Taxation Determination
TD 2006/67
Income tax: capital gains: small business concessions: does a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee control the trust for the purposes of subparagraph 152-30(2)(c)(ii) of the Income Tax Assessment Act 1997?
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Ruling
1. Yes. A person who has the power to remove the trustee of a discretionary trust and appoint a new trustee controls the trust for the purposes of subparagraph 152-30(2)(c)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997). This is only relevant if subsection 152-30(4) of the ITAA 1997 does not apply.
Example 1
2. Discretionary Trust (DT) makes distributions of 25% each to beneficiaries B1, B2, B3 and B4 in each of the last four years. None of the beneficiaries are small business CGT affiliates of each other. The terms of the trust deed specifies that the appointor has the power to remove any trustee and appoint a new trustee.
3. As there is no beneficiary (together with any small business CGT affiliate) who has received a distribution of at least 40% of the total distribution, none of the beneficiaries will control DT under subsection 152-30(5) of the ITAA 1997. As none of the beneficiaries control the trust, subsection 152-30(4) of the ITAA 1997 will not apply.
4. As the terms of the trust permit the appointor to remove and appoint trustees, the appointor controls the trust under subparagraph 152-30(2)(c)(ii) of the ITAA 1997.
Example 2
5. Discretionary Trust (DT) makes distributions of 25% each to beneficiaries B1, B2, B3 and B4 in one of the last four years. B1 and B2 are small business CGT affiliates of each other. The trust deed specifies that the appointor has the power to remove any trustee and appoint a new trustee.
6. As B1 and B2 are small business CGT affiliates and together they received a distribution of 50% of the total distribution from DT, they each control DT for the purposes of subsection 152-30(5) of the ITAA 1997.
7. Where a beneficiary controls the trust for the purposes of 152-30(5) of the ITAA 1997 and that beneficiary is not a small business CGT affiliate of the trustee, or of a person who has the power to determine how the trustee exercises the power to make payments of income or capital, subsection 152-30(4) of the ITAA1997 precludes subparagraph 152-30(2)(c)(ii) of the ITAA 1997 from applying.
8. Even though the terms of the trust permit the appointor to remove and appoint trustees, the appointor does not control the trust under subparagraph 152-30(2)(c)(ii) of the ITAA 1997.
Date of effect
9. This Determination applies to years commencing both before and after its date of issue. However, the Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Commissioner of Taxation
15 November 2006
Appendix 1 - Explanation
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This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.
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Explanation
10. To qualify for the small business capital gains tax (CGT) concessions a taxpayer must, among other things, satisfy the $5 million net asset test in section 152-15 of the ITAA 1997. As part of this test, the taxpayer must include in their net asset calculation the net value of the CGT assets of any entities connected with them. Under paragraph 152-30(1)(a) of the ITAA 1997, an entity is connected with another entity if either entity controls the other entity.
11. Under paragraph 152-30(2)(c) of the ITAA 1997 an entity may control a discretionary trust if the entity, its small business CGT affiliates, or all of them together:
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- is/are the trustee or trustees of the discretionary trust (other than the Public Trustee of a state or territory); or
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- has/have the power to determine how the trustee or trustees exercise the power to make any payment of income or capital to or for the benefit of beneficiaries of the trust.
12. However, an entity may control a discretionary trust in this way only if certain beneficiaries do not control the trust (subsection 152-30(4) of the ITAA 1997). If a beneficiary of a discretionary trust controls the trust under subsection 152-30(5) of the ITAA 1997 and the beneficiary is not a small business CGT affiliate of the trustee, or of a person who has the power to determine how the trustee exercises the power to make payments of income or capital, the trustee or that other person will not control the discretionary trust.
13. On the other hand, if there is no beneficiary who controls the trust under subsection 152-30(5) of the ITAA 1997 or, if all the beneficiaries who control the trust are small business CGT affiliates of the trustee, or of a person who has the power to determine how the trustee exercises the power to make payments of income or capital, subsection 152-30(4) of the ITAA 1997 will not apply and the trustee or that other person will control the trust under paragraph 152-30(2)(c) of the ITAA 1997.
14. Where the trust deed specifies that the appointor of a trust has the power to remove any trustee and appoint a new trustee, it is considered that the appointor has effective power to determine the manner in which the trustee exercises their power to make distributions.
15. In such situations, the appointor controls the discretionary trust and the appointor and the discretionary trust are connected with each other under paragraph 152-30(1)(a) of the ITAA 1997.
Note
16. As noted in the Treasurer's Press Release No. 38 of 2006 (9 May 2006), the Board of Taxation's report on its Post-Implementation Review of the small business CGT concessions contains a number of administrative recommendations. This Taxation Determination is part of the Commissioner's response to Recommendation 6.4 of the Board's report.
Previously issued in draft form as TD 2006/D28
References
ATO references:
NO 2006/8993
Related Rulings/Determinations:
TR 2006/10
Subject References:
basic conditions for relief
capital gains
capital gains tax
CGT small business relief
connected entity
controlling individual
controlling individual test
small business relief
Legislative References:
ITAA 1997 152-15
ITAA 1997 152-30(1)(a)
ITAA 1997 152-30(2)(c)
ITAA 1997 152-30(2)(c)(ii)
ITAA 1997 152-30(4)
ITAA 1997 152-30(5)
TAA 1953
Other References:
Treasurer's Press Release No. 38 of 2006 (9 May 2006)
| Date: | Version: | Change: | |
| You are here | 15 November 2006 | Original ruling | |
| 19 December 2012 | Withdrawn |