ATO Interpretative Decision

ATO ID 2004/665

Income Tax

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

Issue

Is a building owned by a discretionary trust that is used in the business of a beneficiary of the trust, an active asset of the discretionary trust, under paragraph 152-40(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. In this instance as the beneficiary is not able to satisfy the control test for the discretionary trust under subsection 152-30(5) of the ITAA 1997, they will not be a connected entity of the discretionary trust. Since the building is not used by an entity connected with the discretionary trust or a small business CGT affiliate, the building is not an active asset under paragraph 152-40(1)(c) of the ITAA 1997.

Facts

A discretionary trust owned a building which it leased to a person who is a member of one of the classes of potential beneficiaries of the trust. The potential beneficiary operated their business from the building. The trust sold the building during the year ending 30 June 2005 and made a capital gain. During the last four income years before the 2004-05 income year, that beneficiary did not receive any distributions from the trust. However, the trust had made distributions to other beneficiaries for each of those income years.

The potential beneficiary does not have any small business CGT affiliates and is not itself a small business CGT affiliate of the trust. That beneficiary is not in a position to influence the trustee's power to make distributions.

Reasons for Decision

For the small business CGT concessions in Division 152 of the ITAA 1997 to apply to the capital gain, the building must satisfy the active asset test.

The active asset test requires generally, that an asset must be an active asset for half the period of ownership and just before the CGT event, such as the disposal of the asset. (There are modified rules if the business ceases or the asset has been owned for more than 15 years).

Under paragraph 152-40(1)(c) of the ITAA 1997, a CGT asset is an active asset if a taxpayer owns it and it is used, or held ready for use, in the course of carrying on a business by either:

•

a small business CGT affiliate of the taxpayer; or

•

an entity connected with the taxpayer.

Paragraph 152-30(1)(a) of the ITAA 1997 states an entity is connected with another entity if either entity controls the other entity in the way described in section 152-30 of the ITAA 1997. Subsections 152-30(5) and 152-30(6) of the ITAA 1997 contain conditions which determine the control of a discretionary trust.

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.)

In this case, the potential beneficiary did not receive any distributions from the discretionary trust in the last four income years. That beneficiary does not have any small business CGT affiliates. Therefore that beneficiary will not satisfy the test for control of the discretionary trust in subsection 152-30(5) of the ITAA 1997.

The potential beneficiary will also not control the discretionary trust under paragraph 152-30(2)(c) of the ITAA 1997. Accordingly, that beneficiary is not connected with the trust.

As the building is not used by an entity connected with the discretionary trust or a small business CGT affiliate, the building is not an active asset under paragraph 152-40(1)(c) of the ITAA 1997.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   Division 152
   section 152-30
   paragraph 152-30(1)(a)
   paragraph 152-30(2)(c)
   subsection 152-30(5)
   subsection 152-30(6)
   paragraph 152-30(5)(a)
   paragraph 152-40(1)(c)
   subparagraph 152-40(1)(c)(ii)
   section 995-1

Related ATO Interpretative Decisions
ATO ID 2004/663
ATO ID 2004/664

Keywords
Active asset
Active asset test
Basic conditions for relief
Beneficiaries
Capital gains
Capital gains tax
CGT small business relief
Connected entity
Control test
Discretionary trusts
Distributions
Pattern of distribution test
Small Business CGT affiliate
Trust distributions

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  13 August 2004

ISSN: 1445-2782