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Trafficking in trust losses

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The Government has become aware of a significant erosion of the tax revenue that is occurring through trafficking in trust losses. I am announcing today the Government's intention to amend the tax law to stop this leakage of revenue.

The tax law contains tests which limit the deductibility of losses incurred by companies. Their main purpose is to prevent a company with undeducted prior year losses being sold by its shareholders to a purchaser needing a vehicle in which tax sheltered income could be accumulated.

In broad terms, these tests have the effect that a company can carry forward a loss only if there is a continuity of beneficial ownership of the company or the company carries on the same business as before the change in ownership. Corresponding rules apply to the deductibility of current year losses.

These provisions do not apply to the deductibility of trust losses.

The new rules that will apply to trusts will restrict the circumstances in which current year and prior year losses can be deducted by trusts. These rules will differ from those applying to companies, reflecting the different characteristics of trusts.

The main difference will be that the same business test will not apply to trusts other than widely held listed public unit trusts. Also, a new test, referred to as the income injection test. will apply to trusts.

The rules that will apply to discretionary trusts will differ in some respects from those that are to apply to fixed trusts. These rules are explained in Attachment A.

The new rules for trust losses will apply to corporate unit trusts and public trading trusts as well.

Special rules will be provided for family trusts. These rules recognise that trusts are used in carrying on many small family businesses. In general, the rules will permit the carry forward of losses so long as the control of the trust is kept within the family and benefits from the trust flow only to members of the family. These rules are explained in Attachment B.

A specific test. called the income injection test, will apply to all trusts including family trusts. This test will prevent a trust loss being deducted if consideration is received for the use of the loss and income is injected into the trust to be sheltered from tax by the loss. This test is further explained in Attachment A.

The new rules will not apply to complying superannuation funds, approved deposit funds and pooled superannuation trusts. However, if these trusts make investments in other trusts. the rules will apply to the deductibility of losses of those other trusts.

The rules will also not apply to deceased estates for a period of five years from the date of death of the deceased. This will provide an adequate period for the completion of the administration of the estate.

A summary of the tests that have to be satisfied by the different categories of trusts in order to be able to carry forward losses is provided in Attachment C. The proposed date of effect of the measures is explained in Attachment D.


Simon Matthews Australian Tax Office 06 2161523 (w) 06 2852157(h)