Issue
Is the transfer of funds from a discretionary trust to a superannuation fund for the benefit of an employee, who is also a beneficiary of the discretionary trust, considered to be a 'distribution' received by the beneficiary, for the purposes of the controlling individual test in section 152-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. As the transfer of funds is a payment that is made to the person in their capacity as an employee, and not in their capacity as a beneficiary, the amount is not a distribution received by the beneficiary for the purposes of the controlling individual test in section 152-50 of the ITAA 1997.
Facts
A discretionary trust made an ETP to a superannuation fund for the benefit of an employee who is also a beneficiary of the discretionary trust. During that income year, there was no distribution of income or capital to any of the beneficiaries of the discretionary trust.
The discretionary trust wishes to access the small business retirement exemption (SBRE) in Subdivision 152-D of the ITAA 1997 in respect of the ETP paid to the superannuation fund.
Reasons for Decision
One of the tests a discretionary trust must satisfy to access the SBRE is the controlling individual test in section 152-50 of the ITAA 1997. The controlling individual test requires the entity to have a controlling individual just before the CGT event. This requirement is set out in subsection 152-55(3) of the ITAA 1997, which provides: An individual is a controlling individual of a trust (where entities do not have entitlements to all the income and capital of the trust) at a time if, during the income year in which the time occurs: (a) the trust made a distribution of income or capital, or both: and...
The term 'distribution' is not a defined term under section 995-1 of the ITAA 1997 or section 6 of the Income Tax Assessment Act 1936 (ITAA 1936).
However, section 272-45 in Schedule 2F of the ITAA 1936 states: A trust distributes income or capital of the trust to a person if it: (a) pays or credits the income or capital in the form of money to the person; or (b) transfers the income or capital in the form of property to the person; or (c) reinvests or otherwise deals with the income or capital on behalf of the person or in accordance with the directions of the person; or (d) applies the income or capital for the benefit of the person; in the person's capacity as a beneficiary of the trust.
Given the context of these provisions, it is appropriate to adopt similar reasoning in considering the meaning of the term 'distribution' in applying the controlling individual test as set out in section 152-55 of the ITAA 1997.
For the transfer of funds made to the superannuation fund to be considered to be a distribution to the beneficiary, the payment must therefore be made 'in the person's capacity as a beneficiary of the trust'. However, the transfer of money to the superannuation fund was made for the benefit of an employee of the trust, rather than to a beneficiary of the trust, and was made to satisfy the requirements of the ETP legislation. Therefore, the transfer of funds to the superannuation fund is not a distribution to the beneficiary.
As the discretionary trust did not make any distribution of income or capital in the year in which the CGT event happened, the trust fails the controlling individual test, and cannot access the SBRE.