Edited version of your private ruling

Authorisation Number: 1012617949643

Ruling

Subject: Trust - Fixed Entitlement

Question 1

Does the Commissioner consider it fair and reasonable to treat the Company as holding, at each of the test times, the whole or part of its fixed entitlement to the income and capital of the Trust as an individual and for the individual's own benefit pursuant to subsection 272-30(3) of Schedule 2F to the Income Tax Assessment Act 1936 ('ITAA 1936')?

Answer

Yes.

This ruling applies for the following periods:

2013 income year

The scheme commences on:

June 1996

Relevant facts and circumstances

The Trust is not quoted on the official list of approved exchanges.

The Trust incurred tax losses in a number of income years.

The Trust is an unlisted widely held trust as defined in section 272-110 of Schedule 2F to the ITAA 1936 at all times during the test period. The test period starts from the beginning of the loss years until the end of the 2013 income year.

The beneficiaries of the Trust are subsidiaries of the Company which is a publicly listed company.

The Company maintained a greater than 50% fixed entitlement to the income and capital of the Trust during the test period.

The Trustee of the Trust states that it would not be practical for the Company from either a logistical or cost point of view to contact, let alone trace, possibly tens of millions of individual entitlement holders for each of the test times required.

The Trustee advises that they are not aware of any change before or after the test times in the individual shareholders of the Company who can be identified, as it is not practicable to identify any meaningful number of individual entitlement holders.

There has been no change in the units in the Trust since its establishment. There is no intention at this time to change or amend the unit structure of the Trust.

The Trustee is not aware of any change or future change to the capital structure or shareholdings of the Company that would either allow the identification of individual entitlement holders or be different to the current shareholder structure outlined in the Application.

The Trust has not experienced any abnormal trading in its units in accordance with subdivision 269B of Schedule 2F to the ITAA 1936 at any time.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 266-75 of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 266-75(1)(b) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 266-75(3) of Schedule 2F

Income Tax Assessment Act 1936 Section 266-90 of Schedule 2F

Income Tax Assessment Act 1936 Subsection 266-90(1) of Schedule 2F

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

Income Tax Assessment Act 1936 Subsection 269-50(1) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 269-50(2) of Schedule 2F

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

Income Tax Assessment Act 1936 Subsection 269-55(1) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-30(3) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-30(4) of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 272-30(4)(a) of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 272-30(4)(b) of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 272-30(4)(c) of Schedule 2F

Income Tax Assessment Act 1936 Section 272-110 of Schedule 2F

Income Tax Assessment Act 1997 Division 166

Reasons for decision

The deductibility of trust losses

Schedule 2F to the ITAA 1936 limits the deductibility of prior and current year trust losses and debt deductions.

Section 266-75 of Schedule 2F to the ITAA 1936 provides that unlisted widely held trust may be denied tax loss deduction.

Paragraph 266-75(1)(b) of Schedule 2F to the ITAA 1936 provides that section 266-75 of Schedule 2F to the ITAA 1936 applies to a trust that meets certain conditions including that it is an unlisted widely held trust at all times during the test period.

Subsection 266-75(3) of Schedule 2F to the ITAA 1936 prevents a trust to which section 266-75 of Schedule 2F to the ITAA 1936 applies from deducting a tax loss unless it meets the condition in section 266-90 of Schedule 2F to the ITAA 1936.

In the present case, the Trust is an unlisted widely held trust at all times during the test period.

Therefore, in accordance with subsection 266-75(3) of Schedule 2F to the ITAA 1936, the Trust cannot claim a tax loss unless it meets the conditions in section 266-90 of Schedule 2F to the ITAA 1936.

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:

• the beginning of the test period;

• immediately after,

• any abnormal trading in the trust's units; and

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

In the present case, the Trust had no abnormal trading in its units at any time during the relevant test period.

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, a trust will pass the 50% stake test 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 a 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 the trust.

Section 269-55(2) of Schedule 2F to the ITAA 1936 provides that 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.

Accordingly, for the Trust to pass the 50% stake test under sections 269-50 and 269-55 of Schedule 2F to the ITAA 1936, the same individuals must have, indirectly through the Company and for their own benefit, fixed entitlement to a greater than 50% share of income and capital of the Trust.

Fixed entitlements held directly or indirectly by Interposed listed public company

Where an interposed listed public company has directly or indirectly, a fixed entitlement to a share of income or capital of the main entity (the Trust), subsection 272-30(3) of Schedule 2F to the ITAA 1936 contains the Commissioner's discretionary power to treat the company as holding the whole or part of its fixed entitlement as an individual and for the individual's own benefit.

In the present case, the Company is a listed and widely held public company. The Company maintained a greater than 50% fixed entitlement to the income and capital of the Trust during the test period.

Therefore, at issue is whether the Commissioner, under subsection 272-30(3) of Schedule 2F to the ITAA 1936, considers whether it is fair and reasonable to treat Company as holding, at the test times, the whole or part of its fixed entitlement as an individual and for the individual's own benefit. When determining whether it is fair and reasonable, the Commissioner is to have regard to a number of factors set out in s 272-30(4).

The Commissioner's discretion

Subsections 272-30(3) and 273-30(4) of Schedule 2F to the ITAA 1936 provide:

Subsection 272-30(3) states:

If

(a) at the test time a listed public company or widely held unit trust has, directly or indirectly, a fixed entitlement to a share of the income or capital of the main entity; and

(b) having regard to the matters set out in subsection (4), the Commissioner considers it fair and reasonable to treat the company or trust as holding, at the test time, the whole or part of its fixed entitlement as an individual and for the individual's own benefit;

The company or trust is treated as so holding the whole or the part of its fixed entitlement.

Subsection 272-30(4) states:  

For the purposes of paragraph (3)(b), the matters are:

(a) the practicability of identifying any individuals who at the test time have fixed entitlements to a share of the income or capital of the main entity indirectly through the company or trust and for their own benefit; and

(b) any change before or after the test time in the individuals who can be identified as having fixed entitlements of the kind mentioned in paragraph (a); and

(c) any other matter that the Commissioner considers relevant

Paragraphs 13.43 and 13.44 of the Explanatory Memorandum to Taxation Law Amendment (Trust Loss and other Deductions) Bill 1997 (Cth) ('EM'), in reference to subsections 272-30(3) and (4) of Schedule 2F to the ITAA 1936 states as follows:

13.43 There are considerable practical difficulties in tracing interests in or through listed public companies, because of the large number of shareholders and the likelihood that individuals will not hold shares in the listed public company directly. Similar problems arise for widely held unit trusts. The main problem is that it may be difficult, in particular cases, to identify all the direct and indirect holders of fixed entitlements in those entities.

13.44 A provision has been included in the Bill to assist in overcoming difficulties in appropriate cases. This provision will allow the Commissioner to treat all or part of the fixed entitlements in a trust (or interposed entity where relevant) held, directly or indirectly, by a listed public company or widely held unit trust as being held by that company or trust as an individual for its own benefit.

Paragraph 272-30(4)(a) - The practicability of identifying any individuals who at the test time have fixed entitlements to a share of the income or capital of the main entity indirectly through the company for their own benefit

In regard to paragraph 272-30(4)(a) of Schedule 2F to the ITAA 1936, the following is taken into consideration to show the impracticability of identifying individuals who had fixed entitlements at the test times:

1. The scale of the Company's shareholding would make tracing individual entitlements difficult.

2. It is not practically possible either logistically or from a cost point of view to trace possibly tens of millions of individual entitlement holders for the test times.

3. Identifying and confirming individual entitlements is extremely difficult and therefore any meaningful analysis of the purpose of the 50% stake test would be practically impossible to undertake.

Taking into account the facts provided by the Trustee and the guidance provided by the EM, the Commissioner accepts that, in this case, it is not practicable to trace individual shareholding for the purposes of the 50% stake test.

Paragraph 272-30(4)(b) - Any change before or after the test time in the individuals who can be identified as having fixed entitlement of the kind mentioned in paragraph (a); and

The Trustee advises that they are not aware of any change in individual shareholders who can be identified before or after the test times as it is not practicable to identify any meaningful number of individual entitlement holders.

The Commissioner accepts that it is unpractical and problematic to identify any individuals and consequently any meaningful changes in individual shareholdings before and after the test times.

Paragraph 272-30(4)(c) - Any other matters that the Commissioner considers relevant.

Below is a list of matters the Commissioner considers relevant for the application of subsection 272-30(3).

1. There has been no change in the units in the Trust since its establishment. There is no intention at this time to change or amend the unit structure of the Trust.

2. The Trustee is not aware of any change or future change to the capital structure or shareholdings of the Company that would either allow the identification of individual entitlement holders or be different to the current shareholder structure outlined in the Application.

3. If Division 166 of the Income Tax Assessment Act 1997 were to apply to the Company, it would have passed the Continuity of Ownership Test.

Conclusion

Having regard to the matters under Subsection 272-30(4) of Schedule 2F to the ITAA 1936 the Commissioner considers it fair and reasonable to treat the Company as holding, at each of the test times, the whole or part of its fixed entitlement to the income and capital of the Trust as an individual and for the individual's own benefit pursuant to subsection 272-30(3) of Schedule 2F to the ITAA 1936.