Edited version of private advice

Authorisation Number: 1052230430476

Date of advice: 17 April 2024

Ruling

Subject: CGT - active asset

Question

Would Individual B be an affiliate of you pursuant to section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

DD January 20YY

Relevant facts and circumstances

You and your spouse operated a successful business A via a partnership structure until the spouse's death on DD MM YYYY.

The property A used in the business was either held jointly by you and your spouse, or exclusively by the spouse.

Upon the spouse's death, you inherited their interest in the property A.

Prior to the spouse's death, your child, Individual B assisted in the business A operated by their parents.

Since the spouse's death, you have ceased to operate a business in your own right and have instead allowed Individual B to conduct their own sole-trader Business A enterprise using part of the Property A.

You charge Individual B a nominal lease fee that is significantly less than market value.

Individual B regularly discusses business management matters with you making use of your many years of experience.

You intend to transfer the property A into a discretionary trust controlled by Individual B in the 20YY financial year.

There are no formal agreements or relationships between you and Individual B dictating how the parties are to act in relation to each other.

The way that the parties act, or could be expected to act, in relation to each other is based on the relationship between the parties, rather than due to formal agreements or legal or fiduciary obligations.

Individual B's business is highly dependent on the use of your property A, and this use is facilitated purely by your relationship and not through any formal documentation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-130

Further issues for you to consider

We have limited our private ruling to the question raised in your application. There may be related issues that you should consider, including:

a)            Your eligibility for CGT small business concession.

You may apply for another private ruling on this or any other matter.

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.

Application to your circumstances

In this case, we consider Individual B to be acting in accordance with your wishes with regards to his business activities. You provided advice regarding Business A management where appropriate and allowed Individual B to use the property A at a significantly discounted rate. This is further reinforced by the fact that the nature of the relationship was informal and based on your close, family relationship. Individual B is taken to be an affiliate of yours having satisfied the requirements outlined in section 328-130 of the ITAA 1997.