Edited version of your written advice

Authorisation Number: 1051328138784

Date of advice: 25 January 2018

Ruling

Subject: Capital gains tax (CGT) asset - remainder interest - maximum net asset value test

Question 1

Is the net value of the CGT assets of the Trust included as CGT assets of an entity connected with you in determining whether you satisfy the maximum net asset value test in section 152-15 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

If the net value of these CGT assets is included, is it 100% of the net value or a lesser amount?

Answer

100% of the net value.

This ruling applies for the following period

Year ending 30 June 2018

The scheme commences on

1 July 2017

Relevant facts and circumstances

You have a fixed entitlement to 50% of the capital of a trust (the Trust) that is not a discretionary trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-55

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 paragraph 108-5(2)(a)

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

Income Tax Assessment Act 1997 subsection 328-125(2)

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-20

Reasons for decision

Summary

All (100%) of the net value of the CGT assets of the Trust is included in determining whether you satisfy the maximum net asset value test pursuant to section 152-15 of the Income Tax Assessment Act 1997 at the valuing time.

As the net value of all the CGT assets of the Trust is included, the value of your interest in the Trust is not also included.

Detailed reasoning

To qualify for any one of the small business CGT concessions in Division 152, an entity must satisfy a number of basic conditions in subsection 152-10(1). One condition is the maximum net asset value test contained in section 152-15.

Section 152-15 states that:

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 (not counting any assets already counted under paragraph (b)).

Broadly, therefore, the maximum net asset value test seeks to treat a small business entity and all of its related entities as if they were a single economic unit, for the purposes of determining whether its size is below the relevant statutory threshold. Specifically, an entity satisfies the maximum net asset value test if, just before the relevant CGT event (the valuing time), the sum of the net value of their CGT assets and those of their connected entities and affiliates is $6 million or less.

The 'net value of the CGT assets' of an entity is defined in section 152-20 being the sum of the market values of those assets less the sum of the liabilities related to those assets and certain leave and other provisions. Because the maximum net asset value test totals the net CGT assets of each of the entities in the relevant group, there are also specific provisions to ensure that value otherwise reflected in more than one entity is not double counted.

A CGT asset is any kind of property, or a legal or equitable right that is not property (subsection 108-5(1)). It also includes part of, or an interest in, such property or rights (paragraph 108-5(2)(a)).

Your interest

Your interest in the Trust is an equitable right to the capital of the Trust, and as such, is a CGT asset of yours for the purposes of the maximum net asset value test.

However, subsection 152-20(2)(a) states that:

In working out the net value of the CGT assets of an entity:

(a) disregard *shares, units or other interests (except debt) in another entity that is *connected with the first-mentioned entity or with an *affiliate of the first-mentioned entity, but include any liabilities related to any such shares, units or interests;

Thus, where the value of the CGT assets of a connected entity which is a trust are included in determining whether you satisfy the maximum net asset value test, the value of your interest in the trust is not also included.

Connected entity

Pursuant to subsection 328-125(1):

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.

Subsection 328-125(2) states, in part, that:

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

(ii) if the other entity is a partnership - the net income of the partnership; or

(iii) any distribution of capital by the other entity; …

A discretionary trust is generally one in which no objects of the trust have a fixed entitlement or interest in the trust funds (income or capital).

The Trust is not a discretionary trust.

Further, you have a right to receive greater than 40% of any distribution of the capital of the Trust. Thus pursuant to subsection 328-125(1) and section 152-15, the net value of the CGT assets included in your maximum net asset value calculation at the valuing time will include the whole of the market value of the CGT assets of the Trust at this time

As the assets of the Trust are included in determining whether you satisfy the maximum net asset value test, your interest in the Trust will not also be included in this test.