Edited version of private advice

Authorisation Number: 1052055693800

Date of advice: 15 November 2022

Ruling

Subject: Small business - affiliate relationship

Question

Can your parents (who carry on a business in partnership) be your affiliates individually pursuant to section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. Your parents cannot be your affiliates individually pursuant to section 328-130 of the ITAA 1997 because a partner in a partnership cannot in their capacity as a partner, be a small business entity.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired a rural farming property (the Property) from your parents, jointly with your sibling.

Your parents continued to carry on their farming business on the Property following your acquisition.

The farming business was carried on as a partnership.

Your sibling is buying out your share of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Detailed reasoning

An affiliate is defined by subsection 328-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as being an individual or company who acts or could reasonably be expected to at in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the individual or company.

artnerships, trusts and superannuation funds cannot be your affiliates.

aragraph 46 of Tax Determination 2022/7 Income tax: aggregated turnover - application of the 'connected with' concept to partnerships, foreign hybrids and non-entity joint ventures (TD 2022/7) states that:

Subdivision 328-C applies to a partnership as though it were an entity in its own right. For example, a person who is a partner in a partnership in an income year is not, in his or her capacity as a partner, a small business entity for the income year. Paragraph 2.109 of the Explanatory Memorandum to the Tax Law Amendment (200 Measures No. 2) Bill 2009 explains that the clear intention of the small business entity regime was that a partner in a partnership cannot, in their capacity as a partner, be a small business entity; it is only the partnership that can be a small business entity.

Chapter 2 of Explanatory Memorandum to TD 2022/7 explains that in regard to partners and small business entities that:

2.109 When the small business entity regime was introduced the clear intention was that a partner in a partnership could not in their capacity as a partner be a small business entity. It is only the partnership that could be a small business entity.

2.110 This creates uncertainty because a partner could argue that, as they are considered to carry on a business for CGT purposes (consistent with the general law position), they could be a small business entity where their aggregated turnover is less than $2 million.

2.111 Section 328-110 of the ITAA 1997 specifies the meaning of small business entity for applying the small business concession rules.

2.112 Schedule 2 amends section 328-110 of the ITAA 1997 (meaning of small business entity) to provide that a partner in a partnership cannot be a small business entity in their capacity as a partner. This applies for the small business concessions generally and not just for the small business CGT concessions.

2.113 The amendment removes current uncertainty about whether a partner in a partnership can be a small business entity.

2.114 The small business entity regime had effect from the 2007-08 income year so the amendment applies to assessments for the 2007-08 income year and later income years. The amendment applies retrospectively as it aligns the legislation with administrative practice.

Application to your circumstances

You own a property that is being used in the course of carrying on a business by your parents. Your parents run their business in partnership. The partnership cannot be your affiliate because only individuals and companies can be affiliates under section 328-130 of the ITAA 1997.

Furthermore, neither of your parents, as individuals, can be your affiliate. An individual is considered an affiliate when they 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 individual. Your parents cannot be affiliates, as individuals, in relation the affairs of a partnership. This is because a partner in a partnership, in their capacity as a partner, cannot be a small business entity. The small-business entity is the partnership.