Edited version of private advice

Authorisation Number: 1051827481499

Date of advice: 21 April 2021

Ruling

Subject: Deductibility of trust tax losses

Question

For the Trust is the 50% stake test in Subdivision 269-C of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) passed at the relevant times?

Answer

Yes

This ruling applies for the following period:

Year ending 31 December 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The Trust has met all of the requirements to qualify as a withholding managed investment trust as set out in section 12-383 (and previously Subdivision 12-H) of Schedule 1 to the Taxation Administration Act 1953 since inception to 31 December 20XX.

The Trust has a substituted accounting period which equals the calendar year.

In its income year ended 31 December 20XX, Trust incurred a tax loss (i.e. revenue loss) (the Loss).

At all times for the period, the Loss year to 31 December 20XX (Test Period), the Trust:

•         was an unlisted widely held trust in accordance with section 272-110 of Schedule 2F to the ITAA 1936 (Schedule 2F);

•         was not a wholesale widely held trust in accordance with section 272-125 of Schedule 2F;

•         was not an unlisted very widely held trust in accordance with section 272-120 of Schedule 2F; and

•         was not an excepted trust in accordance with section 272-100 of Schedule 2F.

Whilst the direct unitholders of the Trust have remained the same over the test period, the indirect unitholding in the Trust has partially changed by further entities becoming indirectly invested in the Trust.

The Unitholders in the Trust

The ownership structure of the Trust for the period, Test Period is:

•         approximately 99.99% of the Trust units are owned by Corporate Trustee for Offshore Fund. The relationship between Corporate Trustee, the Offshore Fund, and its unitholders is a trust relationship for Australian tax purposes; and

•         approximately 0.01% of the Trust units are owned by Holding entity, an offshore corporate entity (collectively, the Unitholders)

The Offshore Fund and Holding entity have fixed entitlements to all of the income and capital of Trust through their unit holdings in Trust.

The Offshore Fund

The Offshore Fund can be characterised as a wholesale fund/wholesale trust. The Offshore Fund has been established by Corporate Trustee as an investment product for sophisticated wholesale investors.

Corporate Trustee is not a tax resident of Australia, that is 79.5% owned by Foreign Bank with the remainder of its shares publicly traded on a stock exchange.

The central management and control of the Offshore Fund is offshore and is not conducted in Australia. The Offshore Fund has no place of business nor management in Australia.

Three instances of 'abnormal trading' as set out in Subdivision 269-B of Schedule 2F occurred during the Test Period because of the issue if new units.

The issue of the new units was the result of capital raising by the Offshore Fund.

The issuing of the units did not result in a change of 50% or more of the Offshore Fund investors.

The Offshore Fund investors

The Offshore Fund investors were all established outside Australia; their central management and control is not exercised in Australia and they are not controlled by Australian entities.

All investors in the Offshore Fund which have indirectly invested in the Trust from the beginning of the test period, except for AA, BB and CC, are a 'superannuation fund for foreign residents' (the superfund investors) in accordance with the definition provided by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) (i.e.. in accordance with section 118-520 of the ITAA 1997). Each of these superannuation fund investors have more than 50 members.

The table below provides a summary of the unitholding interests held by the Offshore Fund investors in the Offshore Fund for the Test Period:

AA

One of the relevant unitholders in the Offshore Fund is a professional asset management company organised in the form of an offshore corporate entity and is a regulated special fund organised under offshore investment law as an investment vehicle for its only investor and unitholder DD.

DD is organised as a savings bank, i.e. as a financial institution, offshore. DD is organised as a public-law institution under the offshore law.

The owner of DD is AA (a municipality).

AA, as the single owner of DD, is the only entity which is entitled to distributions by DD, or liquidation proceeds in case of a future wind-up of DD.

BB

The second relevant unitholder in the Offshore Fund is EE, a public company incorporated offshore.

The sole shareholder in EE is BB, the head entity of on offshore headquartered multinational financial services group. BB is a public company established under foreign law, the shares of which are listed and traded on a stock exchange.

EE is the legal owner of the Offshore Fund units it holds and is entitled to income and capital distributions on these units by the Offshore Fund, and to a portion of the disposal proceeds of the Offshore Fund should the Offshore Fund be wound up.

At the end of the test period the share register of BB contained more than 500k shareholders. Apart from approximately 1.3% of BB shares held separately. All of the BB shares are held in free float.

BB's share register as at the end of the test period.

No individual, or up to 20 individuals between them, control 75% or more of the voting power, or have the rights to receive 75% or more of the dividends or have the right to receive 75% or more of any distributions of capital of BB.

CC

A further unitholder in the Offshore Fund is a professional asset management company as a regulated special fund organised under the offshore investment law as an investment vehicle for its only investor and unitholder FF.

CC is a foundation having legal capacity/existence it can hold rights and assets, can enter into legal arrangements, and can sue and be sued. CC has no defined end date, neither under its constitution nor under any applicable law.

FF is a public company organised under offshore law. The sole shareholder of FF is CC.

As a foundation, CC has no shareholders, unitholders, partners, nominated beneficiaries nor other membership interests and it does not make any income or capital distributions.

Its funds are to be used for the described foundation purposes. In the case of a dissolution of CC one third of its remaining assets, if any, shall go to the offshore government and two thirds go to the two government states.

The CC has no defined end date, neither under its constitution nor under any applicable law. That is, CC is a separate legal entity/ has a separate legal existence, has an indefinite life, can hold assets and enter into legal arrangements, and is a body corporate and a company. The CC constituent documents prevents it from distributing both income and capital (within the meaning of section 272-50 of Schedule 2F) to any member of the company.

Reasons for decision

Tax losses are generally deductible under Subdivision 36-A of the ITAA 1997 in the order in which they are incurred. Relevantly, Division 266 of Schedule 2F requires that a fixed trust must, in some circumstances, 'pass the 50% stake test' in respect of certain times during a 'test period' in order to deduct the tax losses.

For the purposes of applying the trust loss tests, the relevant subdivisions of Schedule 2F that apply are based on the type of trust that wishes to use the tax loss.

Subsection 266-75(1) of Schedule 2F states:

Type of trust to which this section applies - case 1

266-75(1) This section applies to a trust that:

(a) can in the income year deduct a tax loss from a loss year; and

(b) was an unlisted widely held trust at all times in the period (the test period) from the beginning of the loss year until the end of the income year; and

(c) was not a wholesale widely held trust at all times in the test period; and

(d) was not an unlisted very widely held trust at all times in the test period"; and

(e) was not an excepted trust at all times in the test period.

The Trust is and was at all times for the test period an unlisted widely held trust in accordance with section 272-110 of Schedule 2F.

The test period for Trust is from the beginning of the relevant loss year, until the end of the income year that ended on 31 December 20XX (i.e. the year in which Trust intends to claim a tax loss deduction).

Subsection 266-75(3) of Schedule 2F states:

Condition for deducting tax loss

266-75(3) The trust cannot deduct the tax loss unless it meets the condition in section 266-90.

Subsection 266-90(1) of Schedule 2F relevantly states:

If this section is being applied for the purposes of section 266-75 ..., on each occasion when either of the following events occurs:

(a) an abnormal trading in the trust's units occurs during the test period;

(b) an income year of the trust ends during the test period (including at the end of the test period);

the trust must pass the 50% stake test in respect of the following times:

(c) the beginning of the test period;

(d) immediately after the event occurs.

Therefore, in relation to claiming the loss for the income year ended 31 December 20XX, the relevant 'occasions' in the test period are:

•         at the end of income year in which the loss was incurred,

•         at the end of the income year being examined and all intervening years and

•         at each occasion there was 'abnormal trading'.

In this case that results in six 'occasions', being at the end of the three income years and immediately after the three abnormal trading occasions.

The 50% stake test is set out in section 269-55 of Schedule 2F. Section 269-55 sets out the requirements to pass the 50% stake test as follows:

269-55 (1) If, at all times during a period, or at 2 times:

(a) the same individuals have more than a 50% stake in the income of a trust; and

(b) the same individuals (who may be different from those in paragraph (a)) have more than a 50% stake in the capital of the trust;

the trust passes the 50% stake test for the period or in respect of the 2 times.

269-55(2) If a trust is a widely held unit trust it is taken to pass the 50% stake test for a period or in respect of 2 times if it is reasonable to assume that the requirements of paragraphs (1) (a) and (b) are satisfied in respect of the period or the 2 times.

Subsection 269-50(1) of Schedule 2F defines the meaning of more than a 50% stake in income as follows:

269-50(1) If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the income of a trust, those individuals have more than a 50% stake in the income of the trust.

Subsection 269-50(2) of Schedule 2F defines the meaning of more than a 50% stake in capital as follows:

269-50(2) If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the capital of the trust, those individuals have more than a 50% stake in the capital of the trust.

Therefore, in order for the Trust to pass the 50% stake test for the test period, more than a 50% stake in the income and more than a 50% stake in the capital of the Trust must have been held by the same individuals directly or indirectly during the test period.

The unitholders in the Trust have fixed entitlements to all of the income and capital of the Trust through the units they hold in the Trust. However, the unitholders in the Trust are not individuals. The majority unitholder in the Trust is the Offshore Fund, holding approximately a 99.99% unit holding interest in the Trust since inception.

The relationship between Corporate Trustee, the Offshore Fund, and its unitholders is a trust relationship for Australian tax purposes, with Corporate Trustee acting as trustee. The investors in the Offshore Fund have fixed entitlements to all of the income and capital of the Offshore Fund through the units they hold in the fund. There are Offshore Fund investors that collectively have continued to hold more than a 50% unitholding interest in the Offshore Fund, and therefore also indirectly in the Trust, during the test period. However, none of the Offshore Fund investors/ unitholders are individuals.

Section 272-20 of Schedule 2F states:

272-20 A person holds a fixed entitlement to a share of the income or capital of a company, partnership or trust indirectly if the person holds the entitlement indirectly through fixed entitlements to shares of the income or capital, respectively, of interposed companies, partnerships or trusts.

Hence, the indirect fixed entitlements of individuals to a share of the income and capital of the Trust must be traced through the Offshore Fund and its investors.

Special cases of fixed entitlements held directly or indirectly

Section 272-25 of Schedule 2F states:

Coverage of section

272-25(1) This section affects references in this Schedule (other than in subparagraph 269-75(b)(ii) and section 272-30) to a person or individual having, directly or indirectly, a fixed entitlement to a share of the income or capital of a company, partnership or trust (the main entity) at a particular time (the test time).

Note: This section will not affect a reference to a person or individual having a fixed entitlement where the phrase "directly or indirectly" is not used.

Certain interposed government bodies and special companies.

272-25(2) If at the test time a government body or a special company has, directly or indirectly, a fixed entitlement to a share of the income or capital of the main entity, subsection (4) or (5) applies.

To find out the meaning of government body and special company: see section 272-140.

Certain interposed funds

272-25(3) If:

(a) a fund is:

(i) a complying superannuation fund or complying approved deposit fund in relation to the income year in which the test time occurs; or

(ii) a superannuation fund for foreign residents at the test time; and

(b) at the test time the fund has, directly or indirectly, a fixed entitlement to a share of the income or capital of the main entity;

subsection (4) or (5) applies.

Note:See subsection 6(1) for the meaning of complying superannuation fund, complying approved deposit fund and superannuation fund for foreign residents.

Therefore, where the Offshore Fund investors are either:

•         a government body;

•         a special company;

•         a complying superannuation fund or complying approved deposit fund; or

•         a superannuation fund for foreign residents,

it is necessary to consider subsections 272-25(4) and 272-25(5) of Schedule 2F, which state:

Government bodies, and funds or companies with more than 50 members

272-25(4) In the case of a government body, or a fund or company that has more than 50 members:

(a) except where paragraph (b) applies - the body, fund or company is treated as if it had the fixed entitlement as an individual and for the individual's own benefit; and

(b) if the reference is in subsection 272-105(2) - the fixed entitlement is treated as if it were held instead by more than 20 individuals and for their own benefit.

Funds or companies with 50 members or fewer

272-25(5) In the case of a fund or company that has 50 members or fewer, the fund or company is treated as if it did not have the entitlement, but the members are treated as if they had the entitlement in equal proportions.

That is, the tracing of entitlements to income and capital is simplified under subsection 272-25(4) of Schedule 2F by deeming certain entities to be individuals and not requiring a further tracing to individuals behind these entities.

Under subsection 272-25(5) of Schedule 2F the tracing to individuals is simplified by deeming the members in certain entities to hold the fixed entitlements to income and capital of these entities in equal proportions for the purposes of the 50% stake test.

The superfund investors

As at 1 January 2016, 40.4% of the unitholding interests in the Offshore Fund were held by investors which are 'superannuation funds for foreign residents' with at least 50 members each. By the end of the test period the collective unitholding interest of these investors in the Offshore Fund was diluted to 22.7%. Each of the superfund investors in the Offshore Fund has indirectly a fixed entitlement to a share of the income and the capital of Trust in accordance with the respective investor's indirect unitholding interest in Trust through the Offshore Fund.

In accordance with paragraph 272-25(4)(b) of Schedule 2F each of these superfund investors are therefore treated as having indirectly a fixed entitlement to a share of the income and capital of the Trust as an individual and for the individual's own benefit for the purpose of applying the 50% stake test to the Trust in accordance with Subdivision 269-C of Schedule 2F.

The other "original" investors in the Offshore Fund

The treatment of AA, BB and CC for purposes of sections 272-25 and 272-30 of Schedule 2F.

AA

Subsection 272-25(4) of Schedule 2F applies in the case of AA on the basis that it is a government

body. Section 272-140 of Schedule 2F defines 'government body' as:

(a) the Commonwealth, a State or a Territory; or

(b) a municipal corporation or other local governing body; or

(c) a foreign state.

Relevantly, AA is a municipality, which is an administrative district, and therefore a municipal corporation. Based on the definition of 'government body' as set out above, the term is not limited to include only Australian municipal corporations, or to exclude non-Australian municipal corporations. This is supported by the fact that the term 'government body' extends to include non-Australian territories in the form of foreign states. Therefore, a 'government body' extends to include 'foreign municipal corporations'. Therefore, AA is a government body within the meaning of section 272-140 of Schedule 2F, and that paragraph 272-25(4)(a) of Schedule 2F applies to AA.

On this basis, AA is treated as if it has indirectly a fixed entitlement to a share of the income and capital of the Trust (through DD, and DD's unitholding interest in the Offshore Fund) as an individual and for the individual's own benefit for the purpose of applying the 50% stake test to the Trust in accordance with Subdivision 269-C of Schedule 2F.

BB

The Commissioner's discretion in subsection 272-30(3) of Schedule 2F

Where a 'listed public company' has, directly or indirectly, a fixed entitlement to a share of income or capital of an entity, subsection 272-30(3) of Schedule 2F allows the Commissioner to treat the company as holding the whole or part of its fixed entitlement as an individual and for the individual's own benefit. In practical terms, subsection 272-30(3) of Schedule 2F can provide trusts with relief from the need to undertake tracing of fixed entitlement to, and through, the shareholders of listed public companies.

Specifically, subsection 272-30(3) of Schedule 2F provides:

272-30 Additional special cases of fixed entitlements held directly or indirectly

...

Interposed listed public companies and widely held unit trusts

(3) If:

(a) at the test time a listed public company or widely held unit trust has, directly or indirectly, a fixed entitlement to a share of the income or capital of the main entity; and

(b) having regard to the matters set out in subsection (4), the Commissioner considers it fair and reasonable to treat the company or trust as holding, at the test time, the whole or part of its fixed entitlement as an individual and for the individual's own benefit;

the company or trust is treated as so holding the whole or the part of its fixed entitlement.

Meaning of the term 'Listed public company' is set out in subsection 272-135(1) of Schedule 2F which states:

Basic meaning

272-135(1) A listed public company is a company whose shares (except those that carry a right to a fixed rate of dividend) are listed for quotation in the official list of an approved stock exchange.

Exceptions

272-135(2) However, a company is not a listed public company if:

(a) a person (who is not a company) controls, or is able to control, or up to 20 persons (none of them companies) between them control, or are able to control, 75% or more of the voting power in the company (whether directly, or indirectly through one or more interposed companies, partnerships or trusts); or

(b) a person (who is not a company) has, or up to 20 persons (none of them companies) have between them, the right to receive for their own benefit (whether directly, or indirectly through one or more interposed companies, partnerships or trusts) 75% or more of any dividends that the company may pay; or

(c) a person (who is not a company) has, or up to 20 persons (none of them companies) have between them, the right to receive for their own benefit (whether directly, or indirectly through one or more interposed companies, partnerships or trusts) 75% or more of any distribution of capital of the company.

Meaning of right to receive dividends or distribution of capital indirectly

272-135(3)

For the purposes of subsection (2), persons have the right to receive dividends or a distribution of capital of a company indirectly for their own benefit if they would receive the dividends or capital for their own benefit if:

(a) the company were to pay the dividends or distribute the capital; and

(b) the dividends or capital were then successively paid or distributed by each company, partnership or trust interposed between the company and those persons.

Meaning of distribute

272-135(4) Section 272-50 is disregarded in determining the meaning of distribute in paragraphs (3)(a) and (b).

The shares of BB are listed for quotation in the official list on a stock exchange (i.e. an approved stock exchange per regulation 995-1.05 and Schedule 5 to the Income Tax Assessment Regulations 1997). BB satisfies the 'basic meaning' for it to be a listed public company, but is subject to the application of the exceptions in subsection 272-135(2) of Schedule 2F.

At the end of the test period the share register of BB contained more than 500k shareholders. Apart from approximately 1.3% of BB shares held separately. All of the BB shares are held in free float.

Based on the shareholder structure of BB, none of the 3 exceptions listed above at subsection 272-135(2) of Schedule 2F apply. In particular, no individual, or up to 20 individuals between them, control 75% or more of the voting power, or have the rights to receive 75% or more of the dividends or have the right to receive 75% or more of any distributions of capital of BB. Therefore, BB is not excluded from the meaning of a listed public company as per subsection 272-135(1) of Schedule 2F. Hence, BB is a listed public company.

Given that BB is a listed public company and it indirectly has a fixed entitlement to a share of the income and capital of Trust, paragraph 272-30(3)(a) of Schedule 2F is satisfied.

Paragraph 272-30(3)(b) of Schedule 2F gives the Commissioner the discretion to determine whether it is fair and reasonable to treat the public listed company as an individual for the purpose of applying the 50% stake test. In applying the discretion, the Commissioner must consider the matters set out in subsection 272-30(4) of Schedule 2F, which states:

Matters for the purposes of paragraph (3)(b)

272-30(4)

For the purposes of paragraph (3)(b), the matters are:

(a) the practicability of identifying any individuals who at the test time have fixed entitlements to a share of the income or capital of the main entity indirectly through the company or trust and for their own benefit; and

(b) any change before or after the test time in the individuals who can be identified as having fixed entitlements of the kind mentioned in paragraph (a); and

(c) any other matter that the Commissioner considers relevant.

Therefore, at issue is whether the Commissioner, having regard to subsection 272-30(4) of Schedule 2F, considers it is fair and reasonable to treat BB as holding, at each of the test times, the whole or part of its fixed entitlement to the income and capital of the Trust as an individual and for the individual's own benefit (consistent with paragraph 272-30(3)(b)).

Relevantly, paragraphs 13.43 and 13.44 of the Explanatory Memorandum to Taxation Law Amendment (Trust Loss and other Deductions) Bill 1997 (Cth) ('EM') provide some guidance as to the legislative intent of the Commissioner's discretion in subsection 272-30(3) of Schedule 2F:

13.43 There are considerable practical difficulties in tracing interests in or through listed public companies, because of the large number of shareholders and the likelihood that individuals will not hold shares in the listed public company directly. Similar problems arise for widely held unit trusts. The main problem is that it may be difficult, in particular cases, to identify all the direct and indirect holders of fixed entitlements in those entities.

13.44 A provision has been included in the Bill to assist in overcoming difficulties in appropriate cases. This provision will allow the Commissioner to treat all or part of the fixed entitlements in a trust (or interposed entity where relevant) held, directly or indirectly, by a listed public company or widely held unit trust as being held by that company or trust as an individual for its own benefit.

As required by paragraph 272-30(3)(b) of Schedule 2F, the Commissioner must consider the three paragraphs in subsection 272-30(4) of Schedule 2F.

Given the number of shares on issue and the number of individuals that are shareholders in BB (either directly or through other entities), it is impractical to identify the individuals who at the test time (and before or after the test time) have indirectly fixed entitlements to a share of the income or capital of Trust (i.e. the main entity) through their respective shareholdings in BB. The implication of BB being a listed public company is that its shares are constantly traded throughout any given day on the relevant stock markets where it is listed. As such, the individual shareholdings of BB (and the direct and indirect individual shareholders) are subject to constant fluctuation and volatility.

Having regard to the matters set out above, for the purposes of subsection 272-30(4) of Schedule 2F, the Commissioner is of the view that it is fair and reasonable to treat BB as if it has indirectly a fixed entitlement to a share of the income and capital of the Trust as an individual and for its own benefit for the purpose of applying the 50% stake test to the Trust in accordance with Subdivision 269-C of Schedule 2F.

CC

Special company

Section 272-140 of Schedule 2F defines a "special company" as:

(a) a mutual affiliate company; or

(b) a mutual insurance company; or

(c) a company whose constituent document prevents it from distributing both income and

capital (within the meaning of section 272-50) to any member of the company; or

(d) a credit union, within the meaning of section 3 of the Financial Institutions Codes (as defined in section 111AZC of the Corporations Act 2001), whose constituent documents prevent it from paying dividends to its members; or

(e) a company that is prescribed by the regulations.

The term "company" is defined in section 995-1 of the ITAA 1997 to mean:

(a) a body corporate; or

(b) any other unincorporated association or body of persons;

but does not include a partnership or a non-entity joint venture."

The term "body corporate" is not defined for the purposes of the tax law and must, therefore, take its general meaning. In this regard the definition of the types of entities as set out in Miscellaneous Tax Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provide some guidance. Although this ruling is in relation to the scope of the term "entity" for GST purposes, it is stated at paragraph 18 that it is intended that the term entity has a common meaning across the GST, ABN and income tax Acts.

In MT 2006/1 it is stated at paragraph 30 that:

Body corporate' is a general term to describe an artificial entity having a separate legal existence. A

body corporate has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, hold property, enter into legal contracts, sue and be sued in its own name, just as a natural person can.

A body corporate may be created by common law, by statute, or by registration pursuant to a statute. Based on the above guidance and common law principles, the general features of a body corporate may be summarised as:

•         a separate legal existence;

•         an indefinite life; and

•         the power to act, hold property, enter into legal contracts, and sue and be sued in its own name.

The CC has been established as a foundation having legal capacity. As a foundation with its own legal capacity, it can be the holder of rights and assets, can enter into legal arrangements, and can sue and be sued.

The CC has no defined end date, neither under its constitution nor under any applicable law.

That is, CC is a separate legal entity/ has a separate legal existence, has an indefinite life, can hold assets and enter into legal arrangements, and therefore is a body corporate and a company.

It is therefore necessary to consider the meaning of 'distributing both income and capital' as per section 272-50 of Schedule 2F.

Subsection 272-50(1) of Schedule 2F provides:

Distribution of income

272-50(1) A company distributes income of the company to a person if the company pays a dividend or non-share dividend to the person.

The CC is not permitted to pay dividends or non-share dividends (or any other form of distribution) to any person.

Subsections 272-50(2) and 272-50(3) of Schedule 2F provide:

Distribution of capital

272-50(2) A company distributes capital of the company to a person if:

(a) it pays or credits money, or transfers property, of the company to the person, where the amount paid or credited, or the amount or value of the property, is debited against an amount standing to the credit of the share capital account of the company; and

(b) the payment, crediting or transfer is not the payment of a dividend.

272-50(3) A company distributes capital of the company to a person if the company makes a non-share capital return to the person.

The CC's constituent document prevents it from distributing both income and capital (within the meaning of section 272-50 of Schedule 2F) to any member of the company.

As the CC has no defined end date, neither under its constitution nor under any applicable law. That is, CC is a separate legal entity/ has a separate legal existence, has an indefinite life, can hold assets and enter into legal arrangements, and therefore is a body corporate and a company. The CC is not permitted to pay dividends or non-share dividends (or any other form of distribution) to any person. The CC is barred from making distributions of income or capital. Based on this, CC is a company, and it is prevented (by its Statutes) from distributing both income and capital (within the meaning of section 272-50 of Schedule 2F) to any member of the company.

Therefore, CC is a special company as defined in section 272-140 of Schedule 2F.

CC has no members. In the case of a special company either the company itself is treated as an individual for purposes of the 50% stake test, or the members of the special company are treated as having the fixed entitlements of the special company to income and capital in equal proportions. Relevantly, section 272-25 of Schedule 2F provides:

Government bodies, and funds or companies with more than 50 members

272-25(4) In the case of a government body, or a fund or company that has more than 50 members:

(a) except where paragraph (b) applies-the body, fund or company is treated as if it had the

fixed entitlement as an individual and for the individual's own benefit; and

(b) if the reference is in subsection 272-105(2) [...].

Funds or companies with 50 members or fewer

272-25(5)(5) In the case of a fund or company that has 50 members or fewer, the fund or company is treated as if it did not have the entitlement, but the members are treated as if they had the entitlement in equal proportions.

The definition of 'Member of a company' in section 272-140 of Schedule 2F 'includes a shareholder, stockholder or holder of a life insurance policy of the company'.

Subsection 960-130(1) of the ITAA 1997 sets out who is a member of various entities listed in that provision. It states that in the case of a company the members are "a member of the company or a stockholder in the company" (refer to item 1 in the table to subsection 960-130(1) of the ITAA 1997).

In the present case, CC is organised in the form of a foundation, which does not issue any shares or other membership interests. Therefore, CC does not have any share or stockholders like a corporate entity organised as a Limited or Pty Limited, or an equivalent overseas entity type.

Hence, CC may be considered to have no members and CC itself may be treated as if it has indirectly a fixed entitlement to a share of the income and capital of the Trust as an individual and for its own benefit for the purpose of applying the 50% stake test to the Trust in accordance with Subdivision 269-C of Schedule 2F. This is because there is no tracing possible through membership interests in CC to other entities or individuals behind the foundation.

In particular, the underlying assumption of subsection 272-25(5) of Schedule 2F, where it refers to the special company having 50 members or fewer, is that the company in fact has one or more members - section 272-25 of Schedule 2F does not provide for the case where a special company does not have any members. Treating CC as an individual holding fixed entitlements to a share of income and capital appears appropriate as there cannot be any change in ultimate membership by individuals in an entity (i.e. CC) where the entity has no members and therefore also no individuals can hold directly or indirectly membership interest, and change over time.

On this basis, CC indirectly has a fixed entitlement to a share of the income and capital of the Trust, via its shareholding in FF, FF's investment in the Offshore Fund through another intermediary and the Offshore Fund's unitholding in the Trust.

Alternative view

Should CC be dissolved at any point in time, then one third of its assets shall go to the offshore federal government and two thirds shall go to two states. Therefore, the alternative view is that the three offshore government entities, must be considered members of CC. This is on the basis that these three entities will be entitled to the assets of CC (if and when the foundation is dissolved), i.e. entitled to the capital of CC which will include any accumulated income that has not been spent to achieve the foundation's purpose.

According to subsection 272-25(5) of Schedule 2F, where a special company (i.e. CC) has 50 members or fewer, then the members are treated as if they each had the fixed entitlement to a share of the income and capital of the test entity in equal proportions (and the special company is treated as if it did not have the entitlement). That is, the three government entities, are each to be treated to have a fixed entitlement equal to one third of CC's indirect fixed entitlement to a share of the income and capital of the Trust for the purpose of applying the 50% stake test to the Trust in accordance with Subdivision 269-C of Schedule 2F.

Notably, the three offshore government entities are all government bodies as defined in section 272-140 of Schedule 2F as they are all foreign states. On this basis each of the offshore government entities, are to be treated as holding one third of the fixed entitlement which CC indirectly holds in the share of income and capital of Trust as individuals and for their own benefit.

Abnormal trading

The term trading is defined in section 269-10 of Schedule 2F as:

A Trading in a unit in a unit occurs if there is an issue, redemption or transfer of, or other dealing in, the units.

The trading that might be considered as abnormal is set out in sections 269-15 to 269-49 of Schedule 2F. Section 269-15(1) provides:

There is an abnormal trading in units in a unit trust if there is a trading in the units that is abnormal having regard to all relevant factors, including:

(a) the timing of trading, when compared to the normal timing for trading in units; and

(b) the number of units traded, when compared to the normal number of units traded; and

(c) any connection between the trading and any other trading in units in the unit trust, and

(d) any connection between the trading and a tax loss or other deduction of the trust.

269-15(2)

There may also be an abnormal trading under any of the following provisions.

Those provisions are sections 269-20 to section 269-49 of Schedule 2F. Relevantly, section 269-35 of Schedule 2F states that:

269-35(1) There is an abnormal trading in units in a unit trust (other than a wholesale widely held trust) if more than 20% of the units on issue at the end of any 60 day period were traded during the period.

269-35(2) For the purposes of other provisions of this Schedule, the abnormal trading occurs at the end of the 60 day period.

In this case there are three occasions of abnormal trading as more than 20% of the units on issue were traded at the end of the 60 day period. The instances of abnormal trading in Trust units are:

1)    XXXXXX new units being issued during the period from 21 April 20XX to 20 June 20XX, which represents 103% of the total units on issue at 21 April 20XX.

2)    XXXXXX new units being issued during the period from 17 May 20XX to 16 July 20XX, which represents 76% of the total units on issue at 17 May 20XX.

3)    XXXX new units being issued during the period from 22 June 20XX to 21 August 20XX, which represents 28% of the total units on issue at 22 June 20XX.

These instances of abnormal trading occurred when the Offshore Fund raised capital contributions from investors. In these capital raising/ unit issues the investors who participated had been invested on 1 January 20XX and other, later joining investors, but because the existing investors participated in the capital raising by the Offshore Fund, it did not trigger a change of 50% or more of the investors in the Offshore Fund.

Where there is abnormal trading, the trust must pass the 50% stake test at the beginning of the test period and immediately after the abnormal trading. The Trust passed the 50% stake test at these additional testing times. The aggregate interest of the investors which had been invested in the Offshore Fund on 1 January 20XX at no time (over the period from 1 January 20XX to 31 December 20XX) fell to 50% or less of the indirect entitlements to income and capital of Trust.

In accordance with subsection 266-90(1) of Schedule 2F, there have been six occasions during the Test period where the Trust must pass the 50% stake. For the purposes of section 269-55 of Schedule 2F the Trust passes the 50% stake test on the six occasions in the test period as it is reasonable to assume that that in these circumstances the requirements of paragraphs (1)(a) and (b) of subsection 269-55(1) are satisfied on the six occasions designated by subsection 266-90(1) of Schedule 2F in the Test Period of 1January 20XX to 31 December 20XX.

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