Fixed trust entitlements

1 Will the Unit Holders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

No . The Unit Holders of the Trust do not have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the ITAA 1997 and subsection 272-5(1) of Schedule 2F to ITAA 1936) because the Trust Deed contains several clauses, which cause beneficiary's interests to be defeasible. Question 2 If the answer to question 1 is no, will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F the ITAA 1936 to treat the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust? Answer No. The Commissioner does not exercise his discretion to treat the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust. Question 3 Is the Trust a non-fixed trust? Answer Yes, the Trust is a non-fixed Trust in accordance with section 272-70 of Schedule 2F to the ITAA 1936. Question 4 If the answer to question 3 is yes, does the Trust satisfy the trust losses tests contained in Division 267 of Schedule 2F to the ITAA 1936 regarding non-fixed trust losses? Answer

The trusts losses concepts and tests for non-fixed trusts are contained in Division 267 of Schedule 2F to the ITAA 1936, and include 50% stake test, pattern of distributions test, control test, and income injection test. The Trust satisfies the applicable tests contained in Division 267 of Schedule 2F to the ITAA 1936 regarding non-fixed trust losses. This ruling applies for the following periods : Year ended 30 June 2023 Year ending 30 June 2024 Year ending 30 June 2025 Year ending 30 June 2026 The scheme commenced on: 1 July 2022

The Trust is a unit trust that was settled pursuant to a Trust Deed. The Trustee is an Australian tax resident. The Trust was established, pursuant to the Trust Deed, on the issuing of an initial XXX units (the Units). The Units are not listed on the stock exchange. Currently there are XXX units in the Trust. The Trust will be recapitalised by bringing in a new investor. The new investor would like to acquire the maximum proportion of the units in the Trust to ensure that the 50% stake test is satisfied and the carry forward losses can be utilised in the future. The additional XXX units to a new investor are planned to be issued by the Trustee. In addition, the new investor will receive XX units owned previously by the previous Unitholder. According to the planned changes in relation to Unitholders and issuing new units, the existing Unitholders would keep XXX units and the new investor would receive XXX units consisting of XX existing units and XXX new units. The Trust Deed The relevant clauses are summarised below. o   Clause 4.1 Beneficial interest of Trust Fund vested in Unitholders •         the beneficial interest in the Trust Fund is vested:-

i.    In the Unitholders for the time being; and ii.    If there is more than one Unitholder, in such Unitholders in proportion to the number of units each holds; and each person registered as a Unitholder will be bound by the terms and conditions of this Deed and any supplementary deed and will be entitled to the benefits thereof. o   Clause 4.4 - Changes to existing or future Units •         If all Unitholders consent by unanimous resolution, the Trustee may:- i.    Divide units already issued or to be issued into classes with limited or special rights; and ii.    Reclassify Units as belonging to new or existing classes In reclassifying Units pursuant to this subclause, the Trustee may create any new class of Units with different rights, privileges, conditions or restrictions o   Clause 4.5 - Issue of New Units •         In addition to initial units, the Trustee may issue further Units of any class in the following manner:

i.    A Unitholder (or Applicant) may apply for an issue of New Units by serving the Trustee with an application in writing in the approved form bound by the terms of the Deed and signed by the Applicant together with payment for the New Units so applied for at a price calculated in accordance with the subclause 4.6(...) o   Clause 4.6 - Price of New Units •         The New Unit Price will be such amount as is agreed in writing by all the Unitholders. If the Unitholders cannot unanimously agree on a New Unit Price, then the new units Price will be an amount calculated by dividing the net asset value of the Trust Fund (determined by the valuer) appointed by the Trustee and making due allowance for all actual and contingent liabilities) by the number of Units issued prior to the issue of any New Units, which value will be final and binding on all parties. o   Clause 12.1 - Unitholders may request Trustee to redeem Units •         Any Unitholder may at any time in writing request the Trustee to convert any of the Units held by him or her into money or to distribute to him or her property of equivalent value. o   Clauses 21.1 and 21.2 - Amendment of Deed

•         If Unitholders holding at least 75% of the Units of the Trust consent and subject to this clause, the Trustee may vary, amend, delete from or add to this Deed by executing any instrument in writing to that effect (the "Amending Instrument"). After the execution of the Amending Instrument, this Deed will have effect as varied, amended, deleted from or added to by the Amending instrument. •         If the variation, amendment, deletion or addition affects the rights of a Unitholder or class of Unitholders, the Trustee will obtain the consent of all of those Unitholders who may be affected by the variation, amendment, deletion or addition before executing the Amending Instrument. Assumptions The Trust did not derive any assessable income for the year ended 30 June 2023. Throughout the Ruling Period, it is assumed that: The Trust will not be terminated. Only one class of units will be on issue in the Trust. The Trust will not be listed on any approved stock exchange. The value of the interests of the Unit Holders will be materially reduced by the issue of additional XXX units. There will only be one class of units issued.

No units will be reclassified. The rights attached to units already in existence will not be modified. Units will only be transferred or redeemed at the request of a Unit Holder. The Trust cannot deduct the tax loss unless it meets: •         the condition in subsection267-30(2) of Schedule 2F to the ITAA 1936 regarding passing the pattern of distributions test (if applicable); and •         the condition in section 267-35 Schedule 2F to the ITAA 1936 regarding not failing the pattern of distributions test in the past; and •         the condition in subsection 267-40(2) of Schedule 2F to the ITAA 1936 regarding passing the 50% stake test (if applicable); and •         the condition in section 267- 45of Schedule 2F to the ITAA 1936 regarding passing the control test; and •         is not part of the scheme described in section 270-10 of Schedule 2F to the ITAA 1936.

Income Tax Assessment Act 1936 Division 267 of Schedule 2F Income Tax Assessment Act 1936 section 267-30 of Schedule 2F Income Tax Assessment Act 1936 section 267-35 of Schedule 2F Income Tax Assessment Act 1936 section 267-40 of Schedule 2F Income Tax Assessment Act 1936 section 267-45 of Schedule 2F Income Tax Assessment Act 1936 section 267-75 of Schedule 2F Income Tax Assessment Act 1936 section 267-95 of Schedule 2F Income Tax Assessment Act 1936 section 267-40 of Schedule 2F Income Tax Assessment Act 1936 Division 269 of Schedule 2F Income Tax Assessment Act 1936 section 269-95 of Schedule 2F Income Tax Assessment Act 1936 Subdivision 269-C of Schedule 2F Income Tax Assessment Act 1936 Subdivision 269-D of Schedule 2F Income Tax Assessment Act 1936 Subdivision 269-E of Schedule 2F In

Question 1 Will the Unit Holders of the Trust have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and subsection 272-5 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)? Summary No. The Unit Holders of the Trust do not have fixed entitlements to all of the income and capital of the Trust as defined in subsection 995-1(1) of the ITAA 1997 and subsection 272-5(1) of Schedule 2F to ITAA 1936) because the Trust Deed contains several clauses, which cause beneficiary's interests to be defeasible. Detailed reasoning The term 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997 and section 272-65 of Schedule 2F to the ITAA 1936 to mean a trust in which entities or persons (respectively): ... have fixed entitlements to all of the income and capital of the trust. The definition of the term 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that 'an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the

Income Tax Assessment Act 1936 .' Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a 'fixed entitlement' in a trust: If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital. The concept of a 'fixed entitlement' is used to determine whether a trust is a fixed trust, whether a trust's beneficiaries have maintained the requisite proportion of ownership, and for tracing direct and indirect entitlements. A beneficiary will have a fixed entitlement to a share of the income or capital of the trust if, under a trust instrument, their interest in the income or capital is vested and indefeasible. An interest is 'vested' if the interest is vested in interest or vested in possession. An interest is vested in possession when it gives its holder a right of present enjoyment, whereas an interest is vested in interest if it gives its holder a present right to future enjoyment.

An interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events. An example of a defeasible interest is an interest of a default beneficiary in the income or capital of the trust. In addition, subsection 272-5(2) states that: If: (a) a person holds units in a unit trust; and (b) the units are redeemable or further units are able to be issued; and (c) if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and (d) if the units are not listed as mentioned in paragraph (c) - the units held by the person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a Unitholder, in the income or capital of the unit trust is defeasible. Practical Compliance Guidelines PCG 2016/16 (PCG 2016/16) outlines the process for determining if beneficiaries have fixed entitlements to all of the income and capital of a trust. It also outlines the factors the Commissioner will consider when deciding whether to exercise the discretion to treat an interest in the income or capital of a trust as being entitlement. These factors are contained in subsection 272-5(3) of the Schedule 2F to ITAA1936. As per paragraph 16 of the PCG 2016/16, beneficiary's interests can be defeasible because of the following powers included in the trust deeds: •         Broad powers to amend the trust instrument. •         Powers to issue new units after the trust is settled, or to redeem existing units. •         A power to reclassify existing units so that they do not all have equal rights to receive the income and capital of the trust.

•         A power to classify receipts as being on income or capital account where the units that have been issued do not all have the same rights to receive the income and capital of the trust. •         A power to appoint a beneficiary's interest in the income or capital of the trust to another beneficiary. •         A power to settle or appoint any part of the corpus of the trust to a new trust with different beneficiaries. •         A power to enforce the forfeiture or cancellation of partly paid units due to the non-payment of a call except where such partly paid units would be void ab initio. Moreover, the Commissioner will disregard the following factors which may otherwise result in a different conclusion when working out whether all beneficial interests have the same rights to receive the income and capital of the trust: •         fees or charges imposed by the trustee in relation to the beneficial interests •         issue price and redemption price of the beneficial interests (provided that the savings rule in subsection 272-5(2) is satisfied as explained below), and •         exposure of the beneficial interests to foreign exchange gains and losses.

Application to your circumstances For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument consists of the Trust Deed. Clause 4.1 of the provided Trust Deed states that regardless of any other term in the Deed, all beneficial interests of the Unit Holders in the Income and Capital are vested. The clause also grants a vested interest in the income and capital of the trust to Unit Holders in proportion to the Unit hold by each of them. Therefore, the beneficiaries have a vested interest in all the income and capital of the trust under the trust instrument. However, the Trust Deed contains several clauses, which cause beneficiary's interests to be defeasible, namely: •         Issue of new Units Clause 4.5 of the Trust Deed provides that the Trustee may create and issue additional Units of any class at an issue price and to existing Unit Holders, Applicants (persons who are not Unit Holders) or such Persons as determined by the Trustee. •         Redemption of Units Clauses 12.1 allow the Trustee to redeem the units at request of a Unit Holder. •         Amendment of Deed

Clauses 21.1 and 21.2 provide that the Trustee, upon the consent given by the Unit Holders holding at least 75% of the Units of the Trust, may vary or amend the Deed. The Trustee may also delete from or add to the Deed by executing the Amending Instrument. Given the clauses outlined above and their potential to cause defeasance, the Unit Holders, as beneficiaries of the Trust, do not have a fixed entitlement to a share of the income or capital of the Trust for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936. Question 2 If the answer to question 1 is no, will the Commissioner exercise the discretion in subsection 272-5(3) of Schedule 2F the ITAA 1936 to treat the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust? Summary No. Having regard to the relevant factors in paragraph 272-5(3)(b) of Schedule 2F the ITAA 1936, the Commissioner does not exercise his discretion to treat the Unit Holders of the Trust as having fixed entitlements to all of the income and capital of the Trust. Detailed reasoning

The Commissioner's discretion in subsection 272-5(3) of Schedule 2F to the ITAA1936 is intended to provide for circumstances where, despite the trust not technically meeting the requirements of a 'fixed trust', the likelihood of the beneficiary's vested interest being defeated is low, and it would be unreasonable in the context of the statutory scheme to treat the beneficiary's interest as not constituting a "fixed entitlement". Subsection 272-5(3) states: "If: (a)  a beneficiary with an interest in a share of income that the trust derives from time to time, or of the capital of a trust, does not have a fixed entitlement to the share; and (b)  the Commissioner considers that the beneficiary should be treated as having the fixed entitlement, having regard to: (i)            the circumstances in which the entitlement is capable of not vesting or the defeasance can happen; and (ii)           the likelihood of the entitlement not vesting or the defeasance happening; and (iii)          the nature of the trust; then the beneficiary has the fixed entitlement." Paragraph 55 of PCG 2016/16 outlines factors favourable to the exercise of the Commissioner's discretion:

The Commissioner regards the following factors favourably when deciding whether to exercise the discretion: a trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust commitments are made in Unitholder agreements, Product Disclosure Statements or other documents with legal consequences that the trustee or manager will not exercise a power capable of defeating a beneficiary's interest at all, or in a way that is adverse to the rights of beneficiaries to receive the income and capital of the trust all beneficiaries have the same rights to receive the income and capital of the trust the trust instrument can only be amended with the unanimous (100%) approval of all the beneficiaries

although the trust instrument can be amended without the unanimous approval of beneficiaries, the approval percentage calculated on the current interest or unit holdings of beneficiaries effectively means that all beneficiaries must approve any amendment (for example, where the approval of 75% of Unitholders is required to make the amendment and the smallest unit holding is more than 25% of the units) the trust instrument has been amended in accordance with section 601GC of the Corporations Act 2001 (so as to assist with the efficient administration of the trust) but no beneficial interests in the income and capital of the trust are adversely affected the beneficiaries whose rights to receive the income and capital of the trust have been adversely affected by the exercise of a power capable of defeating a beneficiary's interest have explicitly consented to that specific act (such as upon the redemption of the interests of an employee not covered by the savings rule upon the cessation of employment) the trustee or manager deals with the beneficiaries of the trust on an arm's length basis the trust is governed by a foreign law that is similar to Chapter 5C of the

Corporations Act 2001 , and the trust would satisfy the basic and specific conditions (as applicable to the type of trust) for access to a safe harbour. Factors adverse to the exercise of the Commissioner's discretion are listed in paragraph 56 of PCG 2016/16 and include: a trustee or manager exercises a power to defeat beneficiaries' interests in the income or capital of the trust, however: -          the nature of the power that is exercised will be important, for example, compulsorily redeeming units where a Unitholder's stake is less than a minimum specified in the trust instrument, and the Unitholder receives the redemption price of those units, is unlikely to preclude the exercise of the discretion -          where external factors (such as those in the Global Financial Crisis) temporarily affect the ability of the trustee or manager to fund distributions or redemptions, this is unlikely to preclude the exercise of the discretion (for example, a temporary wholesale freezing or deferral of interests)

there are significantly different beneficiaries of the trust in an income year for which an entity seeks to have a fixed entitlement, than the beneficiaries of the trust in the income year(s) in which the trust made a tax loss, or incurred a bad debt deduction or debt/equity swap deduction an arrangement has been entered into which would result in: a)    section 272-35 having application b)    the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or c)    fraud or evasion. Application to your circumstances Paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 The Trust Deed provides the Unit Holders with vested interests in a share of the income that the Trust derives from time to time and a share of the capital of the Trust. As discussed in Question 1, each Unitholder of the Trust does not, however, have a fixed entitlement to the share of income and capital in the Trust. Subparagraph 272-5(3)(b)(i) of Schedule 2F to the ITAA 1936

When examining the circumstancesin which a beneficiary's interest is capable of not vesting or being defeated, the Commissioner will have regard to any factor that may affect the defeasance of any beneficiary's interest, including: the number of circumstances of potential defeasance, and the significance of those circumstances. This includes having regard to: any person who is capable of altering the beneficiary's interest the nature of their relationship to the beneficiary, and any limitation on their capability to so alter that interest. As discussed in Question 1, the Trust Deed contains several clauses which case the Unit Holders interest to be defeasible. Subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936 When considering the likelihoodof the interest not vesting or being defeated, the Commissioner must form a view as to the probability that the contingency or defeasance will happen. Where the likelihood of the contingency happening is high or the action or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion.

Where the trustee or manager of the trust has a particular power to defeat a beneficiary's interest, it is relevant to consider how often, if at all, they have exercised that power over a relevant period. Any preconditions or caveats that affect the likelihood of a beneficiary's interest not vesting or being defeated are also relevant. In relation to the likelihood of the entitlement not vesting, or the defeasance happening, the following factors are relevant: The Trustee's behaviour from the time the Trust was settled to the date of this ruling application is relevant. It is noted that defeasible powers contained in the Trust Deed have not been exercised to defease any of the requisite interests of the Unit Holders. In respect of the Ruling period, having regard to the assumptions, the Trustee has exercised or may exercise its powers under the Trust Deed such that: ­   additional XXX units will be issued ­   there will only be one class of Units to be issued ­   no units will be reclassified. The rights attached to units already in existence will not be modified. ­   units will only be transferred or redeemed at the request of the Unit Holder.

­   units will be issued or redeemed for a price determined on a basis that satisfies the 'savings rule' in section 272-5(2) of Schedule 2F to the ITAA 1936 - i.e., on the basis of the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16. ­   no units will be issued or redeemed at a discount. ­   no partly paid units will be issued. ­   no streaming of income or capital will occur. ­   in the event the Trust is terminated, all Unit Holders will be entitled to the income and capital of the trust in proportion to their unitholding - if requested by a Unit Holder, the Trustee will transfer assets rather than pay cash in satisfaction of amounts owing, including as part of winding up the trust, to that particular Unit Holder. The Trustee will only transfer to that particular Unit Holder assets of the Trust to the extent that the market value of the assets is equivalent to their proportion of unitholding.

The Trustee is planning to exercise its powers under the Deed in a way that the above assumptions would be applicable and will do so for the Ruling period, to defeat a Unit Holder's interest in the income or capital of the Trust. Moreover, the planned issue of additional XXX units will materially reduce the value of the existing interests of the Unit Holders. Consequently, in the Commissioner's view, the power exercised by the Trustee by issuing additional new units, would result in a defeasance of some or all of a beneficiary's rights to the income and/or capital of the Trust. Subparagraph 272-5(3)(b)(iii) of Schedule 2F to the ITAA 1936 At paragraph 34 of PCG 2016/16, the nature of the trust refers to its basic legal characteristics and its economic function, both actual and intended. The ability of the trustee or manager of the trust to adversely affect the interests of beneficiaries could be limited where: additional responsibilities are placed on the trustee by legislation, most commonly as a registered managed investment scheme under Chapter 5C of the Corporations Act 2001 ; contractual restrictions limit the trust manager's access to trust assets;

the trust is subject to industry regulations, licensing or registration requirements, which are legally enforceable, such as the Australian Securities Exchange (ASX) Listing Rules which are enforceable against listed entities and their associates (sections 793C and 1101B of the Corporations Act 2001 ); commitments are made in a product disclosure statement, investment memorandum or other document to exercise powers in a particular (restrictive and/or non-adverse) way; the trust deed restricts the ability of the trustee to issue and redeem units at anything other than market value or other values approximating net asset value, or the unanimous (100%) approval of the beneficiaries is required prior to the exercise of a power capable of defeating a beneficiary's interest by the trustee or manager. In relation to the nature of the trust the following factors are relevant:

The Trust is a unitised trust; however, the Units are not publicly listed on an approved stock exchange and the Trust is not a managed investment scheme. Therefore, the circumstances and likelihood in which each Unit Holder's entitlement is capable of not vesting or the defeasance happening is not reduced in this Trust. The Trustee is not required to hold an Australian Financial Services Licence in order to act as Trustee of this Trust and therefore not subject to Australian financial services regulations. The parties are dealing on an arm's length basis. The Commissioner accepts that in these circumstances the ability of the Trustee to adversely affect the interests of beneficiaries is not limited - the parties dealing on an arm's length basis. Conclusion

Issuing new units will significantly change the current structure of the Trust and materially reduce the value of existing interests of the Unitholders. Furthermore, because of the issuing of new units, there will be different beneficiaries with noticeably different entitlements to capital, income and losses generated by the Trust in an income year for which an entity seeks to have a fixed entitlement, than the beneficiaries of the Trust in the income year(s) in which the Trust made a tax loss. In addition, the trustee is entitled to issue different classes of units and divide and reclassify current and new units, which may also cause a significant change in the Trust structure in the future. Consequently, the discretion from subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the Unitholders of the Trust as having fixed entitlements to all of the income and capital of the Trust cannot be granted. As such, the Trust cannot be treated as a fixed trust during the ruling period. Question 3 Is the Trust a non-fixed trust? Summary Yes, the Trust is a non-fixed Trust in accordance with section 272-70 of Schedule 2F to the ITAA 1936. Detailed reasoning

After detailed analysis of the Trust Deed, the Commissioner concludes that the Trust is a non-fixed Trust and the beneficiaries of the Trust do not have fixed entitlements to income and capital gains of the Trust as explained in Question 1. In addition, the Trust is also not a hybrid Trust because the Trust Deed does not issue units to Unitholders, entitling the Unitholders to a certain fixed share of income and/or capital of the trust. A hybrid trust is a trust that has features of both discretionary trusts and fixed trusts. There is no single way to describe a hybrid trust, as each trust may be different. The following 2 examples illustrate some hybrid trusts used in practice: 1. Fixed discretionary trust - Such a trust specifies that a fixed percentage of income and capital must be applied for the benefit of one particular class of beneficiaries, with a separate class benefiting from another percentage, and so on. These structures are rarely used outside family groups, as the benefits of tax losses and franking credits are usually lost where multiple family groups are involved.

2. Discretionary unit trust - This type of structure issues units to unitholders, entitling them to a certain fixed share of income and/or capital of the trust. The balance is distributed to beneficiaries at the discretion of the trustee. This approach is utilised where one entity or person in a family group has the majority of funds or borrowing power, but others are to receive benefit from any surplus returns. Therefore, the Trust is neither fixed trust nor discretionary trust. Consequently, the Trust is a non-fixed trust and non-fixed trust losses tests should be applied to the losses generated by the Trust in the prior income tax years. Question 4 If the answer to question 3 is yes, does the Trust satisfy the trust losses tests contained in Division 267 of Schedule 2F to the ITAA 1936 regarding non-fixed trust losses? Summary The trusts losses concepts and tests for non-fixed trusts are contained in Division 267 of Schedule 2F to the ITAA 1936, and include 50% stake test, pattern of distributions test, control test, and income injection test. The Trust satisfies the applicable tests contained in Division 267 of Schedule 2F to the ITAA 1936 regarding non-fixed trust losses.

Detailed reasoning As per section 272-65 of Schedule 2F of Income Tax Assessment Act 1936, a trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust. As explained in the previous section, the unit holders do not have fixed entitlements to all of the income and capital of the trust because their interests are defeasible. Therefore, in accordance with section 272-70 of Schedule 2F of Income Tax Assessment Act 1936, a trust is a non-fixed trust. A non-fixed trust is, accordingly, any trust in which persons do not, directly or indirectly, hold fixed entitlements to all of the capital, and all of the income of the trust. The term non-fixed trust would accordingly capture both "pure'' discretionary trusts, and "hybrid'' trusts having some fixed element, with the remainder being discretionary. As a result, we should consider the application of tests contained in Division 267-A of Schedule 2F of Income Tax Assessment Act 1936. These tests are essentially designed to establish if there has been continuity of ownership or control over the test period . As per

Explanatory Memorandum Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 (the Bill), that amended the law regarding trust losses by inserting Schedule 2F into the Income Tax Assessment Act 1936 , a non-fixed trust is affected by the rules, as they relate to prior year losses, if: •         in the income year it has a tax loss from an earlier income year that is, ignoring the rules in the Bill, deductible; and •         it was a non-fixed trust at any time in the test period; and •         it was not an excepted trust at all times in the test period. If the above conditions are met, then the non-fixed trust cannot deduct the prior year tax loss unless it meets all three conditions set out in the Bill. Two of the conditions may not be applicable to a particular trust for a particular period. If this is the case, the trust does not need to meet the condition that is not applicable. The three conditions relate to: •         the pattern of distributions of the trust - this test will not be applicable if relevant distributions have not been made by the trust [sections 267-30 and 267-35] ; • fixed entitlements to income or capital

of the trust - this test will not be applicable if individuals never hold, directly or indirectly, fixed entitlements to more than 50% of the income or capital of the trust in the test period [section 267-40] ; • control of the trust - this condition will apply to all non-fixed trusts [section 267-45] . Pattern of distributions condition The first condition for non-fixed trusts examines the pattern of distributions of income and capital of the trust over a period to determine whether there has been an effective change in those who benefit under the trust. To this end, the trust must pass the pattern of distributions test for the income year [subsection 267-30(2)] . This test compares trust distributions of income and capital of the year of recoupment and the relevant years in the previous 6 years. Also, the trust must not have failed the pattern of distributions test in relation to the loss in a previous year of income [section 267-35] . The pattern of distributions test does not apply to family trusts as defined.

The condition relating to pattern of distributions must be satisfied by a non-fixed trust if the trust distributed income and/or capital in the income year (or within two months of its end) and in at least one of the six previous income years. [Subsection 267-30(1)]. Application to your circumstances There were no distributions made by the Trust in the prior income years. As a result, because the trust did not distribute income or capital in at least one of the 6 earlier income years, this test is not applicable. Even if the trust distributes its income or capital in the year ended 30 June 2023, the test cannot be applied because distributions were not made in prior income years. 50% stake condition The 50% stake condition applies for income if individuals have fixed entitlements (called a stake ) to more than 50% of the income of the trust at any time in the test period (called the test time

). The test time includes the period from the start of the income year in which the loss was incurred to the end of the income year in which the loss is sought to be recouped. If this is the case, then at all times from the test time to the end of the test period, the same individuals must hold more than a 50% stake in the income of the trust. These individuals can be some or all of those who hold fixed entitlements to income of the trust at the test time [subsections 267-40(1) and (2)] . A 50% stake condition in the same terms applies for capital of the trust. Application to your circumstances A non-fixed trust passes this test if the same individuals have more than a 50% stake in the income or capital of the trust during the test period. Because, as established in Question 1, the beneficiaries of a trust have no fixed entitlements to the trust's income and capital, the 50% stake test is not applicable to the trust. Control condition

The control condition is that no group (i.e. a person and/or his or her associates, either alone or together) must begin to control the trust in the test period (whether directly or indirectly) [section 267-45]. The meaning of control is set out in Division 269. The concept of control of a non-fixed trust is relevant to determining whether a non-fixed trust can deduct a prior or current year loss or debt deduction (see sections 267-45 and 267-75). The relevant rules are triggered if a person and/or his or her associates (called a group), either alone or together, begin to control a non-fixed trust in the test period. As per section 269-95, a group is taken to control a non-fixed trust if the group: •         has the power, by whatever means, to obtain the beneficial enjoyment of the income or capital of the trust (e.g. through obtaining a fixed entitlement to that income or capital or by ensuring the exercise of a trustee discretion in their favour); •         is able to control, directly or indirectly, the application of the income or capital of the trust; •         is capable, under a scheme, of gaining the enjoyment or control referred to in the first two dot points;

•         is in a position such that the trustee of the trust is accustomed or under a formal or informal obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the group; •         has the ability to remove or appoint the trustee or any of the trustees of the trust; •         acquires more than a 50% stake in the income or capital of the trust (i.e., gained fixed entitlements to more than 50% of the income or capital). [Subsection 269-95(1)] A group is defined in subsection 269-95(5) of Schedule 2F to the ITAA 1936 as: a) a person; or b) a person and one or more associates; or c) 2 or more associates of a person. An associate, as referred to in subsection 269-95(5) of Schedule 2F, is defined in section 272-140 of Schedule 2F as having the same meaning as in section 318 of the ITAA 1936.

Whether the trustee of the trust is accustomed or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group is to be determined having regard to all the circumstances of the case. For example, the mere presence in the trust deed of a requirement that the trustee should have no regard to such directions, instructions or wishes would not prevent the examination of the actual circumstances to determine whether the group controls the trust. Some examples of the factors which might be considered are: •         the way in which the trustee has acted in the past; •         the relationship between the group and the trustee; •         the amount of any property or services transferred to the trust by the group; •         any arrangement or understanding between the group and a settlor or persons who have benefited under the trust in the past. Application to your circumstances

After careful consideration of the above presented factors, the Commissioner is satisfied that the Trust is not controlled by a group. Therefore, the Trust satisfies the control test for the income year ended 30 June 2023. The control test will also be satisfied by the Trust in the future income years if the above criteria indicated in section 269-95 of Schedule 2F to the ITAA 1936 regarding control of the Trust continue to be met. Generally, a trust will be treated as though there has been no change in control if the change in control has occurred because of the death, incapacitation or breakdown in the marriage and the other beneficiaries of the trust are the same immediately before and after the change in control. (Subsections 269-95(2) and (3)). As a result, the death of an individual beneficiary and the proposed transfer of his XX units to his wife is not relevant for the purposes of satisfying the control test, because the wife is a member of the test individual's family (paragraph 269-95(2)(c)(i) with paragraph 272-95(1)(d)) and the other beneficiaries to the trust are otherwise the same before and after the transfer of units. Income injection test

Division 270 deals with schemes to take advantage of tax losses and other deductions. The purpose of this Division is to prevent the use of deductions by a trust to shelter assessable income from tax where: •         the assessable income is derived under a scheme involving the provision of benefits to and from the trust; and •         either of those benefits are calculated with reference to the use of the deduction. The test that is applied under this Division is referred to as the income injection test. The test operates objectively and does not have a tax avoidance motive as one of its elements. The test operates to limit the trust's capacity to deduct prior year losses or current year deductions in certain circumstances, even though a trust has satisfied any relevant tests set out in Divisions 266 and 267 (e.g. it satisfies the continuity of ownership test). This is where the benefit from the allowance of the deductions flows to persons (or certain associates) who have, in effect, given a benefit to a trustee or beneficiary of a trust (or associates of those persons) in return for the benefit of the deductions.

There are number of elements that need to be met before the test applies. These are explained below. The trust must have an allowable deduction The first element is that the trust must have an allowable deduction in the income year being examined. This can include a deduction for a prior year loss as well as current year deductions. [Paragraph 270-10(1)(a)] There must be a scheme under which certain things happen For the test to apply there also has to be a scheme under which the things set out below happen. What is a scheme? For the purposes of this test the term scheme takes on the same meaning as in Part IVA of the ITAA 1936. Section 177A of the ITAA 1936 defines scheme as: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. The trust must derive assessable income in the income year. This is referred to as the 'scheme assessable income'. [Subparagraph 270-10(1)(b)(i)]

A person not relevantly connected with the trust (the outsider) must directly or indirectly provide a benefit to the trustee or a beneficiary (or their associates). The terms 'benefit' and 'outsider' are defined in the Bill and are explained below). [Subparagraph 270-10(1)(b)(ii)] What is a benefit? The term benefit is broadly defined and will include any benefit or advantage within the ordinary meaning of those expressions. However, it is defined to specifically include money or other property (whether tangible or intangible), rights or entitlements (whether proprietary or not), services and the extinguishment, forgiveness, release or waiver of a debt or other liability.

The doing of anything that results in the derivation of assessable income by the trust is also specifically defined to be a benefit. For example, if the scheme assessable income is derived by the trust as a result of the transfer, under an agreement, to the trustee of an interest from which assessable income will be derived, the person who transferred that interest to the trustee will have thereby provided a benefit to the trustee, even if the interest is not a benefit other than by reason of satisfying paragraph 270-20(e). [Section 270-20] A benefit is intended to include all means whereby value is transferred between the relevant parties. What is an outsider? The income injection test will only ever apply where the person who has provided directly or indirectly a benefit to the trustee or beneficiary of the trust (or an associate), is an outsider to the trust. The meaning of outsider depends on whether or not the trust is a family trust. In the case of any trust that is not a family trust, an outsider is a person other than the trustee of the trust acting in their capacity as such or a person with a fixed entitlement to income or capital of the trust. [Subsection 270-25(2)].

Therefore, outsider for the trust can be basically any person other than a trustee of the trust because there are not fixed entitlements to income or capital of the trust. Moreover, Australian case law provides further definitions of other terms used in subparagraph 270-10(1)(b)(ii). These definitions are presented below: What is meant by "directly or indirectly"? The Tribunal in the Administrative Appeals Tribunal (AAT) Case Eldersmede Pty Ltd & Ors v.FC of T (2004) ATC 2129 ( Eldersmede ), where the tribunal had to consider whether the trustee of a trust had provided a direct or indirect benefit to the trustee of another trust, discussed the meaning of the expression '"directly or indirectly'': ... the expression "directly or indirectly" requires first an examination of the outcome that is qualified by the expression and then the proximate and contributory causes of that outcome. In the context of subsection 270-10(1) (b) (iii), the outcome that is qualified by the expression is the provision of a benefit. What is meant by "provide"? In Eldersmede at paragraph 48 the tribunal stated the following on the meaning of the word 'provided:

What is meant by the word "provides" in the context of s. 270- 10(1) (b) (iii)? When used as a transitive verb, as it is in the provision, and in so far as it is relevant in this case, it means: "... 4 v.t. Prepare, get ready, or arrange (something) beforehand. Now rare .... 5 v.t. Equip or fit out with what is necessary for a certain purpose; furnish or supply with something.... 6 v.t. Supply or furnish for use; make available; yield, afford...." (The New Shorter Oxford English Dictionary, 1993) ".. v.t. 1. to furnish or supply. 2. to afford or yield.... 4. Archaic . to get ready, prepare, or procure beforehand...." (Macquarie Dictionary, 3rd edition, 1997)

Given the context in which it appears, there seems to be no need to do other than to adopt the ordinary meanings of the word but there are two aspects to those ordinary meanings. One is that of furnishing, supplying or making available. The other, although rare, is that of preparing or making ready. It seems to us that it is in the former sense that the word is used in s. 270-10(1) (b) (iii). The words "directly or indirectly" qualify the manner in which the trustee "provides" a benefit to the outsider or an associate of the outsider. They do not qualify the nature or character of the benefit. An appeal against this decision was dismissed by the Full Federal Court: Corporate Initiatives Pty Ltd v FCT (2005) 59 ATR 351 ( Corporate Initiatives ). In Corporate Initiatives the Court concluded that the term "provides" is not defined in the Act and agreed with the Commissioner's submission that the dictionary meanings referred to by the Tribunal such as "supply or furnish for use; make available; yield, afford" convey the central concept of causing another to have something. The Court was of the opinion that, in not calling on Eldersmede to pay the amount of the distribution.

What is meant by "under a scheme"? In Eldersmede , the Tribunal found that to be "under a scheme" there must be a sufficient nexus or connection between two matters so that one may be said to be under the other or to have occurred under the other. In Corporate Initiatives the Court went on to say in paragraph 27 that the Tribunal correctly found that the enquiry is an objective one and thus the intention of any of the parties is to be ignored. The essential elements of the scheme as found by the Tribunal were the distributions by Eldersmede and then SBS allowing Eldersmede to retain use of the amount of those distributions. Once the Tribunal found, correctly in the view of the Full Federal Court, that by reason of this Eldersmede received a "benefit" in the way explained, then it necessarily follows that Eldersmede received the benefit "under" the scheme, in the sense that the scheme operated to produce that effect.

The trustee or a beneficiary (or associates) must directly or indirectly provide a benefit to the outsider or an associate of the outsider. However, if the test is being applied to a family trust and this return benefit is being provided only to an associate who is not an outsider to the trust, this element will not be satisfied. This ensures that the test will not apply where benefits only flow from the family trust to members of the family group. [Subparagraph 270-10(1)(b)(iii)] ­   There must be a connection between the deduction and one or more of the things that happen under the scheme. The final element is that it must be reasonable to conclude that any one or more of the following is the case: the scheme assessable income has been derived wholly or partly, but not merely incidentally, because the deduction is allowable; or the benefit has been provided to the trustee or beneficiary (or their associates) wholly or partly, but not merely incidentally, because the deduction is allowable; or the benefit has been provided by the trustee or a beneficiary (or associate) wholly or partly, but not merely incidentally, because the deduction is allowable. [Paragraph 270-10(1)(c)]

Whether a benefit has been provided merely incidentally because a deduction is allowable to the trust depends on the particular facts and circumstances surrounding the scheme entered into. What if a person who was an outsider before the scheme ceases to be one as part of the scheme? Where a person enters into a scheme so that the person becomes the trustee of the trust or a person holding fixed entitlements in the trust, with the consequence that the person is no longer an outsider to that trust, the person will, in effect, be taken to be an outsider for the purposes of subsection 270-10(1). [Subsection 270-10(2)] Subsection 270-10(2) ensures that the income injection test cannot be easily avoided by, for example, the simple expedient of giving an outsider a fixed entitlement in the trust. Application to your circumstances The application of the above presented conditions regarding income injection test to the Trust's circumstances is discussed below. The trust must have an allowable deduction

This condition is satisfied for the year ended 30 June 2022. The income tax return for the year ended 30 June 2023 has not been lodged yet. Because the Trust did not derive any income for the year ended 30 June 2023, the loss is carried forward to the future income years. Therefore, this condition is satisfied for the future income years. There must be a scheme under which certain things happen consisting of the following conditions: ­   The trust must derive assessable income in the income year. This is referred to as the 'scheme assessable income'

The Trust's Income Tax Return for the year ended 30 June 2023 has not been lodged yet, so the assessable income derived by the Trust for that year is currently unknown. However, according to the provided information, the Trust did not derive assessable income for the year ended 30 June 2023. As a result, the Trust did not derive the scheme assessable income for the year ended 30 June 2023. Consequently, further conditions with respect to the income injection test do not have to be conI'm goodsidered for the income year ended 30 June 2023. However, these conditions may be applicable in the future income years. These conditions are as follows: A person not relevantly connected with the trust (the outsider) must directly or indirectly provide a benefit to the trustee or a beneficiary (or their associates).

The Commissioner is satisfied that any person does not provide a benefit (especially in the form of money or other property (whether tangible or intangible), rights or entitlements (whether proprietary or not), services and the extinguishment, forgiveness, release or waiver of a debt or other liability to the trustee or a beneficiary (or their associates) of the Trust. Moreover, the Trust did not derive any assessable income for the year ended 30 June 2023. Therefore, there is no scheme for the year ended 30 June 2023. There must be a connection between the deduction and one or more of the things that happen under the scheme This condition is not applicable, because the scheme for the year ended 30 June 2023 did not exist. However, this condition may need to be considered in the future income years, if it will be reasonable in the future income years to conclude that there is a scheme and: the scheme assessable income has been derived wholly or partly, but not merely incidentally, because the deduction is allowable; or

the benefit has been provided to the trustee or beneficiary (or their associates) wholly or partly, but not merely incidentally, because the deduction is allowable; or the benefit has been provided by the trustee or a beneficiary (or associate) wholly or partly, but not merely incidentally, because the deduction is allowable. Moreover, the Commissioner in ATO Interpretative Decision ID 2003/695 Income tax: Trust losses - scheme to take advantage of deductions (income injection test) - prior year losses) (ATO ID 2003/695) has confirmed that the income injection test can apply to tax losses where the loss year is prior to the date the scheme commenced. The requirement of paragraph 270-10(1)(a) of Schedule 2F to the ITAA 1936 is that 'a deduction is allowable to a trust for the income year'. Section 36-15 of the ITAA 1997 determines how tax losses of earlier income years are to be deducted. Subsection 36-15(2) states: If your total assessable income for the later income year exceeds your total deductions (other than *tax losses), you deduct the tax loss from that excess. * denotes a term defined in subsection 995-1(1) of the ITAA 1997.

For the income injection test to apply, there must be an allowable deduction to a trust for the income year pursuant to paragraph 270-10(1)(a) of Schedule 2F to the ITAA 1936. The prior year tax loss is an allowable deduction, pursuant to subsection 36-15(2) of the ITAA 1997, in the income year. Consequently, the income injection test can apply to tax losses where the loss year is prior to the date the scheme commenced. As a result, tax losses incurred in prior income tax years, before the commencement date of the scheme, are subject to income injection test. If the scheme commences in the future and the Trust's losses are not utilised, the losses are subject to an income injection test when the conditions presented in this section are satisfied. Therefore, if the Trust derives assessable income in the income year and a person not relevantly connected with the trust (the outsider) directly or indirectly provides a benefit to the trustee or a beneficiary (or their associates) as explained in detail above, the Trust losses are subject to an income injection test.

Furthermore, where the income injection test is applicable and the test is failed, no deduction is allowable in the income year being examined against the scheme's assessable income, with the result that the net income of the trust for the income year is increased to equal the full amount of the scheme's assessable income. In addition, to the extent the deduction of the trust may be appropriately related to the derivation of the scheme assessable income, the deduction is not allowable. However, for all other purposes, any deduction not related to the derivation of the scheme assessable income is still allowable to the trust. For example, it can be deducted against other assessable income derived in the income year being examined or can be deducted in a later year of income in the form of a tax loss. [Section 270-15]