the UPE.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F;

Income Tax Assessment Act 1936 section 270-10;

Income Tax Assessment Act 1936 section 270-15;

Income Tax Assessment Act 1936 section 270-25;

Income Tax Assessment Act 1936 section 270-270;

Income Tax Assessment Act 1936 Part IVA 177A.

Reasons for decision

Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936) deals with trust losses and other deductions. This Schedule sets out the rules that have to be satisfied by trusts before a deduction is allowed for prior year losses and current year losses and certain debt deductions.

Section 270-10 of Schedule 2F of the ITAA 1936 outlines the income injection test to apply where the trust derives assessable income or a benefit from an outsider to the trust.

Section 270-10 of the ITAA 1936 states:

Basic case

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

Note: The benefit may constitute all or any of the scheme assessable income.

(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

Note: The benefit may constitute all or any of the deduction.

(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).

Section 270-15 of the ITAA 1936 states the tax consequences as:

If the requirements of subsection 270-10(1) are satisfied, the consequences are that:

(a) to the extent (if any) that the deduction mentioned in paragraph 270-10(1) (a) relates exclusively, or may appropriately be related, to the scheme assessable income, the deduction is not allowable; and

(b) if the net income of the trust is less than the scheme assessable income or there is no net income - the trust has a net income equal to, or the net income is increased so that it equals, the scheme assessable income; and

(c) paragraph (b) and the scheme assessable income are disregarded in working out any tax loss incurred by the trust in the income year; and

(d) if paragraph (b) applies and the deduction mentioned in paragraph 270-10(1)(a) is for a tax loss - paragraph (b) and the scheme assessable income are disregarded in working out any deduction in respect of the tax loss allowable after the income year.

The meaning of "outsider" depends on whether or not the trust is a family trust. For a trust that is not a family trust, an outsider is a person other than the trustee of the trust or a person with a fixed entitlement to income or capital of the trust:

Section 270-25(2) states:

If the trust mentioned in paragraph 270-10(1) (a) is not a family trust, an outsider to the trust is a person other than:

(a) the trustee of the trust; or

(b) a person with a fixed entitlement to a share of the income or capital of the trust.

As there have been no family trust elections (FTE) by the two trusts, it is confirmed that Trust 2 is an "outsider" to Trust 1 as it is not a trustee of Trust 1 nor does it have fixed entitlement to a share of the income of Trust 1.

The operation of subparagraph 270-10 (1)(b)(iii) was considered in the Administrative Appeals Tribunal (AAT) Case Eldersmede Pty Ltd & Ors v.FC of T (2004) ATC 2129 (Eldersmede), where the tribunal had to consider whether the trustee of a trust had provided a direct or indirect benefit to the trustee of another trust. An appeal against this decision was dismissed by the Full Federal Court: Corporate Initiatives Pty Ltd v FCT (2005) 59 ATR 351 (Corporate Initiatives).

The tribunal described the issue to be determined as follows:

Before the consequences set out in s. 270-15 must be applied in assessing a trust's assessable income and its deductions, the provisions of s. 270-10 must be fulfilled. As can be seen from the section that we have set out above, it has four main criteria. Of these, it is agreed that three have been fulfilled in their entirety (ss. 270-10(1) (a), (c) and (d)) and one in part (ss. 270-10(1) (b)):

(1) s. 270-10(1) (a):

It is agreed that a deduction is allowable to SBS, as trustee of CUT, for the year of income ending 30 June, 1996. That deduction is the sum of $142,780 for prior year losses and $717,026 for current year losses.

(2) s. 270-10(1) (b):

Each of its three subparagraphs must be satisfied. While it is not agreed that the events specified in s. 270-10(1) (b) occurred "under a scheme" the following is agreed:

(a) It is agreed between the parties that, subject to the qualification we have made, only s. 270-10(b) (i) is fully satisfied. There is no issue between the parties that CUT received a distribution from EDT and that this is an amount of assessable income within the meaning of s. 270-10(b) (i).

(b) With regard to s. 270-10(1) (b) (ii), it is agreed between the parties that Eldersmede, as trustee of EDT, is an outsider to CUT. It is also agreed that, in that capacity, Eldersmede directly or indirectly provided a benefit to SBS, as trustee of CUT.

(c) With regard to s. 270-10(b) (iii), it is agreed between the parties that Eldersmede, as trustee of EDT, is an outsider to CUT. There remains in issue whether SBS, as trustee of CUT, directly or indirectly, provided a benefit to Eldersmede, as trustee of EDT or one of its associates.

(3) s. 270-10(1) (c):

As the three subparagraphs of s. 270-10(1) (c) are expressed in the alternative, only one need be satisfied.

It is agreed that, if the events specified in s. 270-10(b) occurred and occurred "under a scheme", s. 270-10(1) (c) (i) is satisfied as it is reasonable to conclude that CUT received the scheme assessable income, wholly or partly, but not merely incidentally, because the deduction would be allowable.

(4) s. 270-10(1) (d):

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

The circumstances of Trust 1 are comparable to the situation of Eldersmede as:

· there is an allowable deduction in the year of income for prior year losses;

· they have received a distribution in the form of an UPE from Trust 2 and it is an amount of assessable income;

· Trust 2 is an "outsider" to Trust 1;

· Trust 1 is not an excepted trust;

· the issue remains as to whether Trust 1, directly or indirectly has provided a benefit to Trust 2 and the events occurred "under a scheme";

· in relation to subsection 270-10(1) (c), which only requires one of the alternatives to be satisfied, it is reasonable to conclude that Trust 1 received the scheme assessable income, wholly or partly, but not merely incidentally, because the deduction would be allowable.

What is a "Benefit"?

Section 270-20 of the ITAA 1936 states:

A benefit is:

(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.

In Eldersmede at paragraph 36 the tribunal stated the following on the meaning of the word 'benefit' as used in sub-paragraph 270-10 (1) (b)(iii):

The word "benefit", is defined by reference to both the tangible, such as money, dividend or property, and the intangible, such as a right or entitlement (s. 270-20). Paragraph (f) of the definition is also framed in an uncommon fashion. In stating that "a benefit is... anything that, disregarding the preceding paragraphs, is a benefit or advantage" (emphasis added), Parliament has indicated that the meaning given in that paragraph is not to be read down by reference to, the preceding paragraphs in the definition. The implication is that the meaning given to the word under paragraph (f) may overlap with the meanings given in the previous paragraphs and may incorporate some or all of those meanings. The implication is that it is to be given a broad meaning but there is no implication that it is to be read so broadly that it has no limitations. The first limitation is in the meaning of the words ``benefit or advantage'' themselves and the second is in the context of Schedule 2F.

The Tribunal went on to state at paragraph 37:

In so far as they are relevant, the ordinary meanings of the noun ``benefit'' as they appear in the dictionaries are:

"1. A thing well done; a good or noble deed.... 2. a. A kind deed, a kindness; a favour, gift. arch.... c. A benefaction (in somewhat of a legal sense).... 3. a. Advantage, profit, good. (The ordinary sense.)... b. A natural advantage or `gift.'... d. Pecuniary advantage, profit, gain...."

(Oxford English Dictionary, 2nd edition, 1989)

"... 1. An act of kindness. 2. Anything that is for the good of a person or thing...."

(Macquarie Dictionary, 3rd edition, 1997)

Those of "advantage" are:

"I. Superior position... 5. a. A favouring circumstance; anything which gives one the superiority or tends to improve one's position. (The opposite is disadvantage.)

...

II. The result of a superior or better position.

6. a. Benefit; enhancement, improvement; increased well-being or convenience; resulting benefit. to one's advantage: to one's benefit, beneficial to one...."

(Oxford English Dictionary, 2nd edition)

"... 1. any state, circumstance, opportunity, or means specially favourable to success, interest, or any desired end: the advantage of a good education. 2. Benefit; gain; profit: it is to his advantage..."

(Macquarie Dictionary, 3rd edition, 1997)

The Tribunal determined at paragraph 40, that the words "benefit or advantage" should be given their ordinary meanings. 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. What is for the good of another or what is a more favourable position may be measured in tangible or intangible terms and is not limited by the tangible and intangible measures set out in the other paragraphs of the definition of "benefit"'. At paragraph 41 the Tribunal went on to say:

What is good for a person or what puts him or her in a more favourable position is, of course, a matter that depends upon the vantage point from which it is viewed. In the case of s. 270-10(1) (b) (iii), it is to be viewed from the vantage point of the outsider to the trust or of an associate of that outsider. That is not to say, however, that it is to be viewed from the subjective view point of that outsider or associate. The language of s. 270-10 is expressed in objective terms and no reference is made to the subjective aspects of intention. So, for example, s. 270-10(1) (b) (iii) requires that "the trustee... directly or indirectly provides a benefit to the outsider to the trust or to an associate of the trustee..." It is not expressed in terms of the trustee's thinking that he, she or it is providing such a benefit or that the outsider to the trust or the associate thinks that it is being provided with such a benefit. It is not expressed in terms of the trustee's attempting to achieve a particular outcome. It is looking only at what has happened. In this regard, s. 270-10(1)(b)(iii) is to be compared with the provisions of Part IVA of the ITAA 1936 relating to schemes and the consideration given to that Part by the Federal Court in a number of cases. We have regard to a selection of those cases below for the word "scheme" in Schedule 2F is defined by reference to its definition in Part IVA and conclude that whether or not there is a scheme must be assessed objectively. Consistently with that conclusion and for the reasons we have given earlier in this paragraph, we consider that whether or not a benefit has been provided must be assessed objectively.

The Court in Corporate Initiatives stated that it cannot be said that the resolution by Eldersmede as trustee of EDT to distribute $859,806 to SBS as trustee for CUT conferred on the latter any proprietary right, equitable or otherwise, in any particular asset of EDT. The amount of $859,806 was not an identifiable asset, such as money in a particular bank account, but simply a figure which corresponded to SBS's accumulated losses. Likewise the profit of EUT was a figure arrived at after calculations.

In Corporate Initiatives at paragraph 23:

We therefore think the Tribunal was correct in proceeding on the basis that, on demand being made by SBS as trustee for CUT, Eldersmede would have to do something to arrange funds for that payment, whether by selling, or borrowing against, available assets, which would then no longer be available for other trust purposes. Not having to do this was a benefit. Eldersmede was thus in a better or more favourable position than it would have been had it been required to fund the distributions.

With this case, a resolution has been made by Trust 2 in the form of a UPE in favour of Trust 1. Trust 1 has prior year losses available as a deduction and also has a debt owing to Trust 2. As there has been no actual payment of the distribution and Trust 2 has been able to continue to have the funds at their disposal, it thus puts them in a more favourable position and thus providing them with a benefit.

What is meant by "directly or indirectly"?

The Tribunal in Eldersmede discussed the meaning of the expression ``directly or indirectly'':

… the expression "directly or indirectly" requires first an examination of the outcome that is qualified by the expression and then the proximate and contributory causes of that outcome. In the context of subsection 270-10(1) (b) (iii), the outcome that is qualified by the expression is the provision of a benefit. The question then becomes whether SBS, as trustee of CUT, was the proximate or a contributory cause of the provision of a benefit to Eldersmede, as trustee of EDT, or to an associate of Eldersmede, as trustee of EDT. There is no need for SBS to have itself provided a benefit provided it contributed to the provision of that benefit in some way and even though there may be other factors or actions contributing to the provision of the benefit. If it was either the proximate cause or a contributory cause, it will be taken to have provided that benefit directly or indirectly. There is no need to go further and to characterise whether it was direct or indirect; it was one or the other.

As with the decision of the Tribunal in Eldersmede, there is no need for Trust 1 to have it itself provided a benefit provided it contributed to the provision of that benefit in some way, it will be taken to have provided that benefit directly or indirectly.

What is meant by "provide"?

In Eldersmede at paragraph 48 the tribunal stated the following on the meaning of the word 'provided:

What is meant by the word "provides" in the context of s. 270- 10(1) (b) (iii)? When used as a transitive verb, as it is in the provision, and in so far as it is relevant in this case, it means:

"... 4 v.t. Prepare, get ready, or arrange (something) beforehand. Now rare.... 5 v.t. Equip or fit out with what is necessary for a certain purpose; furnish or supply with something.... 6 v.t. Supply or furnish for use; make available; yield, afford...."

(The New Shorter Oxford English Dictionary, 1993)

".. v.t. 1. to furnish or supply. 2. to afford or yield.... 4. Archaic. to get ready, prepare, or procure beforehand...."

(Macquarie Dictionary, 3rd edition, 1997)

Given the context in which it appears, there seems to be no need to do other than to adopt the ordinary meanings of the word but there are two aspects to those ordinary meanings. One is that of furnishing, supplying or making available. The other, although rare, is that of preparing or making ready. It seems to us that it is in the former sense that the word is used in s. 270-10(1) (b) (iii). The words "directly or indirectly" qualify the manner in which the trustee "provides" a benefit to the outsider or an associate of the outsider. They do not qualify the nature or character of the benefit.

In Corporate Initiatives the Court concluded that the term "provides" is not defined in the Act, and agreed with the Commissioner's submission that the dictionary meanings referred to by the Tribunal such as "supply or furnish for use; make available; yield, afford" convey the central concept of causing another to have something. The Court was of the opinion that, in not calling on Eldersmede to pay the amount of the distribution, SBS "provided" a benefit to EDT.

As with Eldersmede, as Trust 2 has not had to pay the distribution it can be seen that Trust 1 has "provided" a benefit to Trust 2.

What is a scheme?

Section 272-140 of Schedule 2F of the ITAA 1936 provides that the word scheme as used in Schedule 2F has the same meaning as in subsection 177A(1) of the ITAA 1936. Subsection 177A(1) provides the following:

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.

To show there was a "scheme" for the purposes of Division 270 of Schedule 2F of the ITAA 1936 it is not necessary to demonstrate that there was any intention on the part of any person to avoid the payment of income tax. For a scheme to exist there must be a sufficient nexus or connection between two matters so that one may be said to be under the other or to have occurred under the other.

The Tribunal in Eldersmede stated (at paragraph 58) that the word "scheme" (at paragraph 58), is to be given its ordinary meaning, and that an objective approach should be adopted in ascertaining not only whether a benefit has been provided but also whether it has been provided under a scheme.

In Eldersmede at paragraph 102, in considering whether the events did happen under a scheme, the tribunal had regard to the actions and conduct of both Eldersmede and SBS against the backdrop of their financial affairs. Viewed objectively, the tribunal was satisfied that there was a scheme to direct assessable income to the loss trust.

It was concluded in Eldersmede at paragraph 105 that:

Having identified the scheme, we find that under the scheme:

· SBS, as trustee of CUT, derived the scheme assessable income of $859,806.00; and

· in allocating its net income for the 1996 year, Eldersmede, as trustee of EDT, directly provided a benefit to SBS, as trustee of CUT.

We also find that, in allowing Eldersmede, as trustee of EDT, to retain the use of $859,806.00 (and later, the balance of that amount after deducting the set off) free of any encumbrance or charge, SBS, as trustee of CUT, provided a benefit to Eldersmede, as trustee of EDT, and provided that benefit under the scheme we have identified.

The circumstances in relation to "scheme" for Trust 1 are comparable to that of Eldersmede in that Trust 2 made a resolution for an amount of assessable income in the form of a UPE to Trust 1 and Trust 1 has a deduction available of prior year losses to offset the income. Trust 1 had only been made a beneficiary of Trust 2 after several years of losses and after accumulating a debt to Trust 2. It is therefore considered that there is a "scheme".

What is meant by "under a scheme"?

In Eldersmede, the Tribunal found that to be "under a scheme" there must be a sufficient nexus or connection between two matters so that one may be said to be under the other or to have occurred under the other.

In Corporate Initiatives the Court went on to say in paragraph 27 that the Tribunal correctly found that the enquiry is an objective one and thus the intention of any of the parties is to be ignored. The essential elements of the scheme as found by the Tribunal were the distributions by Eldersmede and then SBS allowing Eldersmede to retain use of the amount of those distributions. Once the Tribunal found, correctly in the view of the Full Federal Court, that by reason of this Eldersmede received a "benefit" in the way explained, then it necessarily follows that Eldersmede received the benefit "under" the scheme, in the sense that the scheme operated to produce that effect.

Following the guidelines as established in the Eldersmede case and the subsequent Corporate Initiatives case, in this case,

· Trust 1 became a member of an Eligible Class of beneficiary in 20YY,

· Trust 1 had losses in each financial year since establishment in 200X.

· Trust 1 accumulated a debt to Trust 2, accumulated between the years 200Z and 200Y.

· Trust 2 is an outsider to Trust 1.

· Trust 2 made a resolution for a UPE in favour of Trust 1 during the financial year ended 30 June 20XY.

Trust 1 has received assessable income from Trust 2, an outsider to the trust, in the form of a UPE. Trust 1 has prior year losses available as a deduction and a debt owing to Trust 2, all of similar amounts and as such it can be concluded that there was a scheme to direct assessable income to the loss trust.

As Trust 2 has been able to retain the use of the funds and has not been required to make the payment (as with Eldersmede), it is therefore considered that in this case that Trust 1 has provided a benefit to Trust 2.

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