MONTHLY TAX TIP – The ‘alternative’ 50% stake test
May 2022
Where units in a fixed unit trust are held (directly or indirectly) by a non-fixed trust (e.g., a discretionary trust) that has not made a Family Trust Election, there is no fixed interest that can be traced to an individual. Therefore, the discretionary trust’s ownership percentage does not assist the fixed unit trust with satisfying the ‘normal 50% stake test’ for the purposes of claiming its tax losses.
In these circumstances, however, the fixed trust may instead be able to satisfy an alternative 50% stake test. Broadly, this test will be satisfied where all the following conditions are met:
(a) At all times during the test period, non-fixed trusts (other than family trusts) held fixed entitlements to 50% or more of the income or capital of the trust (or its holding entity).
(b) At all times during the test period, each non-fixed trust (other than an ‘excepted trust’) with fixed entitlements in the fixed trust satisfies the ‘pattern of distributions test’, the ‘50% stake test’ (if applicable) and the’ control test’, assuming the non-fixed trust had instead incurred the tax losses or debt deductions.
There has been no change in any of the unitholders’ interests during the test period.
If the fixed trust is unable to satisfy the alternative 50% stake test, it is worth considering whether the non-fixed trust unit holder(s) can make a Family Trust Election, which may assist the fixed trust to satisfy the ‘normal’ 50% stake test (as discussed above).
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