1 Are the Trust A and the partnership of Trust B & Trust A considered connected under section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 Yes. Question 2 Are the Trust A and the partnership of Trust C & Trust A considered connected under section 328-125 of the ITAA 1997? Answer 2 Yes. Question 3 Does the Trust A meet the basic conditions to apply the small business CGT concessions under Division 152 of the ITAA 1997 for the disposal of goodwill from the partnership between Trust B & Trust A? Answer 3 Yes. Question 4 Does the Trust A meet the basic conditions to apply the small business CGT concessions under Division 152 of the ITAA 1997 for the disposal of land and buildings from the partnership between Trust C & Trust A? Answer 4 Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
Background Trust A (you) is a discretionary trust that holds an equal interest in each of two partnerships established to operate a hotel business acquired on a specified date: • Trust C and Trust A Partnership - the property-holding partnership. • Trust B and Trust A Partnership - the hotel-operating partnership, which paid rent to the property-holding partnership. Assets of the Property holding partnership The property-holding partnership owned the hotel premises, comprising the entire parcel of land together with all buildings and improvements located at a specified address. The property was leased in full to the partnership operating the hotel business. Assets of the hotel operating partnership The hotel-operating partnership conducted a licensed hotel business known as Brand A Hotel. The business included a bar, restaurant, gaming facilities, and accommodation. Its assets comprised goodwill, contracts, records, licences and permits, trading stock, and intellectual property. Beneficiaries and trustee of you and the partnerships
You have two beneficiaries, Person A and Person B. Both individuals were directors of the trustee companies and were actively involved in managing the hotel business during its initial phase. Following the engagement and training of a manager to oversee day-to-day operations, their direct involvement reduced. However, both Person A and Person B remained the key decision-makers and jointly exercised control over the trust. The trustee entities are as follows: • Company A - trustee of you (Trust A), • Company B - trustee of Trust B, • Company C - trustee of Trust C. Sale of the hotel business On a specified date, both partnerships sold their respective interests in the hotel business to Company D as follows: • The Trust C and Trust A partnership sold the goodwill for a specified amount. • The Trust B and Trust A partnership disposed of the associated land and buildings for a specified amount.
As an equal partner, you received one half of the capital proceeds from each of the relevant CGT events. You have provided copies of the Business Sale and Purchase Agreements relating to both partnership sales. Net assets value of the CGT assets of the two partnerships At the relevant time: • The net asset value of the CGT assets of the Trust C and Trust A partnership was a specified amount. • The net asset value of the CGT assets of the Trust B and Trust A partnership was a specified amount. Net assets value of your CGT assets Both Person A and Person B each personally hold a specified percentage of interest in two investment properties. Based on current market valuations, the combined net asset value of these properties was a specified amount. You also hold a specified percentage of shareholding in Company E, which recorded a net asset deficiency of a specified amount for the year ended 30 June 20XX.
Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 subsection 152-10(1) Income Tax Assessment Act 1997 paragraph 152-10(1)(a) Income Tax Assessment Act 1997 paragraph 152-10(1)(b) Income Tax Assessment Act 1997 paragraph 152-10(1)(c)(ii) Income Tax Assessment Act 1997 paragraph 152-10(1)(d) Income Tax Assessment Act 1997 subsection 152-10(1AA) Income Tax Assessment Act 1997 section 152-15 Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(iii) Income Tax Assessment Act 1997 section 328-125 Income Tax Assessment Act 1997 subsection 328-125(1) Income Tax Assessment Act 1997 paragraph 328-125(1)(b) Income Tax Assessment Act 1997 subsection 328-125(2) Income Tax Assessmen
Question 1 Summary You are considered connected with the partnership of Trust B and you as you control and hold more than 40% interest in the partnership. Detailed reasoning Meaning of connected entity Subsection 328-125(1) states: An entity is connected with another entity if: (a) either entity controls the other 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. In relation to entities other than discretionary trusts, the relevant control test is set out in subsection 328-125(2). It provides: 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. In your case, your interest in the partnership exceeds the 40% threshold set out in subsection 328-125(2). This means you are taken to control the partnership under the control test. Since the partnership is controlled by you, you are regarded as being connected with it under paragraph 328-125(1)(b) of the ITAA 1997. Therefore, you and the partnership are treated as connected entities. Question 2 Summary You are considered connected with the partnership of you and Trust C as you control and hold more than 40% interest in the partnership. Detailed reasoning Meaning of connected entity As outlined in the response to Question 1, your interest in the partnership exceeds the 40% threshold set out in subsection 328-125(2). Accordingly, you are taken to control the partnership under the control test.
Since the partnership is controlled by you, they are also considered connected with each other under paragraph 328-125(1)(b) of the ITAA 1997. Therefore, you and the partnership are treated as connected entities. Question 3 Summary You are eligible to apply the small business CGT concessions under Division 152 of ITAA 1997 for the disposal of goodwill by the partnership of you and Trust B, as you meet the basic conditions required to qualify for the concession. Detailed reasoning Subdivision 152-A sets out the basic conditions that an entity must satisfy before being entitled to any of the small business CGT concessions. The basic conditions The basic conditions are outlined at subsection 152-10(1) as follows: (a) A CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a CGT small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152-15);
(iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the asset in the income year; (d) the CGT asset satisfied the active asset test (see section 152-35). When you entered a contract to sell the hotel business to Company D, CGT event A1 happened under section 104-10. As a result of this event happening, you made a capital gain in respect of your interest in the partnership asset. Accordingly, the first 2 basic conditions in subsection 152-10(1) are satisfied. Small business entity test The turnover of the partnership of you and Trust B for the 20XX income year exceeds $2 million. Accordingly, this partnership is not a CGT small business entity Maximum net asset value test
This test requires that the total net asset value owned by you together with any entity connected with you must not exceed $6 million immediately before the relevant CGT event. Your combined net asset value is below the $6 million threshold set out in section 152-15 of the ITAA 1997. Therefore, you satisfied the basic condition under subparagraph 152-10(1)( c)(ii) of the ITAA 1997. Active asset test Under section 152-35 of ITAA 1997, a CGT asset satisfies the active asset test if it was an active asset for the entity for at least half the period it was owned or 7.5 years if held for more than 15 years. In your case, the disposed of CGT assets - goodwill were held for more than 7.5 years and actively been used in the business of the partnership for this entire period. You have therefore satisfied paragraph 152-10(1)(d) of ITAA 1997. As you have met all the four basic conditions under subsection 152-10(1), you are eligible to access the small business concession for the distribution of capital proceeds upon sale of goodwill. Question 4 Summary
You are eligible to apply the small business CGT concessions under Division 152 of ITAA 1997 for the disposal of land and building by the partnership of you and Trust C, as you meet the basic conditions required to qualify for the concession. Detailed reasoning As outlined in response to question 2, CGT event A1 occurred when you entered into a contract to sell the hotel business to Company D. You made a capital gain in respect of your interest in the partnership asset. Accordingly, the first 2 basic conditions in subsection 152-10(1) are satisfied. Small business entity test The aggregate turnover of the partnership of you and Trust C for the 20XX income year exceeds $2 million. Accordingly, this partnership is not a CGT small business entity. Maximum net asset value test You satisfy the maximum next asset value test which requires that the total net asset value owned by you together with any entity connected with you must not exceed $6 million immediately before the relevant CGT event. Your combined net asset value is below the $6 million threshold set out in section 152-15 of the ITAA 1997. Therefore, you satisfied the basic condition (c) under section 152-15 of ITAA 1997.
Activity asset test Under section 152-35 of ITAA 1997, a CGT asset satisfies the active asset test if it was an active asset for the entity for at least half the period it was owned or 7.5 years if held for more than 15 years. In your case, the disposed of CGT assets - land and building were held for more than 7.5 years and actively been used in the business of the partnership of you and Trust C for this entire period. You held an equal interest as a partner in a partnership engaged in the operation of a hotel business. The relevant CGT asset is exclusively used by this connected partnership in the conduct of its hotel business, thereby satisfying the active asset test. As you have met all the four basic conditions under subsection 152-10(1), you are eligible to access the small business concession for the distribution of capital proceeds upon sale of the CGT asset.