Private ruling: Small Business Concessions - affiliate
Date of advice: 20 June 2016
Published: July 2016
Ruling period: Year ending 30 June 20yy
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is your relative your affiliate under section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-130

Reasons for decision: Summary: Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 . In the case Re: Stephens and Federal Commissioner of Taxation [2008] AATA 176; (2008) 71 ATR 306; 2008 ATC 10-008 (the Stephens Case ) the Administrative Appeals Tribunal stated that to be a taxpayer's affiliate, an entity must act in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer, in the way it carries on its business generally and not just in relation to the relevant CGT asset. Although your relative may have acted in accordance with your directions or wishes, or in concert with you, in relation to the use of your land in their farming business, there is no information that indicates that they took direction from you in any other aspect of their farming business. That is, there is no information that suggests that they took direction from you, or acted in concert with you, with respect to their overall farming business. This is to be expected given that the farming business is also undertaken on other land not owned by you and that your expertise lies in a non-primary production field. As your influence was only in relation to your land used in your relative's business rather than over the entire business generally, your relative is not considered to be your affiliate. As your land was not used by you, or an affiliate, in carrying on a business, it was not active asset. Consequently, you are not entitled to the small business CGT concessions in relation to the disposal of the land. | Detailed Reasoning - Meaning of affiliate: Section 328-130 provides the meaning of an affiliate. According to subsection 328-130(1), an individual or company is your affiliate if they act, 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. According to the C apital gains tax concessions for small business 2015-16 the factors that may support a finding that a person acts, or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you 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, and • the actions of the parties. | Detailed Reasoning - Reasonably be expected to act: In the Stephens Case , Fice M, in discussing the definition of a small business CGT affiliate under former subsection 152-25(1) in particular the meaning of 'reasonably be expected to act' stated that; It is important to observe that subsection 152-25(1) of the Assessment Act is not limited to the conduct of the small business CGT affiliate in the use of the CGT asset. Rather, it is couched in broad terms and must include the relationship between the parties in the conduct of the affiliate's business generally. The introduction of the definition of an affiliate in subsection 328-130(1) in 2007 supports this view by adding the phrase, 'in relation to the affairs of the business of the individual or company' to the definition. It requires a broader enquiry into the influence an individual has in the making of decisions relating to the business in general rather than an examination of the decision making processes in relation to the CGT asset. | Detailed Reasoning - Acting in concert: In the Stephens Case , Fice M reviewed some of the case law that has dealt with the meaning of 'acting in concert'. He cites Finkelstein J in Papua New Guinea Dockyard Ltd v Adams and Ors (2005) 215 ALR 742 at 746 in stating that an entity will be acting in concert with another if, in consequence of an agreement between the entities, the conduct is in pursuit of an objective or purpose which is common to both. Again, Fice M states that acting in concert is related to pursuing common business purposes rather than acting in concert in relation to the CGT asset. | Detailed Reasoning - Application to your circumstances: You own a property used by your relative's primary production business. For your relative to be considered an affiliate of yours they must act or it must be reasonable to expect that they would act, in accordance with your directions or wishes, or act in concert with you, in relation to the affairs of the business. In this case, there is a close relationship between you and your relative. You allow your relative to conduct their farming business on the property rent free. You have stated that you are not actively engaged in the primary production business apart from undertaking some activities in relation to your land used in the business such as, providing advice on maintenance and repairs required to the property, making regular observations of the stock and general farming conditions of the property, rescuing stock that have escaped from the property, and providing advice on when stock is needed to be moved due to rising flood waters. While your relative may act in concert with you in relation to the land in that you allow their business to use the land rent free, a farming business and the decisions made in running such a business are much broader than considerations solely focused on the land and the activities that you have undertaken. Given the information provided, when viewed objectively it is unlikely that your relative would act, or could be reasonably expected to act, in concert with you or at your direction in relation to the overall farming business. This is especially the case taking into account that your property is not the only land used in their primary production business and that your expertise lies in a non-primary production field. Accordingly your relative is not your affiliate. As your relative is not your affiliate, your property was not used in the course of carrying on a business by an affiliate. Therefore the property was not an active asset and you cannot access the small business CGT concessions on the capital gain that resulted from the sale of the property.

You entered into an agreement with a relative for the use of the land. The terms of the agreement were as follows: | • your relative would use the land in their primary production business | • your relative pays the rates and operational costs for the land | • the agreement between you and your relative was in effect up until the land was sold. | Your relative used the land as part of their primary production business which is a small business entity (SBE). | You were not actively engaged in their primary production business apart from undertaking some activities in relation to your land used in the business such as, providing advice on maintenance and repairs required to the property, making regular observations of the stock and general farming conditions of the property, rescuing stock that have escaped from the property, and providing advice on when stock needed to be moved due to rising flood waters. | You undertook many of these activities as your relative lives some distance away from your land while you live nearby. | Your relative uses other land in their primary production business in addition to your land. | You operate a non-primary production business that is not connected to your land. | You made a gain from the sale of the property.