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Ruling

Subject: Capital gains tax small business concessions

Question 1

Was your spouse taken to be your affiliate while they conducted a sole trader business on land that you owned?

Answer

Yes

Question 2

If so, for the period that your spouse was your affiliate, are the companies that your spouse has an interest in taken to be entities that were connected with you?

Answer

Yes

Question 3

Are you required to include the turnover of your spouse and all of the entities your spouse has an interest in when calculating your aggregated turnover in relation to the sale of Property A and Property B?

Answer

Yes

Question 4

Are you required to include the assets of your spouse and all of the entities your spouse has an interest in for the maximum net asset value test in relation to the sale of Property A and Property B?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You own Property A jointly with your spouse.

For a period, you operated a business in partnership with your spouse. The partnership operated from Property A.

After a period of time, your spouse had developed other business interests. From this point the partnership business ceased and you and your spouse each ran a sole trader business, both from Property A.

You and your spouse operated your respective sole trader businesses independently from Property A; each making independent decisions relating to the business. However, there was some shared use of facilities on Property A. You and your spouse have separate bank accounts used in the running of your respective businesses; you do not have any accounts in joint names.

You acquired Property B. You hold 100% of the ownership interests in Property B.

Property B was also used in your sole trader business. Property B was never used by your spouse in their business.

Your spouse ceased trading in their sole trader business during the 2012-13 income year.

You entered into a contract for the sale of Property A during the 2012-13 income year.

You entered into a contract for the sale of Property B during the 2012-13 income year.

In due course you will retire from your business.

Your spouse has interests in the following entities:

A Pty Ltd

· There are no formal or informal business relationships or agreements between you and this company

· Your spouse is the sole shareholder and director

B Pty Ltd

· Your spouse holds a 50% shareholding with the remaining 50% being owned by C Pty Ltd. Your spouse is the sole director

C Pty Ltd

· Your spouse is the sole director. 100% of the shares are owned by D Pty Ltd

D Pty Ltd

· Your spouse is the sole shareholder and director

E Pty Ltd

· Your spouse is the sole shareholder and director

You have no interest or influence over the operation of the above entities. The only involvement you have had in these entities is that you have been formally employed by E Pty Ltd and A Pty Ltd on a permanent part time basis at various times. You were paid a salary.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-47

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 328-130

Reasons for decision

Question 1 - Affiliate

An affiliate is, according to section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997), an individual or a 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 business of the individual or company.

A spouse or a child under the age of 18 years is not automatically an affiliate. Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative.

However subsection 152-47(1) applies to deem a spouse or child an affiliate of an entity if:

· one entity (the asset owner) owns a CGT asset (whether the asset is tangible or intangible); and

either:

· the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity); and

· the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity);and

· the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner.

The application of section 152-47 of the ITAA 1997 is not limited to situations where an entity that owns a CGT asset and does not operate a business provides that asset to another entity for use in its business (the standard passively held asset). It also applies to situations where an entity that operates a business owns a CGT asset that it provides to another entity for use in that other entity's business.

In this case, you own a portion of Property A which was used in the business of your spouse for a period of time. You contend that the intention of section 152-47 of the ITAA 1997 was to increase access to the small business concessions and should therefore not be applied in your case. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Measures No. 2) Act 2009 states that the inclusion of the affiliate rule contained in section 152-47 of the ITAA 1997 increases access to the concessions by treating an individual's spouse or child as their affiliate in a wider range of situations. However, paragraph 2.38 of the EM also concedes that there will be circumstances where the affiliate rule may also reduce access to the concessions by bringing in more affiliates and more entities that are connected with the asset-owning entity than the old rule.

Accordingly, section 152-47 of the ITAA 1997 will apply to treat your spouse as your affiliate during the period that they were carrying on a business on Property A.

Question 2 - Entities connected with you

An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity (section 328-125 of the ITAA 1997).

Subsection 328-125(2) of the ITAA 1997 provides that you control a company if you or your affiliates, or you together with your affiliates beneficially own, or have the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Your spouse, who under section 152-47 of the ITAA 1997 is deemed to have been your affiliate for the period they used Property A in their business, holds 100% of the interests (indirectly or directly) in the following entities:

· A Pty Ltd

· B Pty Ltd (50% directly and 50% indirectly through C Pty Ltd and D Pty Ltd)

· E Pty Ltd

· C Pty Ltd (indirectly through D Pty Ltd)

· D Pty Ltd

Your spouse is taken to control these entities for the purposes of section 328-125 of the ITAA 1997. Therefore, in accordance with subsection 328-125(2) of the ITAA 1997 the above listed companies are also entities connected with you for the period that your spouse was deemed to be your affiliate.

Question 3 - Aggregated turnover

Aggregated turnover is defined by section 328-115 of the ITAA 1997. Aggregated turnover for an income year is the sum of your relevant annual turnovers for the year and certain related entities of yours (excluding certain amounts as provided for in subsection 328-115(3) of the ITAA 1997).

Your aggregated turnover for the year will be the same for the purposes of determining if you meet the basic conditions for the small business concessions for the disposal of both Property A and Property B.

The relevant annual turnovers as per subsection 328-115(2) are:

· your annual turnover for the income year;

· the annual turnover for the income year of any entity that is connected with you at any time during the year; and

· the annual turnover for the income year of any entity that is an affiliate of you at any time during the income year.

Where an entity is deemed to be your affiliate under section 152-47 of the ITAA 1997, they will also be taken to be you affiliate for the purposes of calculating your aggregated turnover (subsection 152-47(3) of the ITAA 1997).

During the relevant income year, being the income year in which Property A and Property B were disposed of, your spouse was deemed to be your affiliate. Additionally, the entities that your spouse has an interest in (as listed in question 2), were entities that were connected with you during the relevant income year. Accordingly, the turnovers of all of these entities will need to be included in the calculation of your aggregated turnover.

Question 4 - Maximum net asset value test

The maximum net asset value (MNAV) test in section 152-15 of the ITAA 1997 requires that the total net value of CGT assets owned by you, entities connected with you, and any affiliates of yours or entities connected with those affiliates did not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought.

In contrast to the aggregated turnover test, which includes the relevant entities' turnovers if they were your affiliates at any point during the income year, the MNAV test is only applied at a particular point in time. Just prior to the disposal of both Property A and Property B, your spouse was no longer conducting their sole trader business on Property A. Accordingly, section 152-47 of the ITAA 1997 will not apply to treat your spouse as your affiliate just prior to the disposal of Property A or Property B. Once the affiliate relationship between you and your spouse is lost you will also no longer be taken to control the companies connected with your spouse.

Accordingly, when applying the MNAV test in relation to the disposal of Property A and Property B, you are not required to include the assets of your husband or the entities that they have an interest in.