Non-commercial losses: do the beneficiaries of a discretionary trading trust carry on a business activity?

Is a beneficiary of a discretionary trading trust considered to be carrying on a business activity for the purposes of section 35-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. A person who is simply a beneficiary of a discretionary trading trust does not carry on a business activity. The business activity is carried on by the trustee of the trading trust.

For the year ended 30 June 2002, an individual carried on a floristry business. The expenses of the business ($20,000) were greater than the assessable income from trading ($10,000). In the same year, the individual also received a $30,000 distribution of income from a discretionary trust carrying on a similar business activity.

Division 35 of the ITAA 1997 prevents individuals from offsetting losses from non-commercial business activities against other assessable income. The losses can be claimed in a subsequent income year, but only against assessable income from the same business activity (subsection 35-10(2) of the ITAA 1997).

The loss deferral rule in subsection 35-10(2) of the ITAA 1997 applies to each business activity a taxpayer carries on in an income year unless at least one of several tests is satisfied or certain other circumstances exist.

One of the tests is the assessable income test in section 35-30 of the ITAA 1997. This states that the loss deferral rule will not apply if the assessable income from the business activity carried on by the taxpayer is at least $20,000. In determining the assessable income from the business activity the taxpayer carried on, the taxpayer can group together business activities of a similar kind carried on by the taxpayer(subsection 35-10(3)).

A beneficiary of a discretionary trading trust does not, in his or her capacity as beneficiary, carry on a business activity. A beneficiary does not, for example: • control the activities of the business • have authority over workers • provide tools, premises or equipment • take any financial risk in relation to the conduct of the business • have an entitlement to a business loss for taxation purposes; or • undertake the work that constitutes the business activity.

The notion that a beneficiary of a trust carries on the business of the trust has been dismissed in cases such as Doherty v FC of T (1933) 48 CLR 1 and Tindal v FC of T (1946) 72 CLR 609 ( Tindal's case ).

In referring to the decision of the High Court in Tindal's case, Deputy President Thompson said in Case 130 18 ATR 3951; Case U195 87 ATC 1107: [Mrs Tindal's] right to receive income from [the business] was only as beneficiary under the trust. So there could be no doubt that she was a person who had not, in any capacity whatsoever, carried on the business which produced the income of the trust fund which was eventually paid to her.

The business activity of a trading trust is considered to be carried on by the trustee, not by the beneficiaries. A beneficiary of a trading trust derives income from the business activity as a beneficiary under the trust, not as a person who carried on the business activity which produced the income of the trust fund paid to the beneficiary.