Edited version of your written advice

Authorisation Number: 1013083912791

Date of advice: 2 September 2016

Ruling

Subject: Commissioner's discretion

Question 1

Are you and your spouse a partnership for income tax purposes?

Answer:

Yes

Question 2:

Will the Commissioner's discretion be exercised under subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to determine that you and your spouse do not control the Trust?

Answer:

Yes

This ruling applies for the following periods:

Year ended 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Trust is a unit trust but is not a fixed trust.

The Trust operates a business.

A trustee company is the trustee for the Trust.

Person A is the sole director and secretary of the trustee company.

Person A has control over the day to day operations of the business carried on by the Trust.

The Trust initially issued a number of units to the following unit holders:

• You and your spouse hold between 40 and 50% of the units jointly

• Person A's family trust holds the remaining units.

Distributions were made by the trustee of the Trust to the unit holders.

You and your spouse do not carry on a business as a partnership.

You and your spouse have not lodged partnership income tax returns.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Subsection 328-125(1)

Income Tax Assessment Act 1997 Subsection 328-125(3)

Income Tax Assessment Act 1997 Subsection 328-125(4)

Reasons for decision

Partnership

The term 'partnership' is defined in subsection 6(1) of the Income Tax Assessment Act 1936 as follows:

"partnership" means an association of persons carrying on business as
partners or in receipt of income jointly, but does not include a company.

In Taxation Ruling TR 93/32 the Commissioner clarified the treatment of income or losses between co-owners of a jointly owned rental property where the ownership does not amount to the carrying on of a business. TR 93/32 explains that co-ownership of a rental property is a partnership for income tax purposes but is not a partnership at general law unless the ownership amounts to the carrying on of a business. Where co-ownership is a partnership for income tax purposes only, the income/loss from the rental is derived from co-ownership of the property and not from the distribution of partnership profits/losses.

The reasoning in TR 93/32 to the sharing of income or losses from jointly owned rental properties applies equally to jointly owned investments in shares in a company or in units in a unit trust, where the investment activities do not amount to the carrying on of a business.

In your case, you and your spouse jointly own less than 50% of the units Trust and do not carry on a business. You and your spouse received income jointly. Therefore you and your spouse are a partnership for income tax purposes and not a general law partnership.

Connected entities

The term 'connected with' is defined in subsection 995-1(1) of the ITAA 1997 as:

'an entity is connected with you in the circumstances described in section 328-125.'

Subsection 328-125(1) of the ITAA 1997 states that 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.

Direct control of a discretionary trust may be established via either of two paths: subsection 328-125(3) or subsection 328-125(4) of the ITAA 1997.

Subsection 328-125(3) of the ITAA 1997 provides that an entity controls a discretionary trust if the trustee of that trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates, or the entity together with its affiliates.

Subsection 328-125(4) provides, in part, that an entity directly controls a discretionary trust for an income year if, for any of the preceding four income years, the discretionary trust distributed at least 40% of any income or capital paid for that year to either the entity, its affiliates, or to the entity together with any of its affiliates.

Commissioner may determine that an entity does not control another entity

The Commissioner's discretion, as set out in subsection 328-125(6) of the ITAA 1997 states the following:

If the control percentage referred to in subsection (2) or (4) is at least 40%, but less than 50%, 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.

The Capital gains tax concessions for small business (2015) (the guide) discusses the application of the discretion contained in subsection 328-125(6) of the ITAA 1997.

The guide provides that for the Commissioner to be able to consider the discretion in subsection 328-125(6) of the ITAA 1997 there must be a single, identifiable third entity that has a control percentage of at least 40% of the other entity. In working out the third entity's control percentage, the interests of any affiliates of the third entity are taken into account. The third entity 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) of the ITAA 1997 are met by a third entity, the Commissioner cannot determine that the first entity does not control the other entity.

If there was a third entity with a control percentage of 40% or more it would then be necessary to consider additional factors such as who is responsible for the day to day and strategic running of the other entity to determine if the third entity controls it. It is possible that both of the entities having a control percentage of at least 40% may control the other entity if such responsibilities are shared.

Application to your circumstances

In this case, the Commissioner accepts that Person A makes all decisions in relation to the business and is responsible for the day to day operations of the Trust though the trustee company. You and your spouse never had any direct involvement in the running of the business.

The Commissioner will exercise the discretion contained in subsection 328-125(6) of the ITAA 1997 to determine that you and your spouse do not control the Trust as the Commissioner accepts that the Trust is controlled by Person A and their family trust.