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Edited version of your written advice
Authorisation Number: 1012805616551
Ruling
Subject: Interposed Entity Elections
Question 1
Did the Trust pass the family control test in section 272-87 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) at the end of the income year ended 30 June 20XX such that the Interposed Entity Election (IEE) made by the Trustee of the Trust (in respect of the Family Trust) came into force?
Answer
No
This ruling applies for the following periods:
1 July 20XX to 30 June 2014
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You are the specified individual.
Your family, for the purposes of section 272-95 of Schedule 2F to the ITAA 1936 consisted of your parents and yourself.
At the time when the IEEs were made the circumstances surrounding the Trust were as follows:
• Trustee:
• The Directors of the Trustee company were:
• Your parent;
• Your relative; and
• Another investor;
• The Shareholders of the Trustee company were:
• Your parent A%;
• Your relative A%; and
• Another investor A%;
• Unitholders ( Z Unitholders each holding A%):
• First Unitholder (Y units) - controlled by your family;
• Second Unitholder (Y units) - controlled by your relative;
• Third Unitholder (Y units) controlled by another investor;
Relevant legislative provisions
Income Tax Assessment Act 1936
Schedule 2F
Section 272-5
Section 272-75
Section 272-80
Section 272-85
Section 272-87
Section 272-90
Section 272-95
Reasons for decision
Subsection 272-85(4) of Schedule 2F to the ITAA 1936 relevantly provides that:
The company, partnership or trust must pass the family control test (see section 272-87) at the end of the income year.
Therefore, it is a mandatory requirement that the family control test in section 272-87 of Schedule 2F to the ITAA 1936 is passed by the Trust as at 30 June 20XX.
Subsections 272-87(1) and (2) relevantly provide that a trust passes the family control test if:
272-87(1)
(a) the requirement in any of the paragraphs of subsection (2) is satisfied in relation to a group consisting of:
(i) the individual (the primary individual) who is to be specified in the family trust election or, in the case of an interposed entity election, who is specified in the family trust election to which the interposed entity election will relate; or
(ii) one or more members of the primary individual's family (see section 272-95); or
(iii) the primary individual and one or more members of the primary individual's family; or
(b) …; or
(c) the requirement in paragraph (f) of subsection (2) is satisfied in relation to a group consisting of:
(i) the trustees of one or more family trusts, provided the primary individual is specified in the family trust election of each of those family trusts; or
(ii) such trustees and a person or persons covered by subparagraph (a)(i), (ii) or (iii).
The requirement for the purposes of subsection (1) are relevantly:
272-87(2)
(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 of the trust 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 of the trust; or
(f) the group has more than a 50% stake in the income or capital of the trust; or
(g) persons in the group are the only persons who, under the terms of the trust, can obtain the beneficial enjoyment of the income and capital of the trust.
At the relevant times section 272-95 of Schedule 2F to the ITAA 1936 relevantly provided that:
272-95 The family of an individual (the test individual) consists of all of the following (if applicable):
(a) any parent, grandparent, brother, sister, nephew, niece, child, or child of a child, of:
(i) the test individual; or
(ii) the test individual's spouse;
(b) the spouse of the test individual or of anyone who is a member of the test individual's family because of paragraph (a).
Child and spouse are defined in subsection 6(1).
It is noted that, for current purposes, your family for the purposes of section 272-95 of Schedule 2F to the ITAA 1936:
• consists of your two parents and yourself; and
• excludes your relative as the definition of family of the test individual does not include that person's relative.
As such, in respect of the Trust, your family members:
• held positions of control of the A% Unitholder;
• did not hold positions of control in respect of the remaining % of Unitholdings in the Trust (these were held by your relative A% and another investor A%);
• did not hold positions of control in relation to the Trustee company as the relevant Directorships and Shareholdings were held, equally (A% each), by your parent, your relative and the other investor.
In respect of whether a relevant group satisfies any of the paragraphs in subsection 272-87(2) of Schedule 2F to the ITAA 1936 the following comments are made:
• 272-87(2)(a) - no group had 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;
• 272-87(2)(b) - no group was able (directly or indirectly) to control the application of the capital or income of the Trust;
• 272-87(2)(c) - no group was capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in paragraph (b);
• 272-87(2)(d) the Trustee of the Trust was not accustomed, not under an obligation nor could reasonably be expected, to act in accordance with the directions, instructions or wishes of the group;
• 272-87(2)(e) no group was able to remove or appoint the Trustee of the Trust;
• 272-87(2)(f) no group had more than a 50% stake in the income or capital of the Trust
• 272-87(2)(g) persons in the group were not the only persons who, under the terms of the Trust, could obtain the beneficial enjoyment of the income and capital of the Trust.
As the family control test in section 272-87 of Schedule 2F to the ITAA 1936 was not passed by the Trust at any time subsection 272-85(4) was not satisfied.
Consequently, the IEEs never came into force for the purposes of former subsection 272-85(6) of Schedule 2F to the ITAA 1936.
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