The Australian Tax Office (ATO) has issued ATO Interpretative Decision (ATO ID) 2015/8 providing further guidance to trustees of unit trusts seeking to satisfy the basic conditions for access to the capital gains tax (CGT) small business concessions.
The ATO ID states where the trustee of a unit trust has the power to accumulate income, that does not of itself cause the unit trust to fail the fixed trust tests relevant for the purposes of calculating an entity’s small business participation percentage in the trust (item 2 of the table in subsection 152-70(1) of the ITAA 1997). However, a trust will fail the fixed trust test where a trustee has discretion to appoint income or capital to one or more of a class of beneficiaries. These trusts include discretionary trusts and hybrid or class income unit trusts where a discretionary element is present.
In the example in the ATO ID, both unit holders had a fixed entitlement to income and capital of the trust. Importantly, while the trust permitted the trustee to accumulate income of the trust, “the trustee has no discretion to allocate income or capital of the trust to unit holders other than in accordance with the share of income and capital represented by their units.” The ATO view is that such a unit trust is a trust where the entities had entitlements to all the income and capital of the trust and therefore satisfies the fixed trust test.
This ATO ID highlights the importance of carefully reviewing the unit trust deed to determine the unitholder’s right to income or capital of the trust. Taxpayers should exercise caution in applying this ATO ID to all unit trusts and certainly not to hybrid trusts.
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