then, for the purposes of the valuation at the end of the transition year, the cost of the trading stock for the purposes of Division 70 of the Income Tax Assessment Act 1997 is taken to be equal to the value at which it was taken into account at the beginning of the transition year.
Subdivision 57‑M—Imputation
57‑120 Cancellation of franking surplus, credit or debit
Cancellation of surplus
(1) Subject to subsections (3) and (4), if, immediately before the transition time, the transition taxpayer or a subsidiary (see section 57‑125) of the transition taxpayer has a franking surplus, then the surplus is reduced to nil at the transition time.
Cancellation of credit/debit
(2) Subject to subsections (3) and (4), if:
(a) at any time after the transition time, there arises a franking credit or a franking debit of the transition taxpayer or of a subsidiary of the transition taxpayer; and
(b) the franking credit or franking debit is to any extent attributable to a period, or to an event taking place, before the transition time;
the franking credit or franking debit is to that extent taken not to have arisen.
Cases where subsections (1) and (2) do not apply to the transition taxpayer
(3) If:
(a) one or more franking debits of the transition taxpayer arise after the transition time; and
(b) any of the debits is to an extent (the amount of which is the pre‑transition time component of the debit) attributable to the period, or to an event taking place, before the transition time; and
(c) immediately before the transition time:
(i) there was a franking surplus of the transition taxpayer that was less than the total of the pre‑transition time components of all of the debits; or
(ii) there was no franking surplus of the transition taxpayer;
then:
(d) in a case covered by subparagraph (c)(i)—subsection (1) does not apply to the surplus; and
(e) in any case—subsection (2) does not apply to the debits.
Cases where subsections (1) and (2) do not apply to a subsidiary
(4) If:
(a) one or more franking debits of a subsidiary of the transition taxpayer arise after the transition time; and
(b) any of the debits is to an extent (the amount of which is the pre‑transition time component of the debit) attributable to the period, or to an event taking place, before the transition time; and
(c) immediately before the transition time:
(i) there was a franking surplus of the subsidiary that was less than the total of the pre‑transition time components of all of the debits; or
(ii) there was no franking surplus of the subsidiary;
then:
(d) in a case covered by subparagraph (c)(i)—subsection (1) does not apply to the surplus; and
(e) in any case—subsection (2) does not apply to the debits.
57‑125 Subsidiary
(1) A company (the subsidiary company) is a subsidiary of another company (the holding company) if all the shares in the subsidiary company are beneficially owned by:
(a) the holding company; or
(b) one or more subsidiaries of the holding company; or
(c) the holding company and one or more subsidiaries of the holding company.
(2) A company (other than the subsidiary company) is a subsidiary of the holding company if, and only if:
(a) it is a subsidiary of the holding company; or
(b) it is a subsidiary of a subsidiary of the holding company;
because of any other application or applications of this section.
Subdivision 57‑N—Division not applicable in respect of certain plant
57‑130 Plant or depreciating assets covered by Subdivision 58‑B of the Income Tax Assessment Act 1997
(1) Subdivision 57‑J, and Subdivision 57‑K in so far as it applies to balancing adjustments for plant or depreciating assets, do not apply in respect of an asset to which Subdivision 58‑B of the Income Tax Assessment Act 1997 applies.
(2) Despite subsection (1), Subdivision 57‑J applies for the purposes of section 40‑35 of the Income Tax (Transitional Provisions) Act 1997 to capital expenditure incurred by a transition taxpayer before 1 July 2001 that relates to property that is not a depreciating asset.
Subdivision 57‑P—Balancing adjustment on ceasing to have a Division 230 financial arrangement
57‑135 Balancing adjustment on ceasing to have a Division 230 financial arrangement referred to in section 57‑32
(1) This section applies if:
(a) section 57‑32 was applied to work out the market value of an asset (the subject asset); and
(b) the transition taxpayer is a party to the Division 230 financial arrangement (the financial arrangement) to which the subject asset, or the corresponding liability for the subject asset, is or is part of; and
(c) a balancing adjustment is made under Subdivision 230‑G of the Income Tax Assessment Act 1997, after the transition time, in relation to the financial arrangement.
(2) For the purposes of making the balancing adjustment under Subdivision 230‑G of the Income Tax Assessment Act 1997 in relation to the financial arrangement, adjust the amount worked out using the method statement (the method statement) in subsection 230‑445(1) of that Act by:
(a) if the transition taxpayer is the holder of the subject asset—increasing any gain or reducing any loss by the amount worked out under subsection (4) of this section; or
(b) if the transition taxpayer is the holder of the corresponding liability for the subject asset—reducing any gain or increasing any loss by the amount worked out under subsection (4) of this section.
(3) Despite subsection (2):
(a) if the amount worked out under subsection (4) exceeds the amount of the loss to be reduced under paragraph (2)(a)—the transition taxpayer is taken, for the purposes of making the balancing adjustment, to have made a gain equal to the amount of the excess; or
(b) if the amount worked out under subsection (4) exceeds the amount of the gain to be reduced under paragraph (2)(b)—the transition taxpayer is taken, for the purposes of making the balancing adjustment, to have made a loss equal to the amount of the excess; or
(c) if when applying the method statement no balancing adjustment is made in relation to the financial arrangement—the transition taxpayer is taken, for the purposes of making the balancing adjustment, to have:
(i) if the transition taxpayer is the holder of the subject asset—made a gain equal to the amount worked out under subsection (4); or
(ii) if the transition taxpayer is the holder of the corresponding liability for the subject asset—made a loss equal to the amount worked out under subsection (4).
(4) For the purposes of subsections (2) and (3), the amount is the difference between:
(a) the amount that the transition taxpayer would need to receive or pay under the financial arrangement without an amount being assessable income of, or deductible to, the transition taxpayer if the subject asset, or the corresponding liability for the subject asset, were disposed of at the time the balancing adjustment is made; and
(b) the amount that the transition taxpayer would need to receive or pay under the financial arrangement without an amount being assessable income of, or deductible to, the transition taxpayer if:
(i) the subject asset, or the corresponding liability for the subject asset, were disposed of at the time the balancing adjustment is made; and
(ii) the assumptions in subsection (5) were made.
(5) The assumptions referred to in subparagraph (4)(b)(ii) are that, when the financial arrangement was entered into:
(a) the parties to the arrangement were dealing with each other at arm’s length (within the meaning of the Income Tax Assessment Act 1997) in relation to the arrangement; and
(b) if the arrangement gives rise to an interest that is not an equity interest in an entity—the return on the interest would reasonably be expected to be equal to the benchmark rate of return (within the meaning of the Income Tax Assessment Act 1997) for the interest.
(6) This section applies despite section 230‑510 of the Income Tax Assessment Act 1997.
Schedule 2F—Trust losses and other deductions
Division 265—Overview of Schedule
265‑5 What this Schedule is about
If there is a change in ownership or control of a trust or an abnormal trading in its units, it:
• may be prevented from deducting its tax losses of earlier income years; and
• may have to work out in a special way its net income and tax loss for the income year; and
• may be prevented from deducting certain amounts in respect of debts incurred in the income year or earlier income years.
This will not be the case if the trust is an excepted trust. However, if it became one by making a family trust election, a special tax may be payable on certain distributions and other amounts.
If a trust is involved in a scheme to take advantage of deductions, it may be prevented from making full use of them.
265‑10 Diagram giving overview of Schedule
A diagram showing change in ownership or control of a trust
Division 266—Income tax consequences for fixed trusts of abnormal trading or change in ownership
Subdivision 266‑A—Overview of this Division
266‑5 What this Division is about
This Division is about the income tax consequences, for various kinds of fixed trusts, of certain events:
• for an ordinary fixed trust, the event is a change in ownership (subject to a non‑fixed trust exception);
• for an unlisted widely held trust, the event is an abnormal trading in its units, or the end of an income year, together with a change in ownership;
• for a listed widely held trust, the event is an abnormal trading in its units, together with a change in ownership and business;
• for an unlisted very widely held trust or a wholesale widely held trust, the event is an abnormal trading in its units, together with a change in ownership.
266‑10 Diagram giving overview of this Division
Diagram showing the income tax consequences, for various kinds of fixed trusts, of certain events
Subdivision 266‑B—Effect of change in ownership of fixed trust
266‑15 What this Subdivision is about
An ordinary fixed trust:
• cannot deduct a tax loss from an earlier income year; or
• has to work out its net income and tax loss for the income year in a special way; or
• cannot deduct certain amounts in respect of debts incurred in the income year or an earlier income year;
unless there has been continuity of ownership throughout a particular period or an exception relating to holdings by non‑fixed trusts applies.
Note: The exceptions mentioned in this section apply differently in relation to designated infrastructure project entities: see sections 415‑25 and 415‑30 of the Income Tax Assessment Act 1997.
266‑20 Diagram giving overview of this Subdivision
Diagram showing the effect of change in ownership of fixed trust
266‑25 Fixed trust may be denied tax loss deduction
Type of trust to which this section applies
(1) This section applies to a trust that:
(a) can deduct in the income year a tax loss from a loss year; and
(b) was a fixed trust at all times in the period (the test period) from the beginning of the loss year until the end of the income year; and
(c) was not a widely held unit trust at all times in the test period; and
(d) was not an excepted trust at all times in the test period.
To find out the meaning of fixed trust: see section 272‑65.
To find out the meaning of widely held unit trust: see section 272‑105.
To find out the meaning of excepted trust: see section 272‑100.
Condition for deducting tax loss
(2) The trust cannot deduct the tax loss unless it meets either:
• the condition in section 266‑40; or
• the conditions in section 266‑45.
266‑30 Fixed trust may be required to work out its net income and tax loss in a special way
A trust that:
(a) was a fixed trust at all times in the income year (the test period); and
(b) was not a widely held unit trust at all times in the test period; and
(c) was not an excepted trust at all times in the test period;
must work out its net income and tax loss for the income year under Division 268 (How to work out a trust’s net income and tax loss for the income year), unless it meets either:
• the condition in section 266‑40; or
• the conditions in section 266‑45.
Note: See section 415‑25 of the Income Tax Assessment Act 1997 if the trust was a designated infrastructure project entity during part, but not the whole, of the test period.
266‑35 Fixed trust may be denied debt deduction
Type of trust to which this section applies
(1) This section applies to a trust that:
(a) can deduct in the income year an amount:
(i) under section 51 or 63, or under section 8‑1 or 25‑35 of the Income Tax Assessment Act 1997, in respect of the writing off of the whole or part of a debt as bad; or
(ii) under subsection 63E(3) or (4) in respect of a debt/equity swap relating to the whole or part of a debt; and
(b) was a fixed trust at all times in the period (the test period):
(i) if the debt was incurred in an earlier income year—beginning on the day the debt was incurred and ending at the end of the income year; or
(ii) if the debt was incurred in the income year—consisting of the income year; and
(c) was not a widely held unit trust at all times in the test period; and
(d) was not an excepted trust at all times in the test period.
Note: Subdivisions 709‑D and 719‑I of the Income Tax Assessment Act 1997 also affect when a trust that used to be a member of a consolidated group or MEC group may deduct a debt that used to be owed to a member of the group and that the trust writes off as bad.
Condition for deducting amount
(2) The trust cannot deduct the amount unless it meets either:
• the condition in section 266‑40; or
• the conditions in section 266‑45.
266‑40 The trust must pass 50% stake test
The fixed trust must pass the 50% stake test for the test period.
To find out whether the trust passes the 50% stake test for the period: see Subdivision 269‑C.
266‑45 The trust must meet non‑fixed trust stake test
(1) If the condition in section 266‑40 is not met, the trust must satisfy the conditions in this section.
First condition
(2) At all times during the test period:
(a) non‑fixed trusts (other than family trusts) must have held fixed entitlements to a 50% or greater share of the income or a 50% or greater share of the capital of the trust; or
(b) both:
(i) a fixed trust or a company (which trust or company is the holding entity) must have held, directly or indirectly, all of the fixed entitlements to income and capital of the trust; and
(ii) non‑fixed trusts (other than family trusts) must have held fixed entitlements to a 50% or greater share of the income or a 50% or greater share of the capital of the holding entity.
Second condition
(3) The persons holding fixed entitlements to shares of the income, and the persons holding fixed entitlements to shares of the capital, of:
(a) in a paragraph (2)(a) case—the trust; or
(b) in a paragraph (2)(b) case—the holding entity;
at the beginning of the test period must have held those entitlements to those shares at all times during the test period.
Third condition
(4) At the beginning of the test period:
(a) individuals must not have had more than a 50% stake in the income of the trust; or
(b) individuals must not have had more than a 50% stake in the capital of the trust.
Fourth condition
(5) It must be the case that, for each non‑fixed trust (other than an excepted trust) that, at any time in the test period, held directly or indirectly a fixed entitlement to a share of the income or capital of the trust:
(a) if this section is being applied for the purposes of section 266‑25—section 267‑20 would not have prevented the non‑fixed trust from deducting the tax loss concerned if it, rather than the fixed trust, had incurred the loss; or
(b) if this section is being applied for the purposes of section 266‑30—section 267‑60 does not require the non‑fixed trust to work out its net income and tax loss for the income year under Division 268; or
(c) if this section is being applied for the purposes of section 266‑35—section 267‑25, or section 267‑65, as the case requires, would not have prevented the non‑fixed trust from deducting the amount concerned if it, rather than the fixed trust, would otherwise be entitled to deduct the amount.
266‑50 Deducting part of a tax loss
(1) If section 266‑25 prevents the fixed trust from deducting a tax loss, it can deduct the part of the tax loss that is attributable to a part of the loss year.
(2) However, the trust can do this only if, assuming that that part of the loss year had been treated as the whole of the loss year for the purposes of sections 266‑40 and 266‑45, the trust would have been entitled to deduct the tax loss.
266‑55 Information about non‑fixed trusts with interests in fixed trust
Notice about non‑resident non‑fixed trust
(1) The Commissioner may give the trustee of a fixed trust a notice in accordance with section 266‑60 if the requirements of subsections (2) to (5) of this section are met.
First requirement
(2) In its return of income for an income year, the fixed trust:
(a) must have deducted a tax loss from an earlier income year; or
(b) must not have worked out its net income and tax loss for the income year under Division 268; or
(c) must have deducted an amount in relation to a debt;
where it would not be allowed to deduct the tax loss or amount in respect of the debt, or would be required to work out its net income and tax loss under that Division, unless it met the conditions in section 266‑45.
Second requirement
(3) In order to determine whether it meets the conditions in section 266‑45, the Commissioner must need information about a non‑fixed trust mentioned in subsection 266‑45(5).
Third requirement
(4) When the Commissioner gives the notice:
(a) a trustee of the non‑fixed trust must be a non‑resident; or