Edited version of private advice

Authorisation Number: 1052240382089

Date of advice: 17 May 2024

Ruling

Subject: Affiliates

Question

Is Individual B your affiliate as defined by section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of satisfying the definition of affiliates to apply Small Business Restructure Rollover relief?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

Individual A (you) acquired land prior to 20 September 1985.

You and your spouse operated a business.

One of your offspring, Individual B, worked in your business.

From 20YY, Individual B continued to assist your business and used some of the land to start operating their sole trader business.

This informal arrangement was undertaken so that Individual B could gain practical management experience, with a view for them to take over the family business.

You have never charged Individual B for the use of the land, and Individual B has frequently sought guidance and expertise from you in relation to their business matters.

You ceased operating in June. From the start of the next income year, the land held by you has been exclusively used by Individual B in their business.

Individual B's business is highly dependent on the use of your land.

You intend to transfer the land into a discretionary trust controlled by Individual B in the upcoming income year, and wish to apply the Small Business Restructure Rollover (SBRR) under Section 328-G.

You consider that you satisfy all other requirements of the SBRR subject to confirmation that Individual B is an affiliate of yours in the relevant income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 Subdivision328-G

Reasons for decision

Subsection 328-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states an individual is an affiliate of yours if the individual 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. An affiliate relationship requires conduct of the parties in relation to the business affairs of the other entity.

Paragraph 2.36 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 provides the relevant factors that support a finding that a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer include:

•         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.

Section 328-425 of the ITAA 1997 allows owners of small business entities to restructure their businesses and assets whilst disregarding any tax gains or losses that arise. A rollover is available to an asset that has an affiliate that is a small business entity for that income year (paragraph 328-430(1)(ii)).

Application to circumstances

After reviewing the relevant factors and conditions, pursuant to subsection 328-130(1) of the ITAA 1997 the Commissioner will consider individual B to be your affiliate.

The existence of your relationship to use the land with no consideration, has been an opportunity for Individual B to learn the business. Additionally, there is no formal agreement stating how the individuals act in accordance with each other's directions or wishes in relation to the affairs of business. It is reasonable to conclude that Individual B acted in accordance with your directions or wishes, or in concert with you, in relation to the affairs of their business. Therefore, in accordance with section 328-130 of the ITAA 1997, the business relationship between the parties will satisfy the definition of Individual B being your affiliate.