Private ruling: CGT - small business relief - affiliates
Date of advice: 9 April 2024
Published: 27 May 2024
Ruling period: Year ending 30 June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: For the purpose of being classified as a small business entity under subsection 152-10(1AA) of the Income Tax Assessment Act 1997 (ITAA 1997), will you be taken to not be connected with the trust under section 328-125 of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: You are the sole owner of a farmland property (the property). The property was used while carrying on a farming business by a partnership (the partnership). The partners of the partnership consisted of you, your spouse, and your son each with a X% interest in the partnership. The annual turnover of you and the partnership was less than $2 million in the previous income year and is likely to be less than $2 million for the current income year. The total value of the assets owned by you and the partnership are more than $6 million. Your son is also the sole director and shareholder of a company (the company). The company is the corporate trustee of a trust (the trust). The trust carries on a business, separate to the farming business. The trust had an annual turnover of more than $2 million for the previous income year and is likely to be more than $2 million for the current income year. The trust is a discretionary trust. You are a general beneficiary of the trust. You have provided general support and labour of the separate business, but do not receive a salary or wage. You do not have an active involvement in the operation or management of the separate business. You have received varied amounts of distributions of income from the trust since its creation, which have all been less than 40% of the trust's net income.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-10(1AA) | Income Tax Assessment Act 1997 section 328-115 | Income Tax Assessment Act 1997 subsection 328-125(1) | Income Tax Assessment Act 1997 paragraph 328-125(2)(a) | Income Tax Assessment Act 1997 subsection 328-125(3) | Income Tax Assessment Act 1997 subsection 328-125(4) | Income Tax Assessment Act 1997 subsection 328-130(1) | Income Tax Assessment Act 1997 subsection 328-130(2)

Reasons for decision: Summary: Subsection 152-10(1AA) of the ITAA 1997 outlines that an entity will be a CGT small business entity if: Section 328-115 gives the meaning of 'aggregated turnover' for an income year as the sum of the annual turnovers of itself, its connected entities, and its affiliates, excluding dealings with or between any connected entities or affiliates. Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if either entity controls the other entity. Paragraph 328-125(2)(a) of the ITAA 1997 provides that an entity controls another entity if it or its affiliate (or all of them together): Subsection 328-125(3) of the ITAA 1997 provides that an entity controls a discretionary trust if the trustee of that trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates, or the entity together with its affiliates. Subsection 328-125(4) provides, in part, that an entity directly controls a discretionary trust for an income year if, for any of the preceding four income years, the discretionary trust distributed at least 40% of any income or capital paid for that year to either the entity, its affiliates, or to the entity together with any of its affiliates. Under subsection 328-130(1) of the ITAA 1997, 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. Subsection 328-130(2) of the ITAA 1997 also provides that an individual is not your affiliate merely because of the nature of the business relationship shared by the individuals. 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. However, none of these is decisive. Taxation Determination TD 2022/7 Income tax: aggregated turnover - application of the 'connected with' concept to partnerships, foreign hybrids and non-entity joint ventures outlines that a person's spouse or child is not automatically an affiliate of the person. For example, if an individual and their child run their own separate businesses, with no mixing of management, business premises or finances, they would be unlikely to be treated as affiliates. Similarly, co-directors or partners are not necessarily affiliates. Parties to a non-entity joint venture will also not be affiliates merely because of the nature of their business relationship. Application to your circumstances In this case, you carry on a farming business through a partnership with your wife and son, each owning a X% interest of the partnership. The partnership had an annual turnover of less than $2 million in the current income year and is likely to be less than $2 million in the current income year. However, your son also carries on a separate business through the trust, which has an annual turnover of more than $2 million for the current income year and is likely to be more than $2 million for the current income year. Therefore, if you and the trust are connected entities, then the trust's annual turnover will be included in your aggregated turnover and thus you will not be taken to be a CGT small business entity. As no partner owns at least 40% of the net income of the partnership, the partnership will not be taken to be connected with the trust on its own. Furthermore, you also won't be taken to be in control of the trust as all trust distributions made to you have been less than 40%. However, as your son is the sole director and shareholder of the company that is the trustee of the trust, then he will be considered be in control of the trust and thus be connected with it. Therefore, if you and your son are taken to be affiliates then, by extension, you will also be taken to be connected with the trust. While you and your son are partners in the partnership, as mentioned above, neither partner owns at least 40% of the net income of the partnership. Therefore, your son will not be taken to be in control of the partnership and thus will not be connected with the partnership. Furthermore, though you have provided general support and labour of your son's business, you do not have an active involvement in the operation or management of the business. Ultimately, your son does not act in concert with you in respect to the trust, and he does not act according to your wishes in respect to the separate business. Therefore, you and your son will not be taken to be affiliates under subsection 328-130(1) of the ITAA 1997, and thus you will not be taken to be connected to the trust under section 328-125 of the ITAA 1997.