• Legal database
Legal database

ATO Interpretative Decision

ATO ID 2006/317

Income Tax

Trust Losses: unlisted widely held trust - whether classification affected by a higher level trust
FOI status: may be released
  • This ATO ID has been amended to add, as related references, the decision of the Full Federal Court in ConnectEast Management Ltd v FC of T [2009] FCAFC 22 and the Decision Impact Statement for that case.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does a trust have to be wholly owned, directly or indirectly, by another trust in order to satisfy section 272-127 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. Fixed entitlements to all of the income and capital of a trust must be held, directly or indirectly, by another trust in order to meet the requirement in paragraph 272-127(1)(b) of Schedule 2F to the ITAA 1936.

Facts

Trust A is classified as an unlisted widely held trust under section 272-110 of Schedule 2F to the ITAA 1936.

Trust A has issued 1 million units, which comprise all of the fixed entitlements to the income and capital of the trust. All but one of the units are owned by Trust B. The remaining unit is owned by Trust C.

Trust B and Trust C are trusts whose units are listed for quotation on the Australian Stock Exchange. Both trusts are classified as listed widely held trusts under section 272-115 of Schedule 2F to the ITAA 1936.

Trust A wishes to be classified as a listed widely held trust, pursuant to section 272-127 of Schedule 2F to the ITAA 1936.

Reasons for Decision

Section 272-127 of Schedule 2F to the ITAA 1936 provides that the classification of a trust can be affected by a trust of a 'higher level'.

Subsection 272-127(1) of Schedule 2F to the ITAA 1936 states:

If:

(a)
apart from this Subdivision, a trust is an unlisted widely held trust, an unlisted very widely held trust or a wholesale widely held trust; and
(b)
each of one or more trusts of a higher level (see subsection (3)) has, directly or indirectly, fixed entitlements to all of the income and capital of the trust;

the trust is instead a trust of the same kind (see subsection (2)) as the trust of the highest level.

For the purposes of subsection 272-127(3) of Schedule 2F to the ITAA 1936, a listed widely held trust is a trust of a higher level to an unlisted widely held trust.

One of the requirements that must be met before section 272-127 of Schedule 2F to the ITAA 1936 can be applied is contained in paragraph 272-127(1)(b). This is that 'each of one or more trusts of a higher level (see subsection (3)) has, directly or indirectly, fixed entitlements to all of the income and capital of the trust'.

The requirement in paragraph 272-127(1)(b) of Schedule 2F to the ITAA 1936 means that there must be at least one trust (of a 'higher level') that owns all of the fixed entitlements of a lower level trust (whether directly or indirectly), in order for the lower level trust to be classified as a trust of the same kind as the trust of the highest level.

This is confirmed in paragraphs 13.91 and 13.92 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997.

As no trust has, directly or indirectly, fixed entitlements to 100% of the income and capital of Trust A, paragraph 272-127(1)(b) of Schedule 2F to the ITAA 1936 is not satisfied.

As a result, Trust A is not able to take advantage of section 272-127 of Schedule 2F to the ITAA 1936.

Date of decision:  11 October 2006

Year of income:  Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2F
   section 272-110
   section 272-115
   section 272-127
   paragraph 272-127(1)(b)
   subsection 272-127(3)

Other References:
Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997
Decision Impact Statement DIS as Trustee for the ConnectEast Investment Trust 2 VID 347
ConnectEast Management Ltd v. FC of T [2009] FCAFC 22

Keywords
Fixed entitlements
Widely held trust

Siebel/TDMS Reference Number:  5406249

Business Line:  Public Groups and International

Date of publication:  24 November 2006

ISSN: 1445-2782


Back to top