Trust Losses: non-fixed trusts control test - replacement group - family

For the purposes of subparagraph 269-95(2)(c)(ii) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) where a person, who is a member of the replacement group, begins to control a trust because of the death of an individual, does that person have to be a member of the family of the individual who died, at the time the individual died?

No, subparagraph 269-95(2)(c)(ii) of Schedule 2F to the ITAA 1936 requires the replacement group to consist of members of the individual's family at the time the replacement group begins to control the trust.

The trust is a non-fixed trust. The trustee of the trust has not made a family trust election pursuant to section 272-80 of Schedule 2F to the ITAA 1936. The trustees of the trust were Mr and Mrs T.

The trust incurred tax losses in the 2003 income year that are to be recouped in the 2004 income year.

For the purposes of subsection 269-95(1) of Schedule 2F to the ITAA 1936, a group consisting solely of Mr and Mrs T controlled the trust continuously from the beginning of the 2001 income year until Mr T died on 1 February 2004, and consequently ceased to control the trust pursuant to paragraph 269-95(2)(a) of Schedule 2F to the ITAA 1936 at the time of death.

Mr X was appointed as a trustee on 1 June 2004. The replacement group who controlled the trust from 1 June 2004 consisted of Mrs T and Mr X.

Because of the death of Mr T, Mrs T controlled the trust in the interim period after the date of death until Mr X was appointed as trustee.

Mr X was unrelated to Mr T up until he married the daughter of Mr and Mrs T on 1 May 2004.

In accordance with paragraph 269-95(2)(e) of Schedule 2F to the ITAA 1936 the beneficiaries of the trust immediately before the original group ceased to control the trust are the same beneficiaries of the trust immediately after the replacement group begins to control the trust.

Section 267-45 of Schedule 2F to the ITAA 1936 provides that a group must not begin to control the trust directly or indirectly during the period from the beginning of the loss year until the end of the income year.

Due to the death of Mr T, a group consisting of Mrs T and Mr X (the replacement group) began to control the trust from 1 June 2004. This would ordinarily cause the control test to be failed unless subsection 269-95(2) of Schedule 2F to the ITAA 1936 operated to provide otherwise.

If the conditions in subsection 269-95(2) of Schedule 2F to the ITAA 1936 are satisfied upon a change in control of the trust, the replacement group is taken to have controlled the trust from the time the original group (Mr and Mrs T) began to control the trust.

Broadly, the trust must have the same beneficiaries immediately before the original group ceased to control the trust and immediately after the replacement group began to control the trust; subparagraph 269-95(2)(e) of Schedule 2F to the ITAA 1936. The original group must have ceased control and the replacement group began to control the trust, only because of the death of the individual.

Subparagraph 269-95(2)(c)(ii) of Schedule 2F to the ITAA 1936 also requires the replacement group to consist of one or more members of the individual's family, as defined by section 272-95 of Schedule 2F to the ITAA 1936, together with all of the persons who were members of the original group, other than the individual who died.

Further to the requirement in paragraph 269-95(2)(b) of Schedule 2F to the ITAA 1936 that the replacement group 'begins to control the trust', the status of the (replacement) person as a family member (of the deceased individual) in subparagraph 269-95(2)(c)(ii) of Schedule 2F to the ITAA 1936, is determined as at the time they begin to control the trust rather than at the time of death of the individual. (see Note)

Mr X is a member of Mr T's family via the marriage to Mr T's daughter on 1 May 2004, as the definition of family under subsection 272-95(b) of Schedule 2F to the ITAA 1936 includes a spouse of a child of the individual. Even though Mr X was not a member of Mr T's family at the time Mr T died, Mr X was a member of his family at the time the replacement group began to control the trust at 1 June 2004.

The replacement group consists of Mr X and Mrs T for the purposes of subparagraph 269-95(2)(c)(ii) of Schedule 2F to the ITAA 1936. In conjunction with the other facts stated above, this satisfies the requirements of subsection 269-95(2) of Schedule 2F to the ITAA 1936 so that the consequences are that subsection 269-95(3) of Schedule 2F to the ITAA 1936 applies to deem the replacement group to have controlled the trust from the time the original group (Mr and Mrs T) began to control the trust.

Subparagraph 269-95(3)(c) also operates to disregard the interim period that only Mrs T controlled the trust after the death of Mr T, and until the appointment of Mr X as a trustee.

This provides that the control test, pursuant to section 269-95 of Schedule 2F to the ITAA 1936, will not prevent the deduction for the tax losses in the 2004 income year. However, the trust must consider all the tests at subsection 267-20(2) and Division 270 of Schedule 2F to the ITAA 1936 in order to deduct its prior year losses. Note: the time of death may precede the change in control for a period not exceeding 12 months (or such longer period where the Commissioner allows); paragraph 269-95(2)(b) of Schedule 2F to the ITAA 1936.

Date of Amendment Part Comment 23 January 2015 Title 'non-fixed trusts' added to the title of the ATO ID to better reflect the contents of the ATO ID 25 November 2014 Title Amendments to clarify content of the ATO ID

Date of Amendment | Part | Comment

23 January 2015 | Title | 'non-fixed trusts' added to the title of the ATO ID to better reflect the contents of the ATO ID

25 November 2014 | Title | Amendments to clarify content of the ATO ID