Special rules allow beneficiaries of loss trusts to access primary production concessions
The purpose of this section of the notes is to provide an overview of the special rules that allow beneficiaries of loss trusts to use the primary production averaging provisions and the farm management deposit (‘FMD’) provisions. This is a timely issue in light of the bushfires that have devasted so much of Australia and have left many businesses with significant losses.
By way of background, income averaging refers to the provisions in Division 392 of the ITAA 1997 which allow an individual primary producer to smooth out their income and associated tax liability from year to year. Likewise, FMDs also help individual primary producers smooth out their income by allowing a primary producer to claim a deduction for an FMD in the year in which it is made, and then including the amount in assessable income in the income year in which it is repaid/withdrawn.
To be eligible for income averaging, a taxpayer must (among other things) be an individual who carries on a business of primary production in Australia for two or more consecutive years. Similarly, to be eligible for an FMD deduction, a taxpayer must be an individual who carries on a business of primary production at the time the FMD is made. In circumstances where a trust carries on a primary production business, a beneficiary of the trust is taken to carry on the primary production business if the beneficiary is presently entitled to a share of the income of the trust for the income year. Refer to S.392-10, S.392-20, S.393-5 and S.393-25 of the ITAA 1997.
This requirement can be satisfied where the trust has income to distribute; however, where the trust has a net loss (for trust law purposes) for an income year, the requirement cannot be satisfied.
It is important to be aware, however, that special rules exist in S.392-20(3) (for income averaging) and S.393-25(5) (for FMDs) of the ITAA 1997 to ensure that a loss trust can satisfy this requirement in order to access these concessions. These rules apply differently for (loss) fixed trusts and discretionary trusts, as discussed below. Note further that these rules only apply from the 2011 income year, however, reference can be made to (withdrawn) TR 95/29 for prior income years.
All legislative references in this section of the notes are to the ITAA 1997, unless otherwise stated.
The loss trust is a fixed trust
For income averaging and FMD purposes, an individual beneficiary will be taken to carry on the primary production business carried on by a fixed trust where the trust has no income to which a beneficiary could be presently entitled and all of the following requirements are satisfied:
- The beneficiary would have been presently entitled to a share of income, assuming the trust did have income for the income year (e.g., an individual unit holder of a fixed unit trust carrying on a primary production business would generally satisfy this requirement).
- At all times during the income year, the manner or extent to which each beneficiary of the trust can benefit from the trust is not capable of being significantly affected by the exercise, or non- exercise, of a power (referred to as the ‘certain entitlements requirement’).
This test must be satisfied by all beneficiaries of the trust. It broadly requires that the trust itself must not have any ‘material discretionary elements. In this regard, the following are some examples of powers that may be capable of significantly affecting the manner and extent to which a beneficiary can benefit under the trust:
- A power to characterise receipts or expenses as income or capital, or to accumulate trust income to capital (unless those otherwise entitled have the same interest in the capital).
- A power to add new beneficiaries (other than by issuing new units or interests in a way that does not significantly affect the value of existing interests).
- A power to appoint the beneficiary’s interest in the income or capital to another beneficiary.