Private ruling: Active assets of discretionary trust
Published: November 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers: | 1. Did Property #1 disposed of by the Landholding Trust during the year ended 30 June 2014 constitute an active asset in accordance with section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) for the relevant period set out in section 152-35 of the ITAA 1997? | Yes. | 2. Did Property #2 disposed of by the directors of the Trustee during the year ended 30 June 2014 constitute an active asset in accordance with section 152-40 of the ITAA 1997 for the relevant period set out in section 152-35 of the ITAA 1997? | Yes.

Relevant facts and circumstances: Properties #1 and #2 are both post-CGT assets owned for more than 15 years. Property #1 is owned by the Landholding Trust and Property #2 by the directors of the Trustee company. From 1 July 1999, both properties were used in a business operated by the Trading Trust. There was no formal lease in place or rent paid. Both trusts had/have the same Trustee company and all co-directors are siblings and the only key employees of the business. For the years ended 30 June 2010, 2011 and 2012, together, the directors received over 40% of the annual distributions of the Trading Trust. During the year ended 30 June 2014, the properties were transferred to different related entities for nil consideration. The Trading Trust continues to carry on a business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130

Reasons for decision: Summary: Section 152-35 of the ITAA 1997 provides a CGT asset will satisfy the active asset test if you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period from when you acquired the asset until the earlier of the CGT event and the cessation of the business. Subsection 52-40(1) of the ITAA 1997 provides a CGT asset is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, your 'affiliate' or another 'entity that is connected with you'. The term 'affiliate' is defined in section 328-130 of the ITAA 1997. An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Paragraph 2.36 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Act 2007 states the following factors may have a bearing on whether an individual or company is an affiliate of an entity to the extent that they show that two or more entities are acting in concert: • family or close personal relationships; • financial relationships or dependencies; • relationships created through links such as common directors, partners, or shareholders; • the degree to which the entities consult with each other on business matters; or • whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity. The term 'entity that is connected with you' is explained in subsection 328-125(1) of the ITAA 1997. An entity is connected with another entity if: (a) either entity controls the other entity in a way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. In relation to a discretionary trust, section 328-125 of the ITAA 1997 provides two ways in which an entity (the first entity) can control a discretionary trust: • where the trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates or the first entity together with its affiliates (subsection 328-125(3)); or • where, for any of the 4 income years before that year, the trustee of the trust paid to the first entity and/or any of its affiliates at least 40% of the total amount of income or capital paid by the trustee for that year (subsection 328-125(4)). In your case, we are satisfied the directors were 'affiliates' of each other due to their close family business relationship, mutual directorship and mutual beneficial interests in the relevant trust income and capital. It follows we are satisfied that: (i) under subsection 328-125(3) of the ITAA 1997, Property #1 was an active asset of the Landholding Trust because it was used by the Trading Trust in the course of carrying on a business and both trusts, having the same trustee, were connected entities, due to being ultimately controlled by a third entity together with its affiliates, namely, the directors. (ii) under subsection 328-125(4) of the ITAA 1997, Property #2 was an active asset of the directors because Property #2 was used by the Trading Trust in the course of carrying on a business and it, the Trading Trust, was ultimately controlled by an entity together with its affiliates, namely, the directors, who together received 40% of the trust distributions for 3 of the 4 income years prior to the relevant CGT event. Further, the assets satisfy the active asset test because they were used for more than 7½ years in a business.