ATO ID 2010/106: Small business concessions: connected entities - 'control' of an unadministered deceased estate
Date of decision: 20 April 2010
Year of income: Year ended 30 June 2010
Business line: Private Groups and High Wealth Individuals

Issue
Are two unadministered deceased estates connected with each other under subsection 328-125(1) of the Income Tax Assessment Act 1997 (ITAA 1997) because they have the same executor or beneficiaries?

Decision
No. The two unadministered deceased estates are not connected with each other under subsection 328-125(1) of the ITAA 1997 because they have the same executor or beneficiaries.

Facts
Two unadministered deceased estates carry on business in partnership. The estates have the same executor and some of the same beneficiaries. One of the estates disposed of an asset it used in the business but which was not a partnership asset and made a capital gain. The estate is determining whether it qualifies for the small business capital gains tax (CGT) concessions in Division 152 of the ITAA 1997, and in doing so it must determine whether it satisfies the $6 million maximum net asset value test. As part of considering that test, the estate must determine whether the other estate is connected with it such that the other estate's assets are included in its net asset test.

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 of the ITAA 1997 or both entities are controlled in that way by the same third entity. An entity 'controls' another entity if it, its affiliates, or it together with its affiliates owns, or has the right to acquire the ownership of, interests in the other entity that carry between them the right to receive at least 40% of any distribution of income or capital by the other entity (paragraph 328-125(2)(a) of the ITAA 1997). A beneficiary of an unadministered deceased estate does not own, or have the right to acquire ownership of, interests in the unadministered estate which carry rights to receive any distributions of income or capital. The beneficiary therefore does not control (and hence is not connected with) the estate under paragraph 328-125(2)(a) of the ITAA 1997. The executor of an unadministered deceased estate also does not own, or have the right to acquire ownership of, interests which carry rights to receive distributions of income or capital. The executor therefore also does not control (and hence is not connected with) the estate under paragraph 328-125(2)(a) of the ITAA 1997. As such, there is no entity that controls an unadministered deceased estate under paragraph 328-125(2)(a) of the ITAA 1997. Therefore, although the two unadministered deceased estates have the same executor and beneficiaries, there is no entity that controls both estates and accordingly the estates are not connected with each other under subsection 328-125(1) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 152 subsection 328-125(1) paragraph 328-125(2)(a)
Related public rulings and determinations: Taxation Determination TD 2006/68
Subject references: Basic conditions for relief Capital gains tax CGT small business relief CGT deceased estates Connected entity