Edited version of private advice

Authorisation Number: 1052243487183

Date of advice: 1 May 2024

Ruling

Subject: Trust losses

Question 1

Will redundancy payments to workers be considered distributions of capital of the relevant loss trust for the purposes of paragraph 267-30(1)(b) of Schedule F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

If the answer to question 1 is no, then will the condition in subsection 267-30(2)of Schedule F of the ITAA 1936 not apply if there is no distribution of capital in the loss recoupment income year or within 2 months after its end?

Answer

Yes.

Question 3

If the answer to question 1 is no, then will the condition in subsection 267-30(2) of Schedule F of the ITAA 1936 be met if there are distributions of capital in the loss recoupment income year or within 2 months after its end?

Answer

No.

Question 4

If the answer to question 1 is yes, then will the Commissioner treat the loss trusts as satisfying the tests to claim the losses in future years?

Answer

Not applicable.

Question 5

If the loss trust has not been in a position to claim a tax loss in a prior year, as in all subsequent years further tax losses were made, then will section 267-35 of Schedule F of the ITAA 1936 apply?

Answer

No.

Question 6

Will the condition in subsection 267-40(2) of Schedule F of the ITAA 1936 be applicable to the relevant loss trust?

Answer

No.

Question 7

Will a group begin to control the relevant loss trust during the test period?

Answer

No.

Question 8

Will Division 270 of Schedule F of the ITAA 1936 apply to deny the relevant loss trust a deduction for the tax losses?

Answer

No.

Question 9

If the answer to question 2 is yes, is the relevant loss trust entitled to claim a deduction for their tax losses against assessable income in future years?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The trust is an approved worker entitlement fund under subsection 58PB(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986).

The trust was established in 20XX jointly by specified industry parties to provide redundancy benefits to workers in the relevant industry.

The trustee of the fund is a company limited by guarantee with no shareholders. The trustee company has X directors who are appointed jointly by these industry parties.

The trust receives contributions from employers to fund Worker termination payment obligations of the employers. These contributions are mandated under Enterprise Bargaining Agreements (EBAs).

Members of the trust are employers who are required to make weekly redundancy pay contributions to the fund in respect of their workers. Each contribution made by a Member in respect of a worker is credited to the Worker's Account of that worker. The workers are entitled to the capital (but not the income) of the trust.

As at 30 June 20YY the value of assets under investment was approximately $X.

Redundancy payments to workers for the 20YY-YY financial year were approximately $X. Payments were made to thousands of workers.

Clause X of the Consolidated Trust Deed for the trust explains that the distribution or accumulation of income is at the discretion of the trustee.

The trust has carried forward tax losses.

The entitlements to income and capital distributions are set out in the trust deed.

As per the trust deed, so much of the Trust Fund as represents Redundancy Pay Contributions must be maintained exclusively for making redundancy payments to workers.

On vesting, the amount standing to the credit of Worker's Account is held for the relevant worker.

The trust has not ever distributed trust income. Rather all the trust income has been automatically accumulated each year becoming part of the trust capital.

The trust has distributed capital (being accumulations of prior year income) in prior years to a related redundancy fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subdivision 267-B

Income Tax Assessment Act 1936 section 267-30

Income Tax Assessment Act 1936 subsection 267-30(1)

Income Tax Assessment Act 1936 subsection 267-30(2)

Income Tax Assessment Act 1936 section 267-35

Income Tax Assessment Act 1936 subsection 267-40(2)

Income Tax Assessment Act 1936 Division 270

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Subdivision 267-B of the ITAA 1936 set out requirements a non-fixed trust must meet in order to deduct a tax loss from a loss year.

Section 267-30 of the ITAA 1936 explains that if certain distributions are made, the trust must pass the pattern of distribution test. Under subsection 267-30(1) of the ITAA 1936 the trust must meet the condition in subsection (2) if:

a)            The trust distributed income:

              i.        in the income year or within 2 months after its end; and

              ii.        in at least one of the 6 earlier income years; or

b)            The trust distributed capital:

              i.        in the income year or within 2 months after its end; and

              ii.        in at least one of the 6 earlier income years.

The condition set out in subsection 267-30(2) of the ITAA 1936 is that the trust must pass the pattern of distributions test for the income year.

Application to your circumstances

In this case, we agree that the net income/loss made each year and accumulations thereof by the trust is held on a different trust to that in which contributions made by employers in respect of their workers are accumulated and workers' entitlements are held. We consider it is this separate trust, referred to as Sub Trust 1, that is deriving assessable income and incurring deductions generating net income or a tax loss for a year.

Therefore, we do not consider that redundancy payments to workers will be considered distributions of capital of the relevant loss trust for the purposes of paragraph 267-30(1)(b) of the ITAA 1936.

Question 2

Under section 269-60 of the ITAA 1936 a trust passes the pattern of distributions test for an income year, if, before the end of 2 months after the end of the income year:

a)            the trust distributed directly or indirectly to the same individuals, for their own benefit, a great than 50% share of all test year distributions of income; and

b)            the trust distributed directly or indirectly to the same individuals (who may be different from those in paragraph (a)), for their own benefit, a greater than 50% share of all test year distributions of capital.

Application to your circumstances

In this case, Sub Trust 1 has never distributed trust income and therefore the requirement in subparagraph 267-30(1)(a)(ii) discussed at question 1 has not been met.

Although Sub Trust 1 has made capital distributions in the loss years if there is no distribution of capital in the income year (in which the tax loss is recouped) or within 2 months after its end, the requirement in subparagraph 267-30(1)(b)(i) of the ITAA 1936 will not be satisfied.

As a result, the condition in subsection 267-30(2) of the ITAA 1936 will not be applicable.

Question 3

Under subsection 267-30(2) of the ITAA 1936, a trust is required to pass the pattern of distributions test for the income year if the trust either:

•         distributed income in the income year (or within two months after its end) and in at least one of the six earlier income years, or

•         distributed capital in the income year (or within two months after its end) and in at least one of the six earlier income years.

The pattern of distributions test is set out in Subdivision 269-D of the ITAA 1936. Section 269-60 provides that a trust passes the pattern of distributions test if:

(a)          the trust distributed directly or indirectly to the same individuals, for their own benefit, a greater than 50% share of all test year distributions of income, and

(b)          the trust similarly distributed to the same individuals (who need not be the same as those in para (a)) a greater than 50% share of all test year distributions of capital.

Application to your circumstances

In this case, Sub Trust 1 has made capital distributions in the loss years. If they distribute capital in the income year or within 2 months after its end, the condition in subsection 267-30(2) is applicable which requires them to meet the pattern of distributions test for loss recoupment purposes.

Under section 269-60 of the ITAA 1936, to pass the pattern of distributions test, the trust must make the required percentage of distributions (of greater than 50%) to the same individuals.

Capital distributions from Sub Trust 1 are only made to another trust and not directly or indirectly to any individual/s. As we are not able to trace through these amounts to an individual or individuals, Sub Trust 1 would not be able to satisfy the pattern of distribution test.

Question 4

As discussed in question 1, the redundancy payments to workers would not be considered distributions of capital of the relevant loss trust for the purposes of paragraph 267-30(1)(b) of the ITAA 1936 as it is considered that the loss is incurred by Sub Trust 1.

Therefore this question is not applicable.

Question 5

Section 267-35 of the ITAA 1936 only applies if in a year after the tax loss arose and prior to the current year the trust was in a position to claim a deduction for the tax loss (that is, the trust had net income for the year before any prior year loss deduction), but was denied a deduction because of a failure to meet the condition in subsection 267-30(2) of the ITAA 1936.

Application to your circumstances

In this case, given there has been no year since the tax loss arose in which a deduction for the tax loss could have been claimed section 267-35 does not apply.

Question 6

Under subsection 267-40(1) of the ITAA 1936 if at any time (the test time) in the test period, individuals (the threshold group) have more than a 50% stake in the income or capital of the trust, the trust must meet the condition set out in subsection 267-40(2) of the ITAA 1936.

That condition requires that, during the period beginning at the test time and finishing at the end of the test period, the same individuals (who must be some or all of the threshold group) must have had more than a 50% stake in the income or the capital, respectively, of the trust.

Application to your circumstances

In this case, based on the trust deed, there are no entitlements fixed or otherwise to the income of the trust. Additionally, the right of a worker to a payment is contingent on certain events taking place. Further, as discussed earlier, the relevant loss trust is Sub Trust 1 for the trust. The condition in subsection 267-40(2) is not applicable since the relevant loss trust does not have any individual beneficiaries with fixed entitlements to the income or capital of the trust. Therefore, we do not consider the conditions in subsection 267-40(2) of the ITAA 1936 to be relevant.

Question 7

Section 267-45 of the ITAA 1936 states that a group must not, during the test period, begin to control the trust directly or indirectly. Subdivision 269-E of the ITAA 1936 explains what it means for a group to control the trust.

Per subsection 269-95(1) of the ITAA 1936:

Subject to this section, a group (see subsection (5)) controls a non-fixed trust if:

(a)          the group has the power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the trust; or

(b)          the group is able (directly or indirectly) to control the application of the capital or income of the trust; or

(c)          the group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in paragraph (b); or

(d)          the trustee is accustomed, under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the group; or

(e)          the group is able to remove or appoint the trustee; or

(f)          the group acquires more than a 50% stake in the income or capital of the trust.

Application to your circumstances

At all times the control over all aspects of the loss trust is by the trustee company, a company limited by guarantee with no shareholders. The trustee company is controlled by its directors. There are X directors.

Given the nature and structure of the trust and the trustee company it is reasonable to conclude that no group will begin to control the loss trust directly or indirectly as described in Subdivision 267-E of the ITAA 1936 during any test period and that the loss trust will continue to be controlled by the same group, namely, the trustee company which is controlled by its directors who are appointed jointly by specified industry parties.

Question 8

Division 270 of the ITAA 1936 contains provisions designed to prevent income injection schemes that purport to take advantage of tax losses and other deductions. Subsection 270-10(1) of the ITAA 1936 provides that if certain requirements are met, section 270-15 of the ITAA 1936 will apply to disallow deductions related to scheme assessable income where a scheme exists to take advantage of those deductions.

The requirements of subsection 270-10(1) of the ITAA 1936 are:

(a) a deduction is allowable to a trust for the income year; and

(b) under a scheme, the following happen (in any order):

(i) the trust derives an amount of assessable income (the scheme assessable income) in the income year; and

(ii) an outsider to the trust (see section 270-25) directly or indirectly provides a benefit (see section 270-20) to the trustee, to a beneficiary in the trust or to an associate of the trustee or of a beneficiary; and

Note: The benefit may constitute all or any of the scheme assessable income.

(iii) the trustee, a beneficiary in the trust or an associate of the trustee or of a beneficiary, directly or indirectly provides a benefit to the outsider to the trust or to an associate of the outsider (other than an associate covered by any of paragraphs 270-25(1)(a) to (f)); and

Note: The benefit may constitute all or any of the deduction.

(c) it is reasonable to conclude that:

(i) the trust derived the scheme assessable income; or

(ii) the outsider provided the benefit as mentioned in subparagraph (b)(ii); or

(iii) the trustee, beneficiary or associate provided the benefit as mentioned in subparagraph (b)(iii); wholly or partly, but not merely incidentally, because the deduction would be allowable; and

(d) the trust is not an excepted trust under paragraph 272-100(b), (c) or (d).

The meaning of outsider depends on whether or not the trust is a family trust. In the case of any trust that is not a family trust, subsection 270-25(2) provides:

If the trust mentioned in paragraph 270-10(1)(a) is not a family trust, an outsider to the trust is a person other than:

(a) the trustee of the trust; or

(b) a person with a fixed entitlement to a share of the income or capital of the trust.

Application to your circumstances

In this case, the trust losses have arisen due to genuine commercial circumstances, being the low rates of interest income for the years in question.

Additionally no transaction has or will be entered into to generate assessable income that would not have arisen in the ordinary course of events. That is, while the interest income derived by the trust is from an outsider (as defined in subsection 270-25(2) of the ITAA 1936) that income is based on arm's length rates set with regard to an independent benchmark. We accept that in this case it is not reasonable to conclude that the interest income of the trust was derived wholly or partly or to any extent because of the allowance of the tax loss as a deduction.

Question 9

In the circumstances where Sub Trust 1 has never distributed income, if Sub Trust 1 does not make a distribution of capital in the loss recoupment income year or within 2 months after its end we do not consider subsection 267-30(2) of the ITAA 1997 will apply, as set out in question 2. In this circumstance we consider that Sub Trust 1 will be entitled to claim a deduction for their tax losses again assessable income.