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Ruling

Subject: Capital gains tax concessions for small business

Question 1

Is the small business entity (your relative) that used your land in the course of carrying on a business considered to be your affiliate for the purposes of the capital gains tax (CGT) concessions for small business?

Answer: No

Question 2

Do you satisfy the basic conditions necessary to be eligible for the CGT concessions for small business?

Answer: No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You acquired some land.

The land was sold during the 2011-12 financial year. You made a capital gain.

Your relative (a small business entity) used all of the land to carry on a business continually from the date you acquired the land up until the date of sale.

You have never used the land in a business operated by yourself.

You did not receive any rent for the use of your land.

You had no say in how the land was used, improved or maintained and were never consulted on these matters. The small business entity made all the decisions in relation to the land.

You did not incur any costs included in the upkeep of the land.

The small business entity made the decision to sell the land.

The small business entity has custody of all the proceeds of the sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 328-130(1)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 152-40

Reasons for decision

Affiliate

Subsection 328-130(1) of the ITAA 1997 explains that an individual or a company is an affiliate of yours if the individual or company 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 business of the individual or company.

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. No one factor will necessarily be determinative.

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, or in concert with the taxpayer, 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.

Generally, another business would not be acting in concert with you if they:

· have different employees

· have different business premises

· have separate bank accounts

· do not consult you on business matters, and

· conduct their business affairs independently in all regards.

Importantly, even where a family relationship is present, it must be of sufficient strength to enable the entity to direct or influence the potential affiliate in relation to all, or a substantial part, of the affairs of the latter's business. You must be able to demonstrate that you are 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.

In your case, we accept that there is a family relationship in that a business is carried on by your relative. We also acknowledge that you have chosen not to charge your relative rent for the use of the land. However, based on the information provided, your relative makes all the decisions in relation to the use of the land, including its ongoing maintenance and the decision to sell it, without any consultation with you.

Accordingly, you have not demonstrated that your relative 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 their business. Therefore, we consider that your relative is not your affiliate for the purposes of the capital gains tax concessions for small business.

Small business CGT concession eligibility and the active asset test

Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are:

a) a CGT event happens in relation to a CGT asset in an income year.

b) the event would have resulted in the gain

c) at least one of the following applies:

i. you are a small business entity for the income year

ii. you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

iii. you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

iv. the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (e.g. land or buildings) is transferred to another entity.

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

In your case, a CGT event has occurred (the transfer of ownership of the land) and it has resulted in a capital gain. However, as the small business entity (your relative) that used the asset in the course of carrying on a business is not considered to be your affiliate, the asset does not satisfy the active asset test.

Accordingly, as the asset does not satisfy the active asset test, you do not satisfy the basic conditions necessary to be eligible for the CGT concessions for small business.

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