Private ruling: Capital gains tax
Published: September 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is individual A your affiliate as defined by section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes . | Q2: Is the property an active asset under section 152-40 of the ITAA 1997? | A2: Yes .

Relevant facts and circumstances: The property consists of X hectares of primary production land. The property was originally acquired by you and your late spouse as joint tenants after 1985. You and your late spouse operated a business in partnership at the property until your spouse passed away. The partnership was a small business entity with a turnover of less than $2 million. You acquired your spouse's 50% interest in the property. From this point in time you began leasing the property to your relative. There is a formal agreement in place between yourself and your relative. Your relative pays you an amount per annum with a percentage increase each year. This amount is considered to be less than market value. The amount was agreed upon after taking into account the assistance that your relative provides you and the assistance you provide your relative. Your relative pays the rates and similar costs associated with the property. Your relative operates a business at the property as a sole trader. Your relative's business is a small business entity with a turnover of less than $2 million. You have continued to contribute financially to the running of the property including funding various improvements. You and your relative have held regular meetings since the commencement of the leasing during which all major decisions regarding the property, its development and the running of the business are discussed. There have been regular discussions about the future direction of the property and its potential and challenges. You regularly oversee the property when your relative is absent, assuming responsibility for the business activities. You also act as an unpaid worker whenever an additional set of hands is required. You intend to transfer the title to the property to your relative during the relevant financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 152-35 | Income Tax Assessment Act 1997 328-130 | Income Tax Assessment Act 1997 paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 subsection 152-40(4)

Reasons for decision: Detailed Reasoning - Affiliates: An affiliate is defined by section 328-130 of the ITAA 1997 as being an individual or 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 individual or company. Relevant factors that may support a finding that a person acts in such a manner 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. Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company. Whether a person is acting in concert with another is essentially a question of fact. The term 'acting in concert' involves at least an understanding between the parties as to a common purpose or object. | Detailed Reasoning - Application to your circumstances: In this case, a close family relationship exists between you and your relative. Although there is a formal lease agreement in place, the rent paid by your relative is less than market value. The way the parties act, or could reasonably be expected to act, in relation to each other would be based on their personal relationships. The information provided details that you have significant input in your relative's business activities. You oversee the property and assume responsibility for your relatives' business activities when they are absent. You also undertake unpaid work on the property when additional assistance is required. Having regards to your circumstances and the relevant factors, your relative is considered to be your affiliate. | Detailed Reasoning - Active Assets: A capital gains tax (CGT) asset will satisfy the active asset test if: (a) you have owned the asset for 15 years or less and the asset was an active asset of your for a total of at least half of the test period, or (b) you have owned the asset for more than 15 years and the asset was an active asset of your for a total of at least 7½ years during the test period. The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business. Subsection 152-40(1) details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997): · interests in a connected entity (other than those satisfying the 80% test) · shares in companies and interests in trusts (other than those satisfying the 80% test) · shares in widely held companies unless they are held by a CGT concession stakeholder of the company · shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply · financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options · an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary. | Detailed Reasoning - Application to your circumstances: In this case, you acquired a 50% interest in the property after 1985. You acquired a further 50% interest in the property when your spouse passed. For a period, the property was used in the course of carrying on a business by you and your late spouse in partnership. During this period, we consider the property was an active asset. After your spouse passed away, until present, the property has been used in the course of carrying on a business by your affiliate. The property will be considered an active asset during this period. As the property has been active for the entire ownership period, it will satisfy the active asset test in section 152-35 of the ITAA 1997.