Edited version of private advice

Authorisation Number: 1052344296591

Date of advice: 16 December 2024

Ruling

Subject: CGT - active asset

Question 1

Does the interest of each of the Taxpayers in the Home Farm, the subject of the proposed sale described below, satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the Home Farm satisfies the active asset test.

Question 2

Is Person C an affiliate of the Taxpayers under section 328-130 of the ITAA 1997, for the purpose of satisfying section 152-40 of the ITAA 1997?

Answer

Yes. Person C is an affiliate of Persons A and B based on the close family relationship, and that Person C was dependent upon the assistance of Persons A and B in the business operations.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Persons A and B (the Taxpayers) are siblings and executors for the estate of Person C. Persons D and E were their parents.

Person B has three children, Persons F, G and H.

Persons A and B, in their personal and trustee capacities, currently hold property (the Home Farm) as tenants in common and in equal 1/3 shares.

The Home Farm has been owned and operated at different times by these three generations of family.

In the mid-1900s, Person E inherited the Home Farm. Persons D and E lived on the Home Farm. They carried on a primary production business on the Home Farm. Persons A, B and C grew up on the home farm and assisted with general farm duties during their childhoods and adolescences.

After leaving school, Person C worked elsewhere until they returned to the Home Farm and became partner in the family business, with Persons D and E (the partnership).

Person C lacked practical skills and struggled with most aspects of farming. They had difficulty planning work and completing manual tasks. Person D would guide Person C every day with working on the Home Farm and would supervise them.

Person A studied and worked elsewhere until returned to the Home Farm to assist in the business.

Between the mid-1980s and 2010s, Person B attended the Home Farm most days to organise Person C and assist them to complete all farm duties.

In the late 1980s, Person E died. The Home Farm passed to Persons A, B and C as tenants in common in equal shares. Persons D and C continued the family business under the partnership. Persons D, C and A continued to live on the Home Farm. Persons D, A and B continued to work and assist Person C in the business. Person A stepped into Person E's role and became the main person responsible for home duties.

Person D died in the early 1990s and Person C became the sole owner of the family business. Persons A and B stepped into Person D's role and supported Person C in their daily duties in the business. Person C did not pay or reimburse Persons A or B for the use of their share of the Home Farm. Person C did not pay Persons A or B for their work on the Home Farm.

Since then, the primary production business was carried on exclusively by Person C. Person C was a sole trader and at no stage was there a partnership between Persons A, B and C.

Person B's children, Persons F, G and H also assisted on the Home Farm. Person F studied agricultural science and was responsible for all planning aspects of the business, and advised Person C on feeding, fertilisation, herd and hey management, etc. Persons G and H returned to the Home Farm respectively and have assisted in the business since.

Person C was the sole owner of the business on the Home Farm between 19XX and 20XX. As time went by, their involvement reduced until their only roles were administration and managing finances. Persons F, G and H's involvement increased.

In the mid-2010s, Person A took over Person C's role.

In 20XX, Person C moved into a nursing home and the business on the Home Farm ceased. From this time, the Home Farm was leased to a third party.

In 20XX, Person C died. Persons A and B were appointed as executors and trustees of their estate, and they bequeathed their interest in the Home Farm:

•                     One half share to Person A; and

•                     One half share equally amongst Persons F, G and H.

The Home Farm is intended to be sold within 2 years of Person C's death.

There have been no discussions with any real estate agent, or any market research undertaken yet for the sale.

Person C meets the aggregated turnover test.

A valuation of Home Farm was sought as part of the process of obtaining probate for Person C's estate. The valuation indicates that the market value of the Home Farm at this time was approximately $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Question 1

Subsection 152-35(1) of the ITAA 1997 provides that:

A CGT asset satisfies the active asset test 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 specified in subsection (2); 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 7.5 years during the period specified in subsection (2).

Further, subsection 152-35(2) of the ITAA 1997 provides that 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 to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

The meaning of an active asset is defined in section 152-40 of the ITAA 1997 and includes a CGT asset you own that is used in the course of carrying on a business by your affiliate.

Person C conducted a business on the Home Farm and was an affiliate of Persons A and B. The business operating on the Home Farm ceased in 20xx and the Home Farm has been an active asset for at least 7.5 years.

Since 19XX, Persons A and B have owned 1/3 interest each in the Home Farm since it was passed to them as beneficiaries of Person E's deceased estate. As such the interests Persons A and B hold will satisfy the active asset test.

Section 152-80 allows the trustee of a trust established by the will of a deceased individual to reduce or disregard a capital gain under Division 152 where2:

•                     a CGT asset forms part of the estate of the deceased individual;

•                     the asset devolves to that trustee, or the individuals legal personal representative, or passes to a beneficiary of the individual;

•                     the deceased individual would have been entitled to reduce or disregard a capital gain under Division 152 if a CGT event had happened in relation to the CGT asset immediately before their death; and

•                     a CGT event happens in relation to the asset within 2 years of the individual's death, unless the Commissioner extends that time limit in accordance with subsection 152-80(3).

The Home Farm will be sold within 2 years of Person C's death. In respect of the interest previously held by Person C, it will retain the 'character' it had whilst it was owned by Person C. As such the interest previously held by Person C will satisfy the active asset test.

Question 2

Section 328-130 of the ITAA 1997 provides that an individual or a company is an affiliate 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 but is not an affiliate merely because of the nature of the business relationship between the you and the individual or company.

Subsection 152-40(1) of the ITAA 1997 provides that:

A CGT asset is an active asset at a time if, at that time:

(a)      you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i)    you; or

(ii)    your affiliate; or

(iii)    another entity that is connected with you; or

(b)      if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

Person C carried on the business on the Home Farm as a sole trader between 19XX and 20XX. Persons A and B did not carry on the business. Person C required guidance and supervision. There was a close family relationship present. It is reasonable to expect that Person C acted in concert with, and in accordance with the directions and wishes of, Persons A and B. Person C relied on their input and assistance in operating the business on the Home Farm.

Person C is an affiliate of Persons A and B per section 328-130 of the ITAA 1997 which accordingly satisfies subsection 152-40(1) of the ITAA 1997.

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