Issue
If a trust has a corporate trustee that is also the trustee of four other trusts, and the five trusts carry on a business in partnership, is the business carried on by any of those other trusts a related business of the first trust for the purposes of the former subsection 118-250(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No, none of the other four trusts, although they have the same trustee as the first trust, and carry on business in partnership with that trust, are carrying on a related business of the first trust, for the purposes of the former subsection 118-250(4) of the ITAA 1997.
Facts
The trust is a partner in a partnership of five non-fixed trusts that purchased the leasehold of a business after 19 September 1985. The only investment of each of the partners was the share in the partnership. A company is the trustee for each trust in the partnership, but none of the beneficiaries of any of the five trusts in the partnership is a beneficiary of any of the other four trusts in the partnership. The leasehold was sold in 1999, and a capital gain in respect of goodwill was realised on the sale. As a result, a share of the capital gain was made by the trust.
Reasons for Decision
Former subsection 118-250(2) of the ITAA 1997 provides that if there is a change in the ownership of a business, half of the capital gain attributable to the goodwill of the business (the primary business) is disregarded if the sum of the net values of the primary business (or interests in the primary business) and any related businesses is less than the business exemption threshold at the time the capital gain is made ($2,275,000 for 1999-2000 - former section 118-260 of the ITAA 1997). The definition of 'net value' is found in section 995-1 of the ITAA 1997 where it reads:-
'net value of an entity means the amount by which the sum of the market values of the assets of the entity exceeds the sum of its liabilities.'
The definition of a related business is found in the former subsection 118-250(4) of the ITAA 1997 and involves a business which is carried on by the trustee of a trust who is also the trustee of another trust or trusts.
If any entity that benefits or is capable of benefiting under the first trust also benefits or is capable of benefiting under another trust, then a business carried on by the other trust is considered a related business of the first trust. Similarly, if a trust is one of a series of trusts that includes the first trust, and an entity that benefits or is capable of benefiting under the first trust also benefits or is capable of benefiting under another trust(s) in the series, then a business carried on by the other trust(s) will be considered a related business of the first trust.
While each trust in the partnership has the same trustee, none of the beneficiaries of any of the trusts benefits or is capable of benefiting from any of the other trusts in the partnership. Consequently, the business carried on by each of the trusts in the partnership is not a related business of the primary business carried on by the first trust, as defined in the former subsection 118-250(4) of the ITAA 1997. Note: The provisions concerning the former 50% goodwill exemption have been repealed and replaced with (for CGT events happening after 11.45 am, by legal time in Australian Capital Territory, on 21 September 1999) the small business 50% active asset reduction in Subdivision 152-C of the ITAA 1997.