Edited version of private ruling

Authorisation Number: 1011754824848

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Affiliates

Question 1

Is your relative regarded as your affiliate under section 328-130 of the Income Tax Assessment Act 1997 (ITAA)?

Answer: No.

Question 2

Does your relative's activities constitute a business for the purposes of determining whether the active asset test in section 152-35 is met?

Answer: As the answer to Question 1 is no, this question does not need to be considered.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your partner acquired a property after September 1985.The property was originally part of a parcel of land owned by your sibling. The land was subdivided and you purchased an area of land.

Both before and after you purchased the property, the property was used by your relative in running their business.

You let your relative use the property rent-free and you haven't received any income from your relative's business.

There was always a close family connection between you and your relative in which you often assisted your relative in the running of the two properties. On many occasions (approx. every second weekend) you and your partner stayed overnight at your relative's house and stayed for the weekend. On other occasions you would visit for the day.

Business decisions were mainly made by your relative.

Decisions as to which job was a priority for a particular weekend involved both yourself and your relative.

You claim you assisted your relative with the running of the properties on many occasions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-130

Income Tax Assessment Act 1997 Section 152-35

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Legislative references referred to herein are from the ITAA 1997, unless otherwise stated.

The active asset test in section 152-35 is satisfied if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period detailed below or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the period detailed below:

The period:

(a) begins when you acquired the asset and

(b) ends at the earlier of:

i. the CGT event and

ii. if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased.

You have owned the property for more than 8 years. Your relative has used the property in their business for more than 15 years.

Active Asset

It is necessary to ensure that the property satisfies the meaning of an active asset under section 152-40.

Section 152-40 discusses the meaning of the active asset, and at subsection 152-40(1) states, in part, that a CGT asset is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you or your affiliate, or another entity that is connected with you.

Your relative is not another entity connected with you so we need to establish if your relative is an affiliate of yours.

"Affiliate" is defined in subsection 328-130(1) to mean an individual or company that acts, or could reasonably be expected to act, in accordance with the directions or wishes of the taxpayer or in concert with the taxpayer in relation to the affairs of the business of the individual or company. Note that the definition means that an individual or company cannot be an affiliate unless they are carrying on a business.

"Affairs" has been said to be a word of "very wide import". It is suggested that the affairs of a business refers to the conduct and operations of the business in all its relevant aspects, including the making of managerial and operation decisions. It is submitted that "the affairs of the business" does not refer to the whole of the affairs but would include, among other things, operational decisions.

The ATO Advanced Guide also states that, generally, another business would not be acting in concert with "you" if they:

· have different business premises;

· have separate bank accounts;

· do not consult you on business matters;

· conduct their business affairs independently in all regards.

The key consideration is the actions of the parties. If the parties act together in pursuit of a common goal or purpose, or the taxpayer can direct the other person in relation to (not merely where the person is involved in, connected to or participating in) the carrying on of the business, these are factors that may support a conclusion that the parties act in concert, or the other person acts in accordance with the taxpayer's directions or wishes.

In your case, there is a close family connection between you and your relative and you claim you have assisted with many jobs on the property.

You have stated that your relative mainly made the business decisions and you did not receive any income from your relative's business.

It cannot be concluded that you were able to direct your relative in relation to its business operations. There was no reason for your relative to act in concert with, or in accordance with your directions or wishes in relation to its business and you did not have a common business goal or purpose. Your relative is not, therefore, considered to be an affiliate of yours.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).