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If a non-fixed trust only distributes income in the recoupment year, and not in any one of the six earlier income years, does it need to meet the pattern of distributions (POD) test of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936), in order to deduct its prior year losses?

No. A non-fixed trust that distributes income or capital or both during the income year in which the loss is recouped, and not in any one of the six earlier income years, does not need to meet the POD test of Schedule 2F to the ITAA 1936.

The trust is a non-fixed trust that has not made a family trust election.

The trust has prior year tax losses from trading activities for the income years ending 30 June 1996, 1997, 1998, 1999, 2000 and 2001.

The trust, after deducting its prior year tax losses, will return a total net income for the year ended 30 June 2002.

The trust distributed all of its net income for the 2002 income year.

The trust did not distribute any income or capital in the six income years ended 30 June 1996, 1997, 1998, 1999, 2000 and 2001.

The trust did not distribute any capital in the income year ended 30 June 2002.

A non-fixed trust (which is not an excepted trust at all times during the test period) cannot deduct a prior year tax loss unless it meets the applicable tests and conditions contained in the trust loss measures of Schedule 2F to the ITAA 1936. Section 267-30 of Schedule 2F to the ITAA 1936 provides that, if certain distributions are made, a non-fixed trust must pass the POD test as prescribed in Subdivision 269-D of the ITAA 1936.

Subsection 267-30(1) of Schedule 2F to the ITAA 1936 states: If either or both of the following happened, the trust must meet the condition in subsection (2): a) the trust distributed income: i) in the income year or within two months after its end; and ii) in a least one of the 6 earlier income years; or b) the trust distributed capital: i) in the income year or within two months after its end; and ii) in a least one of the 6 earlier income years.

Subsection 267-30(2) of Schedule 2F states:

The condition is that the trust must pass the pattern of distributions test for the income year.

The POD test applies if distributions of either income or capital or both are made in the income year in which the trust seeks to deduct a loss, or within two months after its end, and in at least one of the six earlier income years. This means that where distributions of income or capital or both are made only in the income year, the trust does not need to meet the POD test for that income year.

As income has been distributed in the income year, but not in any one of the six earlier income years, the condition of having to pass the POD test does not apply in these circumstances.