Private ruling: Small business CGT concessions, trust, affiliate, connected entity
Date of advice: 15 April 2020
Published: June 2020
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 1999

Ruling: Q1: Does individual B meet the criteria to be classified as an affiliate of the Trust? | A1: No

Relevant facts and circumstances: The Trust, through its corporate trustee, Company A, owns a property. The trust was established after 20 September 1985 and the property purchased soon afterwards. The shareholders of Company A are individual A and their spouse. The director of the corporate trustee is individual A. The primary beneficiaries of the trust are all siblings and residents of Australia. The property is land which has been leased to one of the primary beneficiaries, individual B, since the property was acquired. Individual B owns the business on the land as a sole trader. The Trust does not direct individual B on how to run their business. A copy of the Lease agreement was provided listing the lease conditions including: · the size of the land leased to individual B · the condition for the rent payment and the amount · the requirement for maintaining, repairing and servicing the property in good order · the term of the lease · the limitation on what individual B is type of business individual B can conduct on the land. The directors of the corporate trustee had been approached with a possible offer to purchase the property. That offer has now been withdrawn but there is another interested investor with a similar priced offer. The decision to sell the property was made by individual A following discussions with their siblings and spouse. The proceeds from the sale will be distributed equally to the primary beneficiaries who are all over 55 years of age.

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

Reasons for decision: Detailed Reasoning - Meaning of affiliate: The definition of affiliate is contained in section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997) and is set out below: (1) 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. (2) However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share. Trusts cannot be your affiliate. A trust may have an affiliate who is an individual. The ATO view on 'affiliates' can be found on the ATO website. Factors to be considered in regard to whether an individual is an affiliate of an entity is the extent that they show that they are acting in concert and expected to act in accordance with their directions in relation to their business affairs. Relevant factors to consider are: · the existence of a close family relationship between the parties · the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other · the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations · the actions of the parties. | Detailed Reasoning - Connected entity test: An entity is connected with another entity if the first entity and/or its affiliate controls the other or both entities are controlled by the same third entity in a manner as prescribed in section 328-125 of the ITAA 1997 (subsection 328-125(1) of the ITAA 1997). | Detailed Reasoning - Discretionary trust: An entity controls a discretionary trust, if the trustee or trustees of the trust could be expected to act in accordance with the wishes of the first entity and/or its affiliates (under subsection 328-125(3) of the ITAA 1997). Factors that can be considered when determining control include: the way the trustee has acted in the past, and the relationship between the trustee and the individual. In regard to a discretionary trust, subsection 328-125(4) of the ITAA 1997 states that a beneficiary controls a trust if they receive at least 40% of the amount of income or capital paid or applied by the trustee in any of the last four years before the financial year that the CGT event occurred. | Detailed Reasoning - Company: An entity controls a company if it, its affiliates or all of them together beneficially own, or have the right to acquire beneficial ownership of equity interests in the company that carry between them at least 40% (the control percentage) of the voting power in the company under paragraph 328-125(2)(b) of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: While the director of the trustee company, and individual B have a sibling relationship, the legislation makes it clear that this in itself is not enough to establish that individual B was your affiliate or a connected entity of the trustee of the trust. You have to look at the entire factual situation to determine this question. In these circumstances, the director of the trustee company has no control, does not act together or have common goals in the running of individual B's business. Individual B runs his business independently. The relationship of the trustee with individual B is that of a lessor and lessee based on a formal agreement in writing. There is enough separation between the trustee for the trust and individual B in relation to his business that they will not be considered affiliates. Also, the conditions for being a connected entity have not been satisfied. Individual B did not control the trustee of the trust, or did not receive more than 40% of the distribution of income or capital of the trust in any of the last four years before the CGT event, and did not own more than 40% of the shares in the trustee company. As a result individual B is not an affiliate of the Trust.