Edited version of private ruling

Authorisation Number: 1011770225314

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Ruling

Subject: CGT - active asset - affiliate

Question 1

For the purposes of paragraph 152-40(1)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997), is the taxpayer considered to be an affiliate of their spouse in accordance with paragraph 152-47(2)(a) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Relevant facts and circumstances

The taxpayer and spouse have jointly owned a commercial property since post 19 September 1985.

Part of the property is leased to tenants and part is used in the carrying on of a business conducted by the taxpayer. The spouse derives wages from the business and they both receive 50% of the rent.

The spouse and taxpayer are considering selling the property.

Relevant legislative provisions

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

Income Tax Assessment Act 1997, paragraph 152-47(2)(a)

Income Tax Assessment Act 1997, section 328-130

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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 of the ITAA 1936, go to our website www.ato.gov.au 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.

Note: all subsequent legislative references are to the ITAA 1997 unless otherwise stated.

Reasons for decision

Section 152-40 discusses the meaning of active asset. In accordance with subparagraph 152-40(1)(a)(ii) if a CGT asset you own is used, or held ready for use, in the course of carrying on a business that is carried on by your affiliate, it will be considered an active asset.

Section 328-130 discusses the meaning of affiliate. A note underneath this section provides that even if they don't qualify for affiliate status using the usual tests under that section, 'For small business relief purposes, a spouse or a child under 18 years may also be an affiliate under section 152-47'.

Under section 152-47 spouses or children may be taken to be affiliates for certain passively held CGT assets. Paragraph 152-47(2)(a) provides that for the purpose of Subdivision 152-A, in determining whether the business entity is an affiliate of the asset owner a spouse of the individual is taken to be an affiliate of that individual.

Application to your circumstances

The spouse owns 50% of the commercial property from which the taxpayer's business is operated and wishes to access the small business CGT relief provisions contained in Division 152. Other than as an employee, they do not have any involvement in the business, therefore they must establish an affiliate connection to the taxpayer.

Regardless of whether affiliate status can be established under section 328-130, the operation of paragraph 152-47(2)(a) will be such that the taxpayer will be considered an affiliate of the spouse for the purposes of the meaning of active asset under subparagraph 152-40(1)(a)(ii) because of their spousal relationship.