CGT small business concessions loom large in the life of most small business operators who make a capital gain from the sale of business assets.
However, in determining whether the taxpayer’s business qualifies as a ‘small business’ for these purposes, the combined asset holdings or business turnovers of the taxpayer and related parties must be taken into account, to see if they fall under the relevant threshold amounts.
Such related parties are either affiliates of the taxpayer or entities connected to the taxpayer – and the tests for this are set out in the tax law.
What is an affiliate?
An affiliate is an individual or company that acts, or could reasonably be expected to act, in accordance with the taxpayer’s directions or wishes, or in concert with the taxpayer, in relation to the affairs of the business of the individual or company. There are many elements to this test but, ultimately, the issue is a factual one.
What is a connected entity?
The definition of connected entity also contains many elements, Moreover, in the case of a discretionary trust, it also includes the capacity of a taxpayer to control the trust in terms of the trustee of the discretionary trust acting, or being reasonably expected to act, in accordance with the directions of the taxpayer and/or the taxpayer’s affiliates.
Changing views
The tax commissioner once took the view that an appointer of a trust with the power to remove a trustee was automatically connected with the trust under this ‘control’ test. However, he now takes the position that the ability of an appointer to remove the trustee and appoint a new one does not, of itself, mean the appointer controls the trust under this test. Whether an appointer controls a discretionary trust will depend on the particular facts.
This is an interesting position for the commissioner to take, as many legal practitioners who set up trusts regard the appointer a key – if not the key – person in the conduct and control of a trust (just ask most practitioners who set up testamentary trusts for clients).
Nevertheless, the commissioner’s current approach probably works in favour of taxpayers in that, like the definition of affiliate, the test will be purely a factual matter rather than being fixed by the legal nature of the relationship between the parties.
