Taxation Ruling TR 2015/4
Date of effect: 25 November 2015

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling. [Note: This is a consolidated version of this document. Refer to the Legal database (www.ato.gov.au/law) to check its currency and to view the details of all changes.]


Ruling: 4. Where a connected beneficiary has a UPE to receive an amount of income or capital from a trust, the value of that UPE [6] will be included once, and once only, in determining whether or not that trust satisfies the maximum net asset value test in section 152-15. The way in which the value of that UPE is so included will vary depending on the character of the beneficiary's entitlement and the way that funds representing the UPE are held. | Sub-trust: 5. Where the funds representing the connected beneficiary's UPE have been set aside on a separate trust (the sub-trust), the net asset value calculation for the main trust will include the following: | No sub-trust: 6. Where funds representing the connected beneficiary's UPE have not been set aside on sub-trust, the net asset value calculation for the main trust will include the following: | Absolutely entitled: 7. Where a connected beneficiary's UPE is an absolute entitlement to one or more trust assets, paragraphs 5 and 6 of this Ruling do not apply and the net asset value calculation for the trust will include the following: | Example 1 - Sub-trust: 8. The Shiny Artichoke Trust carries on a business of producing plastic display vegetables and other plastic products. 9. In the 2013 income year, the trust derives $3 million trust income. On 30 June 2013, Trusty Co (the trustee of the Shiny Artichoke Trust) resolves to make Emmett (a connected beneficiary) presently entitled to 100% of the trust's income. Trusty Co resolves to set aside the amount on sub-trust for Emmett's sole benefit. It records in the accounts of the Shiny Artichoke Trust that the amount is held on sub-trust for Emmett. 10. The trust deed of the Shiny Artichoke Trust provides that while a beneficiary's entitlement is held on sub-trust, the trustee may invest the property of the sub-trust as it sees fit. Trusty Co uses the $3 million held on sub-trust for Emmett to invest in shares. 11. On 1 December 2013, the Shiny Artichoke Trust makes a capital gain on the sale of a factory. It seeks to apply the small business concessions to reduce that gain. It may qualify for relief if it satisfies the maximum net asset value test in section 152-15 (see subparagraph 152-10(1)(c)(ii)). 12. Being held on sub-trust, the $3 million no longer forms part of the assets of the Shiny Artichoke Trust. Accordingly, in calculating the net value of the Shiny Artichoke Trust's CGT assets, the amount of Emmett's UPE will not be accounted for as an asset or liability. The other CGT assets of the Shiny Artichoke Trust have a total market value of $5 million just before the CGT event on 1 December 2013. Table 2: Net value of CGT assets of Shiny Artichoke Trust 13. The sub-trust is connected with the Shiny Artichoke Trust, and therefore the net value of the CGT assets of the sub-trust will be included in the net asset value of the Shiny Artichoke Trust under paragraph 152-15(b). The assets of the sub-trust consist of the $3 million in shares being held for Emmett. Emmett is entitled to that corpus and any income derived thereon. In these circumstances, there is no presently existing obligation on the sub-trust to pay $3 million to Emmett. The sub-trust does not have any relevant legal or equitable liability related to its assets. Table 3: Net value of CGT assets of sub-trust 14. Emmett is a connected beneficiary of the Shiny Artichoke Trust, so the net value of his CGT assets must be taken into account in calculating that trust's net asset value. Emmett's right to payment of his UPE from Trusty Co (as trustee of the sub-trust) is a CGT asset, but as a relevant 'interest' in the sub-trust for the purposes of paragraph 152-20(2)(a), it is a disregarded asset. The value of the UPE is therefore not included in the net value of Emmett's CGT assets. Table 4: Net value of CGT assets of Emmett 15. The net asset value of the Shiny Artichoke Trust will therefore be the same as determined for Example 1. Table 5: Net asset value of Shiny Artichoke Trust 16. As Shiny Artichoke Trust's net asset value exceeded $6 million just before the CGT event, it does not satisfy the maximum net asset value test in section 152-15 and is not entitled to CGT small business relief under Division 152. | Example 2 - No sub-trust: 17. Assume the same facts as Example 1, except rather than setting aside the amount of Emmett's UPE on sub-trust, Trusty Co records the amount as owing to Emmett in the books of account of the trust, and leaves it commingled with other trust funds. 18. Trusty Co's obligation as trustee of the Shiny Artichoke Trust to pay Emmett $3 million is a liability within the meaning of paragraph 152-20(1)(a). The liability is related to the CGT assets of the trust, and is subtracted from their market value in determining the net asset value of the trust's CGT assets just before the CGT event. Table 6: Net value of CGT assets of Shiny Artichoke Trust 19. As Emmett is a connected beneficiary of the Shiny Artichoke Trust, the net value of his CGT assets must be taken into account in calculating the trust's net asset value in accordance with paragraph 152-15(b). Emmett's right to payment of his UPE is a CGT asset. The UPE is not a share, unit or other interest that is disregarded under paragraph 152-20(2)(a), so the market value of the UPE is included in the net value of Emmett's CGT assets. Emmett has no other CGT assets relevant to determining this value. Table 7: Net value of CGT assets of Emmett 20. The net asset value of the Shiny Artichoke Trust is obtained by adding together the net value of it and Emmett's CGT assets. Table 8: Net asset value of Shiny Artichoke Trust 21. As Shiny Artichoke Trust's net asset value exceeded $6 million just before the CGT event, it does not satisfy the maximum net asset value test in section 152-15 and is not entitled to CGT small business relief under Division 152.

Examples: Example 1: Sub-trust 8. The Shiny Artichoke Trust carries on a business of producing plastic display vegetables and other plastic products. 9. In the 2013 income year, the trust derives $3 million trust income. On 30 June 2013, Trusty Co (the trustee of the Shiny Artichoke Trust) resolves to make Emmett (a connected beneficiary) presently entitled to 100% of the trust's income. Trusty Co resolves to set aside the amount on sub-trust for Emmett's sole benefit. It records in the accounts of the Shiny Artichoke Trust that the amount is held on sub-trust for Emmett. 10. The trust deed of the Shiny Artichoke Trust provides that while a beneficiary's entitlement is held on sub-trust, the trustee may invest the property of the sub-trust as it sees fit. Trusty Co uses the $3 million held on sub-trust for Emmett to invest in shares. 11. On 1 December 2013, the Shiny Artichoke Trust makes a capital gain on the sale of a factory. It seeks to apply the small business concessions to reduce that gain. It may qualify for relief if it satisfies the maximum net asset value test in section 152-15 (see subparagraph 152-10(1)(c)(ii)). 12. Being held on sub-trust, the $3 million no longer forms part of the assets of the Shiny Artichoke Trust. Accordingly, in calculating the net value of the Shiny Artichoke Trust's CGT assets, the amount of Emmett's UPE will not be accounted for as an asset or liability. The other CGT assets of the Shiny Artichoke Trust have a total market value of $5 million just before the CGT event on 1 December 2013. Table 2: Net value of CGT assets of Shiny Artichoke Trust 13. The sub-trust is connected with the Shiny Artichoke Trust, and therefore the net value of the CGT assets of the sub-trust will be included in the net asset value of the Shiny Artichoke Trust under paragraph 152-15(b). The assets of the sub-trust consist of the $3 million in shares being held for Emmett. Emmett is entitled to that corpus and any income derived thereon. In these circumstances, there is no presently existing obligation on the sub-trust to pay $3 million to Emmett. The sub-trust does not have any relevant legal or equitable liability related to its assets. Table 3: Net value of CGT assets of sub-trust 14. Emmett is a connected beneficiary of the Shiny Artichoke Trust, so the net value of his CGT assets must be taken into account in calculating that trust's net asset value. Emmett's right to payment of his UPE from Trusty Co (as trustee of the sub-trust) is a CGT asset, but as a relevant 'interest' in the sub-trust for the purposes of paragraph 152-20(2)(a), it is a disregarded asset. The value of the UPE is therefore not included in the net value of Emmett's CGT assets. Table 4: Net value of CGT assets of Emmett 15. The net asset value of the Shiny Artichoke Trust will therefore be the same as determined for Example 1. Table 5: Net asset value of Shiny Artichoke Trust 16. As Shiny Artichoke Trust's net asset value exceeded $6 million just before the CGT event, it does not satisfy the maximum net asset value test in section 152-15 and is not entitled to CGT small business relief under Division 152. | Example 2: No sub-trust 17. Assume the same facts as Example 1, except rather than setting aside the amount of Emmett's UPE on sub-trust, Trusty Co records the amount as owing to Emmett in the books of account of the trust, and leaves it commingled with other trust funds. 18. Trusty Co's obligation as trustee of the Shiny Artichoke Trust to pay Emmett $3 million is a liability within the meaning of paragraph 152-20(1)(a). The liability is related to the CGT assets of the trust, and is subtracted from their market value in determining the net asset value of the trust's CGT assets just before the CGT event. Table 6: Net value of CGT assets of Shiny Artichoke Trust 19. As Emmett is a connected beneficiary of the Shiny Artichoke Trust, the net value of his CGT assets must be taken into account in calculating the trust's net asset value in accordance with paragraph 152-15(b). Emmett's right to payment of his UPE is a CGT asset. The UPE is not a share, unit or other interest that is disregarded under paragraph 152-20(2)(a), so the market value of the UPE is included in the net value of Emmett's CGT assets. Emmett has no other CGT assets relevant to determining this value. Table 7: Net value of CGT assets of Emmett 20. The net asset value of the Shiny Artichoke Trust is obtained by adding together the net value of it and Emmett's CGT assets. Table 8: Net asset value of Shiny Artichoke Trust 21. As Shiny Artichoke Trust's net asset value exceeded $6 million just before the CGT event, it does not satisfy the maximum net asset value test in section 152-15 and is not entitled to CGT small business relief under Division 152. 22. This Ruling applies to years of income commencing both before and after its date of issue. However, this Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10 Public Rulings). It also does not apply in circumstances where a taxpayer takes a position inconsistent with it (for example, by taking a position consistent with some of the dot-points but not others in paragraph 5 of this Ruling). Commissioner of Taxation 25 November 2015 Background Maximum net asset value test 23. To qualify for any one of the small business CGT concessions in Division 152, an entity must satisfy a number of basic conditions in subsection 152-10(1). One such condition is the maximum net asset value test. [7] 24. Broadly, the maximum net asset value test seeks to treat a small business entity and all of its related entities as if they were a single economic unit, for the purposes of determining whether its size is below the relevant statutory threshold. [8] Specifically, an entity satisfies the maximum net asset value test if, just before the relevant CGT event, the net value of its CGT assets and those of its connected entities and affiliates is $6 million or less. [9] 25.The 'net value of the CGT assets' of an entity is defined as being the sum of the market values of those assets less the sum of the liabilities related to those assets and certain leave and other provisions. [10] Because the maximum net asset value test totals the net assets of each of the entities in the relevant group, there are also specific provisions to ensure that value otherwise reflected in more than one entity is not double counted. [11] Specifically, any 'shares, units or other interests (except debt)' that an entity holds in a connected entity or an entity connected with an affiliate are disregarded. [12] UPEs 26. When determining the net asset value of a trust, the following issues arise in relation to the treatment of a UPE: 27. In considering these issues, it should be remembered that in treating relevantly connected entities and affiliates as a single economic unit for the purposes of the maximum net asset value test, special rules have been provided to avoid double counting. [13] In this context, if a UPE were to be counted in the net value of the assets of a connected beneficiary, then a corresponding liability should be taken into account in the net value of the assets of the trust to avoid double counting. But equally, if a UPE were disregarded from the net value of the assets of a connected beneficiary, it would not be appropriate to recognise a liability in the trust, as the value of the trust assets to which a beneficiary with a UPE is entitled would not then be accounted for anywhere in the net asset value of the single economic unit comprising the trust and connected beneficiary. 28. While the net outcome is the same in each case, the technical reasoning differs depending on whether: 29. This Ruling is divided into three parts to explain how the trust's net asset value will be calculated in three common scenarios: Part A: Sub-trust 30. While a UPE remains outstanding, trust property representing that UPE may be held on sub-trust solely for the connected beneficiary. 31. The terms on which a UPE is held on sub-trust may vary, but generally, where a UPE is held on sub-trust: 32. The net value of the CGT assets of the sub-trust (including the UPE) will then be included in calculating the net asset value of the main trust if the sub-trust is 'connected with' the main trust for the purposes of section 328-125. Is the sub-trust 'connected with' the main trust? 33. Where the amount of a connected beneficiary's UPE is held on sub-trust, the connected beneficiary is the sole beneficiary of that trust, with all the interests to distributions of its income and capital. Accordingly, the connected beneficiary controls the sub-trust. [15] 34. A sub-trust will therefore be connected with the main trust in one of three ways: 35. Thus in every situation where the main trust has placed a UPE of a connected beneficiary on sub-trust, that sub-trust will be 'connected with' the main trust and included in its net asset value calculation. 36. The main trust's net asset value under section 152-15 will therefore be calculated as follows. Net value of the CGT assets of the main trust 37. The property representing the UPE has left the main trust, and now forms part of the assets of the sub-trust. Accordingly, the main trust will not have any asset or liability in respect of the UPE. Net value of the CGT assets of the sub-trust Is the UPE a liability of the sub-trust? 38. Taxation Determination TD 2007/14 Income tax: capital gains: small business concessions: what 'liabilities' are included in the calculation of the 'net value of the CGT assets' of an entity in the context of subsection 152-20(1) of the Income Tax Assessment Act 1997? explains that the word 'liabilities' in paragraph 152 20(1)(a) takes its ordinary meaning, and extends to: 39. Where the amount of a UPE has been set aside on sub-trust, there is no presently existing legal or equitable obligation on the sub-trustee to pay an amount to the connected beneficiary. Rather, the entitlement has been dealt with by being so set aside and the existence of any further obligation in these circumstances is contingent on the connected beneficiary exercising their right as sole beneficiary to call for transfer of all the property of the sub-trust to them. [22] Until then, the trustee of the sub-trust is simply holding the funds (being its trust corpus) on trust for the connected beneficiary, subject to the relevant terms of that trust. 40. The sub-trust therefore will not have any liability in respect of the UPE for the purposes of paragraph 152-20(1)(a). But as the amount of the UPE is sitting amongst the funds of the sub-trust, its value will be counted as part of the sub-trust's assets. 41. Note even if the UPE were regarded as a relevant liability of the sub-trust, then, as an obligation due in equity and therefore a relevant debt for the purpose of paragraph 152-20(2)(a), it would no longer be a disregarded asset of the connected beneficiary. Accordingly, the net result would be the same as outlined above. Net value of the CGT assets of the connected beneficiary Is the UPE a CGT asset of the connected beneficiary? 42. A CGT asset is defined broadly as any kind of property or legal or equitable right that is not property. [23] 43. A beneficiary with a UPE held on sub-trust has an equitable right to call for payment of the corpus of that sub-trust (and often also the income generated thereon). That equitable right is a CGT asset within the definition in subsection 108-5(1). 44. However, that asset is disregarded if it is an 'other interest' within the meaning of that term in the expression 'share, unit or other interest' in paragraph 152-20(2)(a). 45. 'Other interests' (or 'interests' alone) is not defined in the ITAA 1997. As a statutory term, it must be considered in the context in which it appears. [24] As expressed by Lord Hoffman in the House of Lords decision of R v. Brown: 46. The term 'other interests' is part of the phrase 'shares, units or other interests'. As such, it is appropriate to consider its meaning as part of that complete phrase rather than the word 'interests' in isolation. 47. 'Shares' and 'units' are a narrow subset of what might generally be called 'interests'. A 'share' has been broadly described as an aliquot [26] interest of a shareholder in a company, with reference to which the shareholder has certain rights. [27] It is comprised of a bundle of rights, [28] which may include rights to participate in dividends while the company is a going concern and the right to participate in the distribution of assets available to shareholders upon a winding up. [29] 48. A 'unit' is not defined in the ITAA 1997, but has been judicially described as an 'aliquot share or interest in the undivided assets of a trust'. [30] Like a share, a unit gives the unit holder a parcel of rights, which may include rights to participate in the trust fund including a right to share in trust income and rights in individual trust assets. Like a share, it is typically an interest 'in which a taxpayer invests'. [31] 49. Thus 'shares' and 'units' are both members of a class of 'interest' which wholly divides up the equity or capital of an entity into portions. The holder of such an interest usually has not just one right but a bundle of rights that include rights to participate in things which may happen in the future and the entirety of which represents something like an investment stake in the entity. 50. Considering 'shares, units or other interests' as a complete phrase would suggest that 'other interests' takes on a meaning akin to 'shares' and 'units'. That is, the more general phrase 'other interests' is constrained by reference to the more specific category that 'shares' and 'units' denotes. 51. A connected beneficiary with a UPE held on sub-trust is the sole beneficiary of that sub-trust, and has a fixed interest in the trust property. Often, it will also have rights to the income generated from investment of the trust corpus. The interest of a connected beneficiary in a sub-trust therefore bears some similarity in nature to a 'unit' or 'share' and is a relevant 'other interest' for the purposes of paragraph 152-20(2)(a). The value of the interest is thus disregarded in calculating the net value of the CGT assets of the connected beneficiary. Summary 52. Where a UPE is held on sub-trust for a connected beneficiary who is not absolutely entitled to any main trust asset, the section 152-15 net asset value calculation for the main trust will be as follows: Part B: No sub-trust Net value of the CGT assets of the trust Is a UPE a liability of the trustee? 53. Where the amount of a connected beneficiary's UPE has not been placed on sub-trust and the connected beneficiary is not absolutely entitled to any trust asset, all that exists is an equitable obligation on the trustee to pay the connected beneficiary an amount of trust income or capital. That is a presently existing equitable obligation to pay a sum certain or an ascertainable sum that is a 'liability' within the meaning of paragraph 152-20(1)(a). 54. In determining the net value of the trust's CGT assets, that liability is subtracted from the sum of the market values of those assets if it is 'related to the assets'. [32] 55. A UPE is an equitable obligation on the trustee in respect of trust assets (typically, it is an obligation to pay, apply, or set aside certain trust assets or a sum from trust assets - most often a specific amount of income or capital of the trust for the benefit of a particular beneficiary). At its core, it results from an appointment of income or capital made under the terms of the trust, of particular trust assets or a particular sum to be paid from trust assets. In a broad sense, it is an entitlement to a relevant share of the trust fund itself; and in this broad sense relates to the trust fund (and therefore the assets of the trust). 56. This is consistent with comments made in obiter by the Full Federal Court in Bell, that in the ordinary case where a UPE exists and must be satisfied from trust assets, that liability will relate to the assets of the trust, notwithstanding the beneficiary's typical inability to call for any specific trust asset to be paid to them. [33] 57. However, the key liability under consideration in Bell was not actually an obligation to pay a UPE but rather an obligation to repay a loan taken out to fund payment of a UPE. The Court observed: 58. Whether a UPE relates to the CGT assets of an entity will ultimately depend on the facts and circumstances of the particular case. An obligation to pay a UPE as defined in paragraph 3 of this Ruling will relate to trust assets within the meaning of paragraph 152-20(1)(a) if the entitlement is to a part of the trust fund (that is, to a particular item or amount of the income or capital of the trust fund). 59. The relationship is different in cases where the parties agree to treat the amount of the UPE as a debt at common law owed by the trust to the beneficiary, [35] or this is effected by the terms of the trust deed. [36] In such cases, a liability of the trustee to repay the loan (plus interest, if any) replaces, or arises instead of, the UPE. As Bell itself indicates, [37] whether a liability to repay a borrowing of the trust relates to the assets of the trust is dependent on the use to which the borrowed funds are put. Net value of the CGT assets of the connected beneficiary Is a UPE a CGT asset of the connected beneficiary? 60. A connected beneficiary with a UPE has an equitable right to receive an amount of trust income or capital. That equitable right is a CGT asset within the definition in subsection 108-5(1). 61. But as noted above, that asset is disregarded if it is an 'other interest' within the meaning of that term in paragraph 152-20(2)(a). 62. A UPE that is not held on sub-trust represents a beneficiary's right to receive a particular amount of trust income or capital, but no kind of investment-like interest in the trust itself. It is a complete, (unapportioned and undivided) one-off right to demand immediate payment, as opposed to a bundle of rights that typically include the right to participate in future happenings (as would be the case if the funds representing the UPE were instead set aside on a separate sub-trust). 63. By nature, a UPE not held on sub-trust is therefore not sufficiently akin to the interests represented by shares and units. 64. Moreover, unlike a typical share or a unit, counting such a UPE as a relevant asset of the beneficiary will not result in a double counting of the assets of a relevant economic unit in respect of which the maximum net asset value test is being applied. [38] This is because a liability corresponding to the beneficiary's UPE will be recognised at the trust level, and eliminates any potential double counting of the value of the UPE. 65. Excluding a UPE from being a relevant 'other interest' that is disregarded in working out the net value of the CGT assets of an entity is therefore consistent with the intended purpose of paragraph 152-20(2)(a). 66. A UPE not held on sub-trust is therefore not relevantly akin to a share or unit and not an 'other interest' for the purposes of paragraph 152-20(2)(a). Accordingly, it is taken into account in working out the net asset value of the connected beneficiary. Is a UPE a 'debt'? 67. Even if a UPE that is not held on sub-trust is a relevant 'other interest' (which the Commissioner does not accept), it is still specifically excluded from the scope of paragraph 152-20(2)(a) (so will be included in calculating the net asset value of the connected beneficiary) if it is a relevant 'debt'. 68. The word 'debt' must be interpreted in the context in which it appears, with regard to the purpose of the provision in which it is used. [39] For example, in GE Crane Menzies J (Barwick CJ, McTiernan, Walsh and Gibbs JJ agreeing) considered that the term 'debt' used in the former bad debt deduction provisions [40] should not be interpreted narrowly to encompass only common law debts, instead deciding that in context it should also include debts due in equity. [41] 69. The equitable obligation on a trustee to pay the amount of a UPE to a beneficiary is not generally a debt at law. [42] However, where a beneficiary has been made presently entitled to income or capital that has come home to the trust, the trustee will be under an equitable obligation to pay such amounts to the beneficiary (as discussed in paragraphs 52 to 54 of this Ruling). Such obligations on the trustee have been referred to by the courts as equitable debts. [43] 70. In the context of provisions that broadly seek to calculate the value of the assets of an economic group of entities net of its liabilities (including present equitable obligations), [44] the specific provisions designed to prevent double counting are not designed to disregard assets which have already been reduced by liabilities of a related entity. Accordingly, assets that would otherwise be disregarded as representing a double counting of value continue to be taken into account if they are debt. In this context, the Commissioner considers that the reference to 'debt' in paragraph 152-20(2)(a) is intended to extend beyond common law debts to include relevant obligations due merely in equity. 71. Accordingly, even if a UPE that is not held on sub-trust is an 'other interest' for the purposes of paragraph 152-20(2)(a) (which is not accepted), it is a relevant 'debt' for the purpose of that provision. The UPE is therefore taken into account in working out the net asset value of the connected beneficiary. Summary 72. Where a UPE is not held on sub-trust and the connected beneficiary is not absolutely entitled to any trust asset, the section 152-15 net asset value calculation for the trust will be as follows: Part C: Absolutely entitled 73. Where the connected beneficiary's UPE comprises an absolute entitlement to one or more trust assets, those assets are treated as the connected beneficiary's assets for various purposes including the maximum net asset value test. [45] The consequences for the trust's net asset value calculation under section 152-15 are as follows. Net value of the CGT assets of the trust Is the UPE a liability of the trust? 74. As the assets corresponding to the UPE are treated as held by the connected beneficiary rather than the trust, the trust is taken not to have a presently existing equitable obligation to pay anything to the connected beneficiary in respect of the UPE. Accordingly, the value of the UPE will not be included anywhere in the net value of the CGT assets of the trust as either an asset or a corresponding liability. Net value of the CGT assets of the connected beneficiary Is the UPE a CGT asset of the connected beneficiary? 75. The specific trust asset (or assets) to which the connected beneficiary is absolutely entitled will fall within the wide definition of CGT asset in subsection 108-5(1). 76. Subsection 152-20(2) lists particular assets that are disregarded in working on the net value of the CGT assets of an entity. [46] Provided none of these exceptions apply to the specific asset to which the beneficiary is absolutely entitled, the value of the asset will be included in the net value of the CGT assets of the connected beneficiary. Summary 77. Where a connected beneficiary's UPE is an absolute entitlement to one or more trust assets, the value of the UPE will factor into the trust's net asset value calculation once, as part of the net value of the CGT assets of the connected beneficiary. Summary of outcomes 78. The net result is the same regardless of whether a UPE is held on sub-trust and regardless of whether the connected beneficiary is absolutely entitled to an asset of the trust as against the trustee: the market value of the UPE (or the funds representing it) will be included once only in the main trust's net asset value calculation under section 152-15, as part of the net value of the CGT assets of either the connected beneficiary or the sub-trust. 79. The following table summarises where the value of the UPE will be factored into calculating the net asset value of the trust (or main trust, where relevant) for each of the scenarios set out in Parts A, B and C of this Ruling: Table 9: Net value of CGT assets summary 80. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Previously issued in draft form as TR 2015/D2

Appendix: Maximum net asset value test: 23. To qualify for any one of the small business CGT concessions in Division 152, an entity must satisfy a number of basic conditions in subsection 152-10(1). One such condition is the maximum net asset value test. [7] 24. Broadly, the maximum net asset value test seeks to treat a small business entity and all of its related entities as if they were a single economic unit, for the purposes of determining whether its size is below the relevant statutory threshold. [8] Specifically, an entity satisfies the maximum net asset value test if, just before the relevant CGT event, the net value of its CGT assets and those of its connected entities and affiliates is $6 million or less. [9] 25.The 'net value of the CGT assets' of an entity is defined as being the sum of the market values of those assets less the sum of the liabilities related to those assets and certain leave and other provisions. [10] Because the maximum net asset value test totals the net assets of each of the entities in the relevant group, there are also specific provisions to ensure that value otherwise reflected in more than one entity is not double counted. [11] Specifically, any 'shares, units or other interests (except debt)' that an entity holds in a connected entity or an entity connected with an affiliate are disregarded. [12] | UPEs: 26. When determining the net asset value of a trust, the following issues arise in relation to the treatment of a UPE: 27. In considering these issues, it should be remembered that in treating relevantly connected entities and affiliates as a single economic unit for the purposes of the maximum net asset value test, special rules have been provided to avoid double counting. [13] In this context, if a UPE were to be counted in the net value of the assets of a connected beneficiary, then a corresponding liability should be taken into account in the net value of the assets of the trust to avoid double counting. But equally, if a UPE were disregarded from the net value of the assets of a connected beneficiary, it would not be appropriate to recognise a liability in the trust, as the value of the trust assets to which a beneficiary with a UPE is entitled would not then be accounted for anywhere in the net asset value of the single economic unit comprising the trust and connected beneficiary. 28. While the net outcome is the same in each case, the technical reasoning differs depending on whether: 29. This Ruling is divided into three parts to explain how the trust's net asset value will be calculated in three common scenarios: | Part A: Sub-trust: 30. While a UPE remains outstanding, trust property representing that UPE may be held on sub-trust solely for the connected beneficiary. 31. The terms on which a UPE is held on sub-trust may vary, but generally, where a UPE is held on sub-trust: 32. The net value of the CGT assets of the sub-trust (including the UPE) will then be included in calculating the net asset value of the main trust if the sub-trust is 'connected with' the main trust for the purposes of section 328-125. | Is the sub-trust 'connected with' the main trust?: 33. Where the amount of a connected beneficiary's UPE is held on sub-trust, the connected beneficiary is the sole beneficiary of that trust, with all the interests to distributions of its income and capital. Accordingly, the connected beneficiary controls the sub-trust. [15] 34. A sub-trust will therefore be connected with the main trust in one of three ways: 35. Thus in every situation where the main trust has placed a UPE of a connected beneficiary on sub-trust, that sub-trust will be 'connected with' the main trust and included in its net asset value calculation. 36. The main trust's net asset value under section 152-15 will therefore be calculated as follows. | Net value of the CGT assets of the main trust: 37. The property representing the UPE has left the main trust, and now forms part of the assets of the sub-trust. Accordingly, the main trust will not have any asset or liability in respect of the UPE. | Net value of the CGT assets of the sub-trust: Is the UPE a liability of the sub-trust? 38. Taxation Determination TD 2007/14 Income tax: capital gains: small business concessions: what 'liabilities' are included in the calculation of the 'net value of the CGT assets' of an entity in the context of subsection 152-20(1) of the Income Tax Assessment Act 1997? explains that the word 'liabilities' in paragraph 152 20(1)(a) takes its ordinary meaning, and extends to: 39. Where the amount of a UPE has been set aside on sub-trust, there is no presently existing legal or equitable obligation on the sub-trustee to pay an amount to the connected beneficiary. Rather, the entitlement has been dealt with by being so set aside and the existence of any further obligation in these circumstances is contingent on the connected beneficiary exercising their right as sole beneficiary to call for transfer of all the property of the sub-trust to them. [22] Until then, the trustee of the sub-trust is simply holding the funds (being its trust corpus) on trust for the connected beneficiary, subject to the relevant terms of that trust. 40. The sub-trust therefore will not have any liability in respect of the UPE for the purposes of paragraph 152-20(1)(a). But as the amount of the UPE is sitting amongst the funds of the sub-trust, its value will be counted as part of the sub-trust's assets. 41. Note even if the UPE were regarded as a relevant liability of the sub-trust, then, as an obligation due in equity and therefore a relevant debt for the purpose of paragraph 152-20(2)(a), it would no longer be a disregarded asset of the connected beneficiary. Accordingly, the net result would be the same as outlined above. | Net value of the CGT assets of the connected beneficiary: Is the UPE a CGT asset of the connected beneficiary? 42. A CGT asset is defined broadly as any kind of property or legal or equitable right that is not property. [23] 43. A beneficiary with a UPE held on sub-trust has an equitable right to call for payment of the corpus of that sub-trust (and often also the income generated thereon). That equitable right is a CGT asset within the definition in subsection 108-5(1). 44. However, that asset is disregarded if it is an 'other interest' within the meaning of that term in the expression 'share, unit or other interest' in paragraph 152-20(2)(a). 45. 'Other interests' (or 'interests' alone) is not defined in the ITAA 1997. As a statutory term, it must be considered in the context in which it appears. [24] As expressed by Lord Hoffman in the House of Lords decision of R v. Brown: 46. The term 'other interests' is part of the phrase 'shares, units or other interests'. As such, it is appropriate to consider its meaning as part of that complete phrase rather than the word 'interests' in isolation. 47. 'Shares' and 'units' are a narrow subset of what might generally be called 'interests'. A 'share' has been broadly described as an aliquot [26] interest of a shareholder in a company, with reference to which the shareholder has certain rights. [27] It is comprised of a bundle of rights, [28] which may include rights to participate in dividends while the company is a going concern and the right to participate in the distribution of assets available to shareholders upon a winding up. [29] 48. A 'unit' is not defined in the ITAA 1997, but has been judicially described as an 'aliquot share or interest in the undivided assets of a trust'. [30] Like a share, a unit gives the unit holder a parcel of rights, which may include rights to participate in the trust fund including a right to share in trust income and rights in individual trust assets. Like a share, it is typically an interest 'in which a taxpayer invests'. [31] 49. Thus 'shares' and 'units' are both members of a class of 'interest' which wholly divides up the equity or capital of an entity into portions. The holder of such an interest usually has not just one right but a bundle of rights that include rights to participate in things which may happen in the future and the entirety of which represents something like an investment stake in the entity. 50. Considering 'shares, units or other interests' as a complete phrase would suggest that 'other interests' takes on a meaning akin to 'shares' and 'units'. That is, the more general phrase 'other interests' is constrained by reference to the more specific category that 'shares' and 'units' denotes. 51. A connected beneficiary with a UPE held on sub-trust is the sole beneficiary of that sub-trust, and has a fixed interest in the trust property. Often, it will also have rights to the income generated from investment of the trust corpus. The interest of a connected beneficiary in a sub-trust therefore bears some similarity in nature to a 'unit' or 'share' and is a relevant 'other interest' for the purposes of paragraph 152-20(2)(a). The value of the interest is thus disregarded in calculating the net value of the CGT assets of the connected beneficiary. | Summary: 52. Where a UPE is held on sub-trust for a connected beneficiary who is not absolutely entitled to any main trust asset, the section 152-15 net asset value calculation for the main trust will be as follows: | Net value of the CGT assets of the trust: Is a UPE a liability of the trustee? 53. Where the amount of a connected beneficiary's UPE has not been placed on sub-trust and the connected beneficiary is not absolutely entitled to any trust asset, all that exists is an equitable obligation on the trustee to pay the connected beneficiary an amount of trust income or capital. That is a presently existing equitable obligation to pay a sum certain or an ascertainable sum that is a 'liability' within the meaning of paragraph 152-20(1)(a). 54. In determining the net value of the trust's CGT assets, that liability is subtracted from the sum of the market values of those assets if it is 'related to the assets'. [32] 55. A UPE is an equitable obligation on the trustee in respect of trust assets (typically, it is an obligation to pay, apply, or set aside certain trust assets or a sum from trust assets - most often a specific amount of income or capital of the trust for the benefit of a particular beneficiary). At its core, it results from an appointment of income or capital made under the terms of the trust, of particular trust assets or a particular sum to be paid from trust assets. In a broad sense, it is an entitlement to a relevant share of the trust fund itself; and in this broad sense relates to the trust fund (and therefore the assets of the trust). 56. This is consistent with comments made in obiter by the Full Federal Court in Bell, that in the ordinary case where a UPE exists and must be satisfied from trust assets, that liability will relate to the assets of the trust, notwithstanding the beneficiary's typical inability to call for any specific trust asset to be paid to them. [33] 57. However, the key liability under consideration in Bell was not actually an obligation to pay a UPE but rather an obligation to repay a loan taken out to fund payment of a UPE. The Court observed: 58. Whether a UPE relates to the CGT assets of an entity will ultimately depend on the facts and circumstances of the particular case. An obligation to pay a UPE as defined in paragraph 3 of this Ruling will relate to trust assets within the meaning of paragraph 152-20(1)(a) if the entitlement is to a part of the trust fund (that is, to a particular item or amount of the income or capital of the trust fund). 59. The relationship is different in cases where the parties agree to treat the amount of the UPE as a debt at common law owed by the trust to the beneficiary, [35] or this is effected by the terms of the trust deed. [36] In such cases, a liability of the trustee to repay the loan (plus interest, if any) replaces, or arises instead of, the UPE. As Bell itself indicates, [37] whether a liability to repay a borrowing of the trust relates to the assets of the trust is dependent on the use to which the borrowed funds are put. | Net value of the CGT assets of the connected beneficiary: Is a UPE a CGT asset of the connected beneficiary? 60. A connected beneficiary with a UPE has an equitable right to receive an amount of trust income or capital. That equitable right is a CGT asset within the definition in subsection 108-5(1). 61. But as noted above, that asset is disregarded if it is an 'other interest' within the meaning of that term in paragraph 152-20(2)(a). 62. A UPE that is not held on sub-trust represents a beneficiary's right to receive a particular amount of trust income or capital, but no kind of investment-like interest in the trust itself. It is a complete, (unapportioned and undivided) one-off right to demand immediate payment, as opposed to a bundle of rights that typically include the right to participate in future happenings (as would be the case if the funds representing the UPE were instead set aside on a separate sub-trust). 63. By nature, a UPE not held on sub-trust is therefore not sufficiently akin to the interests represented by shares and units. 64. Moreover, unlike a typical share or a unit, counting such a UPE as a relevant asset of the beneficiary will not result in a double counting of the assets of a relevant economic unit in respect of which the maximum net asset value test is being applied. [38] This is because a liability corresponding to the beneficiary's UPE will be recognised at the trust level, and eliminates any potential double counting of the value of the UPE. 65. Excluding a UPE from being a relevant 'other interest' that is disregarded in working out the net value of the CGT assets of an entity is therefore consistent with the intended purpose of paragraph 152-20(2)(a). 66. A UPE not held on sub-trust is therefore not relevantly akin to a share or unit and not an 'other interest' for the purposes of paragraph 152-20(2)(a). Accordingly, it is taken into account in working out the net asset value of the connected beneficiary. Is a UPE a 'debt'? 67. Even if a UPE that is not held on sub-trust is a relevant 'other interest' (which the Commissioner does not accept), it is still specifically excluded from the scope of paragraph 152-20(2)(a) (so will be included in calculating the net asset value of the connected beneficiary) if it is a relevant 'debt'. 68. The word 'debt' must be interpreted in the context in which it appears, with regard to the purpose of the provision in which it is used. [39] For example, in GE Crane Menzies J (Barwick CJ, McTiernan, Walsh and Gibbs JJ agreeing) considered that the term 'debt' used in the former bad debt deduction provisions [40] should not be interpreted narrowly to encompass only common law debts, instead deciding that in context it should also include debts due in equity. [41] 69. The equitable obligation on a trustee to pay the amount of a UPE to a beneficiary is not generally a debt at law. [42] However, where a beneficiary has been made presently entitled to income or capital that has come home to the trust, the trustee will be under an equitable obligation to pay such amounts to the beneficiary (as discussed in paragraphs 52 to 54 of this Ruling). Such obligations on the trustee have been referred to by the courts as equitable debts. [43] 70. In the context of provisions that broadly seek to calculate the value of the assets of an economic group of entities net of its liabilities (including present equitable obligations), [44] the specific provisions designed to prevent double counting are not designed to disregard assets which have already been reduced by liabilities of a related entity. Accordingly, assets that would otherwise be disregarded as representing a double counting of value continue to be taken into account if they are debt. In this context, the Commissioner considers that the reference to 'debt' in paragraph 152-20(2)(a) is intended to extend beyond common law debts to include relevant obligations due merely in equity. 71. Accordingly, even if a UPE that is not held on sub-trust is an 'other interest' for the purposes of paragraph 152-20(2)(a) (which is not accepted), it is a relevant 'debt' for the purpose of that provision. The UPE is therefore taken into account in working out the net asset value of the connected beneficiary. | Summary: 72. Where a UPE is not held on sub-trust and the connected beneficiary is not absolutely entitled to any trust asset, the section 152-15 net asset value calculation for the trust will be as follows: | Part C: Absolutely entitled: 73. Where the connected beneficiary's UPE comprises an absolute entitlement to one or more trust assets, those assets are treated as the connected beneficiary's assets for various purposes including the maximum net asset value test. [45] The consequences for the trust's net asset value calculation under section 152-15 are as follows. | Net value of the CGT assets of the trust: Is the UPE a liability of the trust? 74. As the assets corresponding to the UPE are treated as held by the connected beneficiary rather than the trust, the trust is taken not to have a presently existing equitable obligation to pay anything to the connected beneficiary in respect of the UPE. Accordingly, the value of the UPE will not be included anywhere in the net value of the CGT assets of the trust as either an asset or a corresponding liability. | Net value of the CGT assets of the connected beneficiary: Is the UPE a CGT asset of the connected beneficiary? 75. The specific trust asset (or assets) to which the connected beneficiary is absolutely entitled will fall within the wide definition of CGT asset in subsection 108-5(1). 76. Subsection 152-20(2) lists particular assets that are disregarded in working on the net value of the CGT assets of an entity. [46] Provided none of these exceptions apply to the specific asset to which the beneficiary is absolutely entitled, the value of the asset will be included in the net value of the CGT assets of the connected beneficiary. | Summary: 77. Where a connected beneficiary's UPE is an absolute entitlement to one or more trust assets, the value of the UPE will factor into the trust's net asset value calculation once, as part of the net value of the CGT assets of the connected beneficiary. | Summary of outcomes: 78. The net result is the same regardless of whether a UPE is held on sub-trust and regardless of whether the connected beneficiary is absolutely entitled to an asset of the trust as against the trustee: the market value of the UPE (or the funds representing it) will be included once only in the main trust's net asset value calculation under section 152-15, as part of the net value of the CGT assets of either the connected beneficiary or the sub-trust. 79. The following table summarises where the value of the UPE will be factored into calculating the net asset value of the trust (or main trust, where relevant) for each of the scenarios set out in Parts A, B and C of this Ruling: Table 9: Net value of CGT assets summary


What this Ruling is about | NOT LEGALLY BINDING SECTION: | What this Ruling is about: 1. This Ruling sets out the Commissioner's views on how an unpaid present entitlement (UPE) of a beneficiary connected with a trust is treated for the purposes of working out whether the trust satisfies the maximum net asset value test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997). | 1A. All legislative references in this Ruling are to the ITAA 1997, unless otherwise indicated. | 2. Although this Ruling specifically considers the situation where the trust is working out whether it satisfies the maximum net asset value test, the propositions in this Ruling apply equally to calculating the net value of the CGT assets of a trust under paragraphs 152-15(b) or (c) where it is 'connected with' [2] another entity seeking to satisfy the maximum net asset value test, or the other entity's affiliate. | Definitions: 3. The following terms are used in this Ruling as defined: | Table 1: Definitions of terms used in this Ruling | Where a connected beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust, as that phrase is used in the CGT provisions in Parts 3-1 and 3-3. | A beneficiary that is 'connected with' [3] a trust that is seeking to apply the small business CGT concessions. | A separate trust on which the amount of a beneficiary's UPE from another trust (called the main trust) is held, and in respect of which the beneficiary is the sole beneficiary. | Liabilities related to assets | legally enforceable debts due for payment and to presently existing legal or equitable obligations to pay either a sum certain or ascertainable sums. [21] | The fallacy in the Crown's argument is, I think, one common among lawyers, namely to treat the words of an English sentence as building blocks whose meaning cannot be affected by the rest of the sentence ... This is not the way language works. The unit of communication by means of language is the sentence and not the parts of which it is composed. The significance of individual words is affected by other words and the syntax of the whole. [25] | If the outlay, made with borrowed funds, was to purchase an asset, then the liability represented by the borrowing would relate to the asset, but only for so long as that asset was held by the Trust. If the borrowing was for another purpose, such as to discharge an income tax obligation (and was immediately and identifiably used only for that purpose), the corresponding liability would not, in our view, relate to any asset of the Trust. [34] | Appendix 2 - Detailed contents list


Related rulings: TR 94/30 TR 2006/10 TD 2003/28 TD 2007/14 TD 2015/20 TD 2022/11 SMSFR 2009/3
Legislative references: ITAA 1936 ITAA 1936 63 ITAA 1936 Div 7A ITAA 1997 ITAA 1997 106-50(1) ITAA 1997 106-50(2) ITAA 1997 108-5(1) ITAA 1997 Div 152 ITAA 1997 152-10(1) ITAA 1997 152-10(1)(c)(ii) ITAA 1997 152-15 ITAA 1997 152-15(b) ITAA 1997 152-15(c) ITAA 1997 152-20(1) ITAA 1997 152-20(1)(a) ITAA 1997 152-20(2) ITAA 1997 152-20(2)(a) ITAA 1997 152-20(2)(b)(i) ITAA 1997 152-20(2)(b)(ii) ITAA 1997 152-20(3) ITAA 1997 152-20(4) ITAA 1997 328-125 ITAA 1997 328-125(1)(b) ITAA 1997 328-125(2) ITAA 1997 328-125(7) TAA 1953
Case references: Archibald Howie & Others v. Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143
Other references: Austin, RP, Ramsay, IM, Ford's Principles of Corporations Law, LexisNexis Australia Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999