Edited version of private advice

Authorisation Number: 1052198122060

Date of advice: 4 December 2023

Ruling

Subject: CGT - small business concessions

Question

Would Relative A and Relative B have been considered affiliates of The Deceased pursuant to section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question

Would The Deceased have satisfied the active asset test under section 152-35 of the ITAA 1997 during their ownership of the property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

10 August 20YY

Relevant facts and circumstances

The property was acquired prior to September 1985 by The Deceased's spouse who held a 100% interest.

The property was utilised to carry on a business.

At an undisclosed point in time during the 1980's a residence was constructed and occupied by The Deceased and their spouse.

The Deceased's spouse carried on the primary production business until their passing in the financial year ended 20YY.

The Deceased inherited a 100% interest through survivorship.

The Deceased's children, Relative A and Relative B continued the primary production business on the property until the livestock was sold.

Relative A and Relative B continued the primary production business through a partnership from this point forward on their own with no input from The Deceased.

The Deceased allowed Relative A and Relative B to conduct the business on the land with no rent charged and no formal arrangements negotiated. The Deceased retained ownership of the land and farming equipment and allowed Relative A and Relative B to use the land and equipment free of charge.

The arrangement was informal, based on their close family relationship.

The Deceased continued to reside at the property and assisted with the business, alerting Relative A and Relative B of any urgent matters requiring attention. The Deceased was not remunerated for this.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

The meaning of an affiliate is outlined in section 328-130 of the ITAA 1997. Subsection 328-130(1) of the ITAA 1997 states an individual or a company is an affiliate of yours if the individual or company 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.

According to paragraph 2.36 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 which introduced the definition of "affiliate" into the tax law, "the following factors may have a bearing on whether an individual or company is an affiliate of an entity:"

•         family or close personal relationships;

•         financial relationships or dependencies;

•         relationships created through links such as common directors, partners, or shareholders;

•         the degree to which the entities consult with each other on business matters; or

•         whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity.

In this case, we consider Relative A and Relative B could reasonably have been expected to be acting in accordance with The Deceased's wishes. The Deceased monitored the business, provided advice where appropriate and allowed Relative A and Relative B to use the land and equipment free of charge. This is further reinforced by the fact that the nature of the relationship was informal and based on their close, family relationship. Accordingly, Relative A and Relative B are taken to have been affiliates of The Deceased, having satisfied requirements outlined in section 328-130 of the ITAA 1997.

The active asset test outlined in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period; or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the test period.

The test period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

A CGT asset is considered to be active if it is owned by you and is used or held ready for use in a business carried on (whether alone or in a partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

As the property was used to carry on a business by The Deceased's affiliates (Relative A and Relative B) for the entire period of their ownership, The Deceased would have satisfied the active asset test in relation to the property.