The 50% stake test applies to fixed and hybrid trusts.
50% Stake Test
The 50% stake test is all about who has been holding more than a 50% stake in the trust and whether that has changed from the loss to the income year.
Which 50% Stake Test?
There are three different variations of the 50% stake tests. The basic 50% stake test and the alternate 50% stake test – both for fixed trusts. And the 50% stake test for hybrid trusts (non-fixed trusts with fixed entitlements).
Test Period
The test period is 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.
Basic 50% Stake Test for Fixed Trusts
The basic 50% stake test for fixed trusts lives in s266-40 and s269-50 ITAA97.
A trust satisfies the basic 50% stake test if the same individuals have fixed entitlements, directly or indirectly, to more than 50% of the income of the trust at all times during the test period
And the same individuals (not necessarily the same as those that hold entitlements to income) have fixed entitlements directly or indirectly, to more than 50% of the capital of the trust during the test period.
So the question is: Who had fixed entitlement to more than 50% of income – be it directly or indirectly – at the start of the test period, at the end and at all times in between? And who to capital?
It sounds complicated but in practice relatively easy once you got the numbers on the table.
You circle the lowest percentage for each individual over the test period and then add them all up. If you get over 50%, the trust passed the 50% stake test.
Let’s say Bob held 10% of units at the start of Year 1 – the loss year – and then increased his units every year by 10% – until he held 50% of units at the end of Year 5 – the income year. So you circle 10%.
Judy held 30% in Year 1 to 3 and then increased to 50% in Year 4 and 5. So you circle 30%.
Peter held the rest of the units, so 60% in Year 1, 50% in Year 2 and then all the way down to 0% in Year 5. So you circle 0%.
Your total of circled percentages is 40%. The trust failed the 50% stake test for income. So. you don’t even need to look at capital.
Sounds familiar? It probably does because it is the same method as you use for the pattern of distribution test.
Alternate 50% Stake Test For Fixed Trusts
The alternative 50% stake test lives in s266-45 Schedule 2F ITAA36. It applies to fixed (not widely held) trusts that have 50% or more of their fixed entitlements to income or capital of the trust directly held by non-fixed trust(s) during the test period.
But if non-fixed trusts hold more than 50% in the fixed entitlements, then individuals don’t hold more than a 50% stake in the income or capital of the trust at the start of the test period. And that is a problem.
Why?
Think about what the 50% stake test is trying to do. It tries to trace through to the fixed entitlements individuals hold in the trust. But if the fixed trust is held by unit-trusts it is impossible to do that, because no individual has a fixed entitlement in a non-fixed trust.
No fixed trust with more than 50% of either their income or capital entitlements owned by a non-fixed trust can pass the basic 50% stake test.
So here comes the alternate 50% stake test.
A fixed trust passes the alternate 50% stake test if the non-fixed trusts directly holding fixed entitlements nor their share to these fixed entitlements changes. And every non-fixed trust that holds fixed entitlements in the fixed trust, directly or indirectly, would satisfy the relevant tests that apply to non-fixed trusts if they stood in place of the loss trust.
And you leave family trusts and other excepted trusts out of all this.
The alternate stake test is difficult to satisfy.
But there is one way to make it easier. With a family trust election, a non-fixed trust is treated as if it held the fixed entitlement as an individual (see s 272-30(2)). So an interest held by a family trust is treated as if it was held by one individual.
Now you just need to have enough interests held by non-fixed trusts with a family trust election, and you are back in basic 50% stake test territory. Easier to please.
50% Stake Test for Non-Fixed Trusts
The 50% stake test for non-fixed trusts lives in s267-40(2) Schedule 2F ITAA36. It applies to non-fixed trust with more than a 50% fixed entitlements in income or capital. Aka hybrid trusts.
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. It basically just looks at the fixed entitlements.
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