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Edited version of your written advice
Authorisation Number: 1012920235785
Date of advice: 16 December 2015
Ruling
Subject: Capital Gains Tax
Question 1
Have the Trust and the partnership been connected entities, under section 328-125 of the ITAA 1997, since at least XXXX?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commences on
1 July 2015
Relevant facts and circumstances
The Trust purchased a leasehold interest in the property in XXXX.
During the XXXX year the leasehold interest was converted for freehold.
During the XXXX year the partnership was established to conduct primary production operations.
The partners in the partnership are A, B and their five relatives.
Since the XXXX year the trust distributions have been as follows:
(i) XXXX: A- 50% and B- 50%
(ii) XXXX to XXXX: no distributions as there were losses
(iii) XXXX to XXXX: A - 50% and B- 50%
The partnership has always used the property in carrying on its operations.
A and B had originally contributed X head of cattle to the partnership to commence the operations.
From XXXX until XXXX, A and B lived on the property and managed the cattle operations on a full time basis.
During the earlier years some of the relatives lived on the property and worked in the operations with A and B.
Since approximately XXXX none of the relatives have been actively involved in the operations of the partnership.
In XXXX, A and B moved to a township due to their age and health.
Since this time, the partnership has employed managers to run the day to day operations.
A continues to manage the overall operations of both the trust and the partnership.
The managers speak to A on a weekly basis and A spends on average one week a month at the property.
A bank account was established which the managers can access to pay general operating costs.
Large expenditure items need to be approved by A.
A and B continue to oversee the financial aspects of the operations including the payment of wages, attending to external finance requirements including dealings with the external financiers and dealing with external consultants.
The partnership pays rent to the trust for the use of the property; however there is no formal lease in place.
There are no formal agreements between the partners.
A and B have generally always made the decisions and have been the driving force for the primary production operations and the property.
A and B seek advice from their relatives in relation to certain aspects of the operations as their relatives have a diversity of expertise and experience.
The trustee for the trust is now considering a sale of the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Subdivision 152-C
Income Tax Assessment Act 1997 Section 328-125
Income Tax Assessment Act 1997 Section 328-130
Reasons for decision
In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997:
(a) a CGT event happens in relation to an asset that the taxpayer owns
(b) the event would otherwise have resulted in a capital gain
(c) one or more of the following applies
(i) the taxpayer satisfies the maximum net asset value test
(ii) the taxpayer is a "small business entity" for the income year
(iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or
(iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year, and
(d) the asset satisfies the active asset test.
Active asset test
The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:
• you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or
• you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period.
The test period:
• begins when you acquired the asset, and
• ends at the earlier of
• the CGT event, and
• when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months).
A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.
An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.
In this case, we accept that the relatives are affiliates of A as per section 328-130 of the ITAA 1997 since at least July 2007.
Under section 328-125 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.
An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:
(a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of: (i) any distribution of income by the other entity; or
(b) if the other entity is a company - own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company. |
In this case, A together with their affiliates has the right to acquire at least 40% of the net income of the partnership. Therefore, A controls the partnership.
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.
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.
In this case, A received X% distribution from the trust in XXXX and they received a X% distribution from the trust in XXXX through to XXXX. Consequently, A will control the trust from the XXXX financial year through to the XXXX financial year.
Therefore, A together with their affiliates control the partnership and the trust. Consequently, the partnership and the trust are connected entities.