ATO ID 2003/1110: CGT small business concessions: connected entities - indirect control - subsection 328-125(7)
Date of decision: 24 November 2003
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

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
Summary: 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).

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
Subject references: Basic conditions for relief Capital gains tax CGT small business relief Maximum net asset value test