Edited version of your private ruling

Authorisation Number: 1012510826605

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Ruling

Subject: Fixed Trust

Question 1

Is the Trust a 'fixed trust' for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936) and Income Tax Assessment Act 1997I (ITAA 1997) for the years of income ended 30 June 200Y to 30 June 20XX, pursuant to the definition of 'fixed entitlement' under subsection 272-5(1) of Schedule 2F to the ITAA 1936?

Answer

No.

Question 2

Does the Trust pass the 50% stake test in Subdivision 269-C of Schedule 2F to the ITAA 1936 for the test period for each tax loss, the earliest of which starts on 1 July 200X and the latest of which ends on XX June 20XX, by applying subsection 269-55(2)?

Answer

Yes.

Question 3

Is the Trust a 'widely held unit trust' under section 272-105 of Schedule 2F to the ITAA 1936?

Answer

Yes.

Question 4

Is the Trust eligible to satisfy the '50% stake test' in Division 269-C of Schedule 2F on the ITAA 1936 for the period from the loss time 1 July 200X until the first year of recoupment in 30 June 20ZZ to 30 June 20XX (being the final recoupment year) by applying section 269-55(2)?

Answer

Yes.

Question 5

If the Trust is considered to be a 'non-fixed trust' as defined in section 272-70 of Schedule 2F to the ITAA 1936, does the Trust satisfy the 'Control Test' in Subdivision 269-E of Schedule 2F to the ITAA 1936 during the test period, pursuant to section 267-45 of Schedule 2F to the ITAA 1936?

Answer

Not applicable.

This ruling applies for the following periods:

Year ended 31 December 2004

Year ended 31 December 2005

Year ended 31 December 2006

Year ended 31 December 2007

Year ended 31 December 2008

Year ended 31 December 2009

Year ended 31 December 2010

Year ended 31 December 2011

Year ended 31 December 2012

Year ended 31 December 2013

The scheme commences:

Year ended 31 December 2004

Relevant facts and circumstances

Nature of the Trust

The Trust was settled in 200X. It is an Australian registered managed investment scheme, which is subject to Chapter 5C of the Corporations Act 2001.

Currently, the Trustee is the Responsible Entity of the Trust.

The Trust was settled for the purpose of acquiring commercial property, and it owned a building. This was the only investment held by the Trust, other than cash in a bank account, from the time it was settled until 20XX (at which date the property was sold).

At all times in the test period, the units in the Trust were not listed for quotation in the official list of an approved stock exchange.

At all times in the test period, the Trust was not a 'wholesale widely held trust' (as defined under subsection 272-125(1) of Schedule 2F to the ITAA 1936) and was not an 'excepted trust' (as defined under section 272-100 of Schedule 2F to the ITAA 1936).

Powers of the Responsible Entity

The Trust had a previous name and the Responsible Entity of the Trust was another trustee. As per the 'Deed of Removal and Appointment of Trustee', that trustee retired as the Responsible Entity of the Trust and the current trustee agreed to accept the appointment as the Responsible Entity of the Trust. There have been no further changes in the Responsible Entity of the Trust.

The Responsible Entity acts as trustee of the Trust, holding investments on trust for the unit holders; in accordance with the constitution of the Trust.

There are a number of clauses in the constitution of the Trust that relate to the powers/responsibilities of the Responsible Entity. A clause outline the powers of the Responsible Entity; another clause - the retirement and appointment of Responsible entity; another clause - the liability and remuneration of Responsible Entity; and another clause the rights and covenants of the Responsible Entity.

Beneficial Interest of Unit holders & Units held in the Trust.

Another clause of the constitution of the Trust states that the beneficial interest in the Fund is divided into Units. There is only one class of units.

Another clause of the constitution of the Trust states that notwithstanding the unit price for which a unit may have been issued, all units of the same class are of equal value.

The majority of unit holders are Australian resident individual taxpayers and/or superannuation funds.

The number of unit holders and total issued units since 30 June 200X were provided.

The Trust was terminated in the 20XX income year.

There was no change to the number of issued units from the settlement of the Trust until new units were issued under a capital raising carried out in 20YY. The new units were issued for an amount per unit, which price was determined by applying a X% discount to the Net Asset Unit Value of the Trust as at a time in 200Y. This is based on statements in the Product Disclosure Statement issued in respect of the capital raising, which was publicly available. The capital raising was conducted as an entitlement offer to all unit holders to take up their entitlement and to new investors to take up any shortfall. The capital raising was conducted to enable the Trust to refinance its debt.

The Trust is not "closely held" (as defined in subsections 272-105(2) and (2A) of Schedule 2F to the ITAA 1936). A review of the top 20 unit holders (during the test period) shows that they, combined, only owned the following percentage of the total units on issue:

· A table was provided showing the percentage unit holding.

There has not been "abnormal trading" (as defined in Subdivision 269-B of Schedule 2F to the ITAA 1936) in units in the Trust since the settlement of the Trust.

Based on the available records (unit holder registers from 1 July 200X to the time the Trust was terminated) and the understanding of the board of the Responsible Entity, there has not been a more than 50% change in the ownership of the units of the Trust from 1 July 200X to the time the Trust was terminated.

Unit Price

The initial application price of the units was provided.

A clause of the constitution of the Trust states the value of a fully paid unit is an amount equal to the net value (as defined under a clause of the Constitution) of the Fund divided by the total of the number of fully paid units; and the total Paid Up Proportion of all partly paid Units. Another clause of the constitution of the Trust states that a partly paid unit is determined by multiplying the unit price of a fully paid unit and the Paid Up Proportion of the partly paid Unit.

Another clause was then amended by the Supplemental Deed, which states the value of a fully paid unit is an amount equal to the Net Value (Net Value is a defined term under the adjusted a clause of the Trust) of the Trust divided by the total of the number of fully paid units on issue at that time; and the total Paid Up Proportion of all partly paid Units (if any). No amendment was made to the clause in the constitution of the Trust defining a partly paid up unit.

Distribution of Net Trust income and other (including capital) distributions

Clauses of the constitution outline the Responsible Entity's obligations with regards to distribution of income.

Distributions of income must be made so that each unit holder is entitled to the same proportion of the distribution that the total number of units held by the unit holder bears to the total number of all units on issue. You confirmed that it is on this basis that all distributions have been made by the Responsible Entity of the Trust since its inception (i.e. based on number of units held/total units on issue).

Another clause of the constitution deals with "other distributions" (including capital distributions). Those other distributions must also be made so that each unit holder is entitled to the same proportion of the distribution that the total number of units held by the unit holder bears to the total number of all units on issue.

Amendments to the constitution

Another clause of the constitution of the Trust states that subject to the Corporations Act 2001 the Trustee may at any time by executing an instrument in writing alter, modify, vary, amend, revoke or add to any provisions of the constitution. Section 601GC of the Corporations Act 2001 allows amendments to the constitution by a special resolution. A special resolution can only be passed if at least 75% of the unit holders support the resolution.

Since the settlement of the Trust, there have been the following amendments to the constitution by way of Supplemental Deeds. A summary of these was provided.

No alterations to the constitution (by way of the above Supplemental Deeds) have changed the unit holders' rights to income or capital without valuable consideration.

Other information

The trust's losses were provided. The Trust made a tax loss in the income year ending 30 June 200X, but you accept that the Trust will not pass the 50% stake test in respect of this tax loss. This tax loss cannot be deducted.

You advised, amongst other things that the register of unit holders was examined to establish that the Trust is widely held with the majority of the unit holders being individuals and superannuation funds. The following points were made by the applicant:

An analysis of the unit holdings was provided.

You advised that the superannuation funds referred to above are taken to include complying superannuation funds with fewer than 50 members and a complying approved deposit fund with more than 50 members.

You advised that the family trusts referred to above are considered likely to have a family trust election in respect of the trust in force at each of the relevant times in accordance with section 272-75 of Schedule 2F to the ITAA 1936.

The Trust will deduct some of its tax losses in the 20YY income year, and some of its tax losses in the 20ZZ income year. The balance of the tax losses will be deducted in the 20XX income year.

Relevant legislative provisions

ITAA 1997 subsection 995-1(1)

ITAA 1936 subsection 95A(2)

ITAA 1936 section 269-50 of Schedule 2F

ITAA 1936 subsection 269-55(2) of Schedule 2F

ITAA 1936 paragraphs 266-75(1)(b) to (e) in Schedule F

ITAA 1936 subsection 266-75(3) of Schedule F

ITAA 1936 subsection 266-90(1) of Schedule 2F

ITAA 1936 section 272-5 of Schedule 2F

ITAA 1936 subsection 272-5(1) of Schedule 2F

ITAA 1936 subsection 272-5(2) of Schedule 2F

ITAA 1936 subsection 272-5(3) of Schedule 2F

ITAA 1936 subparagraph 272-5(3)(b)(i) of Schedule 2F

ITAA 1936 subparagraph 272-5(3)(b)(ii) of Schedule 2F

ITAA 1936 subparagraph 272-5(3)(b)(iii) of Schedule 2F

ITAA 1936 sections 272-25 of Schedule 2F

ITAA 1936 subsection 272-25(3) of Schedule 2F

ITAA 1936 subsection 272-25(4) of Schedule 2F

ITAA 1936 section 272-30 of Schedule 2F

ITAA 1936 subsection 272-30(2) of Schedule 2F

ITAA 1936 section 272-65 of Schedule 2F

ITAA 1936 section 272-70 of Schedule 2F

ITAA 1936 subsection 272-75 of Schedule 2F

ITAA 1936 section 272-105 of Schedule 2F

ITAA 1936 subsection 272-105(1) of Schedule 2F

ITAA 1936 subsection 272-105(2) of Schedule 2F

ITAA 1936 subsection 272-105(2A) of Schedule 2F

ITAA 1936 subsection 272-105(4) of Schedule 2F

ITAA 1936 section 272-130 of Schedule 2F

Corporations Act 2001 section 601GC

Corporations Act 2001 Chapter 5C

Reasons for decision

Question 1

Summary

No, the Trust is not a fixed trust as defined in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936 for the purposes of the ITAA 1936 and ITAA 1997 for the years of income ended 30 June 200Y to 30 June 20XX.

Detailed reasoning

A 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997, and section 272-65 of Schedule 2F to the ITAA 1936; that definition provides that:

A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust.

The definition of 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that 'an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the ITAA 1936.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement in a trust:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

In addition, subsection 272-5(2) of Schedule 2F to the ITAA 1936 states that:

If:

a person holds units in a unit trust; and

the units are redeemable or further units are able to be issued; and

if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and

(d) if the units are not listed as mentioned in paragraph (c) - the units held bythe person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a unit holder, in the income or capital of the unit trust is defeasible.

The term 'vested and indefeasible' is not defined in the taxation legislation and to date there is no 'ATO view' which defines or clarifies the term. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 does discuss its ordinary meaning at some length, at paragraphs 13.4 to 13.9.

The meaning of the term 'vested and indefeasible' (in the context of Schedule 2F to the ITAA 1936) has not been judicially considered, other than a discussion in Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; 2011 ATC 20-235 in the limited context of amending the constitution of a registered managed investment scheme under section 601GC of the Corporations Act 2001. However, the term 'vested and indefeasible' does appear in subsection 95A(2) of the ITAA 1936 and has been considered in that context by the courts - refer to Estate Mortgage Fighting Fund Trust v FC of T 2000 ATC 4525; Walsh Bay Developments Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4378; Dwight v Commissioner of Taxation (1992) 92 ATC 4192; Harmer v FC of T (1991) 173 CLR 264; 91 ATC 5000.

Also relevant are MSP Nominees Pty Ltd v Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v Commissioner of Stamp Duties (1952) 88 CLR 54; Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490.

It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a fixed entitlement to a share of income or capital there must be a vested or indefeasible interest "under a trust instrument". In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

The first step in determining whether a beneficiary has a vested and indefeasible interest in a share of the income or capital of a trust is to ascertain the terms of the trust upon which the relevant trust property is held. As the High Court recently stated in CPT Custodians Pty Ltd v Commissioner of State Revenue (Vic); Commissioner of State Revenue (Vic) v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [15], in taking this step:

'...a priori assumptions as to the nature of unit trusts under the general law and principles of equity [will] not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2), upon the terms of the particular trust. The term "unit trust" is the subject of much exegesis by commentators. However, "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which dictate the application to particular facts of the [relevant statutory definition]...'

There will be some circumstances in which a trust instrument must be read subject to the operation of a particular legal rule, whether by common law, statute or statutes. See, for example, the provisions of Chapter 5C of the Corporations Act 2001 which, if inconsistent with the constitution of a registered managed investment scheme, can have the effect of altering or modifying the scheme's constitution. It is possible for a constitution to be altered or modified by operation of law irrespective of whether the trust instrument itself expressly recognises the relevant common law rule or statute, and the entitlements of a beneficiary under the trust instrument are those as so altered or modified by operation of law.

For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the constitution consists of the trust deeds and supplementary deeds. The unit holder's interest is not contingent upon any event. They have a present right to the future income and capital of the trust. It is accepted that the constitution provides unit holders with a vested interest in the income and capital of the Trust.

It is accepted that the trust instrument provides members with a vested interest in the income and capital of the Trust. The constitution provides that the beneficial interest in the Trust is divided into units. The unit holders' interest is not contingent upon any event. They have a present right to the current and future income and capital of the Trust.

For the purposes of the phrase "vested and indefeasible" in subsection 272-5(1) of Schedule 2F to the ITAA 1936, the fact that a power held by the trustee or manager has not yet been exercised is not relevant when determining if the power results in an interest being defeasible. The exercise of the power is relevant to determining whether an interest has in law been defeased, not to whether the interest is defeasible. The key question is whether the power, if exercised, would result in a defeasance of some or all of a unit holder's (or beneficiary's) rights to the income and/or capital of the trust.

The constitution of the Trust contains certain clauses by which a unit holder's interest in a share of the income or capital of the trust may be defeased. Therefore, it can be concluded, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, that all beneficiaries (unit holders of the Trust) do not have fixed entitlements to all of the income and capital of the Trust.

Clauses in the trust instrument which may contain defeasible powers

Classes of units

Clauses in the constitution provides for the allotment of units and creation of new units. The power to create new units could enable the trustee to stream income or capital to new unit holders at the expense of existing unit holders. This may constitute a defeasible power.

The price of new units

A clause in the constitution allows for additional units to be created and issued at the 'Unit Price' or otherwise as the Trustee determines subject to the Corporations Act 2001. The power to issue or redeem units for a price that does not comply with subsection 272-5(2) is considered to be a defeasible power.

The power to permit or require reinvestment

A clause in the constitution allows the Trustee to permit or require unit holders to reinvest some or all of any distribution to acquire more units. This power could be used to provide rights to particular unit holders over other unit holders and could be considered a defeasible power.

Amendments

A clause in the constitution permits amendments to the constitution. The trustee may at any time by executing an instrument in writing, alter, modify, vary, amend, revoke or add to any provisions of the Deed.

Section 601GC of the Corporations Act 2001 also permits the amendment of the constitution by a special resolution. A special resolution can only be passed if a least 75% of the unit holders vote on the resolution.

An amendment, approved by a special resolution of unit holders could defease the rights of some of the unit holders to a share of the income or capital of the Trust.

An amendment effected by the Trustee by executing an instrument in writing could permit the amendment of clauses to introduce defeasible powers which do not currently exist.

Therefore, on the basis of this clause alone, the Commissioner has concluded, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, that all unit holders (or beneficiaries) do not have fixed entitlements to all of the income and capital of the Trust.

Question 2

Summary

The Trust will be a 'fixed trust' for the purposes of the ITAA 1936 and ITAA 1997 for the years of income ended 30 June 200Y to 30 June 20XX, pursuant to the exercise of the Commissioner's discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936.

Detailed reasoning

Subsection 272-5(3) of Schedule 2F to the ITAA 1936 contains a discretion, whereby in cases where beneficiaries do not have a fixed entitlement, the Commissioner may treat such beneficiaries as having a fixed entitlement, having regard to the factors prescribed in paragraph 272-5(3)(b).

These factors are:

(i) the circumstances in which the entitlement is capable of not vesting or the defeasance can happen; and

(ii) the likelihood of the entitlement not vesting or the defeasance happening; and

(iii) the nature of the trust.

In view of the conclusion above that the beneficiaries (unit holders) do not have a vested and indefeasible interest in the income and capital of the Trust, and hence do not have a fixed entitlement pursuant to subsection 272-5(1) of Schedule 2F to the ITAA 1936, the only way that the beneficiaries can have a fixed entitlement is if the Commissioner exercises the discretion in subsection 272-5(3).

The interpretation of section 272-5 of Schedule 2F to the ITAA 1936 is expressly addressed in the Trust Consultation Sub-group issues register.

http://www.ato.gov.au/Tax-professionals/Tax-practitioner-consultation/In-detail/NTLG-Sub-committees/Trust/Trust-Consultation-Sub-group-issues-register/

The ATO has stated the following:

In applying the discretion, the ATO would have regard to what the Office understands was the policy that underlay the provisions at the time they were enacted. The Commissioner would also have to apply the statutory tests having regard to the terms of the particular trust deeds and all the surrounding circumstances. Where, however, a trust is a unitized trust registered as a managed investment scheme under the Corporations Act 2001 with a single class of unit holders who deal with the responsible entity on an arm's length basis, the nature of the trust would be one that would weigh in favour of an exercise of the discretion.

...

For unlisted unit trusts (including those that are not registered managed investment schemes for the purposes of the Corporations Act 2001) with a single class of units on issue, it would generally be expected that the Commissioner would exercise the discretion on a year by year basis or for a certain point in time (depending on the relevant legislative provision) provided that, for the relevant year or time:

(a) any issue or redemption of units was actually done at a price determined on the basis of the net asset value at the time of the redemption or issue (that is, the price does not necessarily have to equate precisely to the net asset value, provided that the deviation from that value does not unduly favour or prejudice particular unit holders, is done in the best interests of all unit holders, complies with any relevant ASIC relief, and the Commissioner considers the extent of the deviation to be reasonable in all the circumstances); and

(b) no amendments have been made to the trust's constitution that have had the effect of significantly defeasing a beneficiary's interest in the income or capital of the trust.

For trusts not covered above, the Commissioner may exercise the discretion depending on the specific facts and circumstances.

In the absence of any precedential guidelines, taxpayers seeking access to the Commissioner's discretion will be dealt with according to the relevant facts, on a case by case basis.

After considering all of the relevant factors set out in subparagraphs 272-5(3)(b)(i) to (iii) of Schedule 2F to the ITAA 1936, the Commissioner has concluded that it would be reasonable to treat all the unit holders of the Trust as having fixed entitlements to both the income and capital of the Trust under subsection 272-5(3) for the relevant period.

Question 3

Summary

Yes, the Trust is a 'widely held unit trust' under section 272-105 of Schedule 2F to the ITAA 1936.

Detailed reasoning

Subsection 272-105(1) of Schedule 2F to the ITAA 1936 provides that trust is a widely held unit trust if:

(a) it is a fixed trust that is a unit trust; and

(b) it is not closely held.

Subsection 272-105(2) of Schedule 2F to the ITAA 1936 provides that a trust is closely held if:

(a) an individual has, or up to 20 individuals have between them; or

(b) no individual has, or no individuals have between them;

directly or indirectly and for their own benefit, fixed entitlements to a 75% or greater share of the income of the trust.

In addition subsection 272-105(2A) of Schedule 2F to the ITAA 1936 provides that,

A trust is also closely held if:

(a) an individual has, or up to 20 individuals have between them; or

(b) no individual has, or no individuals have between them;

directly or indirectly and for their own benefit, fixed entitlements to a 75% or greater share of the capital of the trust.

A clause of the constitution divides the beneficial interest into units and it has been accepted that the Trust is a fixed trust following the exercise of the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936.

Therefore, paragraph (a) of the definition of a 'widely held unit trust' is satisfied.

The remaining requirement is establishing that the Trust is not 'closely held'.

You advised that a review of the top 20 unit holders revealed between them their lowest total percentage of unit holding and their highest total percentage of unit holding. The constitution provides unit holders are equally entitled to the income and capital of the trust. That anaysis showed neither paragraph 272-105(2)(a) nor 272-105(2A)(a) are satisfied and the trust is not closely held.

Subsection 272-105(4) of Schedule 2F to the ITAA 1936 states that a unit trust is not a widely held unit trust if certain conditions exist that are capable of causing paragraph 272-105(1)(b) of Schedule 2F to the ITAA 1936 not to be satisfied. Subsection 272-105(4) is satisfied if it is reasonable to conclude that any rights attached to the units could be varied to cause paragraph 272-105(1)(b) not be satisfied.

The constitution of the Trust contains certain clauses under which a unit holder's interest in a share of income or of the capital of the Trust may be rendered defeasible. The power to amend the Trust's constitution could be used to alter the rights of unit holders.

However, the Trust is subject to Chapter 5C of the Corporations Act 2001. Given the fiduciary responsibilities imposed on the responsible entity and the consequences under Schedule 2F to the ITAA 1936 if the Trust was not a widely held trust, it is unlikely that the necessary amendments would be approved by the trustee or by a special resolution of the unit holders. It would therefore seem unlikely that amendments would be made, or actions would be taken that cause the Trust to come within subsection 272-105(4) of Schedule 2F to the ITAA 1936.

Furthermore, the Trust was wound up in 20XX without the rights of unit holders having been so varied. For the reasons stated above we are satisfied that this subsection does not apply.

Therefore, having satisfied all the requirements of section 272-105 of Schedule 2F to the ITAA 1936, the Trust is a widely held unit trust.

Question 4

Summary

Yes, the Trust passes the 50% stake test in Subdivision 269-C of Schedule 2F to the ITAA 1936 for the test period for each tax loss, the earliest of which starts on 1 July 200X and the latest of which ends on XX June 20XX, by applying subsection 269-55(2).

Detailed reasoning

In accordance with paragraphs 266-75(1)(b) to (e) in Schedule 2F of the ITAA 1936, the Trust needs to be an unlisted widely held trust, and, not a wholesale widely held trust, or, an unlisted very widely held trust, or, an excepted trust at all time during the test period.

In accordance with subsection 266-75(1) of Schedule 2F to the ITAA 1936 and section 272-130 of Schedule 2F to the ITAA 1936 the test period is from the beginning of the tax year in which the loss was incurred (loss year) until the end of the tax year in which the loss is to be recouped (income year) but does not include part of the period where a trust ceases to exist.

The test period for the Trust is from 1 July 200X until the Trust was terminated. Although the Trust made a tax loss in the income year ended 30 June 200X (which began when the Trust was settled in 200T), you have accepted that the Trust will not pass the 50% stake test in respect of that tax loss. Therefore, the 200X tax loss cannot be deducted. This means that the test period will only start on 1 July 200X.

The Trust is not an unlisted very widely held trust as it does not have at least 1000 unit holders. You advised that the Trust does not meet the conditions to be a wholesale widely held trust or an excepted trust.

Subsection 266-75(3) of Schedule 2F to the ITAA 1936 provides that an unlisted widely held trust cannot claim a tax loss unless it meets the conditions in section 266-90 of Schedule 2F to the ITAA 1936.

Relevantly, subsection 266-90(1) of Schedule 2F to the ITAA 1936 requires that an unlisted widely held trust must pass the 50% stake test in respect of the following times:

(a) the beginning of the test period;

(b) immediately after,

§ any abnormal trading in the trusts units; and

§ the end of every income year during the test period.

You advised that there was no abnormal trading in the units of the Trust.

Therefore, the relevant times at which the Trust must pass the 50% stake test are:

(1)   1 July 2004

(2)   immediately after 30 June 2005,

(3)   immediately after 30 June 2006,

(4)   immediately after 30 June 2007,

(5)   immediately after 30 June 2008,

(6)   immediately after 30 June 2009,

(7)   immediately after 30 June 2010,

(8)   immediately after 30 June 2011,

(9)   immediately after 30 June 2012,

(11)  immediately after XX June 2013.

Section 269-50 of Schedule 2F to the ITAA 1936 explains what it means to have more than 50% stake of the income and capital of the trust.

More than a 50% stake in income

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.

More than a 50% stake in capital

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.

Under subsection 269-55(1) of Schedule 2F to the ITAA 1936 the 50% stake test will be passed 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 trust; and

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

Subsection 269-55(2) of Schedule 2F to the ITAA 1936 states that if a trust is a widely held unit trust, it is taken to pass the 50% stake test for the period in question if it is reasonable to assume that the requirements of subsection 269-55(1) of Schedule 2F to the ITAA 1936 are met. However, this provision is conditional on there being fixed entitlement by the individuals.

Special Tracing Concessions

Subdivision 272-A of Schedule 2F to the ITAA 1936 contains special rules that apply to modify how fixed entitlements in a fixed trust are traced through certain interposed entities.

According to Paragraph 13.30 of the EM to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997, these special rules were introduced to overcome difficulties caused by the nature of the interests individuals hold in certain interposed entities or because of the practical difficulties in tracing through certain entities. These rules operate where a fix entitlement is held directly or indirectly.

In broad terms, where the rules contained in Subdivision 272-A of Schedule 2F to the ITAA 1936 apply, the trust will not need to trace through all interposed entities in order determine the ultimate individuals who directly or indirectly have a fixed entitlement to the income and capital of the trust. 

For fixed entitlements held, directly or indirectly, by superannuation funds subsection 272-25(3) of Schedule 2F to the ITAA 1936 provides the following tracing concession:

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.

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 individuals 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.

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.

Therefore, to the extent that the fixed entitlement in the Trust is held by a superannuation fund that has more than 50 members, one would not need to trace that fixed entitlement through to the ultimate individuals. Such fixed entitlements will instead be treated for the purposes of the 50% stake test as being held by that superannuation fund as an individual and for its own benefit.

To the extent that the fixed entitlement in the trust is held by a superannuation fund that has 50 members or fewer, the individuals will be treated as holding their entitlement in equal proportions.

For fixed entitlements held, directly or indirectly, by family trusts subsection 272-30(3) of Schedule 2F to the ITAA 1936 provides the following tracing concession:

272-30(2)  

If at the test time a family trust has, directly or indirectly, a fixed entitlement to a share of the income or capital of the main entity, it is treated as if it had the fixed entitlement as an individual and for the individual's own benefit.

272-75 provides:

A trust is a family trust at any time when a family trust election (see subsection 272-80(1)) in respect of the trust is in force.

There are also tracing concessions arising upon death under section 272-40 of Schedule 2F to the ITAA 1936. Section 272-40 provides:

272-40  

If, immediately before an individual dies, he or she has a fixed entitlement to a share of the income or capital of a trust, partnership or company directly or indirectly, and for his or her own benefit, the individual is taken to continue to have the entitlement for so long as:

(a) it is held by someone as trustee of the individual's estate; or

(b) it is held by someone who received it as a beneficiary of the estate

Reasonable To Assume Test

In addition to the tracing concessions outlined above, a widely held unit trust is also permitted to rely on the concession contained in subsection 269-55(2) of Schedule 2F to the ITAA 1936 to assist it in demonstrating that the 50% stake test has been satisfied. Subsection 269-55(2) of Schedule 2F to the ITAA 1936 relevantly provides that:

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.

You submitted that memberships of superannuation funds with 50 members or fewer are relatively static on the basis that there have been no name changes to these unit holders and because self managed superannuation funds have a maximum of 4 members. You advised that the 50% stake test is not passed in the income year 200X.

The applicant provided a table of their analysis.

The table above illustrates that individuals and superannuation funds hold more than 50% of units at 1 July 200X, more than 50% of units at V March 20VV, more than 50% at V April 20VV and more than 50% at XX June 20XX.

Not included in the analysis above are unit holders that are family trusts. Family trusts make up approximately 9% of unit holders following the rights issue in 20VV. You also advised that unit holders who are family trusts are taken to have made a family trust election in order to claim their franking credits.

Under subsection 272-30(3) of Schedule 2F to the ITAA 1936, the tracing concessions allows for family trusts to be treated as a single unit holder. Unit holders that are family trusts, if taken into consideration, would further increase the proportion of the same unit holders above the necessary 50%.

You further advise that also not included in the calculations in the table above are transfers in unit holdings that are included as changes in unit holdings because of deceased estates. These are transfers of units from jointly held to solely held units under survivorship or from deceased estates to authorised representative or beneficiaries of deceased estates. Under section 272-40 of Schedule 2F to the ITAA 1936 these unit holdings will be treated as having continued to hold their fixed entitlement to the capital and income of the trust. The applicant has estimated that a review of these transactions may indicate a 3% upward adjustment to the proportion of units held by the same unit holders since 2004.

Taking into account the views put on your behalf, and the tracing concession provided to both superannuation funds, and, family trusts the Commissioner accepts that in this case it is reasonable to assume that the Trust passes the 50% stake test in respect of the tax loses made in the 200Y to 20VV income years for the test period from 1 July 200X to the termination of the Trust.