Edited version of private advice

Authorisation Number: 1051964407419

Date of advice: 28 June 2022

Ruling

Subject: CGT - small business concessions

Question 1

Will Person P (P) and Person H (H) satisfy the meaning of affiliate under section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the farming land meet the active asset test under section 152-35 of the ITAA 1997 for the purpose of applying the small business CGT concessions?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 19XX

Relevant facts and circumstances

Person P (P) and Person H (H) purchased property (the property) over XX years ago.

P and H hold their interests as tenants in common.

P and H reside on the property. They have been living together and operating the business together for over XX years ago.

P and H share accounts together as well as share the load of house-hold tasks including consultation of the property.

The property was purchased to operate a business.

Over the period of ownership, P has conducted their business as a sole trader.

H does not draw a wage from the business and has their own paying job. H's salary supplements the business income as required when the business cannot.

Some of H's duties in the business included preparation, assistance, harvesting, loading, maintenance, delivery, and other jobs as necessary.

In the period of holding the property, P has undertaken to produce a number of crops.

The business required annual audits and received a letter of compliance to remain certified for each year of operation.

P must keep records of all activity on the asset including cultivation, slashing, mulching, spraying and planting. Particular regard is given to methods of weed and pest control.

For each item harvest, P was required to give every outgoing consignment its own batch number. The batch number allows the tracking of each lot of produce back to its origin.

To adhere to the Australian standards, the business required annual audits.

P has held Certification for over XX years of operations and has not failed an audit in any of the years.

P invested a further 50 hours in an application to achieve a nationally recognised standard as accredited by the Australian Government.

P had regular soil analyses done to assist with his business.

The turnover of the operation has fluctuated over the years.

The previous income year aggregated turnover for P was below $X million.

The current income year expected aggregated turnover for P is below $X million.

There were a number of factors that impacted yield throughout the period including:

•         Weather and natural disasters

•         Supply of incorrect products

•         Crop disease

•         Damage caused by animals

•         Carer responsibilities

•         Illness.

P and H intend to sell the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 152-10(1AA)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-130

Detailed reasoning

Question 1

Meaning of affiliate

Section 328-130 of the ITAA 1997, explains an affiliate is an individual that, in relation to their business affairs, acts or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you. 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 single factor will necessarily be determinative. In certain circumstances an individual can be taken to be your affiliate.

A spouse is not automatically your affiliate. You must consider whether they are acting according to your directions or wishes, or in concert with you, in relation to their business affairs.

Where you own an asset that your spouse uses in business they carry on as an individual, they will be taken to be your affiliate for the purposes of the active asset text, maximum net asset value test and aggregated turnover test.

Your spouse may also be taken to be your affiliate where:

•         an asset is owned by you and that asset is used in a business carried on by an entity that your spouse owns or has an interest in or,

•         an asset is owned by an entity that you own or have an interest in, and that asset is used in business carried on by your spouse, or an entity that your spouse has an interest in.

Application to your circumstances

P and H are considered spouses who own the farm as joint tenants in common. H operates the farm according to the direction and wishes of P in relation to their sole trader business. Both P and H own the farm in concert since 19XX. P and H share joint accounts together. They share the load of house-hold tasks and consult with each other in relation to the property matters.

H does not draw a wage from the business and has their own paying job. H's salary has supplemented the farm's income when the farm could not.

Some of H's duties on the farm included:

•         preparation,

•         assisting,

•         harvesting,

•         loading,

•         maintenance,

•         delivery,

•         assisting P with daily duties and,

•         other duties as necessary.

Therefore, H is an affiliate of P.

Question 2

Active Asset Test

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if:

•         you have owned the asset for XX years or less and the asset was an active asset of yours for a total of at least half of the period owned; or

•         you have owned the asset for more than XX years and the asset was an active asset of yours for a total of at least 7.5 years.

Subsection 152-40(1) of the ITAA 1997 explains the meaning of an active asset is when you own the asset and it is used or ready to use in the course of carrying on a business that is carried on by you, your affiliate, or another connected entity.

Application to your circumstances

The property was acquired in 19XX, more than XX years ago and must be an active asset for a total of at least 7.5 years. From 19XX, the property has been used in P's business for more than 7.5 years. Therefore, the property satisfies the active asset test under section 152-35 of the ITAA 1997.

Although, P and H reside on a portion of the property, the main income source and the main use of the property is the operation, accordingly, the property satisfies the meaning of active asset under section 152-40 of the ITAA 1997. As H is an affiliate of P's, the disposal of the property satisfies the active asset test for both P and H.

Further issues for consideration

This ruling has not fully considered your eligibility for the small business CGT concessions. You should ensure that you satisfy the relevant basic conditions for the concessions. More information is available on our website www.ato.gov.au using keywords 'concessions for small business' to search.