ATO Interpretative Decision

ATO ID 2004/663

Income tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can a 'deductible gift recipient' control a discretionary trust under subsection 152-30(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. Even if the 'deductible gift recipient' did receive a distribution of income or capital in excess of 40% in one of the four income years preceding the year in which the CGT event happened, it cannot control the trust due to the operation of subsection 152-30(6) of the ITAA 1997.

Facts

In July 2004, a family discretionary trust sold the business it had conducted for a number of years and realised a capital gain on the sale of the business premises. The deed of the trust specifies a number of beneficiaries, all of which are eligible to receive the income or capital of the trust.

The discretionary trust made the following net income from its business operations in each of the years ended:

The trust made distributions of its net income to a 'deductible gift recipient' in terms of section 30-227 of the ITAA 1997, as follows:

The trust made no distributions of capital to the beneficiaries in each of these years.

Reasons for Decision

Subsection 152-30(5) in Division 152 of the ITAA 1997 states that:

An entity (the first entity) controls a discretionary trust if, for any of the 4 income years before the income year for which relief is sought for a *CGT event under this Division:

(a)

the trustee paid to, or applied for the benefit of:

(i)

the first entity; or

(ii)

one or more of the first entity's *small business CGT affiliates; or

(iii)

the first entity and one or more of the first entity's small business CGT affiliates;

any of the income or capital of the trust; and

(b)

the amount paid or applied is at least 40% (the control percentage) of the total amount of income or capital paid or applied by the trustee for that income year.

(* denotes a term defined in subsection 995-1(1) of the ITAA 1997.)

The 'deductible gift recipient' received at least 40% of the distributions made by the trust, in one of the four income years before the year in which the CGT event happened, that is, in the 2003 year.

However subsection 152-30(6) of the ITAA 1997 states:

An entity does not control a discretionary trust because of subsection (5) if the entity is:

(a)

an *exempt entity; or

(b)

a *deductible gift recipient.

Although the deductible gift recipient did receive a distribution in excess of 40% in one of the four income years preceding the year in which the CGT event happened, it cannot control the trust in accordance with subsection 152-30(6) of the ITAA 1997.

Note 1: The above control test applies to CGT events happening after 11.45am, by legal time in the Australian Capital Territory, on 21 September 1999. However, transitional rules apply for CGT events that happened before the end of the 2004 income year, where a taxpayer can choose to apply the previous control test for discretionary trusts (with the modification that assets of the potential beneficiaries that are exempt entities or deductible gift recipients do not need to be taken into account).

Note 2: The control test is further modified for the 2000, 2001 and 2002 income years so that the test is based on actual distributions made in the income year for which access to the small business CGT concession is sought and not the actual distributions made in any of the four income years before the income year for which access to small business CGT concession is sought.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   section 30-227
   Division 152
   subsection 152-30(5)
   subsection 152-30(6)
   section 995-1

Related ATO Interpretative Decisions
ATO ID 2004/664
ATO ID 2004/665

Keywords
Basic conditions for relief
Beneficiaries
Capital gains
Capital gains tax
CGT small business relief
Control test
Deductible gift recipients
Discretionary trusts
Distributions
Exempt entities
Pattern of distribution test
Trust distributions

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  13 August 2004

ISSN: 1445-2782