Private ruling: CGT - small business - affiliate
Date of advice: 4 January 2024
Published: 12 February 2024
Ruling period: Year Ending June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: Is your sibling, your affiliate as defined by section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of the proposed sale of land? | A1: Yes, your sibling is considered to be an affiliate of yours under subsection 328-130(1) of the ITAA 1997. On the basis of your close family relationship with your sibling and their dependency on the use of your land and labour, and your involvement in its business decisions, it is reasonably expected that your sibling would act in accordance with your directions or wishes, or in concert with you in relation to the affairs of their business. | Q2: Will the land satisfy the active asset test pursuant to section 152-35 of the ITAA 1997 for the purpose of its sale? | A2: Yes, you have owned the property for more than 15 years and the property has been used by your affiliate (your sibling), who is a partner in a partnership carrying on a farming business for more than 7 ½ years of your ownership period. As such, the property will satisfy the active asset test under section 152-35 of the ITAA 1997. | Q3: Will you satisfy the basic conditions for relief under section 152-10 of the ITAA 1997, allowing you to reduce your capital gain from the proposed sale of the land, under the small business capital gains tax (CGT) concessions? | A3: Yes, a CGT event will occur when you dispose of the property resulting in a capital gain, satisfying paragraph's 152-10(1)(a) and (b) of the ITAA 1997. You will satisfy the maximum net asset test under section 152-15, just before the CGT event, satisfying paragraph 152-10(1)(c)> As forementioned the active asset test under section 152-35 is satisfied, therefore, the third and final basic condition in paragraph 152-10(1)(d) is satisfied.

Relevant facts and circumstances: The property was acquired by your parent prior to 20 September 1985 The farm was previously operated as partnership A, consisting of you, your parents and your sibling. You left school and took employment as a stock and station agent and worked weekends, annual leave and after hours on the farm. In 20XX your parent, under guidance of a legal practitioner entered into an arrangement whereby the operating function of the farm was placed into which was then reconstituted as partnership B, consisting of your parents, your sibling and your sibling's spouse. At the same time in 20XX, your parent transferred ownership of the farmland to you and your sibling, and you had no income participation only land ownership. There were specific terms on the future disposal and future usage of the land for farming purposes by family members as a condition of transfer. You and your sibling were restricted from selling the property and compelled to provide the property for faming purposes by the family until such time as the business ceased. Your parents retired from the partnership XX years ago, with your sibling continuing with their spouse in a reconstituted partnership, (partnership C). Some rent was paid to you by the partnership C, until the financial year ending 20XX, however prevailing drought conditions led to the current arrangement whereby the partnership C, maintains the property and pays all costs associated in exchange for use of the land owned by you, to farm. You continued throughout that time to work a fulltime job as a XXXXXX, however maintained active involvement in farm work activities at certain times of the year, this included shearing, advice on breeding, preparation of wool, sheep management, marketing and strategy for wool growing. Your sibling has experienced some ill health and is contemplating the challenges of operating the farming property in their later years. Due to this the sale of the jointly held land with you is being considered for sale. You are also considering your physical capacity to operate the farm and disposal of the land asset to provide retirement, or transfer land to a Trust for extended family to have clear direction of future ownership. You own as tenants in common with your sibling a total of XXX hectares. The CGT event, that being the disposal of XX hectares (the portion), of the property you own as tenants in common with your sibling is proposed to be sold in the financial year ending 20XX. You intend to continue employment full time for the foreseeable future. If a portion of the farmland you intend on selling is sold, the number of hours you contribute to partnership C, would not reduce proportionately nor would they reduce substantially until such time as your sibling retired or reduced farming activities as well. The property has not ceased being used by partnership C throughout your ownership period. You will satisfy the maximum net asset value test (MNAV) under section 152-15 of the ITAA 1997, just prior to the CGT event, that being the disposal of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 328-130