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20 Mar 14 Decision Impact Statement - Gutteridge

The ATO has published a Decision Impact Statement in relation to the decision of the AAT in Gutteridge v FCT [2013] AATA 947; 2013 ATC 10-347.

The decision concerned the question whether, for the purposes of the CGT small business concessions in Div 152 of ITAA 1997, a trustee company was controlled by the taxpayers' daughter. The taxpayer's daughter was the sole director and shareholder of the trustee company. If it was so controlled, the taxpayer, as beneficiary of the trust that had sold its business assets, would not have satisfied the the maximum net asset value test in s 152-15 of ITAA 1997 and would not therefore have been entitled to CGT relief.

The control test is set out in s 328-125(3) of ITAA 1997 and is determined (in this instance) by whether the trustee company 'could reasonably be expected to act' in accordance with the directions or wishes of the daughter.

The AAT considered the control test has parallels with the definition of 'director' in the Corporations Act 2001. More specifically, there is a reasonable expectation that a person will act in a certain way if the person is 'accustomed to act' in that way.

The AAT held that the test was not simply who held the formal office of director of the trustee company, nor what the trust deed stated, but rather called for an examination of the actual circumstances of a case. Based on the evidence before it, the AAT then held that although the daughter was the director and public face of the business carried on by the trust, the trustee company was not accustomed to act in accordance with her wishes. The AAT considered that the taxpayer alone controlled the trustee company and was, in effect, a shadow or de facto director of the trustee company.

The ATO states its view of the decision as follows:

"The Commissioner accepts that the decision was open to the AAT in view of the findings of fact made by the Tribunal.

However, while the circumstances in this case allow for a finding that a person could reasonably be expected to act in a certain way because they were 'accustomed to act' in that way, the Commissioner does not accept that the 'reasonable expectation' test in subsection 328-125(3) of the ITAA 1997 can be substituted with an 'accustomed to act' test in all cases. It depends, as the AAT said at paragraph 21, on an examination of all the circumstances of a case. For example, if there is no history at all of a trustee having acted on the directions of another, there may nonetheless be an expectation (reasonably founded) that they would act on the directions of a particular person, were such directions to be given."

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