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| Discretionary Trusts Can Lose Small Business Concessions |
| Under a recent Interpretative Decision (ID2002/921), the ATO has advised that a small business operating through a family trust could effectively lose any of the small business CGT concessions where a charity is included as a beneficiary of the trust.< |
Issue
The specific question raised was whether a charity?s net assets could be aggregated with the assets of a trust under S.152-30 for the purposes of the $5m net asset test where the charity was a beneficiary of the trust and the trustee had the power to pay any or all of the income or capital of the trust.
As many charities have net assets well in excess of $5m, this may mean that the CGT small business concessions would not be accessible for the trust.
Reasons for Decision
S.152-30(1) of the ITAA 1997 describes how entities are connected with each other. It says that an entity will be connected to another entity if:
either entity controls the other entity; or
both entities are controlled by the same third entity.
To determine if a beneficiary controls a discretionary trust, that beneficiary is taken to have an interest in any distribution of income or capital of the trust equal to the maximum percentage of the income or capital that the trustee could distribute to that beneficiary under the trust deed, regardless of the actual distribution.
Where a charity is a beneficiary of a trust and is capable of receiving all the income or capital of the trust to the exclusion of all other beneficiaries, it is taken to have a 100% interest in the trust, to control the trust and therefore to be connected with the trust.
The net value of the CGT assets of the charity must be taken into account when applying the maximum net asset value test to the trust. This warning came from a recent Taxpayers Association newsletter.
Action
It was quite common for old deeds to include a charity as a default beneficiary.
We cannot check every client deed, but suggest that you might familiarise yourself with your own family trust deed. The beneficiaries are usually described in a schedule at the back of the document.
Read it and give us a call if you think there might be a problem.
Changes can be made by an expert to avoid surprises.
20th-July-2003 |
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