A trading entity (the 'taxpayer') derives income from a business that it carries on. The business is restructured into a hybrid trust (the 'new trust') which then derives the income. 2. The new trust has a number of classes of units. Each class of units has different rights attached. The taxpayer or associates hold units with income, capital and voting rights in the new trust (class A units). Another trust (the promoter trust) holds units in the new trust with income rights only (class B units). 3. The trustee of the new trust has discretion as to the distribution of the income to class A or class B income unit holders. 4. All the units in the promoter trust are held by a company with carry forward losses (the 'loss company'). 5. The new trust distributes a large proportion of the income to the class B unit holders. A smaller proportion may be distributed to the class A unit holders. 6. An amount, say 10% of the distribution to the class B unit holders, is paid in cash to the promoter trust. The balance of 90% is never paid and by agreement (usually verbal) between the parties is never intended to be paid. 7. The promoter trust then distributes all of the income distribution from the new trust to the loss company. The promoter claims that the loss company has carry forward losses that offset the distribution from the promoter trust.
In some arrangements a variation is used where the 90% balance of the distribution referred to in paragraph 6 above is actually paid but remains under the effective control of the taxpayer or associates through the use of a joint venture. 9. In these arrangements a joint venture is formed between the taxpayer or associates and the promoter trust. 10. By agreement the taxpayer or associates have effective control over the assets of the joint venture. 11. As described above in Arrangement 1 the new trust distributes the income to the promoter trust, however, pursuant to an agreement between the parties, the promoter trust then makes a capital contribution, say 90% of the distribution it receives from the new trust, to the joint venture thereby maintaining the effective control of the taxpayer or associates over those funds. In some cases the funds giving effect to the capital contribution by the promoter trust may be paid directly by the new trust to the joint venture. 12. The basic features of these arrangements can be summarised diagrammatically as follows: