| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private advice
Authorisation Number: 1012637878678
Ruling
Subject: CGT Small Business Concessions - Commissioner's Discretion
Question and Answer
Will the Commissioner exercise his discretion under subsection 328-125(6) of the Income Tax Assessment Act 1997 to determine that you do not control Trust A?
No
This ruling applies for the following period
Year ending 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
You are a discretionary trust and an investment vehicle.
The Trust A is a unit trust that operates a business. The trustee for the Trust A is Company B.
Under a Deed of Agreement between Company B, Company C and you, you acquired X% of the units Trust A.
The Deed of Agreement provides:
7.1.1 |
On or before the effective date, the parties must do all things necessary to appoint your trustee as a Director of Company B. |
7.1.2 |
You are to manage the business and its affairs and will met from time to time with Company C as required by Company C |
7.1.3 |
Meetings of the directors of Company B may not be held unless Person D is in attendance either personally or via electronic communication. |
7.1.4 |
At all meetings of the directors, Person D shall have the number of votes equivalent to the aggregate of the votes of all other directors plus one. |
The remaining Y% of units in Trust A are owned by Trust E.
All acquisitions of units in the Trust A by you were from the Trust E. Trust E has been the majority unit holder in the Trust A since 200X.
Person D has acted as a director and the secretary of Company B since. Your trustee was a director between acquisition and disposal of units. Company F held Y% of the shares in Company B (and now holds 100% of the shares). Person D is the sole director and secretary of Company F and holds all the shares in Company F.
The trustee for Trust E is Company C. Person D is the sole director and secretary of Company C. (Company G) holds all the shares in Company C. Person D is the sole director and secretary of Company G and holds all the shares in Company G.
Person D is a non-related entity to you and is not your affiliate.
While you held units, Trust A was conducted as follows:
1) You ran the day-to-day business operations of the business under a General Manager / Dealer Principal document.
2) All major business decisions for Trust A are made by Person D.
You disposed of your units in the Trust A to Trust E in an arm's length dealing. You made a capital gain as a result of the sale of units.
You wish to apply the small business concessions in Division 152 of the ITAA 1997 in relation to the sale of the units.
If the value of the X% of the Trust A is included in the maximum net asset value test you will satisfy the maximum net asset value test in section 152-15.
If the value of the 100% of the Trust A is included in the maximum net asset value test you will not satisfy the maximum net asset value test in section 152-15.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 328-125(2)
Income Tax Assessment Act 1997 Subsection 328-125(6)
Reasons for decision
The meaning of a connected entity is defined under subsection 328-125(1) of the ITAA 1997 which 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 a way described in this section by the same third entity.
Paragraph 328-125(2)(a) of the ITAA 1997 provides that an entity controls a another entity if the entity, its affiliates, or the entity together with its affiliates beneficially own or has the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (control percentage) that is at least 40% of:
a) Any distribution of income by the other entity; or
b) Any distribution of capital by the other entity.
If your control percentage in the other entity is at least 40%, but less than 50%, the Commissioner may determine, under subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) that you do not control the other entity if the Commissioner thinks that the entity is controlled by a third entity (other than your affiliate).
Subsection 328-125(6) of the ITAA 1997 states that:
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.
For the Commissioner to make the determination under subsection 328-125(6) of the ITAA 1997 there must be a single, identifiable third entity that has a control percentage (including the interests of any small business CGT affiliates) of at least 40% of the other entity. It must control the other entity in the way described in subsection 328-125(2) of the ITAA 1997. Unless the conditions of subsection 328-125(2) are met the Commissioner cannot determine that you do not control the company.
The Commissioner's view is that if there are entities with a control percentage of at least 40%, it is necessary to consider additional factors such as who is responsible for day to day and strategic running of the entity. 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. If it is accepted that Person D had responsibility for strategic running of the company (as you have indicated), then it is also relevant to consider who is responsible for the day to day operation. You have indicated that you were responsible for this.
The Commissioner considers that one entity having responsibility for the day to day running of the business, where there are two entities with a control percentage of at least 40%, may mean that there is ultimately joint control where the responsibility for the entity's strategic running falls in the hands of the other entity.
Ultimately, the Commissioner considers that as you were a director of the Company B at all times, and had, on a practical level, influence over the day to day operations, you controlled Trust A. The Commissioner has not made a determination as to whether any other entity also controlled Trust A.