Edited version of private advice

Authorisation Number: 1052223916325

Date of advice: 22 February 2024

Ruling

Subject: CGT - active asset

Question

Is the farming property owned by the Trust A included in your calculation of the maximum net asset value test under section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

Approximately 20 years ago Company A was registered with you as the sole director.

Company A is trustee of Trust A.

Trust A purchased a share in a property. You have no involvement in the business operations on the property.

You received 100% of the distributions from Trust A in the previous financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-20

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

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

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

Reasons for decision

The term maximum net asset value test is defined in section 152-15 of the ITAA 1997 as follows:

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)).

Connected entities

The meaning of a connected entity is defined under section 328-125 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.

Subsection 328-125(2) of the ITAA 1997 provides that, for the purposes of the small business capital gains tax concessions, a taxpayer will be taken to have control of a partnership where the taxpayer and their affiliates own, or have the right to acquire ownership of, interests in the partnership that gives them the right to receive at least 40% of the income or capital distributions of the partnership.

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

Subsection 328-125(3) of the ITAA 1997 provides that an individual 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 individual, his/her affiliates, or the individual together with his/her affiliates.

Subsection 328-125(4) of the ITAA 1997 provides, in part, that an individual 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 individual, the individual's affiliates, or to the individual together with any of his/her affiliates.

In this case, Trust A owns a share of the property. Trust A distributed 100% of their earnings to you. Therefore, you are connected with the Trust A and the market value of the share of the property that Trust A owns will be included in your calculation of the maximum net asset value test.