Trust Loss Rules: Check Carried-Forward Losses

Trust loss rules allow a trust to deduct carried-forward revenue losses only when it meets the tests for its trust category. Reconcile the loss, establish the trust’s history and document eligibility before claiming a deduction against current-year income.

Start With the Loss and the Trust Type

Reconcile each revenue loss to the return for its loss year before deciding whether the trust can use it. Carry forward the amended figure where a return has changed. Deduct amounts already used in later returns and explain any difference from the accounts.

Keep capital losses in a separate schedule. The ATO’s trust-loss guidance confirms that a trust retains its tax losses. Beneficiaries cannot deduct a share of the trust’s loss in their own returns.

Next, identify the trust category throughout the period under review. A unit trust’s name alone does not establish that it is a fixed trust. Read the deed and entitlement records, including amendments, before selecting the loss tests.

Record any family trust election and its commencement. Also identify any other excepted-trust status. An opening balance in the tax software proves neither the category nor the right to deduct the loss.

Choose the Applicable Tests

Select the test branch from the trust’s actual category and history, then assess income injection separately. Schedule 2F of the Income Tax Assessment Act 1936 sets out these branches.

Trust Category and Test Map

Trust category	Continuity or ownership branch	History to establish
Ordinary fixed trust, outside the widely held categories	50% stake test, or the conditional non-fixed trust alternative in section 266-45	Fixed entitlements from the beginning of the loss year to the end of the claim year, including indirect holdings
Non-fixed trust without excepted status throughout the relevant period	Control test, conditional stake test and conditional pattern of distributions test, including any earlier pattern-test failure	Control and entitlements across the loss-to-claim period, plus the distribution periods selected by the legislation
Widely held fixed trust	Use its specific Division 266 branch	Listing status, holding category and abnormal trading, with the relevant ownership checks and any available business continuity exception
Family trust with a valid election covering the relevant period	Excepted from the ordinary continuity tests	Election commencement and continuing effect, plus the parties and benefits relevant to income injection
Other excepted trust	Establish the exact statutory exception and its duration	Evidence supporting the category at each relevant time, plus whether Division 270 still applies

For an ordinary fixed trust, the stake test traces more than 50% of income entitlements and more than 50% of capital entitlements. The continuing individuals for income and capital can differ. A 50% holding alone falls short.

For a non-fixed trust, the stake condition applies if individuals hold more than a 50% fixed stake in income or capital at a relevant test time. A wholly discretionary trust does not acquire fixed stakes merely because the same beneficiaries receive distributions.

The pattern test has its own trigger. It can apply where income or capital is distributed both in an earlier relevant year and during the claim-year distribution period. That period extends two months beyond the claim year. Section 267-30 uses the six preceding income years for that trigger. Subdivision 269-D then selects the test-year distributions and traces income and capital separately to individuals.

Use each individual’s smallest percentage across the selected distributions when applying that test. Check earlier pattern-test failures against the particular loss under section 267-35. A matching distribution in the claim year does not erase an earlier failure.

Control concerns who can direct income or capital, influence the trustee or appoint and remove it. A trustee-name comparison alone cannot establish continuity. Widely held trusts need their own trading analysis. The business continuity exception for listed widely held trusts is not a general rescue for private trusts.

Excepted categories include specified complying superannuation entities, qualifying deceased estates, certain fixed unit trusts owned entirely by exempt entities and designated infrastructure project entities. Check the statutory conditions and duration. Division 270 expressly excludes the categories in paragraphs 272-100(b), (c) and (d). Family trusts and infrastructure entities require separate consideration.

Trace the Trust’s History

Build a chronology from the beginning of each loss year through the end of the year in which you claim that loss. Add earlier distribution records where the pattern test requires them. Separate losses by year because each can have a different relevant history.

1. Record unit issues, transfers and redemptions, together with changes to income and capital rights. Trace entity holders through to the individuals where the test requires it.
2. List income and capital distributions separately. Include resolutions, beneficiary accounts and any onward distributions needed to establish the ultimate individual recipients.
3. Record changes to trustees, appointors and the people directing the trustee. Include corporate-trustee ownership changes and arrangements affecting who exercises power.
4. Match dealings with outsiders to contracts and bank entries. Record benefits moving in both directions and why the arrangement occurred.

Give each event a date field, a source document and its effect on the applicable test. Keep an unchanged holding supported across the whole period, rather than assuming two matching year-end registers establish continuity.

Where records are missing, request executed deeds and transfer documents from the trustee or former adviser. Bank statements and beneficiary ledgers can help reconstruct distributions. Company records and appointment instruments can support a control chronology.

Identify what each substitute document actually proves. A bank payment alone may not establish the entitlement or ultimate recipient. If the missing evidence prevents a supported conclusion, leave that loss outside the claim and record the outstanding factual question for review.

Check the Effect of a Family Trust Election

A valid family trust election can remove ordinary continuity-test barriers for the period it covers. It does not automatically shelter income received from outsiders. Establish the effective election year and continuing validity before using the family-trust branch.

Keep the election with evidence identifying the specified individual and relevant family members. For an entity treated as within the group, retain the applicable interposed entity election or evidence of the ownership conditions. The family trust election guide covers making and changing the election.

For income injection, examine whether the arrangement meets all of these conditions under section 270-10:

• The trust has an allowable deduction and derives assessable income under a scheme.
• An outsider provides a benefit, directly or indirectly, to the trustee, a beneficiary or an associate of either.
• The trustee, a beneficiary or an associate provides a return benefit to the outsider or a relevant associate.
• At least one specified event occurs wholly or partly, beyond a merely incidental connection, because the deduction is available.

The family-trust rules narrow who counts as an outsider. An arrangement wholly within the qualifying family group generally falls outside this test. Ordinary customer revenue also does not fail simply because customers are outsiders. Apply the benefit and deduction-purpose conditions to the actual arrangement.

For example, an unrelated entity redirecting income to the loss trust in exchange for a benefit needs analysis even if the trust has an election. Check the statutory outsider exclusions and trace any return benefit. Record the section 270-15 consequences for affected income and deductions before calculating the claim.

Document the Recoupment Decision

Document the deduction by loss year, with the tests applied and evidence supporting each conclusion. Keep the arithmetic separate from eligibility so a reconciled amount is never mistaken for an approved claim.

Consider this fictional ordinary fixed trust. Its reconciled opening revenue loss is $80,000. In the claim year, a minority holder transfers a 20% interest to an unrelated new holder.

The continuing individual holders retain 80% of both income and capital entitlements for their own benefit throughout the loss-to-claim period. Executed transfer documents and the register support that history. Assume ordinary fixed-trust status throughout, outside the widely held and excepted categories. The recorded transfer is the only entitlement change.

The workpaper records a pass of the 50% stake test for both income and capital. Pattern of distributions and non-fixed trust control tests do not apply to this ordinary fixed-trust branch. The income-injection review finds ordinary trading receipts, with no scheme satisfying the reciprocal-benefit and deduction-purpose conditions.

Assume the trust has $50,000 of income available for loss deduction after the other relevant adjustments. Its net exempt income is zero. The $80,000 is its only loss, and the stated tests are the only restrictions affecting this example. These invented figures produce the following schedule.

Worked Revenue-Loss Schedule

Movement	Amount	Workpaper support
Opening revenue loss	$80,000	Prior return, amendments and intervening loss-use reconciliation
Loss deducted	$50,000	Applicable tests passed and $50,000 available to absorb the deduction
Closing revenue loss	$30,000	$80,000 less $50,000, retained by the trust
Separate capital loss	$12,000	Separate capital-loss schedule, unchanged in this example

The minority transfer does not itself deny the revenue loss because the required majority continuity remains. If a relevant test fails, calculate any statutory partial-loss relief before deciding the amount allowed. Never treat a permanently denied amount as available merely because software carries it forward.

Distinguish an eligible loss unused for lack of income from a loss whose eligibility is unresolved or denied. Retain those statuses in the closing schedule with the reason and supporting provision. Allocate none of the closing loss to beneficiaries.

Before completing the trust tax return, match its deduction and carried-forward figures to the signed-off workpaper. The final file must identify the claim year, loss years, applicable provisions, evidence, allowed deduction and closing balance, with a preparer and reviewer recorded.