The income injection test is the grande dame among the trust loss provisions in Schedule 2F ITAA36. It applies to all fixed trusts and non-fixed trusts including family trusts.
Income Injection Test
The income injection test lives in Division 270 ITAA36 but nowhere in Div 270 does it say ‘Income Injection Test’. Division 270 is actually about any scheme to take advantage of deductions, be it tax losses or others.
Tax losses just is the area where Division 270 has the greatest impact.
The income injection test doesn’t apply in any case at any time. There are a number of elements that need to be met before the income injection test applies.
The first condition is that the trust must actually be allowed to claim a deduction for the loss. If the trust doesn’t, then there is no point for the income injection test to jump into action.
So the first condition is that
s270-10(1)(a): …a deduction is allowable to a trust,…
There must be a scheme. And under this scheme the following three things must happen. It doesn’t matter in what order they happen, but all three must be present.
1) Assessable Income
The trust must derive assessable income in the income year, so-called scheme assessable income.
s270-10 (1) (b) (i):…the trust derives …assessable income ….in the income year.
There must be an outsider. If there is no outsider involved, then there is no scheme.
Neither the trustee nor unit holders with fixed entitlements are outsiders. Nor is anybody included in a family trust or interposed entity election. But everybody else is an outsider per s270-25.
Let’s look at this again for a moment. This is important. It means that as long as you have a family trust election and somebody in the family is making money, you can get to the losses.
The income injection test is the only test you need to pass for a family trust. So as long as it is an ‘insider’ injecting income, you are done with this exercise.
A family trust can be a fixed or discretionary trust.
2b) Outsider Provides Benefit
This outsider must provide a benefit to the trustee or beneficiary or their associates.
A benefit is described in s270-20. It includes any benefit or advantage within the ordinary meaning of those expressions. Money, a dividend, right or entitlement, tangible or intangible property and anything else that is a benefit. It also includes services and extinguishments, forgiveness, release or wavier of a debt or other liability. And it includes the doing of anything that results in the derivation of assessable income by the trust or the transfer of value between the relevant parties.
Think of this benefit as something that ends up being assessable income for the trust, for example interest income.
3) Outsider Receives Benefit
And then the outsider must receive a benefit from the trustee or beneficiaries or their associates in return.
Think of this benefit as something that ends up being a deduction for the outsider, for example interest paid.
There must be a connection between the assessable income and the deduction. It must be reasonable to conclude that the whole thing happened to get the losses out of the trust.
s270-10 (1) (c):…it is reasonable to conclude that …the trust derived the scheme assessable income…wholly or partly, but not merely incidentally, because the deduction would be allowable.
Whether it did or not depends on the particular facts and circumstances of the case.
Not an Excepted Trust
And the trust must not be an excepted trust.
If all these four conditions are met, then section 270-15 kicks in and stops the deduction.
A trust has a loss of $100,000, but derives income of $100,000 and so determines its net income to be $0.
If the trust fails the income injection test for this income, the net income of the trust is increased to $100,000 and the losses are carried forward to the following year.
A loss trust is a beneficiary of an income trust. The income trust exercises its discretion to allocate net income to the loss trust. But this income is not paid to the loss trust but is instead converted to a loan from the loss trust to the income trust with 1% interest. This arrangement will probably fail the income injection test.
The EM states that the arrangement could be caught even if the loan back was on commercial terms.
Last Updated on 01 October 2018