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Ruling
Subject: Trust elections
Questions
Are the trustees of Trust A required to make an Interposed Entity Election?
Answer:
Yes
Is Company B required to make an Interposed Entity Election?
Answer:
No
This ruling applies for the following period
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commenced on
1 July 2012
Relevant facts and circumstances
The Trust A is a discretionary trust.
A Family Trust Election (FTE) was made by Trust A under section 272-80(1) of Schedule 2F of the ITAA 1936
The election has not been revoked.
The Family Trust A owns all shares in Company B
Relevant legislative provisions
Income Tax Assessment Act 1936 Schedule 2F of ITAA 1936
Reasons for decision
When a trustee has made a family trust election, a company, partners in any partnership or the trustee of any other trust can make an interposed entity election to be included in the family group of the individual specified in the family trust election.
The requirements for making interposed entity election is contained in section 272-85 of Schedule 2F of ITAA 1936
A company or the trustee of any other trust may make an interposed election to be included in the family group of the individual specified in the family trust election of the family trust after a specified day in a specified income year. For this to occur the company or trust must pass the family control test at the end of the income year (subsection 272-85(4) of the ITAA 1936). Subsection 272-85(7) goes on to affirm that the entity making interposed entity election cannot make multiple interposed entity elections, unless the individual specified in each of the family trust elections is the same.
Requirements for passing family control test
Section 272-87 of Schedule 2F of ITAA 1936 lists the requirements for passing the family control test. For a trust making an interpose entity election, if the members of the specified individual's family have control or beneficial enjoyment of the capital or income of the trust, the trust passes the family control test. For a company making an interposed entity election, if the members of the specified individual's family have fixed entitlements to a greater than 50% share of the income or capital of the company, the company passes the family control test.
Requirements for having fixed entitlements
Subparagraph 272-5(3) of Schedule 2F of ITAA 1936 asserts that an entitlement to a share of income or capital of a trust is considered fixed if the Commissioner considers that the beneficiary should be treated as having the fixed entitlement.
According to subparagraph 272-10(1) of the ITAA 1936 if a shareholder holds shares carrying the right to receive some or all of the dividends, the shareholder has a fixed entitlement to a share of the income of the company. A shareholder also has a fixed entitlement to a company if a shareholder holds shares carrying the right to receive the whole or part of any distribution of the paid-up share capital of the company
A person holds a fixed entitlement to a share of the income or capital of a company indirectly if the person holds the entitlement indirectly through fixed entitlements to shares of the income or capital of interposed trusts
Application to your circumstances
Trust A passes the family control test under paragraph 272-87(1) of the ITAA 1936 and can make an interposed entity election in relation.
Company B does not pass the family control test.