Capital Gains Tax: small business concessions - connected entities - control of discretionary trust with tax loss - nomination of controllers

When must the trustee of a discretionary trust make a nomination under subsections 152-30(6A) to 152-30(6C) of the Income Tax Assessment Act 1997 (ITAA 1997) to choose up to four beneficiaries as being the controllers of the trust for an income year for which the trust had a tax loss?

There is no specified time period in which the trustee of a discretionary trust must make a nomination under subsections 152-30(6A) to 152-30(6C) of the ITAA 1997.

A discretionary trust acquired an asset on 1 July 2000 and later sold the asset on 1 July 2005 making a capital gain. The asset was used in the business of another entity, which was a potential beneficiary of the trust, for the entire five year period of ownership.

In each of the five income years the trust owned the asset, the trust had a tax loss and the trustee did not make any distributions to any beneficiary.

The trustee is considering whether the trust qualifies the small business capital gains tax (CGT) concessions.

To qualify for the small business CGT concessions in Division 152 of the ITAA 1997 a number of basic conditions must be satisfied. One of those conditions is the active asset test. The active asset test generally requires the CGT asset to be an active asset just before the relevant CGT event and for half the period of ownership.

A CGT asset is an active asset if, among other things, it is used (or held ready for use) in the course of carrying on a business by a connected entity (subparagraph 152-40(1)(c)(ii) of the ITAA 1997). An entity is connected with another entity if either entity controls the other entity or both entities are controlled by the same third entity (subsection 152-30(1) of the ITAA 1997).

For a discretionary trust, the level of actual distributions made by the trust generally determines who controls the trust (subsection 152-30(5) of the ITAA 1997). However, where the discretionary trust had a tax loss for an income year and the trustee did not make any distributions for that year, the trustee may nominate up to four beneficiaries as being controllers of the trust for that income year. The nomination must be in writing and signed by the trustee and by each nominated beneficiary (subsection 152-30(6C) of the ITAA 1997). There is no specified time period for making the nomination.

The trustee may wish to make such a nomination to ensure that a particular beneficiary controls, and hence is connected with, the trust so that a particular CGT asset owned by the trust and used in that beneficiary's business is treated as an active asset for that year under subparagraph 152-40(1)(c)(ii) of the ITAA 1997.

As the intention of subsections 152-30(6A) to 152-30(6C) of the ITAA 1997 is to enable the trustee in these circumstances to ensure a particular CGT asset is treated as an active asset for the purposes of qualifying for the small business CGT concessions, it would generally be expected the nomination would be made by the time the small business CGT concessions are chosen for a particular capital gain.