EDITED VERSION OF NOTICE OF PRIVATE RULING
Authorisation Number: 34398
This Ruling is a 'Private Ruling' for the purposes of Part IVAA of the Taxation Administration Act 1953.
YEAR(S) OF INCOME TO WHICH THIS RULING APPLIES:
Year ended 30 June 2002
TAX LAW:
Income Tax Assessment Act 1997 paragraph 152-35(a).
Income Tax Assessment Act 1997 paragraph 152-410(b).
Income Tax Assessment Act 1997 paragraph 152-410(c).
Income Tax Assessment Act 1997 section 152-415.
Income Tax Assessment Act 1997 section 152-420.
Income Tax Assessment Act 1997 subsection 152-420(1).
Income Tax Assessment Act 1997 subsection 152-420(3).
Income Tax Assessment Act 1997 subsection 152-30(1).
Income Tax Assessment Act 1997 subsection 152-30(2).
Income Tax Assessment Act 1997 subsection 152-30(5).
WHAT THIS RULING IS ABOUT:
Does the Family Trust satisfy the maximum net asset value test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Will the Commissioner exercise his discretion under subparagraph 152-35(a)(ii) of the ITAA 1997 to allow a period greater than 12 months from the time the business ceased to the time of the capital gains tax (CGT) event, for the assets to satisfy the active asset test?
THE SUBJECT OF THE RULING:
The family trust owned property on which a business was conducted by two connected entities. The entities satisfy the control tests in section 152-30 of the ITAA 1997, and are therefore connected.
Marketing of the property and the premises commenced in 1999 with a real estate company.
A contract was signed for the purchase of the property and the business. This contract did not proceed.
A contract for the sale of the business was signed to the original purchasers but without the sale of the property. This contract required that the premises be leased to the purchaser for a number of years.
Marketing of the property commenced after the lease was in place.
Subsequent negotiations with the eventual purchaser of the property commenced and a contract was entered into. Due to problems with the outgoings in the lease, the contract price was reduced and a final contract was later signed.
The applicant has advised that the trust satisfies the maximum net asset value test. However, the trust deed for the family trust states that charities are beneficiaries of the trust. The secondary beneficiaries of the trust include 'any charity'. 'Any charity' is also a primary beneficiary. A 'charity' means any body or corporation being a charity and any corporation or unincorporated association established wholly for charitable purposes. Any of the beneficiaries can be considered for a distribution from the trust.
COMMENCEMENT OF ARRANGEMENT:
1 July 1999
RULING:
Does the family trust satisfy the maximum net asset value test in section 152-15 of the ITAA 1997?
No. As charities are beneficiaries of the trust, they are taken to have a 100% interest in the trust under subsection 152-30(5) of the ITAA 1997. They are therefore connected with the trust under subsection 152-30(1) of the ITAA 1997 for the purpose of the maximum net value test under sub-paragraph 152-15(a)(ii) of the ITAA 1997.
Will the Commissioner exercise his discretion under subparagraph 152-35(a)(ii) of the ITAA 1997 to allow a period greater than 12 months from the time the business ceased to the time of the capital gains tax (CGT) event, for the assets to satisfy the active asset test?
Yes. However, as the trust has not satisfied the maximum net asset value test, one of the basic conditions for relief under Subdivision 152-A of the ITAA 1997 has not been met, and the small business concessions will not be available to the trust.
EXPLANATION: (This does not form part of the Notice of Private Ruling)
A basic condition of eligibility for the capital gains tax concessions for small business in Division 152 of the ITAA 1997 is that the net value of CGT assets of the entity and related entities, including entities connected with it does not exceed $5 million under section 152-15 of the ITAA 1997.
Subsection 152-30(1) of the ITAA 1997 describes how entities are connected with each other. It says that an entity will be connected to another entity if:
· either entity controls the other entity; or
· both entities are controlled by the same third entity.
To determine if a beneficiary controls a discretionary trust that beneficiary is taken, under subsection 152-30(5) of the ITAA 1997, to have an interest in any distribution of income or capital of the trust equal to the maximum percentage of the income or capital that the trustee could distribute to that beneficiary under the trust deed, regardless of the actual distribution. If that interest is at least 40% the beneficiary is taken to control the discretionary trust under subsection 152-30(2) of the ITAA 1997. This may, depending on the terms of the trust deed, result in several or all of the beneficiaries of a discretionary trust being taken to control the trust.
In order to address this question, it has to be established whether a class of beneficiary referred to here as gift-deductible bodies satisfies the criterion certainty test under trust law (McPhail v. Doulton (1971) AC 424). Lord Wilberforce remarked in this case at p449 that:
a trustee with a duty to distribute, particularly among a potentially very large class, would surely never require the preparation of a complete list of names, which anyhow would tell him little that he needs to know. He would examine the field, by class and category; might indeed make diligent and careful inquiries, depending on how much money he had to give away and the means at his disposal, as to the composition and needs of particular categories and of individuals within them; decide upon certain priorities or proportions, and then select individuals according to their needs or qualifications.
The Administrative Appeals Tribunal in Case U201 87 ATC 1122; AAT Case 133 (1987) 18 ATR 3964 adopted Lord Wilberforce's view, expressed in McPhail v. Doulton, that the objects of a trust power should form a class which is not so large or arbitrary that it cannot be said for certain that a particular person was within the settlor's contemplation as an object of his bounty (noted in Taxation Ruling IT 2462).
We consider that the class of beneficiary referred to as gift-deductible bodies would form a class that is not so large or arbitrary such that a trustee of a discretionary trust can say for certain whether any entity would be within the range of benefit as contemplated by the settlor. Thus it is considered that this class of beneficiary is a valid class of beneficiary of the trust. That is a trustee of a discretionary trust could determine with certainty whether any entity would be within, or excluded from, this class of beneficiary.
A gift-deductible body is a beneficiary of the trust and according to the trust deed is capable of receiving all the income or capital of the trust to the exclusion of all other beneficiaries. Accordingly, it is taken to have a 100% interest in the trust, to control the trust and therefore to be connected with the trust. The net value of the CGT assets of the gift-deductible body must be taken into account when applying the maximum net asset value test to the trust.
To qualify for the CGT Small Business Concessions, the basic conditions as described in subsection 152-10(1) of the ITAA 1997 must be satisfied. The subsection reads as follows:
(1) a *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:
(a) a *CGT event happens in relation to a *CGT asset of yours in an income year;
Note: This condition does not apply in the case of CGT event D1: see section 152-12.
(b) the event would (apart from this Division) have resulted in the gain;
(c) you satisfy the maximum net asset value test (see section 152-15);
(d) the CGT asset satisfies the active asset test (see section 152-35).
Note: This condition does not apply in the case of CGT event D1: see section 152-12.
* denotes a term defined in subsection 995-5(1) of the ITAA 1997
While conditions (a) and (b) are satisfied, (c) is not met. The gift deductible or income tax exempt bodies are taken to have a 100% interest in the trust under subsection 152-30(5) of the ITAA 1997 and are therefore taken to control the trust under subsection 152-30(2) of the ITAA 1997. The bodies are therefore connected with the discretionary trust under subsection 152-30 of the ITAA 1997 for the purposes of the maximum net asset value test under sub-paragraph 152-15(a)(ii) of the ITAA 1997.
Therefore in this case, as the basic conditions in subsection 152-10(1) of the ITAA 1997 are not satisfied, the business premises cannot meet the definition of 'active asset' in section 152-40 of the ITAA 1997. The small business concessions under Division 152 of the ITAA 1997 do not apply.
Nevertheless, the Commissioner has given consideration to whether a longer period than 12 months would be allowed, between the cessation of the relevant business and the disposal of the assets, under paragraph 152-35(a)(ii) of the ITAA 1997.
Paragraph 152-35(a)(ii) of the ITAA 1997 - exercising the discretion
To assist the Commissioner in considering the exercise of his discretion, case law which deals with extension of time issues, case law which considers similar provisions and the exercise of the Commissioner's discretionary powers generally, list relevant factors which the Commissioner must consider.
In Hunter Valley Developments Pty Ltd and Ors v Cohen (1984) 58 ALR 305, Wilcox J summarised principles to guide the exercise of the courts discretion. These principles are of a general nature applicable where there is a discretionary power to extend a procedural time limit and have been applied to the exercise of the power of the Commissioner to extend time: Lighthouse Philatelics Pty Ltd v. Federal Commissioner of Taxation (1991) 32 FCR 148; 91 ATC 4942; (1991) 22 ATR 707; Comcare v. A'Hearn (1993) 45 FCR 441; Case 15/94 94 ATC 191; AAT Case 9379 (1994) 28 ATR 1078; Case 18/94 94 ATC 204; AAT Case 9192A (1994) 28 ATR 1091.
With respect to the exercise of discretions generally the following factors are relevant:
(1) The discretion must be exercised according to the merits of each case.
(2) At common law, a decision maker may be held to have acted ultra vires where:
(i) irrelevant considerations have been taken into account or
(ii) relevant considerations have not been adequately addressed in the exercise of a discretion;
(3) The consideration of the discretion under section 152-35 of the ITAA 1997 will involve a two step process of identifying the relevant factors and applying a weighting to each of those factors; and
(4) In Minister for Aboriginal Affairs v. Peko - Wallsend Ltd (1986) 162 CLR 24, it was held that it is for the decision maker to determine the appropriate weighting to be applied to these factors.
With respect to section 152-35 of the ITAA 1997, the following factors are relevant:
(1) There should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension. However, there is no rule that an explanation is an essential pre-condition;
(2) Account must be had of any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension;
(3) Account must be had of any unsettling of people, other than the Commissioner, or of established practices;
(4) There must be a consideration of fairness to people or entities in like positions and the wider public interest;
(5) Whether there is any mischief involved; and
(6) A consideration of the consequences to the trust.
Application of principles in present case
In the Application for Private Ruling, the Commissioner has been requested to exercise his discretion to allow a longer period then 12 months for the following reasons:
The rulees were unable to sell the business and the property at the time that the business ceased, as the purchaser was not able to obtain the additional finance. Marketing of the business and the premises commenced in 1999 with a real estate company. The rulees would have sold the property at the time the business ceased except that the contract for the sale of both did not proceed. A contract for the sale of the business was signed by the original purchasers but without the sale of the property.
This is considered an acceptable explanation for the extension of time requested. Additionally it would seem fair and equitable to provide the extension of time in these circumstances.
The granting of an extension in these circumstances would not give rise to any prejudice towards the Commissioner, as the circumstances are not the result of any intent on the part of the trust to avoid any form of taxation.
The granting of an extension in the circumstances, would not cause any unsettling of any persons other than the Commissioner, nor would it unsettle any established practices as the granting of an extension of time to the trust, dependent upon the facts, is itself an established practice.
The granting of an extension of time in the circumstances would not result in any amount of unfairness to entities in similar circumstances or like positions to the trust. The ability to apply for an extension of time, in the same manner as the trust has, is available to all entities with similar circumstances as well as to the wider taxpaying public.
There is no mischief involved in the circumstances which have resulted in the request for an extension of time.
Conclusion
It is considered that the Commissioner should exercise his discretion to extend the time to allow the active asset to satisfy the first requirement of the active asset test in paragraph 152-35(a) of the ITAA 1997.
However, as the trust has not satisfied the maximum net asset value test, one of the basic conditions for relief under Subdivision 152-A of the ITAA 1997 has not been met. Therefore, the small business concessions will not be available to the trust.
Disclaimer
The Register of Private Binding Advice is published as a public record of the binding advice issued by the ATO. Each piece of advice is based on a specific set of circumstances advised to the ATO and the law in force at the time of the advice, and is considered binding only in respect of the person/s or entity/ies on whose behalf the advice was sought. The Register is a historical record of advice provided, and is not updated to reflect changes in the law, withdrawal of advice or any other change in circumstance. Each piece of advice has been edited to avoid disclosing the identity of the person or entity on whose behalf advice was sought and published advice may therefore not disclose all the relevant facts or circumstances on which the advice was based. For these reasons, advice published in this Register cannot be relied upon as precedent for any other person or entity.