ATO Interpretative Decision

ATO ID 2004/664 (Withdrawn)

Income tax

• This ATO ID is withdrawn as the ATO view on this matter is now reflected in the publication Advanced guide to capital gains tax concessions for small business.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the beneficiaries 'connected entities' of the discretionary trust in terms of section 152-30 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of the maximum net asset value test under subparagraph 152-15(a)(ii) of the ITAA 1997?

Decision

Yes. In this instance, some of the beneficiaries are connected entities of the discretionary trust for the purpose of the maximum net asset value test under subparagraph 152-15(a)(ii) 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 constituting the trust specifies a number of beneficiaries who 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 the beneficiaries as follows:

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

B2 is the spouse of B1.

B3 is the 20 year old child of B1 and B2.

B4 is an elderly relative of B2.

B5 is a 'deductible gift recipient' in terms of section 30-227 of the ITAA 1997.

Reasons for Decision

One of the basic eligibility conditions for the small business CGT concessions is the maximum net asset value test in section 152-15 of the ITAA 1997. Broadly, the net value of the CGT assets of the taxpayer and certain related entities must not exceed $5 million just before the relevant CGT event.

Subsection 152-30(1) of the ITAA 1997 states:

An entity is connected with another entity if:

(a)

either entity controls the other entity in the way described in this section; or

(b)

both entities are controlled in that way by the same third entity.

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 following are the percentage of distributions made by the trust to the beneficiaries in the respective income years:

B1 and B3 control the trust as they received at least 40% of the distribution in one of the four income years before the year in which the CGT event happened.

B2 also controls the trust, although they do not receive more than 40% of the trust distributions, because they, with their small business CGT affiliate, B1, received at least 40% of the distribution in three of the four income years before the year in which the CGT event happened.

B4 does not control the trust as they did not receive a distribution in excess of 40% in any one of the four income years before the year in which the CGT event happened.

Although B5 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, which 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.

As B1, B2 and B3 control the trust they will be connected entities of the trust in accordance with paragraph 152-30(1)(a) 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 2003-04 income year where a taxpayer can choose to apply the previous control test for discretionary trust (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
   section 152-15
   subparagraph 152-15(a)(ii)
   section 152-30
   subsection 152-30(1)
   paragraph 152-30(1)(a)
   subsection 152-30(5)
   subsection 152-30(6)
   section 995-1

Related ATO Interpretative Decisions
ATO ID 2004/663
ATO ID 2004/665

Keywords
Basic conditions for relief
Beneficiaries
Capital gains
Capital gains tax
CGT small business relief
Connected entity
Control test
Discretionary trusts
Distributions
Maximum net asset value test
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 This ATO ID has been amended to better explain the small business net assets test.