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Edited version of your written advice
Authorisation Number: 1013096054079
Date of advice: 23 September 2016
Ruling
Subject: Maximum net asset value test
Question
Can you disregard the value of an asset gifted to a relative who is not an affiliate or connected entity that will be used in a partnership business that you are a partner of, in considering the maximum net asset value test?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
An asset you acquired prior to September 1985 is used and is integral to a business conducted by a partnership which includes yourself and relatives.
For succession planning purposes you are considering gifting the property to one of your relatives that is involved in the business. You are contemplating this option as you are concerned that if you left the property through your will, other relatives may dispute your choice of who you left the property to. You received legal advice that a transfer of the property now would preclude the possibility of such a dispute.
After the transfer the asset will continue to be used in the business but is not considered an asset of the partnership.
The relative who will receive the gift is not your affiliate. Also, they are not connected with the partnership as they don't have the right to receive at least 40% of the income or capital distributions of the partnership.
Your relatives who are involved in the partnership conduct their business affairs independently from each other and the other partners.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152-10
Income Tax Assessment Act 1997 Section 152-15
Income Tax Assessment Act 1997 Section 152-20
Reasons for decision
Section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the maximum net asset value test. A taxpayer will satisfy the maximum net asset value test if the net value of their assets and those of connected entities does not exceed six million dollars.
You must consider the value of net assets for the following entities:
• you
• entities connected with you
• your affiliates, or entities connected with your affiliates.
Under Section 328-125 of the ITAA 1997 an entity is connected with another entity if:
• either entity controls the other entity, or
• both entities are controlled by the same third entity
Do not include assets of your affiliate, or an entity connected with your affiliate, unless those assets are used, or held ready for use, in your business or the business of an entity connected with you. Include only those assets that are used, or held ready for use, in a business of yours, or an entity connected with you.
A person is not your affiliate merely because of the nature of a business relationship you and the person share. If you are a partner in a partnership, another partner is not your affiliate merely because they act, or could be expected to act in accordance with your directions or wishes in relation to the affairs of the partnership.
For the purposes of the small business capital gains tax concessions a taxpayer will be taken to have control of a partnership where the taxpayer and their affiliates own, or have the right to acquire ownership of, interests in the partnership that gives them the right to receive at least 40% of the income or capital distributions of the partnership (subsection 328-125(2) of the ITAA 1997).
If you are a partner in a partnership and the CGT event happens in relation to an asset of yours, or a CGT asset of the partnership, the maximum net asset value test would include;
• all the assets of the partnership if you are connected with it, and you would exclude the value of your interest in the partnership, or
• only your interest in the partnership if you are not connected with it, and you would not count the assets of the partnership as a whole.
Application to your circumstances
Once you have gifted the asset to your relative you will no longer be required to include the value of the asset in your calculation of the maximum net asset value test. It is considered that you have disposed of your interest in the asset once the transfer has occurred. As your relative is not an affiliate of yours and is not connected to the partnership you will not have to include the value of their assets in your calculation of the maximum net asset value test. Furthermore, as the asset would be held by an individual, the asset would not be considered an asset of the partnership.