A non-fixed trust can only deduct tax losses and debt deductions if there is continuity of control of the trust. So here comes the control test.
Control Test
The control test provides that no group must begin to control the trust, directly or indirectly, during the test period. It lives in s267-45 Sch 2F ITAA36.
The control test only applies under certain conditions outlined in s267-20 (1) Schedule 2F ITAA36. If you don’t meet these, no need to worry about the control test.
Have Income and a Tax Loss
You must have income and a tax loss. If you don’t, then there is nothing to deduct anyway.
s267-20 (1): This section applies to a trust that: (a) can deduct in the income year a tax loss from a loss year…
Be a Non-Fixed Trust
The control test only applies to non-fixed trusts.
s267-20 (1): This section applies to a trust that…(b) was a non-fixed trust …at any time during …the test period
For fixed trusts there is the 50% stake test and of course the income injection test.
During the Test Period
The test period runs from the beginning of the loss year to the end of the income year. Income year is the year you want to claim the tax loss. Loss year is the year you incurred the loss.
s267-20 (1): …the test period …from the beginning of the loss year until the end of the income year…
Not Be an Excepted Trust
And you must not be an excepted trust
s267-20 (1): This section applies to a trust that: …(c) was not an excepted trust at all times in the test period.
How To Go From Here
If you tick these four boxes, the control test is for you. And you can ‘graduate’ to s267-20 (2) which will point you to the actual test in s267-45.
s267-20 (2): The trust cannot deduct the tax loss unless it meets:…the condition in section 267- 45.
Control Test
The actual control test is very short and to the point
s267-45: A group must not, during the test period, begin to control the trust directly or indirectly.
That’s it. That’s all. But there is a fair bit in here nevertheless.
Group
You get a short list of what a group is.
s269-95 (5) A groupis: (a) a person; or (b) a person and one or more associates; or (c) 2 or more associates of a person.
And you find the definitions for person and associates at the start of ITAA36 within its long list of interpretations.
Person includes a partnership, a company and a person in the capacity of trustee of a trust estate. Associate has the same meaning as in section 318.
Begin to Control
A group can stop controlling the trust during the test period, but it can’t begin control.
Control
So now we get to the essence of it all. What does it mean for a group to control a trust?
s269-95 (1) …a group …controls a non-fixed trust if:
(a) the group has the power… to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the trust; or
(b) the group is able (directly or indirectly) to control the application of the capital or income of the trust; or
(c) the group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) or the control in paragraph (b); or
(d) the trustee is accustomed, under an obligation or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the group; or
(e) the group is able to remove or appoint the trustee; or
(f) the group acquires more than a 50% stake in the income or capital of the trust.
There is a fair bit in here.
Some is clear cut. If you change the appointor during the test period, (e) will cause you trouble. If you acquire more than 50%, (f) stands in your way.
But for the rest there might be many shades of grey. So you will probably need to weigh up of various factors to see which way the dice falls.
Part Loss Year
Just one last thing before we go. Even you can’t deduct the tax loss for a full year, you might be able to deduct part of a tax loss per 267-50. Just worth keeping in mind.
s267-50 (1) If section 267-20 prevents a trust from deducting a tax loss because the trust does not meet the condition in section …267-45 …, it can deduct the part of the tax loss that is attributable to a part of the loss year.
(2) However, the trust can do this only if, assuming that that part of the loss year had been treated as the whole of the loss year for the purposes of sections …267-45, the trust would have been entitled to deduct the tax loss.
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