Edited version of private advice

Authorisation Number: 1051609852876

Date of advice: 15 November 2019

Ruling

Subject: Income tax - Capital gains - Small business relief - Connected entities

Question 1

Is ST1 connected with DT1 under section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997) for the income year ending 30 June 2020?

Answer

Yes

Question 2

If the answer to question 1 is yes, would the Commissioner exercise his discretion under subsection 328-125(6) of the ITAA 1997 to determine that ST1 does not control DT1 for the income year ending 30 June 2020?

Answer

Yes

Question 3

If the Commissioner exercises his discretion under subsection 328-125(6) of the ITAA 1997, is ST9 connected with DT1 under section 328-125 of the ITAA 1997 in the income year ending 30 June 2020?

Answer

Yes

Question 4

If the Commissioner exercises his discretion under subsection 328-125(6) of the ITAA 1997, is any of ST10, ST11 or ST12 connected with DT1 under section 328-125 of the ITAA 1997 in the income year ending 30 June 2020?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 2020

The scheme commences on:

1 February 2017

Relevant facts and circumstances

The AB Group

A and B are spouses.

A and B and their children are shareholders, directors, trustees, appointors and/or potential beneficiaries of a number of related companies, and trusts (together referred to in this ruling as the AB Group).

Neither A nor B carries on business in their individual names.

Prior to 3 March 2017, ST9, ST10, ST11 and ST12 (collectively referred to in this ruling as the LOTs) were not members of the AB Group.

The CD Group

A is the child of C and D. A has X siblings, E and F. E's spouse is G, and F's spouse is H.

Until a business separation commencing on 1 February 2017, C and D, A, E and F, and their spouses and children, together with a number of related companies, and trusts were members of the one economic group (the CD Group).

After the business separation, A and B and their children, and the LOTs left the CD Group.

The CD Group operates a business of primary production and other businesses including a bus transport service, agricultural land and machinery leasing; and investing in other off-farm assets.

None of the individuals in the CD Group carry on businesses in their individual capacities.

ST1

ST1 is a discretionary trust. A is the Appointor of ST1, and since 31 August 2016, SCT1 is the Trustee for ST1. A and B were the trustees prior to that time.

Around February 2017, ST1 commenced a business of primary production. Prior to this time ST1 was not actively earning income and had minimal net assets. A and B are the managers and decision makers in relation to ST1's business. Neither C, D, E nor F have been involved in the management, or consulted in relation to, ST1's business.

SC1

SC1 is an Australian resident company. A and B are the directors of SC1 and hold 100% of SC1's issued shares in their capacity as joint Trustees for ST2.

On incorporation, SC1 created a partnership (the DT1/SC1 partnership) with the trustee for the DT1. After the DT1/SC1 Partnership was dissolved, SC1 carried on business renting or leasing its assets to ST1 for use in its business.

On DD/MM/YY, ST1 provided finance to SC1 to payout DT1's interest in the assets of the DT1/SC1 Partnership.

At the present time, ST1 owes SC1 in respect of unpaid present entitlements. No interest has been paid in respect of the unpaid present entitlements.

Since the DT1/SC1 Partnership ended, neither C, D, E nor F have been involved in the management, or consulted in relation to, SC1's business.

SC2

SC2 is an Australian resident company.

A and B are the directors of SC2 and hold 100% of SC2's issued shares in their capacity as joint trustees for ST2.

SC2 operates a rental, hiring and real estate services industry business, renting or leasing agricultural land or pastoral properties. Neither C, D, E nor F have been involved in the management, or consulted in relation to, SC2's business.

SCT1

SCT1is an Australian resident company and is the trustee for ST1. A and B are the directors of SCT1 and each beneficially own 50% of SCT1's issued shares.

SCT1 does not carry on business in its own capacity.

SCT2

SCT2 is an Australian resident company and is trustee for each of the LOTs. A and B are the directors of SCT2 and each beneficially own 50% of SCT2's issued shares.

SCT2 does not carry on business in its own capacity.

DT1

DT1 is a discretionary trust. DCT1 is the Trustee for DT1, and C and D are Appointors for DT1. C and D each beneficially own 50% of the issued shares of DCT1.

DT1 conducts the main farming business for the CD Group. The following facts discuss the management of the CD Group since the business separation:

·        C, E and F have been actively involved in the day to day management and day-to-day operations of the business.

·        The family members, excluding A and B, operate as a management team discussing and allocating specific duties and responsibilities amongst themselves according to their best areas of knowledge and skills.

·        Daily operational decisions for DT1's business are made independently by C, E or F, based on the individual's knowledge and skill.

·        High-level, important decisions are made by the family members as a whole, excluding A and B, with the level of input varying according to the matters being decided, and with C and D having the final say.

·        E is far less involved in "off farm" asset investment and banking issues, such as obtaining loans.

·        After obtaining professional advice, decisions about how the income of the DT1 is distributed each year, distribution decisions are made by the family members as a whole, with each member contributing their views and opinions.

·        A has not been involved in the management of the business of DT1 since 1 February 2017, and ceased acting as a director of the trustee company.

DC1

DC1 is an Australian resident company. A was a director of DC1 from incorporation, but ceased acting as a director on 23 August 2017. Since 23 August 2017, the directors of DC1 have been C, D, E and F.

The sole shareholder of DC1 is DCT1 as trustee for the DT2. DT2's sole beneficiary is DCT1 in its capacity as trustee for DT1.

DC1 carries on business renting, leasing or hiring farmland to unrelated parties. DC1 does not rent, lease or otherwise provide farmland for use in ST1's business. For the years ended 30 June 2017, 30 June 2018, and 30 June 2019, DC1 rented, leased or hired farmland to an unrelated party.

DT1 owes DC1 $X in respect of an unpaid present entitlement, and $X in respect of a loan. DC1 earns interest in relation to the debt.

Neither A nor B have been involved in the management of, or consulted in relation to, DC1's business in any capacity since 1 February 2017.

DC2

DC2 is an Australian resident company. The directors of DC2 are C, D, E and F. DC2's sole shareholder is DCT1 as Trustee for the DT14.

DC2 carries on business renting, leasing or hiring farmland to unrelated parties. DC2 does not rent, lease or otherwise provide farmland for use in ST1's business.

The business separation

The business separation was carried out as A and B wanted to conduct a separate and independent farming business to that carried out by the CD Group.

A farm consultant was engaged to provide advice on the business separation. A report from the farm consultant, provided:

·        an estimate of the equity value of the CD Group,

·        an estimate of A and B's entitlement to approximately 25% of the CD Group equity,

·        confirmed A and B were taking on land,

·        confirmed A and B were taking on machinery to the estimated value (at that time) of $X,

·        an estimate of E and G's entitlement after A and B's separation from the group of approximately 33% of the CD Group equity.

Settlement of A and B's entitlement - the Lands

Each LOT owns large parcels of farmland (the Lands). Prior to 1 December 2016, the Lands were used in the primary production business of DT1.

In partial settlement of A and B's entitlement under the business separation, the trustees and appointors for each of the LOTs were changed (as detailed below) and the LOTs provided the Lands for used in ST1's business. ST1 does not pay rent or lease payments to the LOTs for using the Lands.

Prior to 3 March 2017:

·        DCT1 was the Trustee for each of the LOTs, and

·        C and D were the original Appointors for each of the LOTs, and

·        The directors of DCT1 were C, D, E and A.

On 3 March 2017:

·        DCT1 retired as the Trustee for each of the LOTs,

·        SCT2 was appointed as the new Trustee for each of the LOTs,

·        A ceased acting in the role of director of DCT1, and

·        F was appointed as a new director of DCT1.

On 4 March 2017,

·        C and D retired as Appointors of each of the LOTs,

·        A was appointed the new Appointor, and

·        B was appointed Successor Appointor.

Since 1 February 2017, A and B have managed the Lands, and made all business decisions in respect of the Lands. Since 1 February 2017, C, D, E and F have had no involvement in the management or decision making responsibilities in relation to the Lands.

Settlement of A and B's entitlement - income from DT1

In final settlement of A and B's entitlement under the business separation, the trustee for DT1 made income distributions from the trust for the year ended 30 June 2017.

On DD/MM/YY, tax agents for the CD Group, advised that profit of DT1 had been allocated to A and B's entities as follows:

Profit for the period 1 July 2016 to 31 January 2017: $X

Less Dividend attributed 100% to A and B: $X

Farming Profit: $X

25% share to ST1 $X

The tax agent's letter also advised that:

'When distributing the profit of [DT1] the minute will state that [SC1] will receive dividend income of $X and [ST1] will receive the first $X of ordinary income. The balance of the income will be distributed to the remaining family members or [DC1] as decided when your tax estimates are completed in June.'

The final distributions for DT1 as at 30 June 2017 were as follows:

·        $X to ST1, and

·        $X to SC1.

The income distribution applied to SC1 included a franked dividend of $X (grossed up value $X) together with franking credits of $X:

·        originally paid by DC1 to its shareholder DCT1 as trustee for DT2, then

·        streamed from DCT1 as trustee for DT2 to DCT1 as trustee for DT1, then

·        streamed from DCT1 as trustee for DT1 to SC1.

On DD/MM/YY, the tax agent emailed C and D, E and G, F and H, and A and B that the following payments were required to finalise the farm split:

1. [DT1] to pay [ST1] the amount of $X [the UPE outstanding balance]

2.     [ST1] to pay [SC1] the amount of $X

3. [SC1] to pay [DT1] the amount of $X
4. [ST1] to pay [ST10] the amount of $X
5. [ST10] to pay [DT1] the amount of $X.

The payments were made on MM/DD/YY.

Payment of SC1's income distribution - the DT1/SC1 Partnership

The outstanding balance of SC1's present entitlement ($X) from DT1 was paid into a the DT1/SC1 Partnership), as capital of SC1.

Depreciating plant and equipment, property improvements, and certain motor vehicles (the Depreciating Assets), together with debt associated with the depreciating assets, were transferred from DT1 to the DT1/SC1 Partnership in February 2017.

Between 1 February 2017 and 30 June 2017, the DT1/SC1 Partnership received rental income for renting the Depreciating Assets.

On 1 July 2017, the Depreciating Assets were transferred from the DT1/SC1 Partnership to SC1. The DT1/SC1 Partnership also transferred the debt in respect of the Depreciating Assets to SC1. Around this time the partnership was dissolved.

On DD/MM/YY, ST1 paid $X to DT1, on behalf of SC1, in payment for DT1's remaining interest in the Depreciating Assets.

DT1's commercial and financial relationships with ST1, SC1, SC2 and the LOTs

·        DT1 and ST1 have not had any commercial dealings with each other, or in common with each other, and have not been under any obligation to deal with each other in relation to their businesses.

·        DT1 and ST1 have common sources of profits as all grain growers in WA sell their grain through 3 or 4 major customers

·        Since the DT1/SC1 Partnership was dissolved, DT1 and SC1 have not had any commercial dealings with each other, or in common with each other, have not been under any obligation to deal with each other in relation to their businesses, and have had no profits sources or customers in common

·        Since DT1 paid ST1's present entitlement in respect of the year ended 30 June 2017, and SC1 paid DT1 the final amount owning in respect of the DT1/SC1 partnership, ST1 and SC1 have not had any financial relationships or dependencies on, or with, DT1

·        Since the DT1/SC1 Partnership was dissolved, ST1 and SC1 have not shared resources, facilities or services of, or with, DT1

·        DT1 and SC2 have not had any commercial dealings with each other, or in common with each other, and have not been under any obligation to deal with each other in relation to their businesses.

·        DT1 and SC2 have no profit sources or customers in common

·        SC2 has not shared resources, facilities or services of, or with, DT1.

·        SC2 has not had any financial relationships or dependencies on, or with, DT1

·        Up to 30 June 2016, DT1 paid rental income to the LOTs

·        Since 1 December 2016, there have been no commercial relationships between DT1 and the LOTs

·        DT1 provided finance to the LOTs to purchase the Lands. The debts owed by the LOTs were reduced to nil in DT1's interim balance sheet prepared as at 31 January 2017.

DC1's commercial and financial relationships with ST1, SC1, SC2 and the LOTs

·        ST1, SC1, SC2 and the LOTs have not had any commercial dealings with DC1, or in common with DC1, and were not under any formal or informal obligation to deal with DC1 in relation to its business

·        ST1, SC1, SC2 and the LOTs have not shared resources, facilities or services of, or with, DC1

·        ST1, SC1, and SC2 did not have any common sources of profits, or customers in common, with DC1

·        Up to 30 June 2016, DT1 was a common source of income and profits for the LOTs and DC1. After this time, the LOTs and DC1 did not have any common profit sources, or customers

·        For a period between, financial connections existed between DC1, ST1, SC1 and the LOTs as a result of existing loans to and from DT1, the business separation, DT1's unpaid present entitlements, and the DT1/SC1 Partnership

·        After DD/MM/YY, there were no financial connections between DC1, ST1, SC1, SC2 and the LOTs

DC2's commercial and financial relationships with ST1, SC1, SC2 and the LOTs

·        ST1, SC1, SC2 and the LOTs have not had any commercial dealings with DC2, or in common with DC2, were not under any formal or informal obligation to deal with DC1 in relation to its business

·        ST1, SC1, SC2 and the LOTs have not shared business resources, facilities, goods or services, or purchasing of, or with, DC2

·        ST1, SC1, SC2 and the LOTs did not have common sources of profits, or customers in common, with DC2

·        ST1, SC1, SC2 and the LOTs have not had any financial relationships with, or dependencies on, DC2

Income distributions for the four years prior to the year ending 30 June 2020

DT1

The trustee for DT1 distributed the income of the trust in the following percentages of the trust's total income for the years ended 30 June 2016, 30 June 2017 or 30 June 2018:

The trustee for DT1 did not distribute any capital of the trust for the years ended 30 June 2016, 30 June 2017 or 30 June 2018.

ST9

The trustee for ST9:

·        distributed 50% of the income of the trust to E, and 50% of the income of the trust to A for the year ended 30 June 2016

·        did not distribute any income of the trust for the years ended 30 June 2017 and 30 June 2018

·        did not distribute any capital of the trust for the years ended 30 June 2016, 30 June 2017 or 30 June 2018.

ST10

The trustee for ST10:

·        distributed 25% of the income of the trust to each of C, D, A and E for the year ended 30 June 2016

·        did not distribute any income of the trust for the years ended 30 June 2017 and 30 June 2018.

·        did not distribute any capital of the trust for the years ended 30 June 2016, 30 June 2017 or 30 June 2018.

ST11

The trustee for ST11:

·        distributed 25% of the income of the trust to each of C, D, A and E for the year ended 30 June 2016

·        did not distribute any income of the trust for the years ended 30 June 2017 and 30 June 2018.

·        did not distribute any capital of the trust for the years ended 30 June 2016, 30 June 2017 or 30 June 2018.

ST12

The trustee for ST12:

·        distributed 25% of the income of the trust to each of C, D, A and E for the year ended 30 June 2016

·        did not distribute any income of the trust for the years ended 30 June 2017 and 30 June 2018.

·        did not distribute any capital of the trust for the years ended 30 June 2016, 30 June 2017 or 30 June 2018.

ST1

The trustee for ST1 distributed the income of the trust in the following percentages of the trust's total income for the years ended 30 June 2017 and 30 June 2018:

The Trustee for ST1:

·        did not distribute any income of the trust for the year ended 30 June 2016,

·        did not distribute any capital of the trust for the years ended 30 June 2016, 30 June 2017 or 30 June 2018.

Relevant legislative provisions

Income Tax Assessment Act 1997

section 328-125

subsection 328-125(1)

subsection 328-125(3)

subsection 328-125(4)

subsection 328-125(6)

section 328-130

Reasons for decision

Question 1

Summary

As ST1 has a control percentage of at least 40% in respect of DT1's income distributions for the year ended 30 June 2017 ST1 controls DT1 for the year ended 30 June 2020 under subsection 328-125(4) of the ITAA 1997, and ST1 is connected with DT1 for the year ended 30 June 2020 under subsection 328-125(1) of the ITAA 1997.

Detailed reasoning

Subsection 328-125(1) of the ITAA 1997 provides that an entity is connected with another entity if:

(a)   either entity controls the other entity in a way described in section 328-125, or

(b)   both entities are controlled in a way described in section 328-125, by the same third entity.

Direct control of a discretionary trust

There are two separate control tests for discretionary trusts under section 328-125 of the ITAA 1997. Subsection 328-125(3) adopts an 'actual control' test by stating:

An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates or the first entity together with its affiliates.

Also, subsection 328-125(4) effectively deems control to certain beneficiaries of the trust:

An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a) the trustee of the trust paid to, or applied for the benefit of:

(i) the first entity; or

(ii) any of the first entity's affiliates; or

(iii) the first entity and any of its affiliates;

any of the income or capital of the trust; and

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

Capital and income distributions are calculated separately. An entity's, and/or its affiliates', distributions in each relevant year are added to calculate the entity's control percentage for the relevant year. An entity can be controlled by more than one entity.

In this ruling, the 4 income years before the year ending 30 June 2020, are referred to as the relevant years and include the years ended 30 June 2016, 30 June 2017, 30 June 2018, and 30 June 2019.

An individual or company (the potential affiliate) is an affiliate of ST1 if the potential affiliate acts, or could reasonably be expected to act:

·        in accordance with ST1's directions or wishes, or

·        in concert with ST1,

in relation to the affairs of the potential affiliate's business.

Taxation Ruling TR 2002/6 Income tax: Simplified Tax System: eligibility - grouping rules (STS affiliate, control of non fixed trusts) (TR 2002/6, paragraphs 57 to 65) discusses the meaning of 'in concert' in subsection 328-130 of the ITAA 1997. Although TR 2002/6 has been withdrawn it continues to provide assistance in understanding and applying the term 'in concert'.

The term 'in concert' needs to be interpreted according to its ordinary meaning and the legislative context of the provision in which the term is used (paragraph 58 of TR 2002/6). A potential affiliate will only be regarded as acting 'in concert' with another entity where:

(a)   it is acting together with the other entity in pursuit of a common goal or objective;

(b)   that common goal or objective is the carrying on of a business by the potential affiliate;

(c)   the potential affiliate's business has a substantial degree of connection with, or dependence on, the business carried on by the other entity, and

(d)   the degree of that connection is such that the potential affiliate cannot be viewed as operating independently (paragraph 60 of TR 2002/6).

The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 (the EM), at paragraph 2.36, provides factors that may have bearing on whether two or more entities are acting in concert:

·        family or close personal relationships;

·        financial relationships or dependencies;

·        relationships created through links such as common directors, partners, or shareholders;

·        the degree to which the entities consult with each other on business matters; or

·        whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity.

TR 2002/6 (paragraph 65) provides the following factors relevant to determining the degree of dependence between the businesses:

·        the nature and extent of commercial dealings between the two entities;

·        common resources, facilities or services;

·        involvement in managerial decisions and day to day management;

·        financial interdependencies;

·        common flow of profits;

·        common ownership/capital;

·        shared purchasing of goods or services;

·        common customers; and

·        similar kind of business.

No one factor is decisive. Ultimately, whether an entity is an affiliate will be a question of fact and degree in relation to which an exercise in judgement is necessary, which involves a process of evaluating and weighing these factors in relation to the particular circumstances.

For the year ended 30 June 2017, ST1 was distributed 44.33% of the total income of DT1, and SC1 was distributed 5.34% of the total income of DT1, giving ST1 a control percentage of 49.67%.

As ST1 has a control percentage of at least 40% of the total income distributions of DT1 for the year ended 30 June 2017, ST1 controls DT1 for the year ended 30 June 2020 under subsection 328-125(4) of the ITAA 1997.

As such, ST1 is connected with DT1 under subsection 328-125(1) of the ITAA 1997 as ST1 controls DT1.

Question 2

Summary

For the year ending 30 June 2020, weighing the facts and assumptions, it is considered that the Commissioner would exercise the discretion under subsection 328-125(6) of the ITAA 1997 to determine that ST1 does not control DT1.

Detailed reasoning

Subsection 328-125(6) of the ITAA 1997 provides the Commissioner of Taxation (the Commissioner) discretion to determine that an entity (the first entity) does not control another entity (the second entity) if he or she thinks that the second entity is controlled by:

·        an entity other than the first entity or any of its affiliates, or

·        by entities that do not include, the first entity or any of its affiliates.

The discretion may be exercised where the first entity has a control percentage of at least 40% but less than 50%, as determined under subsections 328-125(2) or (4) of the ITAA 1997.

In relation to the Commissioner's discretion, the EM explains:

2.59 Where an entity's interest in another entity is at least 40 per cent but less than 50 per cent the Commissioner may choose to ignore the interest of that entity in the other entity if the Commissioner determines that a third entity actually controls the other entity.

2.60 The Commissioner may think that another entity controls the entity either based on fact or on a reasonable assumption or inference. Whether or not the third entity has a 40 per cent interest may assist in determining whether the third entity controls the other entity, but it is not decisive [emphasis added].

As determined in question one, ST1's control percentage for the year ended 30 June 2017 was 49.67%. As the control percentage was at least 40% but less than 50% of the income distributed from DT1, the Commissioner can consider whether it is likely that the discretion would be exercised for the year ending 30 June 2020.

Under the circumstances, the discretion provides that the Commissioner may determine that ST1 does not control DT1 if he thinks that DT1 is controlled by:

·        an entity other than ST1 or any of its affiliates, or

·        by entities that do not include, ST1 or any of its affiliates.

As DT1 is a discretionary trust subsections 328-125(3) and (4) of the ITAA 1997 apply in determining control. As discussed in question 1, an entity can be controlled by more than one entity.

Weighing the information provided in the facts, the Commissioner is satisfied that various entities in the CD Group control DT1 for the year ending 30 June 2020 under subsection 328-125(3) of the ITAA 1997.

However, it is necessary to determine that ST1, and/or its affiliates, do not control DT1 for the year ending 30 June 2020, in a way other than by way of ST1's control percentage.

As discussed in question 1, for the purpose of subsection 328-125(4) of the ITAA 1997, ST1's affiliates are SC1 and SC2.

To determine if SC1 or SC2 control DT1 under subsection 328-125(4) of the ITAA 1997 (other than by way of ST1's control percentage),it is necessary to determine whether SC1 or SC2 (together with their affiliates) had a control percentage of at least 40% of the total income of DT1 for any of the relevant years.

As discussed in question 1, the relevant years for:

·        SC1 are the years ended 30 June 2017, 30 June 2018 and 30 June 2019, and

·        SC2 is the year ended 30 June 2019.

Weighing the facts and assumptions, the Commissioner is satisfied that for the purpose of subsection 328-125(4) of the ITAA 1997:

·        DC1 is not SC1's or SC2's affiliate in respect of the years ended 30 June 2017, 30 June 2018 and 30 June 2019 as, in those years, DC1 did not act, and could not reasonably be expected to act, in concert with SC1 or SC2 in relation to DC1's business.

·        DC2 is not SC1's or SC2's affiliate in respect of the years ended 30 June 2018 and 30 June 2019 as, in those years, DC2 did not act, and could reasonably be expected to act, in concert with SC1 or SC2 in relation to DC2's business.

As the trustee for DT1 did not, and will not, distribute income or capital of the trust to SC1 or SC2 or any of their affiliates in respect of the years ended 30 June 2017, 30 June 2018, or 30 June 2019, neither company controls DT1 under subsection 328-125(4) of the ITAA 1997 for the year ended 30 June 2020.

Under subsection 328-125(3) of the ITAA 1997, an entity (the potential controller) controls a discretionary trust if the trustee for the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of:

·        the potential controller,

·        the potential controller's affiliates or

·        the potential controller together with its affiliates.

The EM provides the following guidance in relation to determining control under subsection 328-125(3) of the ITAA 1997:

2.52 Whether a trustee is accustomed or might reasonably be expected to act in accordance with the directions or wishes of another, is determined having regard to all the circumstances of the case. 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 prevent the examination of the actual circumstances to determine whether an entity controls the trust.

2.53 Some factors which might be considered include:

·        the way in which the trustee has acted in the past;

·        the relationship between the entities and the trustee;

·        the amount of any property or services transferred to the trust by the entities; and

·        any arrangement or understanding between the entities and a person or persons who have benefited under the trust in the past.

To determine if ST1, SC1 or SC2 control DT1 for the year ending 30 June 2020 under subsection 328-125(3) of the ITAA 1997, their affiliates for the year ending 30 June 2020 are relevant.

As previously determined, for the purpose of subsection 328-125(4) of the ITAA 1997 in respect of the relevant years:

·        SC1 and SC2 were ST1's affiliates,

·        DC1 and DC2 were not ST1's affiliates, and

·        DC1 and DC2 were not SC1's or SC2's affiliate.

As the accepted assumptions provide that the material facts regarding the potential affiliates will be the same in respect of the year ending 30 June 2020, these previously determined affiliations for the purpose of subsection 328-125(4) of the ITAA 1997, also apply for the purpose of subsection 328-125(3).

Weighing the facts and assumptions, in respect of the year ending 30 June 2020, the trustee for DT1 could not reasonably be expected to act in accordance with the directions or wishes of:

·        ST1, SC1 or SC2; or

·        A and/or B, for and on behalf of ST1, SC1 or SC2.

As such, neither ST1, SC1 or SC2 control DT1 under subsection 328-125(3) of the ITAA 1997, and ST1, SC1 and SC2 do not control DT1 in any other way than by way of ST1's control percentage.

Weighing the facts and assumptions, with the exception of ST1's control percentage, the entities that control DT1 do not include ST1 or any of ST1's affiliates, SC1 or SC2.

As such, weighing the facts and assumptions, on the balance of probabilities, it is considered more likely than not that, at the necessary time, the Commissioner would exercise the discretion under subsection 328-125(6) of the ITAA 1997 to determine that the ST1 does not control DT1 for the year ending 30 June 2020.

Question 3

Summary

As both ST9 and DT1 are controlled by E in ways described in subsection 328-125 of the ITAA 1997, ST9 and DT1 are connected with eachother for the income year ending 30 June 2020.

Detailed reasoning

As discussed in question 1, under subsection 328-125(1) of the ITAA 1997 an entity is connected with another entity if:

(a)   either entity controls the other entity in a way described in section 328-125, or

(b)   both entities are controlled (as described in section 328-125) by the same third entity.

ST9 and DT1 are both discretionary trusts so the two tests in subsections 328-125(3) and (4) of the ITAA 1997 apply to determine control.

Based on the facts and accepted assumptions, it is only necessary to discuss the circumstances and distributions in relation to E, to determine that both DT1 and ST9 are controlled by the same third entity.

The trustee for ST9 distributed 50% of the total income of ST9 for the year ended 30 June 2016, which means he had a control percentage of at least 40% in respect of ST9 for that year. As such, E controlled ST9 for the year ending 30 June 2020 under subsection 328-125(4) of the ITAA 1997.

As the control percentage was not less than 50%, the Commissioner's discretion in subsection 328-125(6) of the ITAA 1997 cannot be exercised to determine that E does not control ST9.

For the years ended 30 June 2016, 30 June 2017 and 30 June 2018, the trustee for DT1 distributed income to E and the potential affiliates, in the following percentages of DT1's total income:

Weighing the facts, for the purpose of subsection 328-125(4) of the ITAA 1997, DC1 was E's affiliate for year ended 30 June 2018 as DC1 acted, or could reasonably be expected to have acted, in accordance with E's directions or wishes in relation DC1's business affairs.

The trustee for DT1 distributed to E and his affiliate, DC1, 0.78% and 39.71% (respectively) of DT1's total income for the year ended 30 June 2018, which means E had a control percentage of 40.49% in respect of DT1 for that year.

As such, E controlled DT1 under subsection 328-125(4) of the ITAA 1997 for the year ending 30 June 2020.

As E controls both ST9 and DT1 in a way described in section 328-125 of the ITAA 1997 for the year ended 30 June 2020, ST9 and DT1 are connected with eachother for the year ending 30 June 2020.

Question 4

Summary

Based on the facts and accepted assumptions, the 3 LOTs are not connected with DT1 for the income year ending 30 June 2020 under section 328-125 of the ITAA 1997 as the 3 LOTs do not control DT1, DT1 does not control the 3 LOTs, and the 3 LOTs and DT1 are not controlled by the same third entity.

Detailed reasoning

As discussed above, under subsection 328-125(1) of the ITAA 1997 an entity is connected with another entity if:

(a)   either entity controls the other entity in a way described in section 328-125, or

(b)   both entities are controlled (in a way described in section 328-125) by the same third entity.

As all the trusts involved are discretionary trusts the two tests in subsections 328-125(3) and 328-125(4) of the ITAA 1997 apply to determine control for the purpose of section 328-125.

To determine if DT1 controls any of the 3 LOTs under subsection 328-125(4) of the ITAA 1997, it is necessary to determine if DT1's and/or any of its affiliates received distributions of income or capital from any of the 3 LOTs for the relevant years.

In the relevant years, the trustee for the 3 LOTs distributed only to individuals. These individuals did not carry on businesses in their own capacities, and cannot be affiliates of DT1. As such, DT1 did not have a control percentage of at least 40% of the income of the 3 LOTs.

As such, DT1 does not control any of the 3 LOTs under subsection 328-125(4) of the ITAA 1997 for the year ended 30 June 2020.

To determine if DT1 controls any of the 3 LOTs under subsection 328-125(3) of the ITAA 1997, DT1's affiliates in respect of the year ending 30 June 2020 are relevant.

Weighing the facts and assumptions, for the purpose of subsection 328-125(3) of the ITAA 1997 in respect of the year ending 30 June 2020:

·        DC1 is DT1's affiliate as DC1 acts, or could reasonably be expected to act, in concert with DT1 in relation to DC1's business.

·        DC2 is DT1's affiliate as DC2 acts, or could reasonably be expected to act, in concert with DT1 in relation to DC2's business.

·        SC1 is not DT1's affiliate as SC1 does not act, and could not reasonably be expected to act, in concert with DT1 in relation to SC1's business.

·        SC2 is not DT1's affiliate as SC2 does not act, and could not reasonably be expected to act, in concert with DT1 in relation to SC2's business.

Weighing the facts and assumptions, in respect of the year ending 30 June 2020, the trustees for the 3 LOTs has not acted, and could not reasonably be expected to act, on the directions or wishes of:

·        DT1, DC1 or DC2; or

·        C, D, E or F, for and on behalf of DT1, DC1 or DC2.

As such, DT1 does not control any of the 3 LOTs under subsection 328-125(3) of the ITAA 1997 for the year ended 30 June 2020.

Based on the above, DT1 does not control any of the 3 LOTs in a way described in subsection 328-125 of the ITAA 1997.

To determine if any of the 3 LOTs controls DT1 under subsection 328-125(4) of the ITAA 1997, it is necessary to determine if any of the 3 LOTs and/or any of their affiliates received distributions of income or capital from DT1 for the relevant years.

The facts and accepted assumptions provide that:

·        for the years ended 30 June 2016, 30 June 2017 and 30 June 2018, the trustee for DT1 did not distribute any capital of the trust to any entities

·        for the years ended 30 June 2016, 30 June 2017 and 30 June 2018, the trustee for DT1 did not distribute income of the trust to any of the 3 LOTs

·        for the year ended 30 June 2016, the trustee for DT1 did not distribute income of the trust to any potential beneficiary of at least 40% of DT1's income.

·        for the year ended 30 June 2019, the trustee for DT1 will not distribute income or capital of the trust to any of the 3 LOTs, and/or any of their affiliates.

As such, for the 3 LOTs to have a control percentage of at least 40% in respect of DT1, it is necessary to determine if any of the 3 LOTs affiliates received income distributions from DT1 for the years ended 30 June 2017 and 30 June 2018.

The trustee for DT1 distributed income to the potential affiliates in the following percentages of the trust's total income for the years ended 30 June 2017 and 30 June 2018:

Weighing the facts and assumptions, for the purpose of subsection 328-125(4) of the ITAA 1997 in respect of the years ended 30 June 2017 and 30 June 2018:

·        DC1 is not an affiliate of the 3 LOTs as DC1 does not act, and could not reasonably be expected to act, in concert with the 3 LOTs in relation to DC1's business.

·        DC2 is not an affiliate of the 3 LOTs as DC2 does not act, and could not reasonably be expected to act, in concert with the 3 LOTs in relation to DC2's business

·        SC1 is an affiliate of the 3 LOT's as SC1 acted, or could not reasonably be expected to act, in concert with DT1 in relation to SC1's business

·        SC2 did not exist in these years so was not an affiliate of the 3 LOTs

As DC1 and DC2 were not affiliates of any of the 3 LOTs for the purposes of subsection 328-125(4) of the ITAA 1997, the 3 LOTs did not have a control percentage of at least 40% for any of the relevant years.

As such, the 3 LOTs do not control DT1 under subsection 328-125(4) of the ITAA 1997 for the year ended 30 June 2020.

The relevant affiliates for the purpose of subsection 328-125(3) of the ITAA 1997 are those entities that are the 3 LOTs affiliates in the year ended 30 June 2020.

As determined above, for the purpose of subsection 328-125(4) of the ITAA 1997 in respect of the years ended 30 June 2017 and 30 June 2018:

·        DC1 is not an affiliate of the 3 LOTs

·        DC2 is not an affiliate of the 3 LOTs, and

·        SC1 is an affiliate of the 3 LOT's

As the assumptions provide that the material facts regarding the potential affiliates will be the same in respect of the year ending 30 June 2020, these previously determined affiliations for the purpose of subsection 328-125(4) of the ITAA 1997, also apply for the purpose of subsection 328-125(3).

In respect of SC2, for the purpose of subsection 328-125(3) of the ITAA 1997, based on the facts and accepted assumptions, SC2 is an affiliate of the 3 LOTs for the year ending 30 June 2020 as SC2 acts, or could reasonably be expected to act, in concert with the 3 LOTs in relation to SC2's businesses.

Weighing the facts and assumptions, for the year ending 30 June 2020, the trustee for DT1 could not reasonably be expected to act on the directions or wishes of:

·        the 3 LOTs, SC1 or SC2; or

·        A and/or B, for and on behalf of the 3 LOTs, SC1 or SC2.

As such, the 3 LOTs do not control DT1 for the year ending 30 June 2020 under subsection 328-125(3) of the ITAA 1997.

Based on the above, the 3 LOTs do not control DT1 in a way described in subsection 328-125 of the ITAA 1997.

As determined in question 3, E controls DT1 under subsection 328-125(4) of the ITAA 1997 as he has a control percentage of least 40% of the distributions of DT1 for the year ended 30 June 2018.

Further, as determined in question 2, neither SC1 nor SC2 control DT1 under subsection 328-125(4) of the ITAA as they do not have a control percentage of at least 40% of the distributions of DT1 for any of the relevant years.

In determining if any other entities control DT1 under subsection 328-125(4) of the ITAA 1997 for the year ending 30 June 2020, based on the facts and accepted assumptions in respect of the relevant years:

·        DC1 and DC2 are affiliates of C, D and F for the year ended 30 June 2018 for the same reasons as E,

·        C, D and F control DT1 as they each have a control percentage of at least 40% of the income distributions of DT1 for the year ended 30 June 2018,

·        DC1 and DC2 may be affiliates of other entities in the CD Group. If so, these other entities would have control percentages of at least 40% of the DT1's total income, and thus would control DT1,

·        ST1 was the only entity in the AB Group, that had a control percentage of at least 40% in respect of DT1 for the relevant years, and

·        In respect of ST1's control percentage, as determined in question 2, it is likely that the Commissioner's would exercise his discretion to determine that ST1 does not control DT1.

As such, under subsection 328-125(4) of the ITAA 1997:

·        C, D, E and F, and possibly other entities in the CD Group control DT1, and

·        no entities in the AB Group control DT1.

As determined in question 3, E controls DT1 under subsection 328-125(3) of the ITAA 1997. Further, as determined in question 2, ST1, SC1 and SC2 do not control DT1 under subsection 328-125(3) of the ITAA 1997.

On considering which other entities control DT1 under subsection 328-125(3) of the ITAA 1997 for the year ending 30 June 2020, based on the facts and accepted assumptions, the Commissioner is satisfied that:

·        C, D and F control DT1 as the trustee for DT1 acts, and could reasonably be expected to act, in accordance with their directions or wishes

·        A and B did not control DT1 as the trustee for DT1 did not act, and could not reasonably be expected to act, in accordance with their directions or wishes

·        No other entities in the AB group control DT1 under subsection 328-125(3) of the ITAA 1997.

As such, under subsection 328-125(3) of the ITAA 1997, in respect of the year ending 30 June 2020:

·        C, D, E and F control DT1, and

·        no entities in the AB Group control DT1.

In summary, under subsection 328-125(3) and (4) of the ITAA 1997, C, D, E and F and potentially other entities in the CD Group control DT1.

To determine which entities control the 3 LOTs under subsection 328-125(4) of the ITAA 1997, the facts in respect of the years ended 30 June 2016, 30 June 2017 and 30 June 2018, show that:

·        The trustees for 3 LOTs did not distribute capital to any entities,

·        The income of the 3 LOTs was distributed only to individuals,

·        Each individual's percentages of the total income of the relevant trust was less than 40% of the relevant trusts total income, and

·        The individuals did not carry on business, so could not be affiliates of any other entity.

For the year ended 30 June 2019, the accepted assumptions provide that the trustee for the 3 LOTs will not distribute income or capital of the relevant trust to any entity in the CD Group, and/or their affiliates, that total at least 40% of the income or capital of the relevant trust.

As such, based on the facts and assumptions, for the purpose of subsection 328-125(4) of the ITAA 1997

·        for the years ended 30 June 2016, 30 June 2017, 30 June 2018 and 30 June 2019, none of the entities in the CD group had a control percentage of at least 40% of the total income or capital of any of the 3 LOTs, so none of the entities in the CD group controls any of the 3 LOTs,

·        for the year ended 30 June 2019, entities in the AB Group may have a control percentage of at least 40% of the total income or capital of the 3 LOTs and may control the 3 LOTs.

On considering which other entities control the 3 LOTs under subsection 328-125(3) of the ITAA 1997, based on the facts and assumptions for the year ending 30 June 2020:

·        A and B control the 3 LOTs as the trustee company acts, and could reasonably be expected to act, in accordance with their directions or wishes, and

·        C, D, E and F do not control the 3 LOTs as the trustee does not act, and could not reasonably be expected to act, in accordance with their directions or wishes

·        No other entities in the CD Group control DT1 under subsection 328-125(3) of the ITAA 1997.

In summary, under subsection 328-125(3) and (4) of the ITAA 1997 A and B, and potentially other entities in the AB Group, control the 3 LOTs.

Weighing the above, DT1 and the 3 LOTs are not controlled by the same third entity in a way described in section 328-125 of the ITAA 1997 for the year ending 30 June 2020.

As neither paragraph 328-125(1)(a) or (b) of the ITAA 1997 apply, the 3 LOTs are not connected with DT1 for the year ending 30 June 2020 under section 328-125.

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