Edited version of your written advice

Authorisation Number: 1013031608237

Date of advice: 8 June 2016

Ruling

Subject: Small business CGT concessions - affiliates - 15-year exemption

Question 1

Are Child A and Child B your affiliates in accordance with section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you apply the small business 15-year exemption to disregard the capital gain made on the disposal of your share of the property?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on

1 July 2015

Relevant facts and circumstances

You and your spouse jointly acquired a property more than 15 years ago.

You carried on a business on the property.

The property was also used in your children's businesses after your business ceased.

You have been actively involved in the running of your children's businesses on the property for no remuneration.

While the businesses have paid a nominal rent for use of the property there have been no formal arm's length leases between the parties. The user of the property has also been responsible for the upkeep of the property in terms of repairs and maintenance.

As you own the property, and due to your business experience, your children consult you on all significant decisions made in relation to the business and works undertaken on the property.

You provide financial support to your children by way of a loan.

You satisfy the maximum net asset value test and will do so when the property is sold.

You are at least 55 years old and do not have any plans to materially engage in business or employment after the property is sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Affiliates

An affiliate is an individual or company that 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 (subsection 328-130(1) of the ITAA 1997).

Whether an individual or company 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 single factor will necessarily be determinative.

Relevant factors that may support a finding that 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, 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.

In your case, a close family relationship exists between you and your children and arrangements between you are on an informal and family basis. There has never been any formal lease agreement in place in respect of the property and the rent paid is less than normal commercial rates. The way the parties act, or could reasonably be expected to act, in relation to each other would be based on your personal relationships.

You have been actively involved in the day-to-day running of your children's businesses on the property for no remuneration. They consult you on all significant decisions made in respect of the business and works undertaken on the property.

In addition, you provide them with financial support by way of a loan.

Having regard to your circumstances and the relevant factors we consider that Child A and Child B are your affiliates.

Small business 15-year exemption

Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain made on the disposal of a CGT asset if you: 

(a) satisfy the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997

(b) continuously owned the CGT asset for the 15-year period ending just before the CGT event, and

(c) are at least 55 years old at the time of the CGT event and the event happens in connection with your retirement, or are permanently incapacitated at that time.

In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 will be satisfied because:

• a CGT event will occur when you dispose of your share in the property

• the event will result in a gain

• you will satisfy the maximum net asset value test at the time of the event, and

• you have owned your share of the property for more than 15 years and the property has been used in businesses carried on by you or your affiliates for a total of at least 7½ years of your ownership period.

In addition,

• you will have continuously owned your share in the property for the 15-year period ending just before the CGT event

• you will be at least 55 years old when you dispose of your share in the property, and

• the disposal will happen in connection with your retirement.

You qualify for the small business 15-year exemption in section 152-105 of the ITAA 1997 in relation to the property. You can disregard your share of the capital gain made on its disposal.