Edited version of private advice

Authorisation Number: 1052363634042

Date of advice: 24 February 2025

Ruling

Subject: CGT - concessions

Question

For the purposes of the maximum net asset value test for the small business concessions, is the Trust a connected entity to the Company under 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

X of XX 20XX

Relevant facts and circumstances

Person 1 was the sole shareholder of the Company when they passed away.

The will of the estate of person 1 named Person 2 and Person 3 as executors of the estate.

As a result, Person 2 and Person 3 became directors of the Company. The will did not bequeath the shares to any particular beneficiaries.

As a result of the will of the estate, Person 2 and Person 3 both own 50% each of the shares of trustee company.

The Trust has not made any distributions since its creation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Under section 152-15 of the ITAA 1997 you satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

a)            The net value of the CGT assets of yours

b)            The net value of the CGT assets of any entities connected with you;

c)            The net value of the CGT assets of any affiliates of yours or entities connected with your affiliates.

Section 328-125 of the ITAA 1997 provides the meaning of 'connected with' an entity. 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 this section; or

b)            Both entities are controlled in a way described in this section by the same third entity.

Control of a company

To work out whether you control a company, you must consider both whether you have an interest in any company and whether your affiliates have an interest in any companies. Subsection 328-125 of the ITAA 1997 states that:

You control a company if you, your affiliates, or you together with your affiliates, have either

•                     shares and other equity interest (or the right to acquire them) in the company that give you and/or your affiliates at least 40% (the control percentage) of the voting power in the company.

•                     interests (or the right to acquire them) with the right to receive at least 40% (the control percentage) of any income or capital the company distributes

Affiliates

Under section 328-130 of the ITAA 1997, an affiliate is an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act:

•                     in accordance with your directions, or

•                     in concert with you.

Trusts, partnership and superannuation funds cannot be your affiliates. However, a trust, partnership or superannuation fund may have an affiliate who is an individual or company.

Control of a discretionary trust

There are 2 tests under subsection 328-125(2) of the ITAA 1997 for determining control of a discretionary trust are the:

•                     distribution test

•                     influence over trustee test

You control a discretionary trust if you meet either of these tests.

Distribution test

You meet the distribution test if any of the previous 4 income years, you, your affiliates or you together with your affiliates received a trust distribution of 40% or more of the total income or capital the trust distributed for that income year.

Amounts paid to, or applied for the benefit of, the beneficiary or their affiliates are included in the calculations of trust distributions received. Distributions of income and capital considered separately (that is, not added together) to determine if the 40% threshold is reached.

Influence over trustee test.

You meet this test if the trustee either acts, or might reasonably be expected to act, according to directions or wishes of you, your affiliate or you together with your affiliates.

You must consider all the circumstances to work out whether you meet this test. For example, to prove that you had no influence over the trustee, it would not be enough for the trust deed to say the trustee must ignore your directions or wishes.

Some factors you might consider include:

•                     the way the trustee acted in the past

•                     the relationship between you or your affiliates (or both) and the trustee

•                     the amount of property or services you and your affiliates (or both) transferred to the trust

•                     any arrangement or understanding between you and any other person who has benefited under the trust in the past.

Application to you

In this case, the Trust does not hold any shares in the Company. Based on the information provided the Trust does not have any affiliates and therefore is not directly connected to the company.

In order to determine whether the Trust is connected to the Company the Commissioner must consider whether both the Company and Trust are controlled by the same third entity.

Firstly, we will consider whether Person B and C, in their roles as trustee of the Trust, control the trust. We do not consider, based on the evidence provided, that anyone exerts influence over the Trustee in the circumstances. The trustees have been appointed due to the will of the deceased and are constrained by the directions in the will and the trust deed.

Also, the Trust has never made any distributions and therefore no entity can control the Trust via the distribution test. As we cannot identify an entity, or an entity and its affiliates, that control the Trust the Commissioner is satisfied that the Trust and Company cannot be controlled by the same third entity.

Therefore we accept that the Trust is not connected to the Company.

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