TAXATION UNIT TRUSTS - TAXATION TREATMENT. Paper CONTENTS

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1 TAXATION UNIT TRUSTS - TAXATION TREATMENT CONTENTS Page 1. Introduction To Unit Trusts Determination Of Unit Trust Profit Unit Trust Taxable Income Comparison To Partnerships Unit Trust Paying Tax Capital Gain Trust Losses Bad Debts Tests Which Apply To A Unit Trust To Determine Whether A Claim Can Be Made For Prior Year Losses, Current Year Losses Or Bad Debts Family Trusts - For Unit Trusts Family Trust Election Family Control Test Distribution Of Income From A Family Trust Distribution From A Family Trust To An Interposed Entity Income Injection Test Family Trusts - Is This The Right Election For The Unit Trust To Make? Fixed Trust Tests That Apply To Determine Deductibility Of Trust Losses And Bad Debts For A Unit Trust That Is Not A Family Trust Income Injection Test For Unit Trusts Which Are Not Family Trusts % Stake Test Discretionary Trust Owning Units In A Unit Trust Exemption For Discretionary Trusts - Other Than Being Family Trusts Capital Gains Tax Issues For Unit Trusts Small Business Entities ESS BIZTOOLS Pty Ltd - ACN: Page 1

2 25. CGT Event E ATO Ruling On The Future Use Of Trusts With Company Beneficiaries Professional Advice ADDENDUMS A Flow Chart - Tests For Determining Whether A Unit Trust Is A Family Trust B Flow Chart - Distribution From A Family Trust C Flow Chart - Additional Test That A Family Trust Has To Satisfy D Flow Chart - Tests That Apply To Determine Deductibility Of Trust Losses And Bad Debts ESS BIZTOOLS Pty Ltd - ACN: Page 2

3 TAXATION UNIT TRUSTS - TAXATION TREATMENT 1. Introduction To Unit Trusts A detailed commentary on Unit Trusts, including comments on: Fixed Interest Payments for Units Uses of a Unit Trust Settler Trustee Trust Deed Unit Holders Business Activities Appointor Distribution of profits and capital gain Unit Holders Accounts Trustees Meetings is contained in Paper Unit Trusts. 2. Determination Of Unit Trust Profit A Unit Trust prepares its financial accounts, comprising: Trading and Profit & Loss Account Balance Sheet in a similar manner to that adopted by other entities. For further information, refer to Paper Trading And Profit And Loss Statement and Paper Balance Sheet There is no special treatment in the financial accounts, other than an indication that profits have been distributed to beneficiaries in accordance with their unit holding. The Balance Sheet contains details of beneficiaries accounts (these relate to profits that have been distributed to beneficiaries which have not been physically paid to them). 3. Unit Trust Taxable Income In preparing a Unit Trust estimate of taxable income, consideration has to be given to the treatment of prior year losses, current year losses and bad debts. - ESS BIZTOOLS Pty Ltd - ACN: Page 3

4 If there has been a material change in the underlying beneficial interest of the beneficiaries in the Unit Trust, then an income tax deduction will probably not be available for prior year losses, current year losses and bad debts. In all other aspects similar adjustments are made in the determination of taxable income as those made in other types of business entities. 4. Comparison To Partnerships If a taxable loss is incurred by a Partnership, then that loss can be distributed to the Partners. You can then utilise the share of the loss to offset against other income received that year. For further information, refer to Paper Partnership This is not the position in a Unit Trust. If a taxable loss is incurred by the Unit Trust, there is no distribution of the loss to the Unit Holders. The loss remains in the Unit Trust to be offset against the taxable income of the Unit Trust in the following years (subject to there being no material change to the underlying beneficial interest of the Unit Holders in the Unit Trust). 5. Unit Trust Paying Tax In normal circumstances a Unit Trust does not pay income tax. A Unit Trust does pay income tax where the Trustee has not distributed the taxable income for the year. This is at a penalty rate 45% plus Medicare Levy 1.5%. Normally a Trustee makes a distribution to the Unit Holders who then have to include the amount of the trust distribution in their own income tax returns and add the trust distribution to all other earnings and pay income tax at the marginal rates for their total taxable income. Trustees of Unit Trusts must disclose in the Trust's income tax return the identity of the ultimate individual or company who will beneficially receive any Trust Distributions i.e. the "Ultimate Beneficiary". Failure to disclose the names of the "ultimate beneficiaries" will result in the Trustee being assessed income tax on that distribution at the highest rate plus Medicare Levy (currently 45% plus 1.5% Medicare levy) - known as "Ultimate Beneficiary Non Disclosure Tax". If the Trustee is an individual, the liability for the "Ultimate Beneficiary Non Disclosure Tax" will be a personal one. If the Trustee is a company, the company and the company's directors will be liable for the payment of the "ultimate beneficiary non disclosure tax". For the 2010 financial year onwards, trustees must also include the tax file number of any beneficiaries which are receiving a distribution from the unit trust - ESS BIZTOOLS Pty Ltd - ACN: Page 4

5 6. Capital Gain Under most Trust Deeds the Trustee would have to distribute any capital gain to Unit Holders in proportion to the units that they own in the Unit Trust. If the Unit Trust's net income includes a capital gain, taxation relief may be available. 7. Trust Losses The Taxation Laws include provisions to control the treatment of trust losses. These Laws are to discourage taxpayers from selling Tax Losses. Similar tests apply to Trusts as those that apply to companies, relative to the claiming of losses carried forward. For further information, refer to Paper Companies and Paper Company Tax The Trust must satisfy certain tests before prior and current year losses can be deducted. Losses carried forward would not be deductible where there is a change in the persons who will benefit from the deduction, compared to the persons who were the Unit Holders when the Trust actually incurred the losses. The losses carried forward from previous years, if a specific test is not complied with, cannot be claimed as a tax deduction. For losses incurred in the current year, if a specific test is not complied with, the income year is divided into periods and then any income or loss is calculated for each period. If the tests are not complied with, a deduction will not be allowable for a specific period. 8. Bad Debts The Taxation Laws include provisions to control the treatment of bad debts. Similar tests apply to Trusts to those that apply to companies, relative to the claiming of bad debts. A Trust must satisfy certain tests before bad debts can be deducted. Bad debts will not be deductible where there is a change in the persons who will benefit from the bad debt deduction compared to the persons who were the beneficiaries when the Trust concluded the transaction relating to the ultimate bad debt being incurred. If this specific test is not complied with, a bad debt cannot be written off and claimed as a tax deduction. - ESS BIZTOOLS Pty Ltd - ACN: Page 5

6 9. Tests Which Apply To A Unit Trust To Determine Whether A Claim Can Be Made For Prior Year Losses, Current Year Losses Or Bad Debts Tests for determining whether these losses are deductible are: If the Unit Trust resolves to be a Family Trust (refer to Item 10) the Unit Trust has to pass the Income Injection Test (refer to Item 15). If the Unit Trust does not resolve to be a Family Trust (refer to Item 10) the tests to be complied with are those applicable for a Fixed Trust, other than widely held Unit Trusts being: Income Injection Test (refer to Item 15 and Item 19) 50% Stake Test (refer to Item 20) 10. Family Trusts - For Unit Trusts A Unit Trust will be a Family Trust where the Trustee of the Trust makes an election (Family Trust Election) (Refer to Item 11) that the Unit Trust will be a Family Trust. Once made the election has effect for the income year for which it was made, as well as later income years, unless it is revoked. Normally, a Family Trust Election is irrevocable; however there is an exemption in the case of a Unit Trust, which has made a Family Trust Election if some of the units in the Unit Trust are sold. Only a Fixed Trust is able to revoke a Family Trust Election. Only those Unit Trusts in which all the units are owned by the test individual or members of the test individual s family can revoke a Family Trust Election. The Family Trust Election will need to be revoked where some or all of the units are disposed of to someone outside the Family Group, or new units are being issued to a person outside the Family Group, otherwise tax will be imposed at 45 plus 1.5% Medicare levy. Notice of Revocation must be made in the Trust s tax return for the year in which the new person became a Unit Holder. The Law provides that the Trustee cannot make more than one (1) Family Trust Election in relation to the Trust. This means that if a Family Trust Election in relation to a Unit Trust is revoked because the Unit Trust is sold to new owners, the new owners are unable to elect for the Unit Trust to be a Family Trust. Once a Trust has elected to be a Family Trust, any distributions of income or capital outside the Family Group by the Trust, or relevant interposed entities, will be assessed at the top marginal tax rate plus Medicare Levy, which is called Family Trust Distribution Tax (45% plus 1.5% Medicare levy). The Family Trust only has to satisfy one (1) test, the Income Injection Test (Refer Item 15), in order to be able to claim deductions for current and prior year losses and bad debts. Unit Trusts, which do not make an election to be a Family Trust, must satisfy the other tests. - ESS BIZTOOLS Pty Ltd - ACN: Page 6

7 11. Family Trust Election The election to be treated as a Family Trust for taxation purposes must specify a year of income from which it is to take effect. The election must also specify one individual whose family group is to be taken into account. If the Trust is not required to lodge a tax return for the year in which it wants to make the election, the Trustee must make the election in writing to the Australian Taxation Office. The election must specify an individual, known as the Test Individual, as the individual whose Family Group is to be taken into account in relation to the election. The election must specify: the name of the Trust the address of the Trust, including the country of residency the beneficiaries of the Trust at the time the election takes affect A Trust cannot make a Family Trust Election unless it passes the Family Control Test (Refer Item 12) from the time the election comes into effect until the end of that income year. 12. Family Control Test To enable a Unit Trust to pass the Family Control Test the Unit Trust must be controlled by one (1) of four (4) specified Family Groups. The four (4) specified Family Groups: the Test Individual also called the Primary Individual one (1) or more members of the Primary Individual s Family the Primary Individual and one (1) or more members of the Primary Individual s Family any person mentioned above and a Legal or Financial Adviser to the Primary Individual or to a member of the Primary Individual s Family. A group will control a Trust if: it has power by means of the exercise of a Power of Appointment or Revocation or otherwise to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the Trust; or it is able (directly or indirectly) to control the application of the capital or income; or the group is capable under a scheme of gaining such beneficial enjoyment or control; or the Trustee is accustomed under an obligation or reasonably expected to act in accordance with the directions, instructions or wishes of the group; or the group is able to remove or appoint the Trustee; or the group acquires more than a 50% stake in the income or capital of the Trust. The Unit Trust needs only to pass the Family Control Test during the tax year in which the election first applies. 13. Distribution Of Income From A Family Trust Once a Family Trust Election has been made, distributions of income or capital can only be made to members of the Family Group of the Primary Individual, without attracting the top progressive rate of tax, plus the Medicare Levy (called Family Trust Distribution Tax). - ESS BIZTOOLS Pty Ltd - ACN: Page 7

8 The Family Group comprises any: spouse child grandchild parent grandparent brother sister nephew niece of the test individual or the test individual s spouse or the spouse of the test individual. The family group includes the spouse of such a child, grandchild, parent, grandparent, brother, sister, nephew or niece and the lineal decedents for a nephew, niece or child of the individual or the individual's spouse. A Flow Chart highlighting the tests for determining whether a Unit Trust is a Family Trust is shown in Addendum A. 14. Distribution From A Family Trust To An Interposed Entity If a Family Trust makes a distribution to an Interposed Entity (i.e. Partnership, Company or Trust) that entity must also make a similar election (i.e. to only distribute to the Test Individual s Family Group) in respect of distributions of income and capital, otherwise the Family Trust will be subject to Family Trust Distribution Tax (45% plus 1.5% Medicare levy). This election is called the Interposed Entity Election. The Interposed Entity Election need not be made at the time that the Unit Trust has made the election to be deemed to be a Family Trust. In the election the Interposed Entity must specify the date from which the election takes effect. It should be before the date of distribution from the Family Trust. The Interposed Entity Election must specify: the Family Trust to which it relates the Test Individual the name of the entity the address of the entity, including its Country of residency the shareholders, partners or beneficiaries of the entity at the time the election takes affect The Interposed Entity must also pass the Family Control Test. An Interposed Entity Election is irrevocable. When buying a Company or Trust an enquiry should be made as to whether an Interposed Entity Election has been made. If it has been and profits are distributed to the new owners, the tax rate will be 45% plus 1.5% Medicare levy. A Flow Chart outlining Distribution from a Family Trust that is a Unit Trust to an Interposed Entity, Elections Necessary; if distributions not in accordance with the Election - Family Trust Distribution Tax imposed at 45% plus 1.5% Medicare levy is in Addendum B - ESS BIZTOOLS Pty Ltd - ACN: Page 8

9 15. Income Injection Test If income has been injected into the Unit Trust in connection with a scheme and the losses are used to shelter what would otherwise have been allowable income, then the deduction of those losses against the income injected will be disallowed. The Income Injection Test applies, not only to current and prior year losses, but also to any current year deductions. If the test is not satisfied, then all deductions claimed by the Trust in the current year could be disallowed. Basically the Law states that if a scheme is devised to take advantage of the deductions, then those deductions maybe disallowed. Prior year losses and current year deductions will be disallowed when under a scheme: the Trust derives an amount of assessable income; an Outsider provides a benefit to the Trustee or a Beneficiary or to an Associate of either of them; the Trustee, a Beneficiary or an Associate provides a benefit to the Outsider or their Associate; it is reasonable to conclude the Trust derived the scheme assessable income or the Outsider provided the benefit wholly or partly, but not merely incidentally because the deduction would be allowable. An Outsider to a Trust does not include: if the Trust is a Family Trust: the Test Individual or a member of his/her family; or a Company, Partnership or Trust that has made an Interposed Entity Election, where the election was in force when the scheme commenced; or a Trust, Company or Partnership if some or all of the following persons had fixed entitlements to all the income and capital of the entity: - the test individual; or - members of the test individual s family; or - family trusts of the test individual The Trustee of a Unit Trust or a person with a fixed entitlement to his/her share of the income or capital of the Unit Trust. A Flow Chart outlining the additional tests that a Family Trust that is a Unit Trust has to satisfy is included in Addendum C. 16. Family Trusts - Is This The Right Election For The Unit Trust To Make? If a Unit Trust elects to be treated as a Family Trust then it only has to satisfy one (1) test - the Income Injection Test. However, if the Unit Trust does not elect to be a Family Trust, then it must satisfy the Income Injection Test and 50% Stake Test. One matter that Trustees of Unit Trusts will have to consider before electing to become a Family Trust is whether the narrow definition of the Family prejudicially affects the future operations of the Unit Trust. In any event the election to be a Family Trust needs only to be made in some future time, when the Unit Trust has incurred a loss. - ESS BIZTOOLS Pty Ltd - ACN: Page 9

10 17. Fixed Trust A Trust is a Fixed Trust if persons i.e. individuals, companies, trusts etc., have fixed entitlements to all of the income and capital of the Trust. A beneficiary has a fixed entitlement to a share of income or capital where the beneficiary has a vested and indefeasible interest in a share of the income of the Trust that the Trust derives from time to time or of the capital of the Trust. In order to qualify as a Fixed Trust the Trust must be a Fixed Trust at all times during the loss year and each intervening income year and the income year. 18. Tests That Apply To Determine Deductibility Of Trust Losses And Bad Debts For A Unit Trust That Is Not A Family Trust Tests that apply relative to Unit Trusts are: Income Injection Test 50% Stake Test 19. Income Injection Test For Unit Trusts Which Are Not Family Trusts The same Income Injection Test as detailed in Item % Stake Test There must be individuals who at all times during the test period have more than a 50% stake in the Fixed Trust. The test period is the tax year in which the loss was incurred, tax year in which the loss is claimed and all intervening tax years. The individual percentages owned do not have to be the same, subject to the individuals having more than 50% interest when the loss was incurred, also having more than 50% interest in the tax year in which the deduction is claimed and all intervening tax years. 21. Discretionary Trust Owning Units In A Unit Trust The 50% Stake Test requires individuals to own fixed entitlement to a share of the income or capital of the Trust in excess of 50%. This means the investment has to be owned through fixed entitlements. The Australian Taxation Office does not consider that an individual has a fixed entitlement in a Discretionary Trust. For this reason, where a Discretionary Trust holds 50% or more of the units in a Unit Trust, the 50% Stake Test will fail. If a Discretionary Trust is a Family Trust for income tax purposes, it has been held that the Trustee of the Discretionary Trust, that is a Family Trust, does have a fixed interest and therefore if the Discretionary Trust, that is a Family Trust, has more than a 50% equity in a Unit Trust, the 50% Stake Test will be passed. - ESS BIZTOOLS Pty Ltd - ACN: Page 10

11 22. Exemption For Discretionary Trusts - Other Than Being Family Trusts If a Discretionary Trust owns more than a 50% interest in a Unit Trust, losses can be deducted, if the Discretionary Trust can satisfy the: Non Fixed Trust Stake Test : Income Injection Test Pattern of Distribution Test Control Test and there has been no change in any of the Unit Holders interests. A Flow Chart explaining the tests that apply to determine the deductibility of trust losses and bad debts for a Unit Trust, that is not a Family Trust, is outlined in Addendum D. 23. Capital Gains Tax Issues For Unit Trusts Unit Trusts have to bring to account net capital gains earned during a year. Net capital gains is the total of the Trust's capital gains earned in that year reduced by any capital losses incurred in that year or capital losses carried forward from an earlier year. (Capital losses can only be offset against capital gains, not offset against normal taxable income. For further information, refer to Paper Capital Gains Tax - Introduction) 24. Small Business Entities A Unit trust may be eligible for the small business entity regime if it satisfies two basic conditions: Carries on business Has an aggregated turnover of less than $2,000,000 If eligible, the unit trust will be able to access the following concessions subject to any relevant criteria to each concession: Simplified depreciation rules Simplified trading stock rules Special rules in regards to prepaid expenses Accounting for GST on a cash basis Paying GST by quarterly instalments Access to the Small Business CGT Concessions FBT Car Parking exemption PAYG instalments based on GDP adjusted notional tax Two year period for amending assessments Entrepreneurs tax offset 25. CGT Event E4 A Unit trust is a useful entity in which to conduct a trading business, however it does create difficulties where the trust is used to hold assets which appreciate in value, holds residential, commercial or other forms of buildings subject to capital works deductions or the business itself is sold. - ESS BIZTOOLS Pty Ltd - ACN: Page 11

12 This is due to the operation of CGT event E4 which when triggered reduces the cost base of the units in the unit trust by distributions from the trust which are not assessable to the taxpayer. This CGT event is usually triggered when a distribution occurs because of: accounting income is in excess of trust income; the non assessable indexed portion of a capital gain is distributed; The non assessable small business 50% active asset concession is distributed; Where the trust makes a return of capital to unit holders; A capital works deduction arises on any form of residential, commercial and other building is distributed; If units are invested into a managed fund, the non taxable distributions which are paid each year are distributed. Once the cost base of the unit held has been reduced to nil by any of the above mentioned events, there is an immediate capital gain recognised by the taxpayer. This event is not eligible for the general CGT discount of 50% and it will occur whenever a further event occurs. 26. ATO Ruling On The Future Use Of Trusts With Company Beneficiaries On the 2nd June 2010, the ATO released Taxation Rule 2010/03 Income Tax Act: Division 7A Loans: Trust Entitlements. If a trust is being utilised in your business and one or more companies are beneficiaries, then this ruling could apply. The ruling is only the Commissioner of Taxation opinion. This does not necessarily make him correct, however until this matter is litigated in a court of law the Commissioner of Taxation's opinion will dictate how the Australian Taxation Office deals with taxpayers and their taxation affairs. The ruling expresses the Commissioner of Taxation's opinion on the circumstances in which a private company, with a "present entitlement to an amount" from an associated trust, makes a loan to that trust in circumstances where funds representing that "present entitlement" remain intermingled with funds of the trust. Division 7A is a provision of the Income Tax Assessment Act 1936 which involves companies and non-company tax payers. In very broad terms, it creates a loan between a company and an associated tax payer whenever the company does any of the following with the associated tax payer: loans money advances money provides credit to or any other form of financial accommodation makes a payment on their behalf. Where a Division 7A loan arises, it will become a "deemed automatic dividend" to the associated tax payer, unless a seven year unsecured or 25 year secured loan agreement is put in place before the relevant income tax return is lodged. If a business is conducted via a trust structure and, at the end of the year, distribution of profits is made to a company beneficiary (often done because of the corporate lower tax rate) and the trust does not actually physically pay cash to the company, in this scenario the payment will be treated as a Division 7A loan which will result in an "automatic deemed dividend" being paid by the company to the associated tax payer i.e. the trust. This applies for trust distributions to companies made after the issuing of the ruling by the Australian Taxation Office with an effective commencement date of 16 December For company beneficiary trust distributions pre 16 December 2009, the position of the Commissioner is that they are to be "grandfathered' (i.e. not Division 7A loans) however each case is to be considered on its individual facts. The consequence for this is that the company will be deemed to have paid a dividend to the trust. - ESS BIZTOOLS Pty Ltd - ACN: Page 12

13 These dividends will more than likely have franking credits attached which will also reduce the company's franking account balance. This dividend and attached franking credits will be assessable income to the trust which will then have to distribute this profit to a beneficiary which will increase the new beneficiary's taxable income resulting in increased tax payable, although this will be partly offset by any attached franking credits. There are a number of possible solutions available in regards to how trust distributions are going to be treated for businesses: Do nothing. This will result in an immediate dividend each year. Will also probably add to taxation burdens. Implement a new Division 7A Loan Agreement every fiscal year. This solution is complicated in that separate loan agreements will need to be prepared each year. This solution requires interest to be paid by the trust and the company needs to include the interest as income. The trust could physically pay the trust distribution to the company. Difficulties that this may present are having the available funds in the trust to pay the trust distribution, and also to be able to get the cash out of the company. Change operating structures. Consideration could be given to changing operating structures by incorporating the company and utilising the capital gains tax rollover elections, to have the discretionary trust owning the shares in the company and putting the business into the company structure. Sale of Business. Sell the business from the trust to a company/partnership/sole trader structure and utilise the small business capital gains tax concessions and general discount to reduce/eliminate capital gains tax and increase the businesses cost base. If you are operating your business through a trust and you have companies as beneficiaries, it is recommended that you seek accounting advice on the ongoing suitability of your current structure having regard to this ATO Ruling. 27. Professional Advice The taxation treatment of Unit Trusts is very complicated. Before establishing a Unit Trust or making the election to become a Family Trust, it is recommended that you seek appropriate professional advice from a professional accountant and solicitor. - ESS BIZTOOLS Pty Ltd - ACN: Page 13

14 ADDENDUM A A Flow Chart - Tests For Determining Whether A Unit Trust Is A Family Trust UNIT TRUST Election to be FAMILY TRUST Must nominate Must pass one control test TEST INDIVIDUAL FAMILY CONTROL TEST Family Group to whom distributions can be made or to:- Child Grandchild Parent Grandparent Brother Sister Nephew Niece Spouse Test individual's Spouse Child Grandchild Parent Grandparent Brother Sister Nephew Niece 1. Test (Primary) Individual 3. Primary Individual and Members of Primary Individual's Family 2. Primary Individual's Family 4. Any person of 1,2,3 and a Legal or Financial Adviser to the Primary Individual or to a member of the Primary Individual's Family - ESS BIZTOOLS Pty Ltd - ACN: Page 14

15 ADDENDUM B B Flow Chart - Distribution From A Family Trust DISTRIBUTION FROM A FAMILY TRUST THAT IS A UNIT TRUST TO AN INTERPOSED ENTITY, ELECTIONS NECESSARY; IF DISTRIBUTIONS NOT IN ACCORDANCE WITH THE ELECTION - FAMILY TRUST DISTRIBUTION TAX IMPOSED AT 46.5% UNIT TRUST Elected to be Can be revoked if sold with authority from Primary Individual FAMILY TRUST If distribution not in accordance with the Election - Tax at 46.5% on all distributions If made Interposed Entity Election Interposed Entity Election INTERPOSED ENTITY Partnership Company Trust FAMILY CONTROL TEST TEST INDIVIDUAL Or to:- 1. Test (Primary) Individual 2. Primary Individual's Family Child Grandchild Parent Grandparent Brother Sister Nephew Niece Spouse Test individual's Spouse Child Grandchild Parent Grandparent Brother Sister Nephew Niece 3. Primary Individual and Members of Primary Individual's Family 4. Any person of 1,2,3 and a Legal or Financial Adviser to the Primary Individual or to a member of the Primary Individual's Family - ESS BIZTOOLS Pty Ltd - ACN: Page 15

16 ADDENDUM C C Flow Chart - Additional Test That A Family Trust Has To Satisfy ADDITIONAL TEST THAT A FAMILY TRUST (WHICH IS A UNIT TRUST) HAS TO SATISFY UNIT TRUST Elected to be FAMILY TRUST Nominated Passed TEST INDIVIDUAL FAMILY CONTROL TEST Must satisfy INCOME INJECTION TEST Income must not be injected to offset a loss that is provided by an "Outsider" - ESS BIZTOOLS Pty Ltd - ACN: Page 16

17 ADDENDUM D D Flow Chart - Tests That Apply To Determine Deductibility Of Trust Losses And Bad Debts TESTS THAT APPLY TO DETERMINE DEDUCTIBILITY OF TRUST LOSSES AND BAD DEBTS FOR A UNIT TRUST THAT IS NOT A FAMILY TRUST UNIT TRUST Does not resolve to be a Family Trust Must satisfy INCOME INJECTION TEST 50% STAKE TEST Income must not be injected to offset a loss that is provided by an "Outsider" Individuals with more than 50% stake - when the loss was incurred, the year the claim was made and intervening years. A Discretionary Trust does not pass 50% Test (even if units are owned) unless it is a Family Trust Exception for a Discretionary Trust not a Family Trust Income Injection Test Must pass Pattern of Distribution Test Control Test No change in any of the Unit Holders' Interests - ESS BIZTOOLS Pty Ltd - ACN: Page 17

18 AN IMPORTANT MESSAGE The forms and commentaries contained in this paper are provided as a guide only and should not form the sole basis for any advice in relation to the particular situation of any person without first obtaining proper professional advice. This paper is provided on the understanding that ESS BIZTOOLS Pty Ltd (ACN: ) will not be responsible as a result of any use made by users hereof of the forms or commentaries of this paper without first obtaining specific professional advice. Neither shall ESS BIZTOOLS Pty Ltd be responsible for any errors or omissions contained in these papers. ESS BIZTOOLS Pty Ltd expressly disclaims liability whether under contract or negligence and whether to a direct purchaser of these papers or to any other person who may borrow or use them in respect of any loss or damage flowing therefrom whether direct or consequential. In particular and without limiting the extent of this disclaimer ESS BIZTOOLS Pty Ltd accepts no liability if any form or commentary contained herein, whether used in its original form or altered in some way by the user, proves not to be valid or not to attain the end result desired by the user. This exclusion shall extend both to the user and to any client of the user who may suffer loss as a result of the use of these papers and it shall apply even though ESS BIZTOOLS Pty Ltd may have been negligent in the publication or preparation of these papers. The user acknowledges that it has not made known to ESS BIZTOOLS Pty Ltd any particular purpose for which these papers are required and that it has not relied on ESS BIZTOOLS Pty Ltd's skill or judgement to provide a paper suitable for any such purpose. INTELLECTUAL PROPERTY NOTICE The authority to use all copyright, trade marks and other intellectual property rights comprised in this paper is held exclusively by ESS BIZTOOLS Pty Ltd (ACN: ). Neither these rights nor any part of this paper may be used, sold, transferred, licensed, copied or reproduced in whole or in part in any manner or form whatsoever without the prior written consent of ESS BIZTOOLS Pty Ltd (ACN: ). - ESS BIZTOOLS Pty Ltd - ACN: Page 18

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