Edited version of private ruling

Authorisation Number: 1011904936231

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Ruling

Subject: Affiliates and small business concessions

Question 1

Are your child (A) and their spouse affiliates of yours under section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are your other child (B) and their spouse affiliates of yours under section 328-130 of the ITAA 1997?

Answer

No

Question 3

Do you satisfy the provisions in subsection 152-10(1A) of the ITAA 1997?

Answer

No

Question 4

Is property C currently an active asset under section 152-40 of the ITAA 1997?

Answer

No

Question 5

Is property D currently an active asset under section 152-40 of the ITAA 1997?

Answer

No

Question 6

Are you entitled to access the small business CGT concessions in Division 152 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

The 2011-12 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The properties C and D were two separate properties on one title.

You have owned the property C and D since after XX September 19XX.

You conducted a primary production business on this property.

You ceased carrying on a primary production business on this property a few years ago.

For a few months after you ceased business, a primary production business was being conducted on the land by A and B, and their respective spouses.

There is no formal agreement, but the family provides you with food and pay for certain living expenses.

The properties separated into C and D.

The aggregated turnover of the businesses will be less than $2,000,000.

You do not satisfy the maximum net asset value test.

Property C

For a few years A and their spouse have carried on a primary production business on property C. They own cattle and occasionally grow small crops.

There is no formal agreement between you and A and their spouse.

You and your spouse live in the homestead on property A. You have lived there for a large number of years. A and their spouse live in a nearby residence on the same property.

A has little farm and land management experience. A relies on your skills, expertise, knowledge and experience to successfully run and manage the primary production business.

As you live close to A and their spouse, you provide regular input into the business.

You still own working dogs, horse and saddle and a work vehicle, which you use in providing assistance to A and their spouse when mustering cattle.

A's spouse is unable to assist in the business as they have young children. As a result, without your assistance, they would have to employ a farm hand which is an expense the business may not have been able to afford, particularly in the start up years.

You have provided security for the business borrowings as the business is not in a position to obtain business borrowings without security (you own property C). There is a mortgage registered over your land to secure the business borrowings. You have also provided personal guarantees in respect of the debts of A's business. You have a significant interest in the ongoing viability of the business.

The family has a meeting to consider the circumstances and obtain opinions of all family members whenever there are major decisions to be made. You are involved in these meetings and your opinion is significant given that you are the owner of the land. Your ongoing support is essential for the viability of the business. You control the major decisions of the partnership because the business cannot borrow without your support and cooperation.

A's business uses the same bank manager and accountant as you.

This is a family arrangement.

A's business current turnover is less than $2,000,000.

You are contemplating selling to a natural resource company that has expressed interest in buying the land instead of negotiating natural resource compensation with you when it proceeds to apply for a natural resource lease.

Property D

For a few years now, B and their spouse have operated a business to carry on a primary production (cattle) on property D.

Your residence is a few kilometres away from property D.

There is no formal agreement between you and D and their spouse.

B and their spouse do not own any land and cannot borrow for the business without you providing security. You have provided a mortgage to secure the majority of the business borrowings and you have also personally guaranteed the debts of the business. A couple of years ago you attended the bank with B and their spouse to extend their debt and borrow additional funds. B and their spouse had to explain to you and the bank why the funds were required. You have an interest in the business as you want to ensure that the business can repay the business debts.

B and their spouse consult you on issues relating to land management. For example, the location of fences and dams, stock management and grazing practices, fire management, horse training, flood management, animal husbandry, mechanical advice and weed control.

The family has a meeting to consider the circumstances and obtain opinions of all family members whenever there are major decisions to be made. You are involved in these meetings and your opinion is significant given that you are the owner of the land. Your ongoing support is essential for the viability of the business. You control the major decisions of the partnership because the business cannot borrow without your support and cooperation.

You provide regular assistance with mustering and working cattle in the yard. You provide your dogs, horse and saddle and work vehicle. B and their spouse have kept a work and cattle diary recording the days you have helped mustering cattle on property D.

This is a family arrangement.

The business operated on property D has a current turnover of less than $2,000,000.

You are contemplating selling to a natural resource company that has expressed interest in buying the land instead of negotiating natural resource compensation with you when it proceeds to apply for a natural resource lease.

Relevant legislative provisions

Section 100-35 of the Income Tax Assessment Act 1997
Division 104 of the Income Tax Assessment Act 1997
Division 152 of the Income Tax Assessment Act 1997
Subdivision 152-A of the Income Tax Assessment Act 1997
Section 152-10 of the Income Tax Assessment Act 1997
Subsection 152-10(1A) of the Income Tax Assessment Act 1997
Section 152-15 of the Income Tax Assessment Act 1997
Section 152-35 of the Income Tax Assessment Act 1997
Subsection 152-40(1) of the Income Tax Assessment Act 1997
Paragraph 152-40(1)(a) of the Income Tax Assessment Act 1997
Paragraph 152-40(1)(b) of the Income Tax Assessment Act 1997
Subparagraph 152-40(1)(a)(ii) of the Income Tax Assessment Act 1997
Subparagraph 152-40(1)(a)(iii) of the Income Tax Assessment Act 1997
Section 328-110 of the Income Tax Assessment Act 1997
Section 328-115 of the Income Tax Assessment Act 1997
Section 328-120 of the Income Tax Assessment Act 1997
Section 328-125 of the Income Tax Assessment Act 1997
Section 328-130 of the Income Tax Assessment Act 1997
Subsection 328-130(2) of the Income Tax Assessment Act 1997
Division 392 of the Income Tax Assessment Act 1997
Section 995-1 of the Income Tax Assessment Act 1997
Paragraph 15(1)(a) of the Corporations Act 1989

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 deternatural resource 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

All legislative references contained herein refer to the Income Tax Assessment Act 1997 unless otherwise stated.

Small business concessions

The basic conditions for small business relief are provided in section 152-10. The relevant conditions are:

1 a CGT event happens to a CGT asset of yours

2 the event would have resulted in a gain

3 at least one of the following applies:

(a) you are a small business entity for the income year

(b) you satisfy the maximum net asset value test

(c) you satisfy the conditions in subsection 152-10(1A)

4 the CGT asset satisfies the active asset test.

CGT events

CGT events are listed in Division 104. Disposal of a CGT asset is CGT event A1.

Capital gain

Section 100-35 explains that you make a capital gain if you receive or are entitled to receive capital amounts from the CGT event which exceed your total costs associated with that event.

Small business entity

Small business entities are explained in section 328-110. You are a small business entity for an income year if:

1 you carry on a business in the current year and

2 one or both of the following applies:

(a) you carried on business in the previous year and your aggregated turnover for the previous year was less than $2 million

(b) your aggregated turnover for the current year is likely to be less than $2 million

Aggregated turnover is explained in section 328-115 as the sum of the relevant annual turnovers. The relevant annual turnovers are:

1 your annual turnover for the income year, and

2 the annual turnover of any entity that is connected with you at any time during the income year, and

3 the annual turnover of any entity that is an affiliate of yours at any time during the income year.

'Connected with is defined at section 328-125 and 'affiliate' is explained in section 328-130. Annual turnover is described at section 328-120 as the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

Maximum net asset value test

Section 152-15 contains the maximum net asset value test. You satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6 million:

1 the net value of the CGT assets of yours

2 the net value of the CGT assets of any entities connected with you

3 the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates.

Subsection 152-10(1A)

Subsection 152-10(1A) discusses passively held assets and affiliates and entities connected with you. This provision states:

The conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

(a) your affiliate, or entity that is connected with you is a small business entity for the income year; and

(b) you do not carry on a business in the income year (other than in partnership); and

(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred ti un subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

Active asset

The active asset test is outlined in section 152-35. A CGT asset satisfies the active asset test if:

· 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 or

· 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.

Subsection 152-40(1) states that a CGT asset is an active asset if, at that time:

· you use it, or hold it ready for use, in the course of carrying on a business, or

· it is used, or held ready for use, in the course of carrying on a business by your affiliate or by another entity that is connected with you.

In accordance with paragraph 152-40(1)(a) your interest in the property will satisfy the definition of active asset if it is used or held ready for use in the course of carrying on a business by you, your affiliate or an entity connected with you.

Affiliate
An individual or company is an affiliate of a taxpayer if the individual or company 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 (section 328-130). However, subsection 328-130(2) points out that an individual or company is not your affiliate merely because of the nature of the business relationship.

Taxation Determination TD 2006/79 provides guidance on when an entity is a small business CGT affiliate. TD 2006/79 at paragraph 41 explains that whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. 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 is able to 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 accordance with directions and wishes

Relevant factors that may support a finding that a person acts or could reasonably be expected to act in accordance with the taxpayer's directions or wishes include:

· the existence of a close family relationship between the parties

· the lack of any formal agreement between the parties prescribing how the parties are to act in relation to each other

· the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements

· the actions of the parties.

No one factor will necessarily be determinative. Example 3 in TD 2006/79 demonstrates that a close family relationship between the owner of the property and the owner of the business does not mean that they are small business CGT affiliates of one another. The key consideration is the actions of the parties. If the person is able to direct the other person in relation to the carrying on of the business, this factor 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 concert

Whether a person is acting in concert with another is essentially a question of fact.

The term 'act in concert' is not defined in the CGT small business relief provisions in Division 152 or elsewhere in the ITAA 1997. The term must therefore be interpreted both according to its ordinary meaning and in keeping with the purpose and scope of Subdivision 152-A.

The Macquarie Dictionary, 1991, 2^nd edn, Macquarie Library, McMahon's Point, defines the term 'in concert' to mean 'in a coordinated or organised way; together'.

The term 'in concert' has not been considered judicially in an income tax context. However, in IPT Systems v. MTIC Corporate Pty Ltd [2000] WASC 316, Owen J considered the meaning of the term 'acting in concert' for the purposes of paragraph 15(1)(a) of the Corporations Act 1989.

Owen J referred to his earlier consideration of the term in Bank of Western Australia v. Ocean Trawlers Pty Ltd (1995) 13 WAR 407 and the decision in Adsteam Building Industries Pty Ltd v. Queensland Cement & Lime Co Ltd (No 4) [1985] 1 QdR 127 (Adsteam Building Industries Case). His Honour identified the following three principles from those cases:

(a)   the words 'in concert' take their meaning from the context and the scope and the purpose of the legislative framework they appear in;

(b)   the term 'acting in concert' involves at least an understanding between the parties as to a common purpose or object; and

(c)   the common purpose or object can be established by inference as much as by direct evidence.

In the Adsteam Building Industries Case, McPherson J said:

…I cannot see that it is possible for a person to "act in concert" towards an end or object, or even simply to act in concert, unless there is at least an understanding between them as to their common purpose or object. The expression in question evokes the notion of joint actors, or perhaps even joint tortfeasors, as to which it is settled that there must be "concerted action to a common end": see The Koursk (1924) p. 140 at 156.  A mere coincidence of separate acts is insufficient: see Fleming: The Law of Torts, 6^th ed., at pp. 227-228.

In Australasian Meat Industry Employees Union v. Allied Trades Federation of Australia (1991) 32 FCR 318 at 329, Gray J said:

The difficulties in the concept of 'in concert' are acute when the acts of one person are confined to advising, requesting, encouraging or inciting the other, who responds by performing the desired act.

At FCR 334, French J said:

The phrase 'in concert' has been construed … as involving knowing conduct, the result of communication between the parties and not simultaneous actions occurring spontaneously. It has been said to involve contemporaneity and a community of purpose which requires a consensual element: …

And, in J-Corp Pty Ltd v. Australian Builders Labourers Federated Union of Workers (WA) (1992) 46 IR 263 at 536; French J said:

Conduct involving direction and response may, according to the circumstances of the case, be conduct in concert on the part of the person directing and the person acting upon that direction.

Consistent with the views drawn from the above cases and the ordinary meaning of the term, a person will be viewed as acting in concert with a taxpayer for the purposes of the 'affiliate' definition where they both act together in pursuit of a common goal or purpose or the taxpayer is able to direct the other person in relation to, and not merely where the taxpayer is involved, connected to or participated in, the carrying on of the business.

Question 1 and question 2

Summary

A and their spouse and B and their spouse are not acting in accordance with your directions or wishes, and are not acting in concert with you. Therefore A and their spouse and B and their spouse are not your affiliates under section 328-130.

Detailed reasoning

The primary production business being carried on at property C is being conducted by A and their spouse. The primary production business being carried on at property D is being conducted by B and their spouse.

The term 'partnership' is defined in section 995-1 to include 'an association of persons carrying on business as partners. This aspect of the definition imports the common law meaning of partnership, being the relationship which exists between persons carrying on business in common with a view to profit.

A partnership is not a separate legal identity. Each partner of a partnership is carrying on the partnership business. It follows that, where a partnership is carrying on a primary production business, each partner of that partnership is considered to be carrying on the primary production business. The individual taxpayer who is a partner in a partnership which carries on a primary production business is considered to be an individual who carries on a primary production business for the purposes of Division 392.

In order to be affiliates, A and their spouse and B and their spouse would be required to act, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you in relation to the affairs of the business.

In accordance with directions or wishes

In this case, you own the properties from which the businesses are conducted. There is a close family relationship as the properties C and D are farmed by your children and their spouses. However, it may be considered that the relationship between you is as a result of you being the owner of the land they are farming, and their financial obligations to you.

There is no formal agreement between you and A and their spouse and B and their spouse prescribing how you are to act in relation to each other. However, you have provided security for the business's borrowings. There are mortgages registered over your land to secure their borrowings. You have also provided personal guarantees in respect of the debts of the businesses. This creates formal agreements between you and the operation of the businesses.

While the way the parties act may be based on the family relationship, the following points are noted:

· your significant interest in the ongoing viability of the businesses due to your financial involvement

· your opinion is significant given that you are the owner of the properties

· the businesses cannot borrow without your support and cooperation

· while you are influential in family meetings, there is no compulsion for A and their spouse or B and their spouse to follow your advice

· your assistance at property C has meant that A and their spouse did not have to employ a farm hand that they could not afford.

These points indicate that the actions of you and A and their spouse and B and their spouse are based more on their financial dependence on you rather than that of a family relationship.

The actions of the parties are key in considering if A and their spouse and B and their spouse are acting in accordance with your directions or wishes. You have provided several examples of where your opinion is 'considered', where you are 'consulted' or where your opinion is 'significant'. You have not shown that A and their spouse and B and their spouse actually act in accordance with your directions or wishes.

In concert

Summarising the main points to consider if a person is acting in concert with another. The term 'acting in concert' considers:

· acting in a coordinated or organised way; together

· at least an understanding between the parties as to a common purpose or object

· concerted action to a common end

· the difficulties in the concept of 'in concert' are acute when the acts of one person are confined to advising, requesting, encouraging or inciting the other

· contemporaneity and a community of purpose which requires a consensual element

· both parties acting together in pursuit of a common goal or purpose and the taxpayer is able to direct the other person in relation to, and not merely where the taxpayer in involved, connected to or participate in, the carrying on of the business.

On reviewing the facts, the following points are noted:

· you provide assistance with mustering

· you have a significant interest in the ongoing viability of the business's due to the security and personal guarantees that you have provided

· your opinion is significant when the family discusses major decisions as you own the properties

· you provide regular input into the business at property C as you live close to A and their spouse

· you are consulted on land management issues at property D.

It is accepted that you provide assistance to A and their spouse and B and their spouse and your opinions are given significant weight. You undoubtedly are involved in, and participate in, the carrying on of the businesses. However, this assistance falls short of the requirements to be 'acting in concert'.

Question 3

Summary

As A and their spouse and B and their spouse are not your affiliates, you do not satisfy the provisions in subsection 152-10(1A).

Detailed reasoning

Subsection 152-10(1A) may apply in relation to affiliates and passively held assets. The first condition to be satisfied is that your affiliate is a small business entity for the income year. As A and their spouse and B and their spouse are not your affiliates, you do not satisfy the provisions in subsection 152-10(1A).

Question 4 and question 5

Summary

As A and their spouse and B and their spouse are not your affiliates, then the properties C and D are not used, or held ready for use in the course of carrying on a business by either you, your affiliate or another entity that is connected with you. Therefore property C and property D are not active assets under section 152-35.

Detailed reasoning

You own the property C and it is being used in a primary production business by A and their spouse. You also own the property D and it is being used in a primary production business by B and their spouse. In order for properties C and D to be active assets, they needs to be used, or held ready for use in the course of carrying on a business by either you, or your affiliate or another entity that is connected with you. You state that you ceased carrying on a business a few years ago. Therefore, in order to satisfy the requirements to be active assets, A and their spouse and B and their spouse need to be your affiliates.

It has been determined that A and their spouse and B and their spouse are not your affiliates. Therefore you do not meet the requirements to satisfy the active asset test.

Question 6

Summary

As neither property C nor property D are active assets under section 152-35, you are not entitled to access the small business CGT concessions for either of these properties using the basic conditions in section 152-10.

Detailed reasoning

One of the basic requirements needed in order to access the small business CGT concessions is that the CGT asset satisfies the active asset test.

Neither of the properties are active assets under section 152-35. Therefore you are not entitled to access the small business CGT concessions for either of these properties.

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