Edited version of private advice

Authorisation Number: 7920152613739

Date of advice: 14 December 2022

Ruling

Subject:Carried forward losses

Question 1

Does Division 270 of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the trustee of the Family Trust to disallow deductions for prior year losses in the years ended 30 June 20XX to 30 June 20XX?

Answer

No

Question 2

Is the trustee of the Family Trust able to deduct tax losses of incurred in earlier years against its assessable income in the years ended 30 June 20XX to 30 June 20XX, inclusive, pursuant to section 36-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period

Years ended 30 June 20XX to 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Family Trust (the Trust)

On X November 20XX, the Family Trust (the Trust) was settled.

Clause 2.3 of the Trust Deed of the Family Trust defines the term 'beneficiary' to mean any of the specified, general or ultimate beneficiaries.

Individual A is the Designated Person pursuant to clause 2.6 of the Trust Deed of the Trust.

Clause 2.10 of the Trust Deed of the Family Trust broadly provides that the term 'general beneficiaries' means the specified beneficiaries, the spouse of any of the specified beneficiaries, the parents of the Designated Person and of the spouse of the Designated Person and any trustee of an eligible trust, any eligible corporation or other corporation in which one share or interest is held by any general or specified beneficiary.

The term 'specified beneficiaries' is defined in clause 2.20 of the Trust deed as the Designated Person, the spouse of the Designated Person and the children and remoter issues of the Designated Person.

Family Trust Elections

The Family Trust has a Family Trust Election (FTE) in place, commencing on 1 July 20XX, which lists Individual A as the specified individual.

Similarly, the Property Trust has an FTE election in place, commencing on 1 July 20XX, listing Individual A as the specified individual.

AQWRT Partnership (the Partnership):

During the ruling period, the two partners of the AQWRT Partnership (the Partnership) were the trustee of the Family Trust and the ABC Trust.

a.         There is no documented Partnership Agreement for the Partnership. You explain that the partners decided not to execute a written Partnership agreement due to being advised that a documented agreement would cost approximately $XXX.

Partnership losses

On 1 July 20XX, a meeting was held between Individual A and Individual B. The Minutes of this meeting record that the losses will be allocated to the Family Trust.

You state that the amount of the losses for the Partnership is $XXX.

Property Trust

Property Trust is a discretionary trust.

The trustee of the Property Trust has an FTE in place with Individual A as the specified individual and 20XX as the commencing income year.

Distributions from the Property Trust:

From the year ended 30 June 20XX, the Family Trust has received distributions from the Property Trust.

The trustee of the Family Trust expects to receive a distribution from the trustee of the Property Trust in coming years.

Relevant legislative provisions

Division 270 of the Income Tax Assessment Act 1936

Section 36-15 of the Income Tax Assessment Act 1997

Section 960-115 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Does Division 270 of the ITAA 1936 apply to the trustee of the Family Trust to disallow deductions for prior year losses in the years ended 30 June 20XX to 30 June 20XX?

EXPLANATION OF THE LEGISLATION

Schemes to take advantage of deductions

Broadly, Division 270 of the ITAA 1936 operates to disallow a deduction for a trust for prior year losses or deductions where a scheme has been entered into to take advantage of those losses or deductions. The test contained in Division 270 is known as the 'income injection test'.

a.    Section 272-140 provides that the term 'scheme' has the same meaning as that in subsection 177A(1).

b.    Subsection 177A(1) provides that 'scheme' means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal process; and

(b)       any scheme, plan, proposal, action, course of action or course of conduct.

Section 270-10 provides that if the following conditions are met, section 270-15 will apply:

a.    the trust has an allowable deduction in the income year

b.    under the scheme, the following occur:

                          i.          the trust derives assessable income in the income year

                         ii.          an outsider to the trust directly or indirectly provides a benefit to the trustee, a beneficiary or an associate of the trustee or beneficiary, and

                        iii.          the trustee, beneficiary or associate of the trustee or beneficiary, directly or indirectly provides a benefit to the outsider to the trust or an associate to the outsider to the trust, and

c.     it is reasonable to conclude that:

                             i.         the trust derived the scheme assessable income, or

                            ii.        the outsider provided the benefit mentioned in subparagraph 270-10(1)(b)(ii),

                           iii.        the trustee, beneficiary or associate provided the benefit mentioned in subparagraph 270-10(1)(b)(iii)

wholly or partly, but not merely incidentally, because of the allowable deduction, and

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

The concept of outsider to the trust is explained in section 270-25, which states that if the trust in paragraph 270-10(1)(a) is a family trust, an outsider to the trust is a person other than:

a.    the trustee of the trust

b.    a person with a fixed entitlement to some or all of the income or capital of the trust

c.     the specified individual in the trust's FTE

d.    a member of the specified individual's family

e.    a trust with the same individual specified in its FTE

f.      a company, partnership or trust that has a valid interposed entity election to be included in the specified individual's family group, where the election was in force when the scheme mentioned in paragraph 270-10(1)(b) commenced

g.    the trustees of one or more family trusts with FTE's in place with the same specified individual.

Subsection 270-10(2) provides for a special case where an outsider to the trust becomes the trustee of the trust, which is not relevant to the current case.

The term 'benefit' is defined in section 270-20 as:

a.    money, dividend or property

b.    a right or entitlement

c.     services

d.    the extinguishment, forgiveness, release or waiver of a debt or other liability

e.    the doing of anything which results in the derivation of assessable income, or

f.      any other action that is a benefit or advantage.

The consequences of the satisfaction of the conditions in section 270-10 are provided in section 270-15, which states that:

(a)       to the extent (if any) that the deduction mentioned in paragraph 270-10(1)(a) relates exclusively, or may appropriately be related, to the scheme assessable income, the deduction is not allowable; and

(b)       if the net income of the trust is less than the scheme assessable income or there is no net income - the trust has a net income equal to, or the net income is increased so that it equals, the scheme assessable income; and

(c)       paragraph (b) and the scheme assessable income are disregarded in working out any tax loss incurred by the trust in the income year; and

(d)       if paragraph (b) applies and the deduction mentioned in paragraph 270-1-(1)(a) is for a tax loss - paragraph (b) and the scheme assessable income are disregarded in working out any deduction in respect of the tax loss allowable after the income year.

Application to your circumstances:

As a result of the agreement reached on 1 July 20XX in relation to the Partnership, you state that the trustee of the Family Trust has losses of $XXX (the losses). In order for the trustee of the Family Trust to be able to deduct these prior year losses against assessable income in later years, it is necessary to establish whether the conditions in Division 270 have been met.

The scheme in relation to the losses includes the 20XX agreement for the losses to be allocated to the trustee of the Family Trust and the proposed distribution of income from the trustee of the Property Trust. As such, a scheme to take advantage of the losses is proposed to be entered into.

One of the conditions for satisfaction of section 270-10 is that the trustee of the Family Trust must have an allowable deduction and, under the scheme, and an outsider to the trust provides a benefit to the trustee, beneficiary or an associate of the trustee or beneficiary. It is therefore necessary to establish whether the trustee of the Property Trust is an outsider to the Family Trust.

The trustees of the Family Trust and the Property Trust both have FTEs in place with Individual A as the specified individual and 20XX as the commencing income year. Consequently, subsection 270-25(1)(c) provides that the trustee of the Property Trust will not be an outsider to the Family Trust.

As the trustee of the Property Trust is not an outsider to the Family Trust at the time of the proposed distribution, section 270-10 is not satisfied and it is not necessary to consider the other conditions under the income injection test. The conditions in Division 270 have not been satisfied to disallow deductions from prior year losses.

Question 2

Is the Family Trust able to deduct tax losses of $XXX against its assessable income in the years ended 30 June 20XX to 30 June 20XX, inclusive, pursuant to section 36-15 of the ITAA 1997?

EXPLANATION OF LEGISLATION

Deductions for tax losses of earlier income years:

Section 36-10 explains that a tax loss is calculated as follows:

a.    sum up eligible deductions for the year (excluding tax losses for earlier years)

b.    subtract assessable income

c.     subtract any net exempt income as calculated under section 36-20, and

d.    any remaining amount is the tax loss for the year.

Broadly, section 36-15 provides that a non-corporate tax entity may deduct a tax loss from an earlier tax year against a later tax year.

a.         Section 960-115 provides that an entity will be a corporate tax entity if the entity is:

                           iv.        a company at any time

                            v.         is a corporate limited partnership, or

                           vi.        is a public trading trust.

Application to your circumstances:

On 1 July 20XX, it was resolved that the Partnership losses, which amount to $XXX, would be allocated to the Family Trust. Therefore, the $XXX is a tax loss in accordance with section 36-10.

The trustee of the Family Trust is not a company, a corporate limited partnership or a public trading trust and as such, is not a corporate tax entity pursuant to section 960-115. As such, the trustee may deduct a tax loss from an earlier year against its assessable income for a future year in accordance with section 36-15 unless the income injection test applies to deny the deduction.

As explained in Question 1, the criteria in the income injection test of Division 270 have not been met in relation to distributions received from the Property Trust, the trustee of the Family Trust is permitted to deduct tax losses against these distributions where they are distributions of assessable income.

Consequently, in any particular year of income the trustee of the Family Trust may deduct against assessable income tax losses incurred in prior years pursuant to section 36-15.