Connected with - control of a discretionary trust

Control by entity with influence over trustee

From the 2007-08 year an entity controls the discretionary trust if the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of the entity and/or the entity's affiliates.

All the circumstances of the case need to be considered in determining whether you satisfy this test. For example, the mere presence in the trust deed of a requirement that the trustee should have no regard to such directions or wishes would not be sufficient.

Some factors which might be considered include:

• the way in which the trustee has acted in the past
• the relationship between the entity and/or its affiliates and the trustee
• the amount of any property or services transferred to the trust by the entity and/or its affiliates, and
• any arrangement or understanding between the entity and any person who has benefited under the trust in the past.

Control by beneficiary

The level of actual distributions made by a discretionary trust is used to determine who controls the trust. A beneficiary is taken to control a discretionary trust only if, for any of the four income years before the year for which relief is sought for a CGT event:

• the trustee paid to, or applied for the benefit of, the beneficiary and/or their affiliates any of the income or capital of the trust, and
• the amounts paid or applied were at least 40% (the control percentage) of the total amount of income or capital paid or applied for that income year (subject to the Commissioner's discretion where the control percentage is between 40% and 50%).

Exempt entities and deductible gift recipients are not treated as controlling a discretionary trust regardless of the percentage of distributions made to them.

To determine if a particular beneficiary controls a trust, amounts paid to or applied for the benefit of any of the beneficiary's affiliates are also included when determining whether the beneficiary reaches the 40% threshold.

Distributions of income and capital made to the same beneficiary are considered separately (that is, not added together) to determine if the beneficiary reaches the 40% threshold.

Public entities can also be taken to control a discretionary trust if distributions to them meet the 40% control percentage. A public entity is a publicly traded company or unit trust, a mutual insurance company, a mutual affiliate company or a company in which all the shares are beneficially owned by one or more of those entities.

Example

The XY discretionary trust sold a business asset during the year ended 30 June 2008 and made a capital gain. The trust made the following percentage distributions of income and capital for the previous year (there were no distributions of any kind for any of the earlier years, nor did the trust have a tax loss in any previous year):

As Mr and Mrs X each received at least 40% of the total distributions of income from the trust, they each control the trust. As Mrs Y received at least 40% of the total distributions of capital from the trust, she also controls the trust. However as Mr Y received less than 40% (and Mrs Y is not his affiliate) he does not control the trust.

Example

The Z discretionary trust sold a business asset during the year ended 30 June 2008 and made a capital gain. None of the Z family members are affiliates of each other. The trust made percentage distributions of income for the previous four years as follows (there were no distributions of capital and no tax losses for any year):

All four prior years need to be examined to identify everyone who controls the trust.

Accordingly, Mrs Z and each child control the trust.