Edited version of private ruling

Authorisation Number: 1011794252037

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Ruling

Subject: Trust losses

Question 1

Can the trustee for the the Trust deduct the prior year tax losses from the net income derived by the Trust in the period beginning from a certain date to the transfer date when the deceased estate transferred the units in the Trust and the share in the Company to Person A?

Answer

Yes.

Question 2

Can the excess of prior year tax losses arising in question 1 be deducted from the net income derived by the Trust in the period following the transfer date?

Answer

No.

Question 3

Can the Trust deduct a loss or outgoing arising in the period beginning a certain date to the transfer date from the net income derived by the Trust in this period?

Answer

Yes.

Question 4

Can the excess of losses or outgoings arising in question 3 be deducted from the net income derived by the Trust following the transfer date?

Answer

No.

Relevant legislation

Section 318 of the Income Tax Assessment Act 1936

Section 266-25 of Schedule 2F to the Income Tax Assessment Act 1936

Section 266-30 of Schedule 2F to the Income Tax Assessment Act 1936

Section 266-40 of Schedule 2F to the Income Tax Assessment Act 1936

Section 267-20 of Schedule 2F to the Income Tax Assessment Act 1936

Section 267-45 of Schedule 2F to the Income Tax Assessment Act 1936

Section 267-50 of Schedule 2F to the Income Tax Assessment Act 1936

Section 268-10 of Schedule 2F to the Income Tax Assessment Act 1936

Section 268-25 of Schedule 2F to the Income Tax Assessment Act 1936

Section 269-50 of Schedule 2F to the Income Tax Assessment Act 1936

Section 269-55 of Schedule 2F to the Income Tax Assessment Act 1936

Section 269-95 of Schedule 2F to the Income Tax Assessment Act 1936

Section 272-40 of Schedule 2F to the Income Tax Assessment Act 1936

Relevant facts and circumstances

A certain company as trustee for the Trust commenced a business on a certain date.

Person A and Person B were the sole shareholders and directors of the Company. Person A and Person B each subscribed for units in the Trust.

On a certain date, Person B passed away.

Person B's units in the Trust and their share in the Company passed to their estate.

On or about a dated following Person B's date of death, Person B became the sole director of the Company.

Subsequently and following this date (the transfer date), Person A purchased Person B's units and their share in the Company from the estate.

No change in ownership of units or shares had occurred prior to Person B's death.

As at a certain date prior to the transfer, the Trust had accumulated tax losses.

Reasons for decision

Detailed reasoning

All references are to the Income Tax Assessment Act 1936 unless stated otherwise.

A trust that has a change in ownership or control may be prevented from deducting a tax loss of an earlier year or may have to work out in a special way its net income and tax losses for an income year.

Fixed trust

If the Trust is a fixed trust, the Trust will need to satisfy the provisions of Division 266 of Schedule 2F.

In particular, the Trust will need to satisfy the 50% stake test. The 50% stake test is referred to at section 266-40 of Schedule 2F and is described at section 269-55 of Schedule 2F.

If the Trust does not satisfy the 50% stake test, its prior year tax losses will be denied under section 266-25 of Schedule 2F and it will have to calculate its net income and tax losses for the 2011 income year under section 266-30 and section 268-10 of Schedule 2F.

The 50% stake test is met during a period where both the following conditions occur. The same individual or individuals have more than a 50% stake in the income of the trust, and the same individual or individuals (who may be different from the income individuals) have more than a 50% stake in the capital of the trust.

A more than 50% stake in the income of a trust means a fixed entitlement to a greater than 50% share of the income of the trust. There is a similar test for capital. See sections 269-50 and 272-5 of Schedule 2F.

That is, the 50% stake test requires the same individual or individuals to retain a fixed entitlement to a greater than 50% share of the income and a fixed entitlement to a greater than 50% share of the capital through out a relevant period.

Under section 272-40 of Schedule 2F, an individual who has died is taken to continue to have a fixed entitlement to a share of the income or capital of a trust for as long as the entitlements are held by the trustee of the individual's estate or a person who received it as a beneficiary of the estate.

Person B died a certain date. Their units in the Trust passed to their estate. Prior to this, there had been no change in ownership of units by either Person B or Person A. On the transfer date, Person A purchased Person B's units from their estate.

Up until Person B's date of death, Person A and Person B each had fixed entitlements to 50% of the income and 50% of the capital of the Trust. Person B's death has no consequences while their estate holds their units because Person B is taken to continue to have their fixed entitlements to income and capital.

With the transfer of the units to Person A, Person A is considered to have a fixed entitlement to 100% of the income and 100% of the capital of the trust.

To recoup a tax loss a trust is required to pass the 50% stake test from the start of the loss year to the end of the period in which the loss is recouped. That is, a loss arising during a period that the trust passes the 50% stake test for a particular individual or individuals can only be recouped in that period.

In the present case the 50% stake test applies in relation to Person A and Person B for the period up to the date the units were transferred to Person A because, between them during this period, they have fixed entitlements to greater than 50% shares of income and capital. Losses arising in a period can only be recouped in that period.

From the date the units were transferred to Person A, a new period has commenced because Person A alone has fixed entitlements to greater than 50% shares of income and capital.

Any loss or outgoing, including the prior year tax losses, arising in the period up to the transfer date can only be recouped in this period. The losses arising in this period can not be recouped after the transfer date.

Non-fixed trust

If the Trust is not a fixed trust, the Trust will need to satisfy the provisions of Division 267 of Schedule 2F.

In particular, the Trust will need to satisfy, amongst other things, the control test. The control test is referred to at section 267-45 of Schedule 2F and is described at section 269-95 of Schedule 2F.

If the Trust does not satisfy the control test, its prior year tax losses will be denied under section 267-20 of Schedule 2F and it will have to calculate its net income and tax losses for the 2011 income year under section 267-50 of Schedule 2F.

The control test is not met if a group, during the test period, begins to control the trust. A group controls a non-fixed trust if the group is able (directly or indirectly) to control the application of the income or capital of the trust. See paragraph 269-95(1)(b) of schedule 2F.

A loss arising during a period that a group controls a trust can be recouped only in that period. The loss cannot be recouped in a period that another group begins to control the trust (section 268-25 and Subdivision 268-C of Schedule 2F).

Subsection 269-95(5) of Schedule 2F defines a group as a person or a person and one or more associates or two or more associates of a person. The term associate is defined in section 318.

In the present case the Company, as the trustee, is able to control the application of the income and capital of the trust. Under paragraph 318(2)(d), an associate of a company would be a person who sufficiently influences the company. A director of a company is able to sufficiently influence the company. A director of the Company is an associate of the Company.

Under subsections 269-95(2) and (3) of Schedule 2F, the death of Person B does not, by itself, cause a change in the control of the Trust. However, with the transfer of the share to Person A, Person A has full ownership and therefore control of the company. A new group comprising the Company and Person A begins to control the Trust.

Any loss or outgoing, including prior year tax losses, arising in the period up to the transfer date can only be recouped in this period. Any loss or outgoing arising in this period can not be recouped after the transfer date.

Conclusion

Any loss or outgoing, including the prior year tax losses, arising before the transfer date cannot be recouped, in the period following the transfer date by the Trust.

Other comments

Reference was made as to whether the estate of Person B was an excepted trust for the purposes of section 272-100 of Schedule 2F.

A trust of a deceased estate is an excepted trust during the period from the death of the individual until the end of the year of income in which the fifth anniversary of the death occurs.

Person B died on a certain date. Their units in the Trust and their share in the Company passed to their estate. Subsequently and before a certain date, Person A purchased Person B's units and their share in the Company from their estate.

The transfer to Person A occurred before the fifth anniversary of Person B's death. The estate was, from the date of death to the end of that financial year, an excepted trust under section 272-100 of Schedule 2F.