Edited version of private advice

Authorisation Number: 1052246809190

Date of advice: 23 May 2024

Ruling

Subject: CGT - Small Business Concessions

Question 1

Were Person C and person D affiliates of person A and person B for two years as defined in section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the disposal of the property satisfy the active asset test in section 152-35 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

In 20XX person A and person B entered into a contract to acquire a 50% interest each in the property.

Since the property was acquired and up to when the XXXX business ceased person A and person B have resided on the property as their main residence.

The property was used in growing small crops of vegetables.

The farming operation was conducted by the following parties:

•         Person C and D (the parents) in partnership (the partnership)

•         The trust

Person A and person C are the directors of the corporate trustees of the trust.

Person A and B are spouses.

The XXXX business ceased in June 20XX

The arrangement between person A and person B and the entities carrying on the XXXX business are set out below.

•         In most years, person A and person B allowed the use of the property for the XXXX business for no consideration or a lease payment that was well below market value that was just used to cover basic costs.

•         There was no formal agreement in place between parties who operated the XXXX business.

•         Person A and person B managed many aspects of the XXXX business on behalf of the parents and the trust over the respective years.

•         Person A and person B were responsible for pre-season planning including soil testing and analysis, ordering the seedlings, material required for planting, liaising with labour hire organisations to arrange seasonal picking staff and all other day to day matters.

•         Person A and person B were paid a wage from the parent and the trust in some years, but it was below the market value.

•         Person A and person B were involved in all strategic decisions made in the XXXX business.

•         All business decision were made jointly between Person A and person B as well as the parents and the trust.

•         Person A works X hours per week in the XXXX business as they was head of production which included: pre-season planting, soil testing, ordering seedlings, chemicals and fertiliser, liaising with employment and labour hire providers for seasonal staff.

•         Person B works X hours per week looking after the accounts, Business Activity Statements and implement the business moving to a desktop software program from traditional pen and paper accounts.

•         Person C looked after the packing and marketing of product, while person D worked in the packing shed while harvest was on.

•         Person A and person B were authorised to make expenditure on behalf of the owners of the XXXX business and both taxpayers have authority/access to banking for the XXXX business.

Person A and person B are considering selling the property.

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 152-47

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Question 1

Section 328-130 sets out the meaning of affiliates as:

(1) 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.

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

Factors that may indicate that parties are acting in concert may include family or close personal relationships; financial relationships or dependencies; relationships created through links such as common partners, directors or shareholders; degree of consultation; and whether there is an obligation to conduct business with the other.

In this case, person A and person B were involved in the management of the business with the parents. All decisions regarding the business were made by all the parties. The parents relied heavily on person A and person B for their entire XXXX business.

Therefore, person C and person D are considered affiliates of the taxpayers under section 328-130(1) of the ITAA 1997 for 2 years.

Question 2

The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for more than 15 years, the active asset test is satisfied if the asset was an active asset of yours for a total of at least 7.5 years of the test period detailed below.

The test period:

•         begins when you acquired the asset, and

•         ends at the earlier of

o   the CGT event, and

o   when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

Section 152-40 of the ITAA 1997 explains that a CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Connected Entities

Direct control of a discretionary trust

Subsection 328-125(3) states an entity controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates, or the first entity together with its affiliates.

Section 328-130 states for small business relief purposes, a spouse may be an affiliate under section 152-47 of the ITAA 1997.

Section 152-47 of the ITAA 1997 applies if:

(a) one entity (the asset owner) owns a CGT asset (whether the asset is tangible or intangible); and

(b) either:

(i) the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity); or

(ii) the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity); and

(c) the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner.

152-47(2) explains that for the purposes of the basic conditions for relief under Subdivision 152-A, a spouse of an individual is taken to be an affiliate of the individual.

As the property has been owned for more than 15 years, to satisfy the active asset test, the property is required to be used in a business carried on by the taxpayer, their affiliate, their spouse or entity connected with them.

In this case, as discussed in question 1, the property was used by an affiliate of Person A and B (the partnership business) for the two financial years.

Person A and B were involved in the management of the business with the parents for both businesses. All decisions regarding the business were made by all the parties. The parents relied heavily on Person A and B for their entire XXXX business.

Person A, together with person B are taken to control the trust because they control the trustee.

In conclusion, the property satisfies the active asset test under section 152-35 of the ITAA 1997.