Edited version of private advice

Authorisation Number: 1051613229025

Date of advice: 27 November 2019

Ruling

Subject: Deductibility of trust tax losses

Question 1

Will the Unitholders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the Unitholders of the Trust as having fixed entitlements to all of the income and capital of the Trust?

Answer

Yes

Question 3

Is the Trust 'closely held' for the purposes of subsections 272-105(2) and 272-105(2A) of Schedule 2F to the ITAA 1936 in respect of the income years ended 30 June 2018 and 30 June 2019?

Answer

Yes

Question 4

Will the Trust pass the 50% stake test in Subdivision 269-C of Schedule 2F to the ITAA 1936 in respect of each Test Period so that the Tax Losses will not be denied under section 266-25 of Schedule 2F to the ITAA 1936?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commences on:

1 July 2017

Relevant facts and circumstances:

The Trust was settled on 1 July 2017.

The Trust is not a registered MIS for the purposes of Chapter 5C of the Corporations Act 2001.

The Trustee does not hold an AFSL for the purposes of Part 7.6 of the Corporations Act 2001.

Investment in the Trust does not require a PDS to be issued.

The Trust is a resident of Australia for taxation purposes.

The Continuous Unitholders will, between them, be ultimate beneficiaries to at least 50% of the income and capital of the Trust throughout the Ruling Period.

Tax losses have been incurred in relation to the trading activities of the Trust in the income years ended 30 June 2018 and 30 June 2019.

It is not the intention for the Tax Losses to be recouped by way of an injection of income.

There has never been and there will not be any agreements in place between past, present or future Unitholders and/or Ultimate Beneficiaries (or entities controlled by them) in relation to the recoupment of the Tax Losses.

The Trustee has never exercised a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the income or capital of the trust (refer to PCG 2016/16).

The Trustee is a resident of Australia for taxation purposes.

Section 272-35 of Schedule 2F to the ITAA 1936 will not have application to the arrangement.

The arrangement will not involve the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction.

The arrangement will not involve fraud or evasion.

Section 100A of the ITAA 1936 will not apply to the arrangement.

Besides the relevance to the recoupment of Tax Losses the existence of 'fixed entitlements' as per the meaning of that term in section 272-5 of Schedule 2F to the ITAA 1936 will not have any other relevance to the Trust.

Assumptions:

Throughout the Ruling Period:

·        The issue price of Units in the Trust will be determined on the basis of the valuation of the assets and liabilities of the Trust in accordance with Australian Accounting Principles.

·        The Trust Deed will not be amended.

·        The redemption price of Units in the Trust will be determined on the basis of the valuation of the assets and liabilities of the Trust in accordance with Australian accounting principles.

·        The Trust will not satisfy the requirements to be a 'managed investment trust' under section 275-10 of the ITAA 1997.

·        In the event that the Trust has more than one class of Units on issue, all classes of Units will have the same rights and entitlements.

·        The Trustee will not exercise a power capable of defeating a Unitholder's interest to defeat a Unitholder's interest in the income or capital of the trust.

·        Section 272-35 of Schedule 2F to the ITAA 1936 will not apply.

·        There will be no trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction.

·        There will be no fraud or evasion.

·        There will be no duplication of a tax loss or capital loss.

·        For the income years ended 30 June 2020, 30 June 2021, 30 June 2022, 30 June 2023 and 30 June 2024 the Trust is closely held for the purpose of section 272-105 of Schedule 2F to the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936

Subsection 6(1)

Section 100A

Section 266-25 of Schedule 2F

Section 266-40 of Schedule 2F

Subdivision 269-C of Schedule 2F

Section 269-50 of Schedule 2F

Section 269-55 of Schedule 2F

Subsection 269-55(1) of Schedule 2F

Section 272-5 of Schedule 2F

Subsection 272-5(1) of Schedule 2F

Subsection 272-5(2) of Schedule 2F

Subsection 272-5(3) of Schedule 2F

Paragraph 272-5(3)(a) of Schedule 2F

Paragraph 272-5(3)(b) of Schedule 2F

Subparagraph 272-5(3)(b)(i) of Schedule 2F

Subparagraph 272-5(3)(b)(ii) of Schedule 2F

Subparagraph 272-5(3)(b)(iii) of Schedule 2F

Subsection 272-25(3) of Schedule 2F

Subsection 272-25(5) of Schedule 2F

Section 272-35 of Schedule 2F

Section 272-65 of Schedule 2F

Section 272-105 of Schedule 2F

Subsection 272-105(2) of Schedule 2F

Subsection 272-105(2A) of Schedule 2F

Subsection 272-105(3) of Schedule 2F

Income Tax Assessment Act 1997

Subsection 995-1(1)

Section 275-10

Corporations Act 2001

Chapter 5C

Part 7.6

Reasons for decision

Question 1

As per paragraph 16 of PCG 2016/16, the Trust Deed 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 (Unitholders of the Trust) do not have fixed entitlements to all of the income and capital of the Trust.

Question 2

It is reasonable to conclude, based on the "trust instrument" of the Trust, that for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the beneficiaries (Unitholders) of the Trust do not have fixed entitlements to any of the income and capital of the Trust.

However, pursuant to paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936, and after having regard to the requirements of subparagraphs 272-5(3)(b)(i), (ii) and (iii) and submissions from the applicant, it is submitted that it is appropriate that the Unitholders of the Trust should be treated as having fixed entitlements to all of the income and capital of the Trust for the relevant income years.

In summary, as:

·        the trust instrument (being the Trust Deed) contains powers which have not been used to defease the interests of the beneficiaries in the income or capital of the Trust;

·        the likelihood of defeasance is low;

·        the requirements of safe harbour 6 in paragraph 54 of PCG 2016/16 are satisfied for the entire retrospective aspect of the Ruling Period and are expected to be (according to the facts and assumptions) satisfied in respect of the prospective portion of the Ruling Period; and

·        there is little likelihood that a tax benefit of the Trust will be transferred,

there is a reasonable case for the Commissioner to exercise the discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat all of the Unitholders of the Trust as having a fixed entitlement to their share of the income and capital of the Trust for the relevant income years.

Question 3

The relevant legislation is as follows:

·        Subsections 272-105(2) and (2A) of Schedule 2F to the ITAA 1936 relevantly (and effectively) provide 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 or capital of the trust.

·        Subsection 272-105(3) of Schedule 2F to the ITAA 1936 also provides that:

For the purposes of subsection (2) or (2A), all of the following are taken to be a single individual:

(a) an individual, whether or not the individual holds units in the unit trust; and

(b) the individual's relatives; and

(c) in relation to any units in respect of which other individuals are nominees of the individual or of the individual's relatives - those other individuals.

·        For these purposes the following legislative definitions are relevant:

·        'relative':

'relative' in subsection 6(1) of the ITAA 1936 has the meaning given by subsection 995-1(1) of the ITAA 1997.

A person's 'relative' is defined in subsection 995-1(1) of the ITAA 1997 to mean:

(a) the person's spouse

(b) the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the person, or of that person's spouse

(c) the spouse of a person referred to in (b).

·        'person':

'person' in subsection 6(1) of the ITAA 1936 has the same meaning as in the ITAA 1997

'person' is defined in subsection 995-1(1) of the ITAA 1997 to mean: 'includes a company'

It is demonstrated via the actual Unitholdings and beneficially held stakes in the Trust that 20 or less individuals between them beneficially hold, directly or indirectly, 75% or more of the fixed entitlements to income or capital of the trust.

Question 4

Summary

The Trust will pass the 50% stake test in respect of each of the 10 Test Periods.

Detailed reasoning

The relevant times at which the 50% stake test is required to be passed by a trust is determined by the conditions which apply to that particular type of trust.

In Question 3 it was concluded that the Trust is 'closely held' for the purposes of subsections 272-105(2) and 272-105(2A) of Schedule 2F to the ITAA 1936 in respect of the elapsed income years. Also, the Assumptions include that for the income years ended 30 June 2020, 30 June 2021, 30 June 2022, 30 June 2023 and 30 June 2024 the Trust is closely held for the purpose of section 272-105 of Schedule 2F to the ITAA 1936. Therefore, for the entirety of the Ruling Period the Trust is considered to be a closely held trust.

In the case of the Trust, it is a closely held trust the 50% stake test must be satisfied at all times throughout the Test Period (per sections 266-25 and 266-40 of Schedule 2F to the ITAA 1936).

Subsection 266-25 of Schedule 2F to the ITAA 1936 effectively provides that a closely held trust will not be able to deduct a tax loss unless it satisfies the condition in section 266-40 or 266-45.

Section 266-40 of Schedule 2F to the ITAA 1936 provides that the closely held trust must pass the 50% stake test for the Test Period.

Section 269-50 of Schedule 2F to the ITAA 1936 defines the term 'more than a 50% stake' in relation to the income and capital of a 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.

Subsection 269-55(1) of Schedule 2F to the ITAA 1936 defines the term 'passes 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)) have more than a 50% stake in the capital of the trust;

the trust passes the 50% stake test for the period or in respect of the 2 times.

Conclusion as to passing the 50% stake test in each Test Period

There are 10 Test Periods (per paragraph 266-25(1)(b) of Schedule 2F to the ITAA 1936).

The facts include that the Continuous Unitholders will, between them, be ultimate beneficiaries through various Unitholdings to at least 50% of the income and capital of the Trust throughout the Ruling Period. These Unitholdings constitute fixed entitlements (as outlined above).

Therefore:

·        For the purposes of section 269-50 of Schedule 2F to the ITAA 1936 the same individuals (the Continuous Unitholders) will (between them), directly or indirectly, and for their own benefit have fixed entitlements to more than a 50% stake in the income and capital of the Trust at all times throughout each of the 10 Test periods;

·        For the purposes of section 269-55 of Schedule 2F to the ITAA 1936 the Trust passes the 50% stake test at all times throughout each of the 10 test Periods; and

·        The Trust will not be denied from deducting a Tax Loss because of the operation of section 266-25 of Schedule 2F to the ITAA 1936.