House of Representatives

Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1998

Second Reading Speech


That the bill be now read a second time.

The bill will insert rules in the income tax law to limit the circumstances in which trusts can deduct current year and prior year losses and debt deductions. The measures generally take effect from 9 May 1995. The government announced in the 1996-97 budget its intention to proceed with the previous government's 1995-96 budget announcement on 9 May 1995 that trust loss rules would be introduced.


The government has consulted widely with taxpayers and tax professionals in developing the trust loss legislation. The government announced in the 1996-97 budget that several significant changes would be made to the previous government's draft legislation. Those changes were set out in a press release issued on budget night. Most of these changes were made in response to the concerns expressed by taxpayers and tax professionals about the previous government's proposed legislation.

In announcing that it would go ahead with the measures, the government committed itself to consulting widely with taxpayers and tax professionals before introducing legislation into the parliament. To this end, the government's draft of the legislation was released for public comment on 10 February 1997. A large number of submissions concerning the exposure draft were received. The government has considered these submissions and has taken them into account in finalising the legislation. The government has made many modifications to the measures in response to concerns raised in the submissions.

One of the main concerns raised was about the application of the income injection test to family trusts. In response to this concern, the government announced in the 1997-98 budget that it would relax the application of the income injection test for family trusts but the definition of `family member' would be narrowed from the 1997-98 budget time.

Purpose of the trust loss measures

The purpose of the trust loss measures is to restrict the recoupment of losses and other deductions of trusts in order to prevent the transfer of the tax benefit of the losses. This occurs when a person who did not bear the economic effect of the loss when it was incurred by the trust obtains a benefit as a result of the trust's ability to deduct the loss.

The measures achieve this aim by examining whether there has been a change in underlying ownership or control of a trust or whether certain schemes have been entered into in order to take advantage of a trust's losses or other deductions.

The tax law already contains tests which limit the deductibility of losses incurred by companies. The proposed rules that are to apply to trusts will differ in some respects from those that apply to companies, reflecting the different characteristics of trusts.

Changes in ownership or control of a trust

The tests to be satisfied before losses are deductible will vary depending on the type of trust. Each type of trust has to satisfy certain tests relating to ownership or control of the trust in order to be able to deduct prior and current year losses and debt deductions.

For example, while fixed trusts will be subject to a continuity of ownership test, non-family discretionary trusts will be subject to continuity of ownership, continuity of control and pattern of distributions tests. This reflects the fact that it is not possible to apply the same beneficial ownership test to discretionary trusts.

Special rules will also apply to widely held unit trusts so that ownership will be tested generally only where there are abnormal transactions. These rules will help to minimise compliance costs for these types of trusts. Also, a listed widely held unit trust can apply the same business test if it fails the continuity of ownership test.

Special tracing rules are provided to overcome difficulties in monitoring ownership of trust interests where certain entities are interposed between the loss trust and the underlying beneficiaries. A special tracing rule applies for family trusts.

These tests do not apply to family trusts, some superannuation funds, deceased estates within a reasonable administration period and unit trusts with unit holders exempt from income tax. These trusts are called excepted trusts in the legislation.

Income injection schemes

If a trust is involved in an income injection scheme to take advantage of deductions, the income injection test may prevent the trust from making full use of the deductions. Under these schemes, income is injected into trusts with losses or other deductions so that no tax is payable on the income. This test applies to all trusts other than excepted trusts. However, the test does apply to family trusts in some circumstances.

Family trusts

Family trusts (as defined) that distribute only to members of the family group will generally not be affected by the proposed measures. The income injection test will generally apply to family trusts only where income is injected from outside the family group. A trust will become a family trust for the purposes of the measures if it makes a family trust election.

A consequence of making the election is that a special tax, called family trust distribution tax, is payable where a family trust gives income or capital to persons who are not members of the family group. This tax will be levied at the top marginal rate applying to individuals, plus Medicare levy. The family trust distribution tax is an anti-avoidance measure designed to ensure that the tax benefit of a family trust's losses cannot be transferred to non-family members. The government hopes the tax will never need to be paid.

Drafting of the legislation

The trust loss measures have been drafted so as to fit into the new income tax law being developed as part of the tax law improvement project. The proposed rules are lengthy but necessarily so. For example, there are many different categories of trusts. One way of dealing with trust losses would be to have a few standard rules that apply to all trusts. This would result in the rules themselves being unfair in their impact.

Instead, different rules have been applied to the different categories of trusts, depending on their nature. The result is that the size of the legislation increases, but this is matched by an increase in the fairness of treatment.

The length of the provisions has also been greatly affected by the changes made by the government in response to representations from taxpayers and tax professionals. This has resulted in a trade-off between simplicity and equity.

Revenue gain

The estimated gain to revenue from the proposed changes is $90 million in 1995-96, $185 million in 1996-97, $160 million in 1997-98, $75 million in 1998-99, $20 million in 1999-2000 and $20 million in 2000-2001. I commend the bill to the House. I also present the explanatory memorandum to this bill, the Family Trust Distribution Tax (Primary Liability) Bill 1997 , the Family Trust Distribution Tax (Secondary Liability) Bill 1997 and the Medicare Levy Consequential Amendment (Trust Loss) Bill 1997 , and provide copies for the House.

Debate (on motion by Mr Laurie Ferguson) adjourned.

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