Private ruling: Capital gains tax small business concessions
Date of advice: 6 May 2016
Published: June 2016
Ruling period: year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is your spouse an affiliate of yours under section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is your spouse an affiliate of yours under section 152-47 of the ITAA 1997? | A2: Yes | Q3: If the answer to question 2 is yes, does the application of section 152-47 mean you are connected to the Family Trust for the purposes of subsection 328-125(3) or 328-125(4) of the ITAA 1997 during the 2016 income year? | A3: Yes | Q4: Are you a small business entity in the 2016 income year pursuant to section 328-110 of the ITAA 1997? | A4: No | Q5: Does the land you own satisfy the active asset test under section 152-35 of the ITAA 1997? | A5: Yes

Relevant facts and circumstances: You own a CGT asset, being land. You have owned the land for a period greater than 20 years. For the entire period of your ownership, the land has been used in the business conducted by Company A as trustee of the Family Trust. You receive the following from the Family Trust: an annual rent figure for use of the land, a salary for managing the business, and, a trust distribution. Your net asset value for the purposes of section 152-15 of the ITAA 1997 exceeds $6 million. You own three separate properties and personally conduct a business on these properties. You are intending to dispose of the land during the relevant income year. CGT event A1 will occur upon disposal. As a result of the intended CGT event, you will generate a capital gain. Your spouse owns a separate property and runs a business on this property. You do not have any direct or indirect influence with regard to your spouse's business activities. Your spouse also receives payments from the Family Trust including a salary for managing the business and a trust distribution. The Family Trust is a discretionary trust. The annual gross business income generated by the Family Trust exceeds $2 million. You are the principal of the Family Trust. In accordance with the Family Trust deed, the principal has the power to remove the trustee. In the four income years prior to the 2015-16 income year, the Family Trust distributions have been appropriated to the following beneficiaries: you, your spouse, Company A and Company B. You have not received greater than 40% of the Family Trust distribution in any of the four income years prior to the 2015-16 income year. Your spouse received greater than 40% of the Family Trust distribution in one of the four income years prior to the 2015-16 income year. You have received greater than 40% of the Family Trust distribution in XX separate income years since the land was acquired. Company A is trustee for the Family Trust. You and your spouse each hold 50% of the shares in, and are the only two directors of, Company A. Your spouse is the sole shareholder and director of Company B.

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 152-47 | Income Tax Assessment Act 1997, section 328-110 | Income Tax Assessment Act 1997, section 328-115 | Income Tax Assessment Act 1997, section 328-125 | Income Tax Assessment Act 1997, section 328-130

Reasons for decision: Detailed Reasoning - Detailed reasoning: An affiliate is, according to section 328-130, an individual or a company who 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. A spouse or a child under the age of 18 years is not automatically an affiliate. Whether a person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative. In your case, your spouse owns a property and runs a business on this property. You advised that you do not have any direct or indirect influence with regard to your spouse's business activities. Essentially, your spouse runs their business independently from you. Based upon these facts, it could not be reasonably expected that your spouse acts in accordance with your directions or wishes or in concert with you, in relation to the affairs of their business. Therefore your spouse is not considered your affiliate under section 328-130. | Detailed Reasoning - Detailed reasoning: Section 152-47 may apply to deem a spouse or child an affiliate of you if: • one entity (the asset owner) owns a CGT asset (whether the asset is tangible or intangible); and • either: • the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity); or • the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity); and • the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner. The application of section 152-47 is not limited to situations where an entity that owns a CGT asset and does not operate a business provides that asset to another entity for use in its business (the standard passively held asset). It also applies to situations where an entity that operates a business owns a CGT asset that it provides to another entity for use in that other entity's business. The rule applies only if the 'business' entity is not otherwise an affiliate of, or connected with, the asset-owning entity. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Measures No. 2) Act 2009 states that the inclusion of the affiliate rule contained in section 152-47 increases access to the concessions by treating an individual's spouse or child as their affiliate in a wider range of situations. However, paragraph 2.38 of the EM also concedes that there will be circumstances where the affiliate rule may also reduce access to the concessions by bringing in more affiliates and more entities that are connected with the asset-owning entity than the old rule. In your case, you own the land which has been used in the business carried on by the Family Trust during the entire period of your ownership. The Family Trust is not your affiliate as an affiliate can only be an individual or a company under section 328-130. The remaining issue to consider is whether you are connected with the Family Trust. In accordance with subsection 328-125(1), an entity is connected with another entity if one of the entities controls the other entity, or if the two entities are controlled by a third entity. In determining whether a discretionary trust is connected with another entity for the purposes of section 328-125, it is necessary to consider whether the discretionary trust is controlled by another entity. The issue under consideration is whether you have direct control of the Family Trust under either subsections 328-125(3) or 328-125(4). You do not satisfy subsection 328-125(4) in the 2015-16 income year, apart from section 152-47, as the trust distributions to you, your affiliates or you and your affiliates does not exceed 40% for any of the four prior income years. Guidance on what factors need to be taken into consideration to determine 'control' as described in subsection 328-125(3) can be found in the Explanatory Memorandum to Taxations Laws Amendment (Small Business) Bill 2007 ("2007 EM"). The issue of control of a discretionary trust was considered in Gutteridge v FC of T [2013] AATA 947; 2013 ATC 10-347 ( Gutteridge ). The Tribunal's findings confirmed the view expressed above in the 2007 EM that all the circumstances of the case must be taken into consideration rather than, for example, mere considerations of the formal titles or the instruments under which roles within an entity are defined. You contend that you do not have sufficient control over the trustee of the Family Trust to satisfy subsection 328-125(3), notwithstanding your status as the principal of the Family Trust. You have provided a number of relevant facts and circumstances for consideration. However, consistent with the decision in Gutteridge , the Commissioner considers further information is required to determine whether or not it could be reasonably expected that the trustee for the Family Trust will act, or could reasonably be expected to act, in accordance with solely your directions or wishes. If it was determined you did have sufficient control over the trustee of the Family Trust, then you would be connected to the Family Trust under subsection 328-125(3), and accordingly section 152-47 would not apply. However, in the absence of further information, if the Commissioner accepts your contention that you are not connected to the Family Trust, all three conditions in subsection 152-47(1) would be satisfied and section 152-47 will apply to deem your spouse to be your affiliate for the 2015-16 income year. | Detailed Reasoning - Detailed reasoning: As already concluded in question 2, under section 152-47 your spouse is deemed to be your affiliate for the 2015-16 income year. Under subsection 152-47(2), your spouse will be taken to be your affiliate for the purposes of Subdivision 152-A in determining whether the Family Trust is connected with you. Subsection 152-47(3) provides that if an entity is an affiliate of, or connected with, another entity as a result of subsection 152-47(2), the spouse is taken to be an affiliate of the taxpayer for the purposes of subdivision 152-A of the ITAA 1997 and for the purposes of sections 328-110 to 328-125 of the ITAA 1997 to the extent that these sections relate to Subdivision 152-A. In your case, subsection 152-47(2) treats an entity (your spouse) as an affiliate of another entity (you) for the purposes of determining whether you are a small business entity under subsection 152-10(1). Therefore, subsection 152-47(3) applies and for the purposes of section 328-110 to 328-125 your spouse will be taken to be your affiliate. As previously mentioned, subsection 328-125(3) provides that you control a discretionary trust if the trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of you, your affiliates, or you together with your affiliates. The issue under consideration is whether you and your affiliate, your spouse, have direct control of the Family Trust under either subsection 328-125(3) or 328-125(4). The Family Trust is a discretionary trust. You and your spouse each hold 50% of the shares in, and are the only two directors of, Company A, the trustee of the Family Trust. The Commissioner considers it could be reasonably expected that Company A would act in accordance with the directions or wishes of you and your affiliate. Therefore, under subsection 328-125(3), you control the Family Trust. For completeness, the discretionary trust control test under subsection 328-125(4) provides you will control the Family Trust for the 2015-16 income year if, for any of the 4 income years before that year, the trustee of the trust paid at least 40% of the total amount of income or capital paid for that year to you, your affiliates, or, you and any of your affiliates. From the information provided, in one of the four income years prior to the 2015-16 income year, your spouse received greater than 40% of the Family Trust distributions. Therefore subsection 328-125(4) is satisfied. In accordance with subsection 328-125(1), you are connected with the Family Trust for the 2015-16 income year. You contend that paragraph 152-47(4)(a) means that subsection 152-47(2) only applies for the purposes of determining access to the small business CGT concessions, not for the purposes of excluding an entity from accessing the concessions. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Measures No. 2) Act 2009 expands upon the insertion of subsection 152-47(4) in the discussion at paragraphs 2.44 and 2.45: 2.44 The rule treating an individual's spouse or child (under 18 years of age) as an affiliate of the individual applies in relation to any capital gain from any CGT asset owned by the individual, an affiliate of the individual or an entity connected with the individual. This means in Examples 2.3 and 2.4 that, if Crystal sells a CGT asset, the rule will treat Philip as Crystal's affiliate. 2.45 This means that the individual or entity faces the same set of aggregation rules for the purposes of the maximum net asset value test or the aggregated turnover test regardless of which CGT asset the individual is seeking to claim the small business CGT concessions for. However, the rule does not apply for the purposes of determining eligibility for the other small business concessions such as the concessional rules for fringe benefits tax and pay as you go instalments. The EM discussion focusses on the words 'any capital gain from any CGT asset' within paragraph 152-47(4)(a). Consistent with this emphasis, the intention of paragraph 152-47(4)(a) is to ensure that when the affiliate rule is applied to an individual taxpayer, it is adopted consistently by the taxpayer, the taxpayer's affiliates and any resultant entities connected with the taxpayer, who are seeking to access the small business concessions within Division 152 for any capital gain from any CGT asset. Paragraph 2.45 of the EM, after stating the same aggregation rules apply for the aggregated turnover test, also states the rule does not apply for the purposes of determining eligibility for the other small business concessions such as the concessional rules for fringe benefits tax and pay as you go instalments. This suggests the deemed affiliate rule within section 152-47 is limited to determining eligibility for relief provided by Subdivision 152-A, provided the basic conditions are met. With respect to the wording of paragraph 152-47(4)(a), the words 'For the purposes of reducing or disregarding under this Division' do not just refer to, or limit the operation of the provisions to, situations enabling access to the small business CGT concessions. These words are a broader reference back to the opening words of subsection 152-10(1), which talks about a capital gain being reduced or disregarded under Division 152 if certain conditions are satisfied. | Detailed Reasoning - Detailed reasoning: Section 328-110 provides you are a small business entity for an income year (the current year) if: • you carry on a business in the current year; and • one or both of the following applies: • you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million; • your aggregated turnover for the current year is likely to be less than $2 million. You personally conduct a business on three different properties you own, thus you satisfy the carry on a business requirement under paragraph 320-110(1)(a). Aggregated turnover is defined by section 328-115. Aggregated turnover for an income year is the sum of your relevant annual turnovers for the year and certain related entities of yours, excluding certain amounts as provided for in subsection 328-115(3). The relevant annual turnovers as per subsection 328-115(2) are: • your annual turnover for the income year; • the annual turnover for the income year of any entity that is connected with you at any time during the year; and • the annual turnover for the income year of any entity that is an affiliate of you at any time during the income year. As per the conclusions to question 2 and 3 of this ruling, your spouse was deemed to be your affiliate and the Family Trust is connected with you during the 2015-16 income year. By the same reasoning, your spouse will be your affiliate and the Family Trust connected with you for the 2014-15 income year as well. Under section 328-115, your aggregated turnover for the relevant income years will be the sum of the annual turnovers of you, your spouse and the Family Trust. Your aggregated turnover for both the relevant income years is expected to be greater than $2 million, as the annual turnover of the Family Trust alone was greater than $2 million in the 2014-15 income year and will be greater than $2 million in the 2015-16 income year. Therefore, you will not be a small business entity for the 2015-16 income year as you do not satisfy paragraph 328-110(1)(b). | Detailed Reasoning - Detailed reasoning: Under section 152-35, a CGT asset satisfies the active asset test if: • you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period specified in subsection (2). In subsection 152-35(2), relevant period begins when you acquired the asset and ends at the earlier of CGT event or the cessation of the business. Under subsection 152-40(1), a CGT asset is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate, or another entity that is connected with you. In your case, the CGT asset is land. You have owned the land for greater than 20 years and it has been used in the course of the business carried on by the Family Trust for the entire period of your ownership. As you did not use your land during the relevant period in the course of carrying on a business, it will need to be determined whether your land was used by your affiliate or an entity that is connected with you in the course of carrying on a business. The issue under consideration is whether you are connected with Family Trust at any time during the period since you acquired the land. Under subsection 328-125(4), you control the Family Trust for a specific income year if the trustee of Family Trust paid to you at least 40% of the discretionary trust distributions for any of the 4 income years before that year. The history of the Family Trust distributions during the entire period of land ownership shows that you received greater than 40% trust distributions from the Family Trust in XX income years since the land was acquired. Under subsection 328-125(4) you control the Family Trust for each of these XX income years as you received greater than 40% of the total income paid by the trustee for that year. For each income year you are connected with the Family Trust, the land is considered an active asset under subsection 152-40(1) as it is used in the course of carrying on a business that is carried on by another entity that is connected with you. None of the exceptions in subsection 152-40(4) of the ITAA 1997 apply in your case. Therefore, the land satisfies the active asset test under section 152-35 as you owned the land for more than 15 years and it was an active asset for at least 7 ½ years during the relevant time period.