Published on 01 Oct 14
by "THE TAX SPECIALIST" JOURNAL ARTICLE
Most discretionary trusts will be family trusts under Australian tax law. For some discretionary trusts, though, the constraints associated with being a family trust are unacceptable. For these trusts with losses, the loss-access qualifying rules will be relevant. The rules that apply in this situation have received little attention. This article analyses the two key rules that may be relevant to a discretionary trust, namely, the revenue loss usage exclusion rule in s 95(1) where a beneficiary does not incur the related economic loss, and the pattern of distributions test (PODT) in the trust loss rules.
The conclusion of the article is that for most discretionary trusts, the s 95(1) loss usage exclusion rule will not prohibit revenue loss usage. Surprisingly, though, the design of the PODT has not taken full account of the flexibility inherent in many modern discretionary trusts. The result is that through a naturally occurring circumstance or some basic planning, the PODT will rarely cause a discretionary trust to lose access to its revenue losses.
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