Private ruling: CGT - small business entity
Date of advice: 5 March 2025
Published: 14 April 2025
Date scheme commenced: 1 July 202R

Ruling: Q1: For the purposes of determining the 'aggregated turnover' of the No 1 Partnership under section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997) for the income year ended 30 June 202X, was the No 2 Partnership 'connected with' the No 1 Partnership under subsection 328-125 of the ITAA 1997 during the financial year ended 30 June 202X? | A1: No. | Q2: For the purposes of determining the 'aggregated turnover' of the No 1 Partnership under section 328-115 of the ITAA 1997 for the income year ended 30 June 202X, was the Company 'connected with' the No 1 Partnership under section 328-125 of the ITAA 1997 during the financial year ended 30 June 202X? | A2: No. | Q3: For the purposes of determining the 'aggregated turnover' of the No 1 Partnership under section 328-115 of the ITAA 1997 for the income year ended 30 June 202X, was the Company an 'affiliate' of the No 1 Partnership under section 328-130 of the ITAA 1997 during the financial year ended 30 June 202X? | A3: No. | Q4: Do Individuals 1, 2, 3 and 4 satisfy the basic condition under subparagraph 152-10(1)(c)(iii) of the ITAA 1997 in respect of the sale of the No 1 Partnership's business goodwill and the Property? | A4: Yes. This private ruling applies for the following period: Year ended 30 June 202X The scheme commenced on: 1 July 202R

Relevant facts and circumstances: The relevant individuals Individual 1 and Individual 2 are spouses. Individual 3 and Individual 4 are spouses. Individual 5 and Individual 6 are spouses. Individuals 1, 3 and 5 are siblings. Although the above individuals are related, each exercises independent judgment in relation to their own commercial affairs. The No 1 Partnership Until recently, Individuals 1 to 6 ran a business in partnership: the No 1 Partnership. The partnership property included real property used in the business (the Property) and other business assets comprising goodwill and plant and equipment (Business Assets). The Property and Business Assets were sold to an unrelated third party under a contract of sale executed in the income year ended 30 June 202X (relevant CGT Event). The fractional legal and equitable ownership interests of each partner in the Business Assets was as follows: Table 1: Fractional legal and equitable ownership interests of each partner Owner Ownership Individual 1 5% Individual 2 15% Individual 3 30% Individual 4 5% Individual 5 15% Individual 6 30% The legal and equitable ownership interests in the Property was as follows: Table 2: Ownership interest in the Property Owner Ownership Individual 1 10% Individual 3 30% Individual 5 60% Despite the varying ownership interests of the partners in the Property and Business Assets, the net income of the No 1 Partnership was always shared equally between the Partners. There was no formal written partnership agreement between the Partners. The agreement in terms of how the Property and Business Assets were owned and the entitlements to the net income of the No 1 Partnership was the subject of an informal verbal agreement. The annual turnover of the No 1 Partnership was significantly less than $2 million for the financial year ended 30 June 202R. If the business conducted by the No 1 Partnership had not been sold in the financial year ended 30 June 202X, its annual turnover would have been similar to the financial year ended 30 June 202R, and significantly less than $2 million. No 2 Partnership Individuals 1, 2, 3 and 4 are partners in another partnership business: the No 2 Partnership. Individuals 1, 2, 3 and 4 each have an equal 25% interest in the income and capital of the No 2 Partnership. The annual turnover of this farming partnership was $X for the financial year ended 30 June 202X. The Company The Company is an Australian resident private company for Australian tax purposes. The directors of the Company throughout the financial year ended 30 June 202X were Individuals 1 and 3. The Company conducts a business. Individuals 1 and 3 are both involved in the management of the Company. Individual 5 has not been involved in the business conducted by the Company for many years. The Company and the No 1 Partnership did not: • have any commercial dealings between each other (e.g. they did not provide services or supply goods to the other) • share employees • promote each other's business • use the same assets or business premises or provide assets to the other to use in their business. The Company had an outstanding loan payable to the No 1 Partnership equal to $X. This was an unsecured, interest free loan between the two entities. The Company is wholly owned by Holding Company. The annual turnover of the Company for the financial year ended 30 June 2023 was $X. The shareholding in the Company is and was throughout the financial year ended 30 June 202X: Table 3: Shareholding in company at end of financial year Shareholder Share Class Number of shares issued The Trustees for the Family Trust No 1 ORD 6 The Trustees for the Family Trust No 2 ORD 6 TOTAL ORD 12 Family Trust No 1 The Family Trust No 1 is a resident discretionary trust for Australian tax purposes. The trustees of the Family Trust No 1 are Individuals 3 and 4. The trustees of the Family Trust No 1 do not earn any business income in their capacity as trustees, nor did they received any business income in the four years preceding the relevant CGT event from any other sources. The income of the trust estate was distributed in the 4 financial years before 30 June 202X as follows: Table 4: Distribution of income for 4 financial years Financial year ended Net income distributed (%) 30 June 2019 Individual 3 50% 30 June 2019 Individual 4 50% 30 June 2020 Individual 3 50% 30 June 2020 Individual 4 50% 30 June 2021 Individual 3 70% 30 June 2021 Individual 4 30% 30 June 2022 Individual 3 50% 30 June 2022 Individual 4 50% Family Trust No 2 The Family Trust No 2 is a resident discretionary trust for Australian tax purposes. The trustees of the Family Trust No 2 are Individuals 1 and 2. The trustees of the Family Trust No 2 do not earn any business income in their capacity as trustees, nor have they received any business income in the four years preceding the relevant CGT event from any other sources. The income of the trust estate was distributed in the 4 financial years before 30 June 202X as follows: Table 5: Distribution of income for trust estate over 4 years Financial year ended Net income distributed (%) 30 June 2019 Individual No 1 50% 30 June 2019 Individual No 2 50% 30 June 2020 Individual No 1 50% 30 June 2020 Individual No 2 50% 30 June 2021 Individual No 1 70% 30 June 2021 Individual No 2 30% 30 June 2022 Individual No 1 50% 30 June 2022 Individual No 2 50% Other matters The Partners do not carry on business in their own right or in any other partnerships (that is, other than the No 1 Partnership and where relevant, the No 2 Partnership). There are no other entities that should be considered for the purposes of determining whether the No 1 Partnership is a CGT small business entity.


Reasons for decision: Summary: No, the No 2 Partnership was not 'connected with' the No 1 Partnership under subsection 328-125 during the financial year ended 30 June 202X. | Detailed Reasoning - Small business concessions: An entity will be a CGT small business entity for an income year if it is carrying on a business in the income year (current year) and has an aggregated turnover of less than $2 million (subsection 152-10(1AA) and section 328-110). Aggregated turnover is calculated using one of three methods: • the entity carried on business in the previous year before the current year and its aggregated turnover for the previous year was less than $2 million (subparagraph 328-110(1)(b)(i)); • the entity's estimated aggregated turnover for the current year is likely to be less than $2 million provided the turnover when the business was carried on in both the 2 previous years was not $2 million or more (subparagraph 328-110(1)(b)(ii) and subsection 328-110(3)), or • the entity's aggregated turnover for the current year, worked out at the end of the year, is less than $2 million (subsection 328-110(4)). Under subsection 328-115, an entity's aggregated turnover for an income year is the entity's annual turnover for the income year plus: • the annual turnover for the income year of any other entity that is connected with the entity at any time during the income year, and • the annual turnover for the income year of any other entity that is an affiliate of the entity during the income year. An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business: subsection 328-120(1). Subsection 328-120(5) states that if an entity does not carry on a business for a whole income year, its annual turnover is worked out using a reasonable estimate of what it would be if it carried on a business for the whole income year. | Detailed Reasoning - Meaning of 'connected with' an entity and 'affiliate' of an entity: Subsection 328-125(1) states: An entity is connected with another entity if: (a) either entity controls the other entity in a way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. 1. Subsection 328-125(2) prescribes when an entity directly controls another entity other than a discretionary trust. Subsection 328-125(2) states: An entity (the first entity ) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates: (a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of: (i) any distribution of income by the other entity; or (ii) if the other entity is a partnership - the net income of the partnership; or (iii) any distribution of capital by the other entity; or (b) if the other entity is a company - own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company. The meaning of 'affiliate' is set out in section 328-130: 328-130(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. 328-130(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. Note: For small business relief purposes, a spouse or a child under 18 years may also be an affiliate under section 152-47. Example: A partner in a partnership would not be an affiliate of another partner merely because the first partner acts, or could reasonably be expected to act, in accordance with the directions or wishes of the second partner, or in concert with the second partner, in relation to the affairs of the partnership. Directors of the same company, or the company and a director of that company, would be in a similar position. A partnership is an entity. [1] Subdivision 328-C [2] applies to a partnership as though it were an entity separate to its partners. [3] A person who is a partner in a partnership in an income year is not, in his or her capacity as a partner , a small business entity for the income year: subsection 328-110(6). A partner in a partnership may still be a small business entity in another capacity. [4] A partner will directly control a partnership if the partner, its affiliates or the partner together with its affiliates, own or have the right to acquire ownership of interests in the partnership that carry between them the right to receive: • at least 40% of any distributions of income of the partnership: subparagraph 328-125(2)(a)(i)) • at least 40% of any distributions of capital of the partnership: subparagraphs 328-125(2)(a)(iii), or • at least 40% of the net income of the partnership. [5] A partnership is not capable of being an affiliate of another entity because only an individual or a company can be an affiliate of an entity within the meaning of section 328-130. [6] However, a partnership can have an affiliate that is a company or an individual. Neither a spouse nor a child is automatically an individual's affiliate. [7] The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 (EM) states: 2.26 ... The affiliate rules are designed to ensure that entities that genuinely carry on independent businesses are not aggregated... 2.36 The following factors may have a bearing on whether an individual or company is an affiliate of an entity to the extent that they show that two or more entities are acting in concert: • 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. 2.37 None of these factors are determinative in their own right. Subsection 328-130(1) makes it explicit that the 'affiliate' definition is only to be considered 'in relation to the affairs of the business' of the relevant individual or company. Therefore, an entity that does not carry on their own business cannot be an 'affiliate' for the purposes of section 328-130. [8] The 'affiliate' test must be assessed on an entity-by-entity basis. This means that it is possible for one entity (the first entity) to be an affiliate of another entity (the second entity) even though the second entity is not itself an affiliate of the first entity. | Detailed Reasoning - Was the No 2 Partnership connected with the No 1 Partnership in the income year?: The No 2 Partnership cannot directly control the No 1 Partnership as it is not a partner in that partnership. Similarly, the No 1 Partnership cannot directly control the No 2 Partnership. Therefore, the No 2 Partnership is not connected with the No 1 Partnership under subsection 328-125(1)(a). Therefore, the relevant question is whether both partnerships are controlled by the same third entity. The spousal relationship of Individuals 1 and 2, 3 and 4 and 5 and 6 does not automatically make them each other's affiliate. Similarly, neither will the sibling/siblings in law relationship between the Partners make them affiliates. Further, none of the Partners would be affiliates if they merely act, or could reasonably be expected to act, in accordance with the directions or wishes of the other, or in concert with the other, in relation to the affairs of the partnership: subsection 328-130(2). Further, as none of the Partners carry on any business in their own right, they cannot be an affiliate of the others 'in relation to the affairs of their business'. Individuals 5 and 6 are not partners in the No 2 Partnership. Therefore, even if Individual 5 controls the No 1 Partnership by virtue of their right to 60% of the Property, being capital (a partnership asset) of the No 1 Partnership, as they are not a partner in the No 2 Partnership, they cannot control both entities. As Individual 1, 2, 3 and 4 are not affiliates they did not control the No 1 Partnership as each of them had less than 40% entitlement to the income and capital of the No 1 Partnership. Further as Individuals 1, 2, 3 and 4 are not affiliates and each are entitled to only 25% of the net income and capital of the No 2 Partnership, none of them control the No 2 Partnership. Therefore, as the No 1 Partnership and the No 2 Partnership are not controlled by the same third entity, the No 2 Partnership is not connected with the No 1 Partnership under subsection 328-125(1)(b). Accordingly, for the purposes of determining the 'aggregated turnover' of the No 1 Partnership under section 328-115 for the income year ended 30 June 202X, the No 2 Partnership was not 'connected with' the No 1 Partnership under subsection 328-125. | Detailed Reasoning - Question 2: For the purposes of determining the 'aggregated turnover' of the No 1 Partnership under section 328-115 for the income year ended 30 June 202X, was the Company 'connected with' the No 1 Partnership under section 328-125 during the financial year ended 30 June 202X? | Summary: No, for the purposes of determining the No 1 Partnership's aggregated turnover for the year ended 30 June 2023, the Company was not connected with the No 1 Partnership withing the meaning of section 328-125. | Detailed Reasoning - Detailed reasoning: The previous question detailed the provisions that govern when an entity will directly control an entity, other than a discretionary trust. In addition, subsection 328-125(7) provides an indirect control test, which applies to all entities, including discretionary trusts. This section applies to an entity (the first entity ) that directly controls another entity (the second entity ) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or applications of this section, controlled by the second entity. In relation to control of a discretionary trust, section 325-125 provides: 328-125(3) An entity (the first 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 first entity, its *affiliates, or the first entity together with its affiliates. 328-125(4) An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year: (a) the trustee of the trust paid to, or applied for the benefit of: (i) the first entity; or (ii) any of the first entity' s *affiliates; or (iii) the first entity and any of its affiliates; any of the income or capital of the trust; and (b) the percentage (the control percentage ) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year. Neither the Company nor the No 1 Partnership directly or indirectly controls the other in a way described in section 328-125: • The Company is not a partner in the No 1 Partnership and the Partners are all individuals; • The No 1 Partnership is not a shareholder in the Company and does not control the shareholders of the Company. The shareholders in the Company are the Trustee for the Family Trust No 1 and the Family Trust No 2 each holding 50% of the ordinary shares. Individuals 1 and 2 both control the Family Trust No 2 because: • They are the trustees of the trust; and • As trustees they paid, or applied for their benefit as beneficiaries, income of the trust of at least 40% of the total amount of income in at least one of the last 4 income years before 202X. No other entities (other than Individuals 1 and 2) received distributions from the Family Trust No 2, and therefore, there are no other controllers of that trust. Individuals 1 and 2 also indirectly control the Company under subsection 328-125(7), because as trustees of Family Trust (in that capacity), they own 50% of the ordinary shares in the Company. Individuals 3 and 4 control the Family Trust No 1 because: • They are the trustees of the trust; and • As trustees they paid, or applied for their benefit as beneficiaries, income of the trust of at least 40% of the total amount of income in at least one of the last 4 income years before the year ended 30 June 202X. No other entities (other than Individuals 3 and 4) received distributions from the Family Trust No 1, and therefore, there are no other controllers of that trust. Individuals 3 and 4 also indirectly control the Company under subsection 328-125(7) because as the trustees of the Family Trust No 1 (in that capacity), they own 50% of the ordinary shares in the Company. As discussed under question 1, neither Individual 1, 2 3 or 4 controls the No 1 Partnership because they are not entitled to receive at least 40% of the net income, income or capital of the No 1 Partnership. Furthermore, as none of the Partners are affiliates of the other, none of those individuals, together with their affiliates, are entitled to receive at least 40% of net income, income or capital of the partnership. Therefore, as neither the Company nor the No 1 Partnership control the other and they are not both controlled by the same third entity, subsection 328-125(1) is not satisfied. Therefore, for the purposes of determining the No 1 Partnership's aggregated turnover for the year ended 30 June 202X, the Company was not connected with the No 1 Partnership within the meaning of section 328-125. | Detailed Reasoning - Question 3: For the purposes of determining the 'aggregated turnover' of the No 1 Partnership under section 328-115 for the income year ended 30 June 202X, was the Company an 'affiliate' of the No 1 Partnership under section 328-130 of the during the financial year ended 30 June 202X? | Summary: No, the Company was not an 'affiliate' of the No 1 Partnership under section 328-130 during the financial year ended 30 June 202X. | Detailed Reasoning - Detailed reasoning: As discussed under question 1, section 328-130 provides that 'affiliate' of an entity means an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act: • in accordance with the entity's directions or wishes, or • in concert with the entity. The EM explains (at paragraph 2.35) that the affiliate rules are designed to ensure that entities that genuinely carry on independent businesses are not aggregated. Whether a company acts or could reasonable expected to act in a particular way depends on whether the majority shareholders and/or directors of the company act, or can reasonably be expected to act, in the relevant way. This requires an examination of the nature of the relationships between the company and the majority shareholders and/or directors, together with the nature of the relationships between those shareholders and directors. [9] As previously explained in Question 1, as none of the Partners carry on any business in their own right they cannot be affiliates of the others. They will not be affiliates merely because they act, or could reasonably be expected to act, in accordance with the directions or wishes of another partner, or in concert with another partner, in relation to the affairs of the partnership or similarly in such a way in their role as directors of a company. Although two of the directors and the trustees of the shareholders of the Company are also partners in the No 1 Partnership that will not make the entities affiliates of each merely because they have common individuals carrying out their duties in their respective roles in the entities. Further, two of the partners in the No 1 Partnership are not involved in the business of the Company. It cannot be said that the Company acts, or could reasonably be expected to act, in accordance with the entity that is comprised of the Partners of the No 1 Partnership. | Detailed Reasoning - Meaning of 'acts in concert': An individual or a company will also be an entity's affiliate if they act in concert with the entity, or could reasonably be expected to do so, in relation to the affairs of their business. The term 'in concert' is not defined in the ITAA 1997 and must therefore be interpreted according to its ordinary meaning and legislative context . [10] In the context of the former 'STS affiliate' definition, TR 2002/6 states (at paragraph 59) that, to ensure that the 'in concert' test only operates to group entities that are sufficiently related to warrant grouping, a potential affiliate will only be regarded as acting 'in concert' with another entity where: • it is acting together with the other entity in pursuit of a common goal or objective; and • that common goal or objective is the carrying on of a business by the potential affiliate with a substantial degree of connection with, or dependence on, the business carried on by the other entity. The overall degree of that connection must be such that the potential affiliate cannot be viewed as operating independently of the other entity. [11] The EM (at paragraph 2.36) provides the following list of factors that may have a bearing on whether an individual or a company is an affiliate of an entity to the extent that they show that two or more entities are acting in concert: • 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. However, none of these factors are determinative in their own right. [12] TR 2002/6 also details a number of non-exhaustive factors which can be taken into account when determining whether two entities are acting in concert with each other. [13] These include: • the nature and extent of commercial dealings between the two entities; • the extent to which the entities share common resources, facilities or services for the operation of their businesses; • the extent to which an entity actively participates in the managerial decisions and day-to-day management of the potential affiliate's business; • whether there are financial interdependencies between the entities; • whether the profits from the businesses carried on by the entities are ultimately received by the same entities, and the source of the capital underpinning the two entities is the same; • whether the entities coordinate their orders for goods or services, or the potential affiliate is under an obligation to order through the other entity; • whether the entity directs customers to the potential affiliate or uses it to obtain custom; and • whether the entities provide similar goods or services, or the nature of their businesses are inherently different. None of these factors are decisive in their own right, nor does each one necessarily need to be given the same weight. Rather, determining whether a potential affiliate is acting in concert with an entity in relation to its own business affairs will be a matter of overall impression. [14] In the context of the former 'STS affiliate' definition, TR 2002/6 states (at paragraph 64) that it is sufficient if the potential affiliate's business has the required degree of connection with, or dependence on, the other entity's business. It is not necessary for the other entity's business to also have a substantial degree of connection with, or dependence on, the potential affiliate's business. Relevant factors to consider in this case are: • The Company directors are Individuals 1 and 3 and its shareholders are discretionary trusts controlled by Individuals 1 and 2 and 3 and 4. While those individuals are also partners in the No 1 Partnership, so are Individuals 5 and 6, and they do not control the No 1 Partnership. There is a familial relationship between all of the individuals but they are not affiliates within the meaning of 328-130. • Individuals 1 and 3 were involved in the management of both entities. Individual 6 has not been involved in the business of the Company and Individual 5 has not been involved in that business for a number of years. • The two entities operate different separate and distinct businesses. • The two entities did not have any commercial dealings between each other (e.g. they did not provide services or supply goods to the other). • They entities did not share employees (other than common management in Individuals 1 and 3). • They did not promote each other's business. • The did not use the same assets or business premises or provide assets to the other entity to use in its business. • The Company had an outstanding unsecured and interest free loan payable to the No 1 Partnership. Although the Company had an outstanding loan to the No 1 Partnership, in the circumstances we do not consider this loan supports a finding that the company had any financial dependency on the partnership. On balance, the facts do not establish that the Company had a substantial degree of connection with, or dependence on, the business of, the No 1 Partnership such that the two entities were acting together in pursuit of the common objective or goal of carrying on the business of No 1 Partnership. Rather, the two entities operated separate, distinct and independent businesses, albeit with a degree of common management and ownership. For the purposes of determining the No 1 Partnership's aggregated turnover for the income year ended 30 June 2023, the Company was not an 'affiliate' of the partnership under section 328-130 at any time during that year. | Detailed Reasoning - Question 4: Do Individuals 1 to 4 satisfy the basic condition under section 152-10(1)(c)(iii) in respect of their sale of the No 1 Partnership's business goodwill and the Property? | Summary: Yes, Individuals 1 to 4 satisfy the basic condition under paragraph 152-10(1)(c)(iii) in respect of their sale of the No 1 Partnership's business goodwill and the Property. | Detailed Reasoning - Detailed reasoning: To qualify for any of the CGT small business concessions, an entity must satisfy several conditions that are common to all the concessions, known as the basic conditions. The basic conditions are contained in Subdivision 152-A. Subsection 152-10(1) states: A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) *CGT event happens in relation to a *CGT asset of yours in an income year; Note: This condition does not apply in the case of CGT event D1: see section 152-12. (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a *CGT small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152-15 ); (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test (see section 152-35 ). Note: This condition does not apply in the case of CGT event D1: see section 152-12. To satisfy subparagraph 152-10(1)(c)(iii) of the ITAA 1997, an entity must be a partner in a partnership that is a CGT small business entity for the income year, and the CGT asset must be an asset of the partnership. Individuals 1 to 4 were partners in the No 1 Partnership and the Business Assets and the Property are assets of the No 1 Partnership. Therefore, they will satisfy subparagraph 152-10(1)(c)(iii), if the No 1 Partnership is a CGT small business entity. An entity will be a CGT small business entity for an income year if it is carrying on a business in the income year (current year) and has an aggregated turnover of less than $2 million (subsection 152-10(1AA) and section 328-110). Aggregated turnover is calculated using one of three methods: • the entity carried on business in the previous year before the current year and its aggregated turnover for the previous year was less than $2 million (subparagraph 328-110(1)(b)(i)); • the entity's estimated current year is likely to be less than $2 million provided the turnover when the business was carried on in both the 2 previous years was not $2 million or more (subparagraph 328-110(1)(b)(ii) and subsection 328-110(3), or • the entity's aggregated turnover for the current year, worked out at the end of the year, is less than $2 million (subsection 328-110(4)). As discussed in the previous questions, aggregated turnover includes the annual turnover of the relevant entity for the income year and the annual turnover of entities that are connected with the relevant entity or are an affiliate of the relevant entity. Under subsection 328-110(4), an entity will be a small business entity if it carried on business in the income year and its aggregated turnover for the current year, worked out as at the end of that year, is less than $10 million. As previously stated, if an entity does not carry on a business for the whole of an income year, the entity's annual turnover for the income year must be worked out using a reasonable estimate of what the annual turnover for the income year would be if the entity carried on a business for the whole of the income year: subsection 328-120(5). [15] The No 1 Partnership was carrying on a business that had an estimated annual turnover for the year ended 30 June 202X (assuming it had not been sold) of well under $2 million for the purposes of subsection 328-120(5). We have ruled that the No 2 Partnership was not connected with the No 1 Partnership at any time during the years ended 30 June 202X, and as it is a partnership it cannot be an affiliate of the No 1 Partnership. We have also ruled that the Company was not connected with or an affiliate of the No 1 Partnership during the year ended 30 June 202X. The facts state that there are no other entities that need to be considered for the purposes of determining whether the No 1 Partnership is a CGT small business entity. Therefore, the aggregated turnover of the No 1 Partnership for the year ended 30 June 202X, for the purposes of the test in subsection 328-110(4), will only include its own annual turnover as worked out under subsection 328-120(5). Therefore, the No 1 Partnership will be a CGT small business entity in the year ended 30 June 202X, because: • it carried on a business in the year ended 30 June 202X; and • its' aggregated turnover for the current year, worked out at the end of the year, is less than $2 million (subsection 328-110(4) and 328-120(5)). Therefore, Individuals 1 to 4 will meet all of the conditions of subparagraph 152-10(1)(c)(iii). [1] Paragraph 960-100(1)(d). [2] Subdivision 328-C explains the meaning of the terms small business entity, annual turnover, aggregated turnover and related concepts. [3] Paragraph 4 of Taxation Determination TD 2022/7 Income tax: aggregated turnover - application of the 'connected with' concept to partnerships, foreign hybrids and non-entity joint ventures (TD 2022/7). [4] Paragraph 46 and footnote 30 of TD 2022/7. [5] Paragraph 5 and 48 of TD 2022/7. [6] Paragraph 9 of TD 2022/7. [7] Paragraph 2.38 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 (EM). Although a spouse or child may be treated as an affiliate for the purposes of subsections 152-40(1A). [8] EM at paragraphs 2.34 to 2.40. NTLG Losses and CGT Sub-committee minutes - 14 November 2007 (Item 1.9) and 10 June 2009 "Small business CGT concessions and definition of 'affiliate' and 'connected entity'". [9] TR 2002/6, at paragraph 107. [10] The Macquarie Dictionary (online edition) defines the phrase 'in concert' to mean: 'in a coordinated or organised way; together'. [11] TR 2002/6, at paragraph 60. [12] The EM, at paragraph 2.37. [13] TR 2002/6, at paragraph 65. [14] TR 2002/6, at paragraph 65. [15] See ATO Interpretative Decision ATO ID 2009/49 Income Tax Small Business Concessions: small business entity test - annual turnover - business carried on part year only

Reasons for decision: All legislative references in these reasons for decision are to the Income Tax Assessment Act 1997 , unless stated otherwise. | For the purposes of determining the 'aggregated turnover' of the No 1 Partnership under section 328-115 for the income year ended 30 June 202X, was the No 2 Partnership 'connected with' the No 1 Partnership under subsection 328-125 during the financial year ended 30 June 2023?