Trust Losses

Complex rules in the income tax law restrict the ability of a trust to deduct prior year tax losses against assessable income.

The trust loss rules do not apply to “excepted trusts” which are defined to include family trusts, complying superannuation funds and other superannuation entities, a deceased estate within 5 years of the death, a fixed trust wholly owned by tax exempt entities and designated infrastructure project entities.  The trust loss rules do not apply to capital losses and net capital losses.

The trust loss rules apply differently depending on whether a trust is a non-fixed trust, a closely held fixed trust, an unlisted widely held trust, a listed widely held trust, an unlisted very widely held trust or a wholesale widely held trust.

For these purposes “fixed trust” means a trust where persons have fixed entitlements to all of the income and capital of the trust – many unit trusts fit into this category.  A trust is closely held if 20 or fewer individuals have between them a 75% or greater share of the income or capital of the trust.  A trust is widely held if is not closely held and is very widely held if the trust has at least 1,000 unitholders and certain other conditions are satisfied.  A trust is a wholesale widely held trust if the trust is widely held but not very widely held and at least 75% of its units are held by, broadly, wholesale investors.

Non-fixed trust

In order for a non-fixed trust, usually a discretionary trust to deduct tax losses of an earlier income year, a pattern of distributions test must be passed if:

  • the non-fixed trust has distributed income and/or capital within 2 months of the end of the income year in which the tax loss is sought to be deducted; and
  • Made such distributions in any of the 6 earlier income years.

Further, if at any time after the start of the income year in which the tax loss was incurred individuals have a more than 50% stake in the income or capital of the non-fixed trust, that more than 50% stake must be maintained from that year to the year in which the tax loss is deducted in order for the non-fixed trust to deduct the tax loss.

In addition, a new group must not begin to directly or indirectly control the trust after the start of the income year in which the tax loss was incurred – this is called the control test.

Family Trusts

Many discretionary trusts may qualify as family trusts provided the trust has made a family trust election.  By doing so, the tests mentioned in this article may not need to be satisfied and as a result, carry forward tax losses are more readily made tax deductible.  In a later article, I will explain the requirements in the income tax law to qualify as a family trust.

Closely held fixed trust

In order for a closely held fixed trust to deduct tax losses of an earlier income year, the trust must either pass the 50% stake test or the non-fixed trust stake test.

In order to pass the 50% stake test, from the beginning of the income year in which the tax loss was incurred until the end of the income year in which the tax loss is sought to be deducted, the same individuals must have a more than 50% stake in the income of the trust and the same individuals must have a more than 50% stake in the capital of the trust.

Broadly, in order to pass the non-fixed trust stake test, non-fixed trusts other than family trusts which could satisfy the tax loss deduction tests for non-fixed trusts must have a 50% or more stake in the income and capital of the closely held fixed trust from the beginning of the income year in which the tax loss was incurred until the end of the income year in which the tax loss is sought to be deducted.

Unlisted widely held trust

In order for an unlisted widely held trust to deduct tax losses of an earlier income year, the 50% stake test must be satisfied at the end of each income year from the loss year until the deduction year and also at the time of each abnormal trading of units in the unlisted widely held trust.  That is, the same individuals must hold a more than 50% stake in the income and capital of the start of the loss year, the end of the loss year, the end of the deduction year, the end of all intervening income years and all times of abnormal trading in the units of the unlisted widely held trust.

Listed widely held trust

In order for a listed widely held trust to deduct tax losses of an earlier income year, the 50% stake test or the same business test must be satisfied at each time of abnormal trading in the units of the listed widely held trust.

Unlisted very widely held trust or wholesale widely held trust

In order for an unlisted very widely held trust or wholesale widely held trust to deduct tax losses of an earlier income year, the 50% stake test must be satisfied at each time of abnormal trading in the units of the unlisted very widely held trust or wholesale widely held trust.

Categories: Articles

%d bloggers like this: