If you operate your business as a trust and you incur a tax loss, you cannot distribute the loss to the trust’s beneficiaries.
Losses must be 'quarantined' in a trust to be carried forward by the trust indefinitely until offset against future net income. It is possible to use those losses as deductions against income in the trust for succeeding income years if the trust satisfies certain tests relating to ownership or control of the trust. If the trust terminates before the losses can be offset against income, they are lost.
The trust loss rules apply in different ways to each of the following categories of trust:
This guide sets out tests that must be satisfied if a trust wishes to deduct a tax loss and/or certain debt deductions. The trust loss legislation is contained in Schedule 2FExternal Link to the Income Tax Assessment Act 1936 (ITAA 1936).
In order to determine which test applies, you will need to determine the type of trust that is seeking a trust loss deduction. The different types of trusts are:
unlisted widely held trust
unlisted very widely held trust
wholesale widely held trust
fixed trust other than a widely held trust.
Once you have determined the type of trust, you need to consider and apply the relevant trust loss tests that apply to that trust.
The tests are:
50% stake test
pattern of distributions test
income injection test.
The tests that apply to each type of trust are listed in the table under the heading 'Summary of tests that apply'.
This document provides an explanation and examples for each of the trust loss tests.
A trust will be able to deduct a tax loss and/or certain debt deductions if it satisfies the trust loss tests that apply to it.