Edited version of private advice

Authorisation Number: 1052290722039

Date of advice: 31 October 2024

Ruling

Subject: Capital gains tax - affiliates

Question 1

For the purposes of subsections 152-48(2) and (3) of the Income Tax Assessment Act 1997 (ITAA 1997), is the CGT asset referred to in subsection 152-10(1A) or (1B), Person 1 and Person 2's fractional interest in the property?

Answer 1

Yes

Question 2

For the purposes of subsection 152-48(2) and (3) of the ITAA 1997, is the entity that owns the CGT asset referred to in subsection 152-10(1A) or (1B), relevantly person 1 and person 2?

Answer 2

Yes.

Question 3

Are Person 3 and Person 4 (including any entities in which Person 3 and Person 4 control) deemed to be connected with, or an affiliate of, the 2-way partnership between Person 1 and Person 2, pursuant to section 152-48 of the ITAA 1997 for the purpose of determining whether the way 2-way partnership is a CGT small business entity?

Answer 3

Yes.

This ruling applies for the following period:

X of XX 20XX to X of XX 20XX

The scheme commenced on:

X of XX 20XX

Relevant facts and circumstances

Person 1 and Person 2 acquired their interest in the property as joint tenants inter se as their half interest in the property as tenants in common.

The balance of the property is owned by Person 1 and Person 2's relatives (Person 3 and Person 4), as joint tenants inter se as their half interest as tenants in common.

Person 1 and Person 2 are involved in two separate partnerships. These partnerships comprise of:

a) A partnership solely of Person 1 and Person 2 (the 2-way partnership); and

b) A partnership between Person 1, Person 2, Person 3, and Person 4 (the 4-way partnership)

The 4-way partnership uses the property in carrying on its primary production business.

The 2-way partnership conducts its primary production business on the property.

The two partnerships respective businesses are kept separate.

Person 1 and Person 2 act in concert with each other in relation to their individual business affairs conducted in the 2-way partnership.

Person 1 and Person 2 together own or have the right to acquire a share of the net income of the 4-way partnership.

Person 1 and Person 2 have their own separate businesses.

Person 3 and Person 4 have no involvement in the businesses run by Person 1 and Person 2.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 106-5

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-48

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 section 960-100

ATO interpretation documents

Taxation Ruling IT 2540 Income Tax: Capital Gains: application to disposals of partnership asset and partnership interests.

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

For the purpose of subsection 152-48(2) and (3) of the Income Tax Assessment Act 1997 (ITAA 1997), is the CGT asset referred to in subsection 152-10(1A) or (1B), Person 1 and Person 2's fractional interest in the property?

Question 2

For the purposes of subsection 152-48(2) and (3) of the ITAA 1997, is the entity that owns the CGT asset referred to in subsection 152-10(1A) or (1B), relevantly Person 1 and Person 2?

Detailed reasoning

You can disregard a capital gain you make if you satisfy the basic conditions for relief under Division 152 of the ITAA 1997. One of the conditions that you can meet to satisfy the provision is that you meet the requirements under subsections 152-10(1A) or (1B) of the ITAA 1997 (see section 152-10(1)(c) ITAA 1997).

For passively held assets for affiliates and entities that are connected to you, you satisfy the conditions if you are a CGT small business entity (including any affiliates and entities connected with you), you do not carry on a business other than in partnership, if you are in business the CGT asset isn't an interest in an asset of the partnership, and the small business entity carries on a business in relation to the CGT asset (subsection 152-10(1A) ITAA 1997).

For passively held assets for partnerships you satisfy the conditions if you are a partner in a partnership, the partnership is a CGT small business entity, you do not carry on businesses other than in the partnership, the CGT asset is not an interest in an asset of the partnership, and the business carried on in the partnership is carried on in relation to the CGT asset (subsection 152-10(1B) ITAA 1997).

An entity (the deemed entity) is taken to be an affiliate of, or connected with, the test entity if the deemed entity is an affiliate of, or connected with, the entity that owns the passively held asset in a partnership; and the deemed entity is not an affiliate of, or connected with, the test entity (subsection 152-48(2) ITAA 1997).

If an entity that holds a passively held asset in partnership is a partner in 2 or more partnership and the asset is used in the course of carrying on a business that is carried on by at least 2 of those partnership, then each partnership that is not connected with the test entity is taken to be connected with the test entity (subsection 152-48(3) ITAA 1997).

Both an individual and a partnership can be an entity for taxation law purposes (subsection 960-100(1) ITAA 1997).

A CGT asset can include a part of, or interest in any kind of property (section 108-5 ITAA 1997). Also, individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common (section 108-7 ITAA 1997). Additionally, any capital gain you make from a CGT event that happens in relation to one of its CGT assets is made by the partnership individually (subsection 106-5(1) ITAA 1997).

Application to your circumstances

Person 1 and Person 2 passively hold the property in partnership with Person 3 and Person 4.

Any capital gain that is made on the sale of Homebush will be made Person 1, Person 2, Person 3, and Person 4 respectively.

The Commissioner confirms this view in paragraph 6 of IT 2540, stating:

...even though the partnership itself is treated as a taxpayer for purposes of calculating the "net income" of the partnership, that "net income" does not include a net capital gain on the disposal of a partnership asset. Similarly, a capital loss determined under paragraph 160Z(1)(c) in respect of the disposal of a partnership asset is not a partnership loss; rather, the loss is incurred by the partners in their own right.

Therefore, under the relevant provisions, the relevant asset that is held in partnership by the 4-way partnership is Person 1 and Person 2's respective ownership in the property (subsections 152-48(2) and (3) ITAA 1997). Consequently, the entities that own this asset is Person 1 and Person 2.

Question 3

Are Person 3 and Person 4 (including any entities in which Person 3 and Person 4 control) deemed to be connected with, or an affiliate of, the 2-way partnership between Person 1 and Person 2, pursuant to section 152-48 of the ITAA 1997 for the purpose of determining whether the way 2-way partnership is a CGT small business entity?

Detailed reasoning

An entity is connected with another entity if either entity controls the other entity, or both entities are controlled by another entity (section 328-125 ITAA 1997).

An entity is an affiliate of yours if you can be expected to act in accordance with that entities wishes, or that entity acts in concert with you in relation to your business affairs (section 328-130 ITAA 1997).

Person 1 and Person 2 operate a primary production business that is separate from the primary production business operated by the 4-way partnership. Therefore, Person 3 and Person 4, or any entity that they control, are not affiliates.

There is a deemed connection between the 2-way partnership and the 4-way partnership because Person 1 and Person 3 are partners in 2 or more partnerships, and their respective ownership in the property is used in the course of carrying on the business of both partnership (subsection 152-48(3) ITAA 1997.

However, this deemed connection between the 2-way partnership and the 4-way partnership does not, in on itself, mean that Person 1 and Person 2, and the other entities that they control, are affiliated with Person 3 and Person 4. This is because Person 1 and Person 2 themselves are not affiliates of Person 3 and Person 4 through their own respective businesses that are conducted on the property.

For the purpose of satisfying the maximum net asset value test (section 152-15 ITAA 1997), Person 1 and Person 2 are connected with other entities that they have control over.