Edited version of private advice

Authorisation Number: 1052226213463

Date of advice: 11 March 2024

Ruling

Subject: CGT - small business concession

Question

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

Answer

Yes.

Question 2

Will you and person 1 satisfy the meaning of affiliate under section 328-130 of the ITAA 1997?

Answer

Yes.

Question 3

Does the Property situated at XX (the Property) satisfy the Active Asset Test for the purpose of the capital gain tax (CGT) small business concessions under section 152-35 of the ITAA 1997?

Relevant facts and circumstances

You were born in 19XX and are an Australian resident for tax purposes

You satisfy the maximum net asset value test set out under section 152-15 of the ITAA 1997

You do not carry on a business

You and Person 2 are siblings

Person 1 is your child

The property and its owners

The company was incorporated on XX of X, 19XX and is an Australian resident for tax purposes

In XX of 20XX, the Property was acquired by the Company, you and person 3 as tenants-in-common.

The purchase price of the property was $xxx

Person 3 disposed of their shares in the company in 20XX, leaving you and the Company to hold the Property as tenants-in-common

Half of the property comprises of cleared land that is used to carry on a business by the Company and Person 1

The business

The property was purchased to operate a business

After the property was purchased, the Company and Person 1 entered into a partnership to carry on a primary production business.

The partnership has always used the Property to carry on the business and they continue to operate to this date

A greenhouse used for the business has been erected on the Property and paid for by the business.

The total cost of the greenhouses and related additions and improved total $XXX.

The Partnership pays all operating costs of the Property, including council and water rates. This is a mutual understanding that the Partnership pays the operating costs of the Property, and in turn is not charged rent to use the Property.

Sale of the Property

You and the Company intend to sell the Property in this income year

Your involvement in the business and retirement

since xx of 20XX, you have been employed by the business as a XXXX

Once the Property is sold, you will commence permanent retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Reasons for decision

Under subsection 328-130(1) of the ITAA 1997, 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.

However, under section 328-130(2), an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual company share.

The public advice on ato.gov.au provides the following relevant factors for determining whether a person acts, or could be reasonably expected to act, in accordance with your directors, or in concert with you:

•         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.

According to paragraph 152-35(1)(b) of the ITAA 1997, a CGT asset satisfies the active asset test for the purpose of CGT small business relief if 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 XX years during the period specified under subsection 152-35(2) of the ITAA 1997:

a)            When you acquire the asset; and

b)            When you sell the asset

Additionally, subsection 152-40(1) of the ITAA 1997 outlines what is considered an active asset for the purpose of section satisfying the active asset test. A CGT asset is considered an active asset at the time if, at the time:

a)            You own the asset, and it is used, or held ready to use, in the course of carrying on a business that is carried on by:

             i.                 You; or

             ii.                Your affiliate; or

             iii.                Another entity that is connected with you.

Person 1 is an affiliate of you under section 328-130 of the ITAA 1997. This is on the basis of your close family relationship, the business dependency on the use of the Property, the lack of formal arrangements in regard to the use of the Property and the relevant consultation around business decisions, it is reasonably expected that person 1 would act in accordance with your wishes, in relation to their business affairs.

The company is an affiliate of yours under section 328-130 of the ITAA 1997. This is on the basis of your close family relationship, the business dependency on the use of the Property, the lack of formal arrangements in regard to the use of the Property and the relevant consultation around business decisions, it is reasonably expected that The Company would act in accordance with your wishes, in relation to your business affairs the Company's business affairs.

Furthermore, the Property satisfies the active asset test under section 152-35 of the ITAA 1997. This is on the basis that you purchased the Property in MM of 20YY and has been used in the course of carrying on a business by your affiliates, person 1 and The Company since that time. You have therefore owned the property for over XXyears it has been used by your affiliates as an active asset for over XX years, satisfying the legislative provisions for an active asset for small business concessions.