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Edited version of your written advice
Authorisation Number: 1012802796503
Ruling
Subject: CGT - SBC - Control - Commissioner's discretion
Question 1
Will the Commissioner exercise the discretion under subsection 328-125(6) of the Income Tax Assessment Act 1997 to determine that Trust One does not control the Partnership?
Answer
Yes.
Question 2
Does A apportion the properties held by the Partnership based on the trust's ownership percentage when calculating their maximum net asset value?
Answer
Yes.
This ruling applies for the following period(s)
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016.
The scheme commences on
1 July 2013
Relevant facts and circumstances
A is connected to Trust One.
A, along with their affiliates control Trust One.
Trust One acquired properties with Trust Two.
Trust Two is controlled by members of the B Family.
Together the trusts bought X properties.
Trust One owns X% of these properties and Trust Two owns X% of these properties.
The rental income from these properties is returned under a partnership income tax return known as The Partnership.
Trust Two has significantly more financial resources available to it through the B family and as a consequence is the dominate owners and decision maker in respect of the properties.
All decisions regarding the management of the rental properties are based on the percentage of ownership.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 328-125
Income Tax Assessment Act 1997 Subsection 328-125(2)
Income Tax Assessment Act 1997 Subsection 328-125(6)
Income Tax Assessment Act 1997 Section 328-130
Reasons for decision
The meaning of a connected entity is defined under section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997) which states as follows:
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 a way described in this section by the same third entity.
Direct control of a company
Subsection 328-125(2) of the ITAA 1997 provides that an entity controls a company if the entity, its affiliates, or the entity together with its affiliates beneficially own:
• interests in the company that give them the right to receive at least 40% (the control percentage) of any distribution of income or capital; or
• equity interests in the company that carry between them the right to exercise at least 40% (the control percentage) of the voting power in the company.
An affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you (section 328-130 of the ITAA 1997). A trust, partnership or superannuation fund cannot be an affiliate.
Commissioner may determine that an entity does not control another entity
The Commissioner's discretion, as set out in subsection 328-125(6) of the ITAA 1997 states the following:
If the control percentage referred to in subsection (2) or (4) is at least 40%, but less than 50%, the Commissioner may determine that the first entity does not control the other entity if the Commissioner thinks that the other entity is controlled by an entity other than, or by entities that do not include, the first entity or any of its *affiliates.
The Advanced Guide to Capital Gains Tax Concessions for Small Business 2012-2013 NAT 3359 (Advanced Guide) discusses the application of the discretion contained in subsection 328-125(6) of the ITAA 1997.
The Advanced Guide provides that for the Commissioner to be able to consider the discretion in subsection 328-125(6) of the ITAA 1997 there must be a single, identifiable third entity that has a control percentage of at least 40% of the company. In working out the third entity's control percentage, the interests of any affiliates of the third entity are taken into account. The third entity must control the company in the way described in subsection 328-125(2) of the ITAA 1997. Unless the conditions of subsection 328-125(2) of the ITAA 1997 are met by a third entity, the Commissioner cannot determine that the first entity does not control the company.
If there was a third entity with a control percentage of 40% or more it would then be necessary to consider additional factors such as who is responsible for the day to day and strategic running of the company to determine if the third entity controls it. It is possible that both of the entities having a control percentage of at least 40% may control the company if such responsibilities are shared.
Application to your circumstances
In this case, the remaining shareholder, Trust Two, holds a X% interest in The Partnership. All the decisions regarding the management of the properties are based on the percentage of ownership. As Trust Two owns X% of the partnership they control the partnership. Accordingly, the Commissioner will exercise the discretion contained in subsection 328-125(6) of the ITAA 1997.
As the Commissioner has exercised the discretion under subsection 328-125(6) of the ITAA 1997, Trust One does not control The Partnership. Therefore, when calculating their maximum net asset value, A will only include Trust One's ownership percentage of the partnerships assets and liabilities.
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