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ATO Interpretative Decision

ATO ID 2003/1110

Income Tax

CGT small business concessions: connected entities - indirect control - subsection 328-125(7)
FOI status: may be released
  • This ATO ID was amended by replacing the references to the former section 152-30 with references to section 328-125 . Section 328-125 applies in relation to the 2007-08 income year and later years.
    This document has changed over time. View its history.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

If the beneficiaries of a discretionary trust control the trust for the purposes of subsection 328-125(1) of the Income Tax Assessment Act 1997 (ITAA 1997) are the beneficiaries then connected with each other because of the operation of subsection 328-125(7) of the ITAA 1997?

Decision

No. If the beneficiaries of a discretionary trust control the trust for the purposes of subsection 328-125(1) of the ITAA 1997 the beneficiaries are not then connected with each other because of the operation of subsection 328-125(7) of the ITAA 1997.

Facts

The taxpayer, an individual, carries on a farming business on land they own. The taxpayer is also a beneficiary of a family discretionary trust. The taxpayer's spouse, other family members and various charitable institutions are also potential beneficiaries of the family trust. The family trust derives income from various activities and has for many years distributed all of the net income of the trust to the taxpayer and their spouse in equal shares.

The taxpayer intends to sell the farm land and seek access to the small business CGT concessions in Division 152 of the ITAA 1997. Accordingly, they must determine whether they satisfy the $6 million maximum net asset value test and, in considering that test, whether certain entities are connected entities.

Reasons for Decision

Under subsection 328-125(1) of the ITAA 1997 an entity is connected with another entity if either entity controls the other entity in the way described in section 328-125 or both entities are controlled in that way by the same third entity.

Section 328-125 of the ITAA 1997 sets out the various ways an entity is taken to control another entity including the circumstances in which beneficiaries of a discretionary trust are taken to control the trust.

If a beneficiary is taken to control the trust, the beneficiary and the trust are connected with each other under paragraph 328-125(1)(a) of the ITAA 1997. However, this does not mean the trust controls the beneficiary.

Under subsection 328-125(7) of the ITAA 1997 an entity that directly controls a second entity is also taken to control any other entity that is directly or indirectly controlled by the second entity. That is, if A controls B and B controls C, A is also taken to control C.

Therefore, if a beneficiary of a discretionary trust is taken to control the trust and the trust also controls another entity, the beneficiary will also be taken to control, and hence be connected with, that other entity.

However, if the beneficiaries of a discretionary trust are taken to control the trust, the trust is not also taken to control the beneficiaries by that reason alone. Accordingly, subsection 328-125(1) of the ITAA 1997 does not apply to deem control of one beneficiary by another beneficiary and therefore the beneficiaries are not connected with each other simply because of the operation of subsection 328-125(7).

Note: The beneficiaries may be otherwise 'affiliated' or 'connected with' under sections 328-125 or 328-130 of the ITAA 1997. These concepts form part of the aggregation rules: (a) that apply to the small business entity test from the 2007-08 income year for entities seeking to determine whether they are a 'small business entity', and (b) in determining whether the CGT asset is an 'active asset'.
As from 1 July 2007, the term 'small business CGT affiliate' was replaced with the term 'affiliate' in section 328-130 of the ITAA 1997, and the term 'connected with' was retained in section 328-125 of the ITAA 1997.

Amendment History

Date of Amendment Part Comment
1 October 2014 Reasons for Decision Added reference to subsection 328-125(1) of the ITAA 1997
Note Updated to describe the effect of the changes to the legislation
Legislative References Corrected citation of subsection 328-125(1)

Date of decision:  24 November 2003

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   Division 152
   section 328-125
   subsection 328-125(1)
   paragraph 328-125(1)(a)
   subsection 328-125(7)
   section 328-130

Keywords
Basic conditions for relief
Capital gains tax
CGT small business relief
Maximum net asset value test

Siebel/TDMS Reference Number:  3794754; 1-5CELDSK

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  12 December 2003
Date reviewed:  23 June 2015

ISSN: 1445-2782

history
  Date: Version:
  24 November 2003 Original statement
You are here 11 November 2005 Updated statement

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