1052134520504 | Legal database

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Edited version of private advice

Authorisation Number: 1052134520504

Date of advice: 28 June 2023

Ruling

Subject: CGT - small business concessions

Question

Is a family member (sister), with joint ownership of farming land used in a separate business, an 'affiliate' of the Taxpayer (as defined in s 328-130 of the Income Tax Assessment Act 1997 ('ITAA 1997')) who sold farming land of a business conducted in his own name in partnership with his wife?

Answer

No.

This ruling applies for the following period

DD MM YYYY to DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

Background information

1. The Taxpayer was born on DD MM YYYY and is presently xx years of age.

2. The Taxpayer owned cattle grazing land in his own name, that was an active asset used in a business in partnership with his wife.

3. The land was sold in MM YYYY and a capital gain was made.

4. The Taxpayer's wife is an 'Affiliate' in the terms of s 328-130 of the ITAA 1997.

5. In accordance with s 152-15 of the ITAA 97, all of the CGT assets owned by the Taxpayer and his wife, either individually or jointly, are valued under a net value of $XXX.

6. The Taxpayer's Tax Agent has determined that the Taxpayer is entitled to the CGT Small Business Concessions of s 152-10 of the ITAA 1997.

Further related facts

7. The Taxpayer also owns other farming land as tenants-in-common with his wife, his sister and brother-in-law.

8. This farming land is leased to Company X which operates another business.

9. The Taxpayer, his wife, his sister and his brother-in-law are all Directors in Company X.

10. The Taxpayer and his wife own 50% of the shares through a company owned and directed by them.

11. The Taxpayer's sister and brother-in-law also own 50% of the shares through a separate company, independently owned and directed by them.

12. Company X and the company that holds the Taxpayer and his wife's shares in Company X are connected entities to the Taxpayer.

13. The Taxpayer's analysis of his net assets also included the full value of the net assets of these two companies.

14. It is noted that:

• The Taxpayer's sister and brother-in-law have no interest in any farming business in their own names.

• The Taxpayer's sister and brother-in-law have no interest in the farming business operated by the Taxpayer and his wife.

• The Taxpayer's sister and brother-in-law have no interest in any lands used by the Taxpayer and his wife in their farming business.

Relationship between the parties

15. The Taxpayer's sister and brother-in-law do have a family relationship with the Taxpayer.

16. The Taxpayer's sister and brother-in-law also have a business relationship with the Taxpayer through their interest in Company X.

17. The Taxpayer's sister and brother-in-law do not act in accordance with the Taxpayer's wishes, or in concert with him, in relation to the affairs of the farming business operated by the Taxpayer and his wife.

18. Nor did the Taxpayer's sister and brother-in-law act in this manner in relation to the land sold by the Taxpayer which was an active asset in the business.

19. The Taxpayer is seeking a private ruling as to whether the Taxpayer's sister and brother-in-law are 'Affiliates" of the Taxpayer. If they are determined to not be affiliates, then the Taxpayer will not be required to include the value of any CGT assets owned by his sister or brother-in-law in assessing his assets under the provisions of s 152-10 and s 1521-15 of the ITAA 1997.

Information provided

20. You have provided several documents containing detailed information in relation to the Taxpayer, including:

• Private Binding Ruling ('PBR') Application, dated DD MM YYYY

21. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Section 328-130

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

QUESTION:

SUMMARY

A family member (sister), with joint ownership of farming land used in a separate business, is not an 'affiliate' of the Taxpayer (as defined in s 328-130 of the Income Tax Assessment Act 1997 ('ITAA 1997')) who sold farming land of a business conducted in his own name in partnership with his wife.

DETAILED REASONING

22. As stated in section 152-1 ITAA 1997, subdivision 152-A of the ITAA 1997 sets out the 'basic conditions' which must be satisfied in order for small business entities to qualify for any of the CGT small business concessions to reduce their capital gain by the various concessions in Division 152 of the ITAA 1997.

Meaning of Affiliate

23. Under subsection 328-130(1) of the ITAA 1997, an individual or a company is an affiliate of yours if the individual 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.

24. However, under subsection 328-130(2) of the ITAA 1997, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

25. For small business relief purposes, a spouse or a child under 18 years of age may also be an affiliate under section 152-47 of the ITAA 1997.

26. 'Small business affiliates' are defined as any individual or company that, in relation to their business affairs, acts or could reasonably be expected to act either:

• according to your directions or wishes

• in concert with you.

27. If entities are considered a taxpayer's affiliate, this will affect the:

• calculation of their aggregated turnover

• calculation of the maximum net asset value test

• the application of the active asset test.

28. Whether a person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, depends on the circumstances of the case.

29. 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.

APPLICATION TO YOUR CIRCUMSTANCES

30. For the purpose of this private ruling, a determination is to be made whether the brother-in-law and sister of the Taxpayer are affiliates of the Taxpayer under section 328-130, so as to establish whether the Taxpayer is required to include the value of any CGT assets owned by them are to be included when assessing the Taxpayer's assets under the provision of section 152-10 and section 152-15 of the ITAA 1997.

31. The background facts provided state that the Taxpayer owned farming land in his own name, that was an active asset used in a business in partnership with his wife. The land was sold in MM YYYY and a capital gain was made. The Taxpayer's wife is an 'Affiliate' in the terms of s 328-130 of the ITAA 1997.

32. In accordance with s 152-15 of the ITAA 97, all of the CGT assets owned by the Taxpayer and his wife, either individually or jointly, are valued under a net value of $6,000,000. The Taxpayer is entitled to the CGT Small Business Concessions of s 152-10 of the ITAA 1997.

33. The Taxpayer also owns additional farming land as tenants-in-common with his wife, his sister and brother-in-law. This orchard farming land is leased to Company X which operates another business. The Taxpayer, his wife, his sister and his brother-in-law are all Directors in the company.

34. The Taxpayer and his wife own xx% of the shares through a company owned and directed by them. The Taxpayer's sister and brother-in-law also own xx% of the shares through a separate company, independently owned and directed by them.

35. Company X and the company that holds the Taxpayer and his wife's shares in Company X are connected entities to the Taxpayer.

36. The Taxpayer's analysis of his net assets also included the full value of the net assets of these two companies.

37. It is noted that:

• The Taxpayer's sister and brother-in-law have no interest in any farming business in their own names.

• The Taxpayer's sister and brother-in-law have no interest in the farming business operated by the Taxpayer and his wife.

• The Taxpayer's sister and brother-in-law have no interest in any lands used by the Taxpayer and his wife in their farming business.

38. In considering whether the Taxpayer's sister is an affiliate of the Taxpayer, we look to subsection 328-130(1) of the ITAA 1997, which states that an individual or a company is an affiliate of yours if the individual 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.

39. You state the Taxpayer's sister and brother-in-law do not act, nor could they reasonably be expected to act, in accordance with the Taxpayer's directions or wishes, nor in concert with the Taxpayer, in relation to the affairs of the business of the Taxpayer.

40. You further state the Taxpayer's sister and brother-in-law have no interest in the farming business operated by the Taxpayer and his wife, and no interest in any lands used by the Taxpayer and his wife in their farming business.

43. Consequently, the Taxpayer's sister and brother-in-law are not affiliates of the Taxpayer under section 328-130 of the ITAA 1997, therefore the Taxpayer will not be required to include the value of any CGT assets owned by the sister and brother-in-law in assessing his assets under the provisions of section 152-10 and section 152-15 of the ITAA 1997.

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