Edited version of private ruling

Authorisation Number: 1011719435381

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Ruling

Subject: CGT active asset

Question

Does the property satisfy the active asset test under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You purchased the property several years earlier with your child.

You owned a 50% share in the property. The other 50% being owned by your child.

The another property is owned by your child-in-law.

The properties were run as one farm with your child-in-law conducting a farming and grazing business as a sole trader.

You receive rent. This was halved in some later income years due to the inability of the farm to generate enough income due to severe prevailing drought conditions and to meet all the other costs associated with the farm.

Your involvement in the business includes:

· moving livestock

· checking livestock

· drafting livestock for sale

· checking fences and water

· livestock marking

· accompanying your child-in-law to the sales

You sold your interest in the property.

A capital gain was made when the property was sold.

Another property was purchased. You have a 25% share, your child has a 25% share and your child-in-law has a 50% share.

Your child-in-law conducts a business of farming and grazing on this new property as a sole trader.

You spend half your time living close to medical facilities, and the other half of the time at the new property.

You have contributed to the operation of the businesses at the two properties.

You satisfy the maximum net asset value test in subparagraph 152-10(1)(c)(ii) of the ITAA 1997 and section 152-15 of the ITAA 1997.

You did not use the original property in the course of carrying on a business.

There is no formal arrangement between you and your child-in-law in relation to the use of either properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152,

Income Tax Assessment Act 1997 Subdivision 152-A,

Income Tax Assessment Act 1997 Subparagraph 152-10(1)(c)(ii),

Income Tax Assessment Act 1997 Section 152-15,

Income Tax Assessment Act 1997 Paragraph 152-30(2)(a),

Income Tax Assessment Act 1997 Section 152-35,

Income Tax Assessment Act 1997 Subsection 152-40(1),

Income Tax Assessment Act 1997 Paragraph (1)(a),

Income Tax Assessment Act 1997 Paragraph (4)(e),

Income Tax Assessment Act 1997 Subparagraph (1)(c)(i),

Income Tax Assessment Act 1997 Section 328-125,

Income Tax Assessment Act 1997 Subsection 328-125(6),

Income Tax Assessment Act 1997 Section 328-130,

Income Tax Assessment Act 1997 Paragraph 328-135(1)(b) and

Corporations Act 1989 Paragraph 15(1)(a).

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 determining whether Part IVA may apply.

For more information on Part IVA, go to our website 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.

Summary

From the information provided, the property will not satisfy the meaning of an 'active asset' under subparagraph 152-40(1)(c)(i) just before the happening of the CGT event as it was not used, or held ready for use, in the course of carrying on a business by you, your affiliate or an entity connected with you.

As such, the active asset test also will not be satisfied.

Detailed reasoning

The active asset test

According to section 152-35 the active asset test is satisfied 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 test period outlined below, 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 during the test period.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of:

· the CGT event, and

· if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased.

Active asset

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

A person can be an affiliate of a taxpayer if the person 'acts, or could reasonably be expected to act, in accordance with (the taxpayer's) directions or wishes, or in concert with the taxpayer' (section 328-130).

Whether a person acts in such a manner, is a question of fact dependent on all the circumstances of the particular case. The key consideration is the action 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.

Consistent with these views and the ordinary meaning of this term, an entity will only be viewed as acting in concert with another entity for the purposes of the affiliate definition where it and the other entity act together in pursuit of a common goal or purpose.

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. Relevant factors may include the existence of a close family relationship or friendship between the parties and any agreement or common understanding between the parties about how the parties are to act in relation to each other.

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 and 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.

In your case

To be considered an active asset, the property must be used or held ready for use in the course of carrying on a business that is carried on by;

· you

· your affiliate or

· another entity that is connected with you.

You state that you do not use the property in the course of carrying on a business.

Quite clearly, the property is used in the farming business that your child-in-law operates as a sole trader.

In order to determine whether the property is an active asset, it is necessary to first determine whether your child-in-law is considered to be your affiliate.

Affiliate

In order to be regarded as an affiliate, you must satisfy at least one of two tests.

· your child-in-law acts, or could reasonably be expected to act, in accordance with your directions or wishes, or

· your child-in-law acts in concert with you.

Whether a person acts, or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you is a question of fact dependant on all the circumstances of the particular case. No one factor will necessarily be determinative. Relevant factors summarised from Taxation Determination TD 2006/79 that may support a finding that a person is your affiliate 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

· the actions of the parties.

There is a family relationship between the parties. He is your child-in-law.

There is no formal agreement between the parties. You received annual rent. This was halved when, due to the drought, the farm could not generate enough income. It appears there is an informal arrangement between your child-in-law and yourself.

The business was conducted by your child-in-law as a sole trader. The business consisted of farming the two properties. You state that by owning a 50% interest in the property and having an active role in the day to day running and overall management of the business, you were, and still are, able to direct your child-in-law in relation to the carrying on of the business. However, as the business consisted of the two properties, your interest was only 25%.

You advise that you contributed to water management strategies, you helped your child-in-law in the yards and you accompanied your child-in-law to sales. You state that you were a huge help to your child-in-law. These statements are not indicative of your child-in-law acting in accordance with your wishes, nor of acting in concert. It appears that you were merely involved in or participated in, the carrying on of the business.

You discuss your proposal to plant salt bush in response to the drought that lasted from 2001 to 2010. You purchased the property and sold a few years later. Your proposal was not implemented before the property was sold. You explain you are considering a similar project at your new property. The lack of progress with your proposal reinforces the fact that your child-in-law is not acting in accordance with your wishes.

You suggested a back up bore to secure water supply. This was your suggestion and you financed it. There is no indication that you and your child-in-law were acting in concert.

You have contended that you and your child-in-law are clearly acting together in pursuit of the common goal of running a viable farming business. However, there is nothing to suggest that you and your child-in-law act together in pursuit of a common goal or purpose or that you had directed, or was able to direct your child-in-law in accordance with your wishes or direction.

Your regular involvement in the business includes activities such as:

· monitoring weather conditions

· moving livestock

· checking livestock

· drafting livestock for sale

· checking fences and water

· livestock marking

· accompanying your child-in-law to the sales

· providing advice not to over stock the property

You appear to have limited involvement in the business, amounting to participation, with no responsibility. You also appear to have no responsibility for most management decisions.

You have not demonstrated that you are acting together with your child-in-law in a coordinated way. For example:

there are no regular meetings

· apart from receiving rent and financing the bore, you do not contribute or benefit financially from the business. You are financially independent

· you have part owned the property for six years. In that period there are only two instances of any decision making:

· your suggestion to sink a back up bore

· your proposal to plant salt bush

· your child-in-law does not consult you on plans and activities

· your child-in-law is not required to act in accordance with your decisions or wishes, or in concert.

In the present case, whilst you have contended that the you were involved in the carrying on of the business, there is nothing to suggest that you and your child-in-law had acted together in pursuit of a common goal or purpose or that you had directed, or was able to direct, your child-in-law in the conduct of his business.

 The fact that you took a personal interest in the business and charged him a lower than normal rent for the use of the property under an informal 'lease' arrangement does not suggest that you were 'acting in concert' in relation to the business.

Assisting your child-in-law in activities on the property does not lead one to the conclusion that there was a concerted joint activity to achieve a common purpose.

From the information provided, there is no evidence to suggest that your child-in-law had acted, or could reasonably be expected to have acted, in concert with you.

You were collecting rent for the use of the property for years and your child-in-law ran the business.

Your child-in-law ran the business as a sole trader. From the information provided, you have not shown that your child-in-law acted, or could reasonably be expected to have acted, in accordance with your directions or wishes, or in concert with you.

'Connected entity'

As you and your child-in-law are both individuals, you cannot be connected to each other.

Conclusion

From the information provided, the property will not satisfy the meaning of an 'active asset' under subparagraph 152-40(1)(c)(i) just before the happening of the CGT event as it was not used, or held ready for use, in the course of carrying on a business by you, your affiliate or an entity connected with you.