Issue
Is a family trust election (FTE) for the 1994-95 income year valid if the trust did not pass the family control test from 1 July 1994?
Decision
No. Transitional provision sub item 22(2) of the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998 requires the trust to pass the family control test at all times from the beginning of an earlier year of income (1 July 1994 in this case) until the end of the 1997-98 year of income.
Facts
On 30 June 1998 the trustee of the Family Discretionary Trust (the FD Trust), Trustee Coy, decided that for the purposes of the 'trust loss provisions' as contained in Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936), a FTE would be made in respect of the FD Trust.
Trustee Coy made the FTE, specifying the 1994-95 year of income by the time when it furnished the trust's tax return for the 1997-98 year of income.
Trustee Coy had been the trustee of the FD Trust since 2 May 1995.
Prior to 2 May 1995 the FD Trust had been controlled by a different family group.
The individual specified in the FTE was Mr Citizen.
Neither Mr Citizen, any one or more members of his family, nor the legal or financial advisers to Mr Citizen or to his family, controlled the FD Trust as per the requirements of subsection 272-87(2) of Schedule 2F to the ITAA 1936 prior to 2 May 1995.
Reasons for Decision
The transitional provisions as outlined in the Taxation Laws Amendment (Trust Loss & Other Deductions) Act 1998 (the original transitional provisions) apply to the making of a FTE for the 1996-97 and earlier income years.
The original transitional provisions were operative from 16 April 1998 until 30 May 2000 (see the Note below concerning amendments to the original transitional provisions).
Sub items 22(1) and 22(2) of the original transitional provisions provide: (1) Subject to this item, a family trust election that is proposed to be made cannot specify a year of income under subsection 272-80(1) of the trust loss etc. Schedule that is before the 1997-98 year of income. (2) If: (a) a family trust election can, in accordance with sub item (1), be made specifying the 1997-98 year of income; and (b) the trust concerned passes the family control test (see section 272-87) at all times from the beginning of an earlier year of income until the end of the 1997-98 year of income; the election can instead specify the earlier year of income. If it does so, the trust concerned will, under subsection 272-80(5) of the trust loss etc. Schedule, be a family trust at all times after the beginning of the earlier year of income.
Sub item 22(2) of the original transitional provisions requires the family control test to be passed at all times from the beginning of the earlier income year until the end of the 1997-98 year of income. In this case, the family control test is only passed from 2 May 1995 and onwards rather than 1 July 1994 as prescribed by paragraph (b) of sub item 22(2) of the Taxation Laws Amendment (Trust Loss & Other Deductions) Act 1998 . Therefore, a FTE cannot be made specifying the 1994-95 year of income.
As the FD Trust passes the family control test from the beginning of the 1995-96 income year until the end of the 1997-98 income year, the FTE will be valid for the income year 1995-96 and will be treated as a family trust at all times after 1 July 1995 pursuant to subsection 272-80(5) of Schedule 2F to the ITAA 1936.
In general, the provisions dealing with trust losses in Schedule 2F to the ITAA 1936 apply to transfers of the tax benefit of trust tax losses after 1995 Budget time (7.30pm, Eastern Standard Time, on 9 May 1995). The original transitional provisions for making a FTE for the 1994-95 income year provide an exception to that general rule.
Note: The original transitional provision sub item 22(2) of the Taxation Laws Amendment (Trust Loss & Other Deductions) Act 1998 applies with effect from 16 April 1998. Item 22 was amended by Taxation Laws Amendment Act (No. 2) 2000 with effect from 31 May 2000.