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Ruling

Subject: Small business capital gains tax concessions - affiliate

Question 1

Is the company your affiliate for the purpose of the small business capital gains tax concessions?

Answer

Yes.

Question 2

Does the property used to run the business satisfy the active asset test?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling.

Less than five individuals are equal shareholders of the company.

They are the only directors of the company which ran a business.

The business premises were owned equally by one of the company directors and the spouse of the other directors.

The property was used for the business since its purchase.

In the 2012 financial year the business and premises were sold.

The new owner negotiated separate contracts; however the sale was completed as a whole. The purchase of the business and premises went hand in hand and the transaction would not have gone ahead without both the business and premises being settled and sold together.

Although the legal ownership of the business was with the company and the directors, the business was in fact run by the X individuals.

The property owners were very involved with the business.

The individuals worked in a coordinated and organised way to achieve good outcomes for the growth of the business.

The decisions that were made by the group, both to expand the business by way of offering various programs, and to remove programs that were no longer financially viable, were done as a group and not just the directors of the company.

The actions of the individuals also show that they worked together to achieve outcomes, although the spouse of the directors were not legal owners of the business they were very much involved in improving the business with both professional input and physical labour.

There was no formal agreement between the parties nor any remuneration paid to the property owners for their time and effort.

There was no lease agreement between the company and the individual property owners nor was an agent used in collection of rent.

Various decisions were made at regular informal meetings between the individuals.

All tasks performed by the owners of the property were done gratis and to support the company's business. All materials used to carry out tasks were purchased by the business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-130,

Income Tax Assessment Act 1997 152-10,

Income Tax Assessment Act 1997 section 152-35,

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

Income Tax Assessment Act 1997 subsection 152-40(4).

Reasons for decision

Question 1

An affiliate is defined by section 328-130 of the Income Tax Assessment Act 1997 as being an individual or company who 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 individual or company.

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.

Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company.

Whether a person is acting in concert with another is essentially a question of fact. The term 'acting in concert' involves at least an understanding between the parties as to a common purpose or object.

Application to your circumstances

In this case, a close family relationship exists between some directors and property owners. One individual is both an owner of the property and a director of the company. There is no formal lease agreement in place between the owners of the property and the company. The way the parties act, or could reasonable be expected to act, in relation to each other would be based on their personal relationships.

The information provided details numerous decisions made by the directors of the company and the owners of the property as a whole. The actions of the parties also demonstrate that the company and the individual property owners act in a coordinated way together. Also, that the parties have an understanding as to a common purpose or object and the concerted action is to a common end.

Therefore, the company is an affiliate of the owners of the business.

Question 2

Summary

As the property has been used in the course of carrying on a business by a CGT affiliate of the property owners for the entire ownership period, the property will satisfy the active asset test.

Detailed reasoning

The active asset test requires the capital gains tax (CGT) asset to be an active asset for:

· 7 years, if owned for more than 15 years, or

· half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997).

An active asset may be a tangible asset or an intangible asset.

A tangible or intangible asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by:

· the taxpayer

· the taxpayer's spouse or child under 18 years

· the taxpayer's affiliate, or

· an entity connected with the taxpayer (paragraph 152-40(1)(a) of the ITAA 1997).

Assets which cannot be active assets

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

· interests in a connected entity (other than those satisfying the 80% test)

· shares in companies and interests in trusts (other than those satisfying the 80% test)

· shares in widely held companies unless they are held by a CGT concession stakeholder of the company

· shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply

· financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options

· an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

Application to your circumstances

In this case, the property has been owned for just over X years. For the entire ownership period, the property was leased to the company. For the CGT asset to be considered an active asset it must be owned and used, or held ready for use, in the course of carrying on a business by the property owners or their small business CGT affiliate. As discussed above, the company is considered to be an affiliate of the property owners. Therefore, the property will be considered an active asset for the entire period of ownership.

For the property to satisfy the active asset test, it must have been active half of the ownership period as it has been owned for less than 15 years. As the property has been active for the entire ownership period, it will satisfy the active asset test in section 152-35 of the ITAA 1997.