The AAT has allowed husband and wife taxpayers’ appeals and held that the husband alone was the person who controlled the relevant Trust within the meaning of s 328-125(3) of the Income Tax Assessment Act 1997 (‘ITAA97’) and therefore that the Trust was entitled to certain CGT Small Business Reliefs.
A company was incorporated in August 2005 and the taxpayers’ daughter was the sole director and shareholder. A discretionary Trust was settled in March 2006 with the company as trustee and an individual as appointor. The Trust sourced suitable properties for conducting childcare businesses, secured long-term leases of the properties, had them fitted out, obtained approvals and then offered the facilities as a package able to be let or licensed by corporate clients wanting to provide child care facilities for use principally by their own employees. At all material times (including for the year ended 30 June 2008), all of the Trust’s income (including capital gains) was distributed by the trustee (by means of a resolution of its sole director) to the taxpayers in approximately equal shares.
The appeal concerned disputed entitlements to Small Business Relief pursuant to Div 152 of Part 3-3 of the ITAA97 in connection with a sale of assets in the 2008 year by the Trust, under which the taxpayers were beneficiaries, and the consequent effect on amounts that the taxpayers were liable to be assessed under s 97 of the ITAA 1936. The issues in dispute were the 50% small business reduction provided for by s 152-205, the small business retirement exemption provided for by s 152-305 and the small business roll-over provided for by s 152-410 and penalty.
The principal dispute was whether, for the purposes of s 328-125 of the ITAA97, the Trust was controlled, either alone or with others, by the taxpayers’ daughter. The Commissioner argued that the daughter was a controller of the Trust and, therefore, the Trust was connected with another entity controlled by her with the effect that the Trust was not eligible for any of the Div 152 Small Business Relief.
The taxpayers dispute the Commissioner’s refusal to accept that the husband controlled the Trust in the requisite sense and the daughter did not.
The Tribunal concluded that the Trust was not accustomed to act in accordance with the daughter’s wishes independently of her father’s wishes in circumstances where her wishes and directions were her father’s. She was, the AAT said, acting as the director of the trustee in circumstances where the trustee could be removed at the will of appointor and the appointor regarded himself bound by the wishes and directions of the husband. The Tribunal considered there was ample evidence to find that the daughter was a puppet director, or that the husband was a shadow or de facto director. Accordingly, the Tribunal found that the husband alone was the person who controlled the Trust within the meaning of s 328-125(3) of the ITAA97, and therefore the Trust was entitled to the Small Business Relief as claimed.
(AAT Case [2013] AATA 947, Re Gutteridge and FCT, AAT, O’Loughlin SM, AAT Ref: 2012/2724, 2012/2725, 24 December 2013.)
[FJM Note: The trust was to qualify for the CGT relief as a ‘small business entity’ under Division 328 of the ITAA97, requiring (broadly) it’s annual turnover together with that of it’s ‘connected entities’ to be under $2m. It appears that if the daughter was in control, this test would be breached, wheras if the father was in control, it would not.]
[LTN 2, 6/1/14]
s328-125 of the ITAA97 – Meaning of connected with an entity
(1) 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.
Note 1: See Subdivision 106-B if a CGT asset of yours is vested in a trustee in bankruptcy or a liquidator.
Note 2: See Subdivision 106-C if you are absolutely entitled to a CGT asset as against the trustee of a trust.
Note 3: See Subdivision 106-D if you provided security over an asset to another entity.
Direct control of an entity other than a discretionary trust
(2) An entity (the first entity ) controls another entity if the first entity, its * affiliates, or the first entity together with its affiliates:
(a) except if the other entity is a discretionary trust–own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of:
(i) any distribution of income by the other entity; or
(ii) if the other entity is a partnership–the net income of the partnership; or
(iii) any distribution of capital by the other entity; or
(b) if the other entity is a company–own, or have the right to acquire the ownership of, * equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company.
Direct control of a discretionary trust
(3) An entity (the first entity ) controls a discretionary trust if a 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.
(4) An entity (the first entity ) controls a discretionary trust for an income year if, for any of the 4 income years before that year:
(a) the trustee of the trust paid to, or applied for the benefit of:
(i) the first entity; or
(ii) any of the first entity‘s * affiliates; or
(iii) the first entity and any of its affiliates;
any of the income or capital of the trust; and
(b) the percentage (the control percentage ) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.
Note: Section 328-112 of the Income Tax (Transitional Provisions) Act 1997 affects the operation of this subsection in relation to the 2007-08, 2008-09, 2009-10 and 2010-11 income years.
(5) An entity does not control a discretionary trust because of subsection (4) if the entity is:
(a) an * exempt entity; or
(b) a * deductible gift recipient.
Commissioner may determine that an entity does not control another entity
(6) If the control percentage referred to in subsection (2) or (4) is at least 40%, but less than 50%, the Commissioner may determine that the first entity does not control the other entity if the Commissioner thinks that the other entity is controlled by an entity other than, or by entities that do not include, the first entity or any of its * affiliates.
Indirect control of an entity
(7) This section applies to an entity (the first entity ) that directly controls another entity (the second entity ) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or applications of this section, controlled by the second entity.
(8) However, subsection (7) does not apply if the second entity is an entity of any of the following kinds:
(a) a company * shares in which (except shares that carry the right to a fixed rate of * dividend) are listed for quotation in the official list of an * approved stock exchange;
(b) a * publicly traded unit trust;
(c) a * mutual insurance company;
(d) a * mutual affiliate company;
(e) a company (other than one covered by paragraph (a)) all the shares in which are owned by one or more of the following:
(i) a company covered by paragraph (a);
(ii) a publicly traded unit trust;
(iii) a mutual insurance company;
(iv) a mutual affiliate company.