Edited version of private advice

Authorisation Number: 1052233128442

Date of advice: 18 March 2024

Ruling

Subject: CGT - small business relief - active asset

Question 1

Is person B an affiliate of person A and the trust under subsection 328-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is property A and property B active assets under sections 152-35 and 152-40 of the ITAA 1997?

Answer

Yes.

Question 3

Does person A and the trust satisfy the basic conditions for the capital gains tax (CGT) small business relief under section 152-10 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

Person A is the son of person B.

The company (the company) is the trustee of the trust (the trust).

Person A owns 100% of the company's shares.

In 20XX, person A and person B acquired the first property in equal shares as tenants in common (property A).

In 20XX, person B transferred their share of property A to person A.

In 20XX, the trust acquired the second property (property B).

Since their acquisition until the date of sale, person B used property A and property B in the course of carrying on a primary production business.

Person A had an active involvement in person's B business activities, contributing to the land's improvement and maintenance, and advising on various business decisions.

A cottage on property A was used to derive rental income for two income years.

The rental income derived from property A was less than the business income derived from the property.

The net value of all the assets owned by person A and the trust is less than $X million.

In the 20XX financial year, person A sold property A and property B, resulting in a capital gain.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 paragraph 328-125(2)(a)

Income Tax Assessment Act 1997 subsection 328-130(1)

Income Tax Assessment Act 1997 subsection 328-130(2)

Reasons for decision

Question 1

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.

Subsection 328-130(2) of the ITAA 1997 also provides that an individual is not your affiliate merely because of the nature of the business relationship shared by the individuals.

Furthermore, under subsection 328-125(1) of the ITAA 1997, an entity is taken to be connected with another entity if either entity controls the other entity.

Paragraph 328-125(2)(a) of the ITAA 1997 provides that an entity controls another entity if it or its affiliate (or all of them together):

• owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of

o   any distribution of income or capital by the other entity, or

o   if the other entity is a partnership, the net income of the partnership or

o   if the other entity is a company, owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company.

In this case, person A owns property A, and the trust owns property B. The trust is controlled by the company as the trustee. Since person A owns 100% of the company's shares, which will be his control percentage over the company, he will be taken to be in control of the company. Therefore, person A will be connected with the company and thus, by extension, they will be connected with the trust.

Property A and property B are both used to carry on a business by person B, the parent of person A. Evidence has been provided that person A acted in concert with person B as he had an active involvement in person B's business activities, contributing to the land's improvement and maintenance, and advising various business decisions. Therefore, person B will be taken to be an affiliate of person A. Furthermore, as person A controls the trust and is connected with it, person B will also be an affiliate of the trust by extension.

Question 2

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

1. 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
2. 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 7½ years during the test period.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Under subsection 152-40(4) of the ITAA 1997, a CGT asset cannot be an active asset if it's main use is to derive interest, an annuity, rent or royalty unless this main use was only temporary.

In this case, property A and property B were used in the course of carrying on a primary production business by person B. As established under question 1, person B will be taken as an affiliate of person A and the trust. As property B was used as an active asset in the business since its acquisition until its date of sale, the property will satisfy the active asset test.

While property A was used for deriving rental income as well as business income for two income years, as the rental income derived was less than the business income derived, the main use of the property during those years will be taken to be to derive business income and not rental income. Therefore, property A will satisfy the active asset test as the property was used as an active asset for over half its ownership period. Thus, property A and property B will both satisfy the active test under 152-35(1) of the ITAA 1997.

Question 3

The basic conditions for small business CGT relief, as set out in subsection 152-10(1) of the ITAA 1997, are:

1.    a CGT event happens in relation to a CGT asset of yours in an income year

2.    the event would have resulted in a gain

3.    at least one of the following applies:

a.    you are a small business entity for the income year;

b.    you satisfy the maximum net asset value test;

c.    you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership; or

d.    you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you.

4.    the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

In this case, property A and property B were sold in the 20XX financial year, resulting in a capital gain. As the net value of all the assets owned by person A and the trust is less than $6 million, person A and the trust will satisfy the maximum net asset value test. Furthermore, as established under question 3, property A and property B will satisfy the active asset test. Therefore, person A and the trust will satisfy the basic conditions for small business CGT relief under subsection 152-10(1) of the ITAA 1997.