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Trust loss allocation – When can you or do you have to offset what loss with income?
Trust Loss Allocation
In the last episode, ep 401, we looked at the concept of trust income. In this episode, we look at court cases that establish when you can or have to do a trust loss offset with Ron Jorgensen of Thomson Geer in Melbourne. Here is what we learned but please listen in as Ron explains all this much better than we ever could.
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Trust Loss Allocation
There are three court cases that play a big role in the allocation of trust losses.
- Upton v Brown
- Cajkusic v FCT151
- Raftland Pty Ltd v Commissioner of Taxation
Upton v. Brown sets the scene. And then Cajkusic and Raftland confirm Upton v. Brown but very much limit its application.
Upton v Brown
The court case Upton v Brown directs that you have to offset losses in one year, in the absence of any contrary direction in the trust instrument, with profits of subsequent years and not out of capital. So that there can be no income properly distributable until all past losses are paid.
‘Upton v Brown’ only applies to discretionary trusts and only to income that comes through s97. Since streamed capital gains and franking credits are not assessed via s97, but are assessed via Div 115-C and 207-B ITAA97, Upton v Brown doesn’t apply to capital gains and franking credits.
In this interview, we say ‘Upton and Brown’, but it is actually Upton v Brown. Upton and Brown were both beneficiaries of a discretionary trust, way back in 1884. Upton was the income beneficiary. And Brown was entitled to the trust’s capital. And that didn’t go well, so they went to court to fight it out.
Cajkusic v FCT151
In Cajkusic v FCT151 (Cajkusic DIS (2007)) the ATO states:
“We note the view expressed by the Full Federal Court that losses in one year must, in the absence of any contrary direction in the trust instrument, be made up out of profits of subsequent years and not out of capital (paragraph 31). The correctness of this view is the subject of the taxpayer’s appeal to the High Court in Raftland Pty Ltd v Commissioner of Taxation.”
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Last Updated on 11 September 2023
Tax Talks spoke to Ron Jorgensen - Partner at Thomson Geer Lawyers - for more details.
