Edited version of your private ruling

Authorisation Number: 1012442253985

Ruling

Subject: Maximum net asset value test

Question

Are assets, other than partnership assets, owned by the other partners (X and Y) required to be included in your calculation of the maximum net asset value test?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You are a partner in a partnership that carries on a business.

You have an interest in the partnership of more than 40%.

The remaining interest in the partnership was held by one other individual for a period of time.

During the relevant financial year, the other partner sold their partnership interest; the remaining interest is now held by X and Y.

You are not related to X or Y by any family relationship or any other business.

X and Y operate other business activities separate to the partnership business. These other business activities are operated from separate premises with different employees and are operated independently by X and Y. You have no involvement in these business activities.

You owe an amount to a financial institution that relates to your original purchase of your share in the partnership business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

The maximum net asset value (MNAV) test in section 152-15 of the Income Tax Assessment Act 1997 (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.

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 partnership if you or your affiliates beneficially own interests in the partnership that carry the right to receive a percentage (the control percentage) that is at least 40% of any distribution of income or capital from the partnership.

You hold more than a 40% interest in the partnership and are therefore connected with the partnership.

You have no ownership or control over any of the separate business activities carried on by X and Y. Accordingly, you are not connected with X and Y or any of their businesses.

Affiliates

An affiliate is, according to section 328-130 of the 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.

The Advanced guide to capital gains tax concessions for small business 2010-11 (NAT 3359), provides a number of relevant factors that may support a finding that a person is an affiliate of a taxpayer:

· 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.

However, subsection 328-130(2) of the ITAA 1997 points out that an individual or company is not your affiliate merely because of the nature of the business relationship. Companies and trusts are not affiliates of their directors and trustees respectively, and vice versa, merely because of the positions held. Similarly, a partner in a partnership would not be an affiliate of another partner merely because the first partner acts in accordance with the directions or wishes of the second partner in relation to the affairs of the partnership.

In this case, your relationship with X and Y is limited to the interests you share as partners in the partnership; you do not have a family or personal relationship with them. You have no interest or involvement in the business activities carried on by X and Y separately to the partnership business.

We consider that the likelihood that X and Y would act in relation to you would be solely based on formal partnership agreements or arrangements and not on any relationship you share. Accordingly, X and Y are not considered to be your affiliates.

Conclusion

As you are not connected with or affiliated with X or Y, you are not required to include their assets in your calculation of the MNAV test. However, as you are connected with the partnership, you are required to include all of the assets of the partnership. Additionally, if there are other entities not considered in this ruling that are connected with you or are your affiliates, you will also be required to include the assets of these entities.