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Ruling

Subject: Small business concessions - affiliate

Question 1

Is the current lessee of the property your affiliate for the purposes of the capital gains tax concessions for small business?

Answer

No.

Question 2

Will the property be considered an active asset under section 152-40(1) of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You and your spouse own a property.

You and your spouse operated a business on the property for a period of time.

During that period, the property would have satisfied all requirements to be considered an active asset.

The property was then rented to an unrelated party for a period of time.

During this time the asset was a passive asset.

The lease for the property was then acquired by a new company.

This company is an unrelated party of you and your spouse.

A formal lease agreement is in place detailing the rights to occupy the premises and rental payments.

You and your spouse made yourself available for guidance, mentoring and to provide business coaching and instruction.

There is no formal agreement which dictates the terms of the arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-30,

Income Tax Assessment Act 1997 section 152-35,

Income Tax Assessment Act 1997 paragraph 152-40(1)(a), and

Income Tax Assessment Act 1997 subsection 152-40(4).

Reasons for decision

Question 1

An affiliate is defined by section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997) as being an individual or company who acts 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 individual or company.

Relevant factors that may support a finding that a person acts in such a manner include:

· the existence of a close family relationship between the parties;

· the lack of any formal agreement or formal relationship between the parties dictating 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 or legal or fiduciary obligations; and

· the actions of the parties.

Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company.

In this case, a close family relationship does not exist between the parties. A formal lease agreement is in place that sets out the occupancy rights and rental payments. The way the parties act, or could reasonably be expected to act, in relation to each other would be based on the formal lease agreement.

We accept that you and your spouse provide guidance, mentoring, business coaching and instruction to the lessee and that there is no formal agreement in place in regards to this assistance. However, the Commissioner is not satisfied that the lessee could reasonably be expected to act in accordance with you and your spouse's directions or wishes or in concert with them.

Therefore, the lessee is not an affiliate of you or your spouse.

Question 2

The active asset test requires the capital gains tax (CGT) asset to be an active asset for:

· 7 years, if owned for more than 15 years, or

· half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997).

An active asset may be a tangible asset or an intangible asset.

A tangible or intangible asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by:

· the taxpayer

· the taxpayer's spouse or child under 18 years

· the taxpayer's affiliate, or

· an entity connected with the taxpayer (paragraph 152-40(1)(a) of the ITAA 1997).

Assets which cannot be active assets

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

· interests in a connected entity (other than those satisfying the 80% test)

· shares in companies and interests in trusts (other than those satisfying the 80% test)

· shares in widely held companies unless they are held by a CGT concession stakeholder of the company

· shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply

· financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options

· an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

Application to your circumstances

For the property to satisfy the active asset test, it must have been active half of the ownership period as it has been owned for less than 15 years. As the property has been active for less than half the period of ownership it will not satisfy the active asset test.

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