Issue
Does a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee, control the trust under subparagraph 152-30(2)(c)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. A person who has the power to remove the trustee of a discretionary trust and appoint a new trustee, controls the trust under subparagraph 152-30(2)(c)(ii) of the ITAA 1997.
Facts
A discretionary trust owns certain assets. An individual is described in the trust deed as the appointor of the trust. Under the deed, the individual, as appointor, has the power to remove any trustee of the trust and appoint a new trustee.
The individual carries on their own business separately from the activities of the discretionary trust. During the 2004-05 income year the individual sold a business asset and made a capital gain. The individual wishes to reduce the capital gain by utilising the small business concessions in Division 152 of the ITAA 1997.
For each of the income years 2000-01, 2001-02, 2002-03 and 2003-04, the trustee did not make distributions of income or capital to any beneficiary (including their small business CGT affiliates) that totalled at least 40% of the total distributions of income or capital for that year.
Reasons for Decision
To qualify for the small business CGT concessions a taxpayer must, among other things, satisfy the $5 million net asset test in section 152-15 of the ITAA 1997. As part of this, the taxpayer must include in their net asset calculation the net value of the CGT assets of any entities connected with them. Under paragraph 152-30(1)(a) of the ITAA 1997, an entity is connected with another entity if either entity controls the other entity.
Under paragraph 152-30(2)(c) of the ITAA 1997 an entity may control a discretionary trust if the entity, its small business CGT affiliates, or all of them together: • is/are the trustee or trustees of the discretionary trust (other than the Public Trustee of a state or territory), or • has/have the power to determine how the trustee or trustees exercise the power to make any payment of income or capital to or for the benefit of beneficiaries of the trust.
However, this will be the case only if certain beneficiaries are not taken to control the trust.
If a beneficiary of a discretionary trust controls the trust under subsection 152-30(5) of the ITAA 1997 and the beneficiary is not a small business CGT affiliate of the trustee, or of a person who has the power to determine how the trustee exercises the power to make payments of income or capital, then the trustee or that other person will not also be taken to control the discretionary trust (subsection 152-30(4) of the ITAA 1997).
The level of actual distributions made by a discretionary trust is used to determine which beneficiaries control the trust (subsection 152-30(5) of the ITAA 1997). Subject to certain transitional arrangements, a beneficiary is taken to control a discretionary trust if, for any of the four income years before the year for which relief is sought for a CGT event: • the trustee paid to, or applied for the benefit of, the beneficiary and/or their small business CGT affiliates any of the income or capital of the trust, and • the amounts paid or applied were at least 40% (the control percentage) of the total amount of income or capital paid or applied for that income year (subject to the Commissioner's discretion where the control percentage is between 40% and 50%).
In this case, the trust deed specifies that the appointor of the trust has the power to remove any trustee and appoint a new trustee. It is considered that this power of removal gives the appointor effective power to determine the manner in which the trustee exercises their power to make distributions. If the appointor did not approve of the manner in which the trustee made distributions they could remove the trustee.
Further, there is no beneficiary of the trust who controls the trust under subsection 152-30(5) of the ITAA 1997 because there is no beneficiary who (together with any small business CGT affiliates) has received distributions of income and capital of at least 40% of the total distributions of income or capital in any of the relevant years.
Accordingly, subsection 152-30(4) of the ITAA 1997 does not apply and therefore the appointor, being a person who has the power to determine the manner in which the trustee exercises their power to make distributions, controls the trust under subparagraph 152-30(2)(c)(ii) of the ITAA 1997.
As such, the appointor and the discretionary trust are connected with each other under paragraph 152-30(1)(a) of the ITAA 1997 and therefore the assets of the discretionary trust are included in the appointor's $5 million net asset calculation under subparagraph 152-15(a)(ii) of the ITAA 1997.