Private ruling: Capital gains tax concessions for small business - affiliate
Published: December 2012
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is Operating Company Pty Ltd (OC) an affiliate of the Family Trust (FT)? | A1: Yes.

Relevant facts and circumstances: The FT is a discretionary trust. Investment Company Pty Ltd (IC) is the trustee of the FT. Two individuals, A and B, hold 100% of the shares of IC (50% each). A and B are the only directors of IC. The primary beneficiaries of the FT include A and B, and their family members. The general beneficiaries of the FT are: · the primary beneficiaries and their respective family members · any spouse of the foregoing general beneficiaries · the trustee of any trust under which the foregoing general beneficiaries is interested whether absolutely, contingently or in expectancy · any corporation of which all the members are some or all of the foregoing general beneficiaries. A holds X% of the shares in OC, with a number of family members each holding Y%. An unrelated party holds the remaining Z%. The shares held by the unrelated party are redeemable by OC in the event of death or incapacitation of the individual shareholder. OC voting rights are according to shares held. A has the casting vote if required, although this has not been necessary to date. The number of family members who each hold Y% of the shares in OC have provided statutory declarations which declare that in all matters relating to OC and the FT they have never voted against nor disregarded the wishes of A, nor do they ever intend to vote against them in any matter in the future. Some years ago FT purchased a property to secure premises for OC. This property would not have been purchased by the FT if OC did not require new premises. The property was purchased by the FT and not OC for asset protection purposes. At the request of the FT, OC entered into a formal commercial agreement to rent the premises. The rent OC pays is at the low end of an acceptable commercial rate. The FT is flexible with the rental agreement with OC, allowing OC additional time to pay rent on several occasions. The FT has undertaken improvements to the property over the years to better accommodate OC's business. OC also made a number of improvements to the property during its tenancy due to the FT's limited cash flow. A couple of years ago the board of OC committed to securing larger premises due to the growth of the business. The property was significantly damaged in a disaster during the period of tenancy; however, OC continued to run the business from this property in sub-standard conditions while paying the full rent to the FT. Recently, negotiations began to purchase a larger property. The bank considered OC and the FT a consolidated entity. To satisfy the banks loan to value ratio the decision was made to sell the existing premises. The FT purchased new premises. B has been a financial creditor of OC for many years. Over the years OC has paid various debts on behalf of the FT due to tight cash flow. OC provides services to the FT including: · storing financial documentation (invoices, receipts) at their business premises · storing FT's financial data on their computer systems · a OC employee processes and reconciles all accounting transactions for the FT on OC's business premises · a OC employee maintains the bank account of the FT including receipting and paying all transactions · a OC employee collects the FT's mail from its post office box · a OC employee answers all phone calls relating to the FT's affairs. The employees of OC receive no additional remuneration from FT for time spent on the FT's affairs. OC receives no remuneration from FT for time spent on the FT's affairs.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: One of the basic conditions for the small business CGT concessions is that the active asset test must be satisfied. Amongst other things, an asset will be an active asset if it is used or held ready for use in the course of carrying on a business that is carried on by your affiliate. An affiliate is an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act: · in accordance with your directions or wishes, or · in concert with you. Whether an individual or company acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer, is a question of fact dependent on all the circumstances of the particular case. No single factor will necessarily be determinative. Relevant factors that may 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. Generally, another business would not be acting in concert with you if they: · have different employees · have different business premises · have separate bank accounts · do not consult you on business matters · conduct their business affairs independently in all regards. In your case, there is a relationship that constitutes a relationship of control or influence through individuals who have links to both you and OC. The spouse controls you (FT) and is a director and majority shareholder in OC, and the majority of the shareholders in OC are your beneficiaries. The only reason you acquired commercial business premises was for use in the business conducted by OC. The property was purchased by the FT and not by OC or its individual shareholders/directors for asset protection purposes. While there is a formal lease agreement in place you do not strictly enforce it, allowing OC extensions of time to pay rent on a number of occasions. In addition, the amount of rent charged is at the low end of an acceptable commercial rate. You carried out improvements to better accommodate OC's business. Also, due to the FT's limited excess cash flow available for property improvements, OC made a number of improvements to the property during its tenancy. OC has also paid various other debts on behalf of the FT due to its limited cash flow. As the FT does not carry on a business it does not have any employees or business premises. While there is no formal agreement in place, OC provides services to the FT including storing and holding all the FT's financial documentation and data at their business premises, and having their employee's deal with the FT's affairs such as maintaining its bank account (including receipting and paying all transactions), collecting mail and other administration services. OC receives no remuneration from the FT for time spent on the FT's affairs. Having regard to the above factors it is accepted that OC acts in accordance with the FT's directions or wishes, or in concert with the FT, in relation to OC's business affairs. As such, OC is considered to be an affiliate of the FT under section 328-130 of the Income Tax Assessment Act 1997 .

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.