Private ruling: CGT - small business concessions
Date of advice: 2 August 2024
Published: 16 September 2024
Ruling period: Year ending 30 June 2023
Date scheme commenced: 1 July 2022

Ruling: Q1: Did the property, satisfy the active asset test pursuant to section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. The property is not an active asset in accordance with Division 152 of the ITAA 1997 as you did not use the property in a business you own or a business of an affiliate or an entity connected with you. As a result, property is not considered to be an active asset and the small business concessions in Division 152 cannot be accessed in relation to the disposal of the property.

Relevant facts and circumstances: You acquired your share of the property on as tenants in common with your sibling (sibling A) and have owned it for more than XX years. You sold your half of a parcel of primary production land to sibling A in June XXXX. Sibling A owned the other 50% prior to their acquisition of your 50% share. You have never run your own business on your 50% share. You leased your share of the property for XX years, to your sibling (sibling B) for use in their primary production business of sheep farming in exchange for lease payments. Sibling B paid you $XXX per month for the use of your part-ownership of the land and you paid 50% of the council and water rates. Sibling A did not receive any remuneration from Sibling B for the use of their part-ownership of the land - however, sibling B paid sibling A's 50% of the council and water rates. You were not involved in sibling B's business operations. You did not carry on a business in the 20XX-XX income year. You satisfied the maximum net asset test just before the CGT event.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 section 152-105 | Income Tax Assessment Act 1997 Subdivision 328-C | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: Subdivision 152-A sets out the 'basic conditions' which must be satisfied in order for small business entities to qualify for any of the CGT small business concessions to reduce their capital gain by the various concessions in Division 152 of the ITAA 1997. | Detailed Reasoning - Active assets: For the small business concessions in Division 152 to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy the basic conditions in section 152-10 and the active asset test in section 152-35. Subsection 152-35(1) states that a CGT asset satisfies the active asset test if: (a) 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 of ownership, or (b) 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 7 and a half years. For a CGT asset to be an active asset for the purposes of Subdivision 152-A, it must firstly satisfy one of the 'positive tests' in subsection 152-40(1), and then also not be excluded by one of the exceptions in subsection 152-40(4). Under paragraph 152-40(1) a CGT asset is an active asset (subject to the exclusions) if it at that time, you own it and: • it is used (or held ready for use) in the course of carrying on a business by you, an affiliate of yours or an entity connected with you, or • it is an intangible asset that is inherently connected with a business you, your affiliate or another entity that is connected with you, carries on. | Detailed Reasoning - Affiliate: The meaning of an affiliate is outlined in section 328-130 of the ITAA 1997. Subsection 328-130(1) of the ITAA 1997 states 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. According to paragraph 2.36 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 which introduced the definition of "affiliate" into the tax law, "the following factors may have a bearing on whether an individual or company is an affiliate of an entity:" • family or close personal relationships; • financial relationships or dependencies; • relationships created through links such as common directors, partners, or shareholders; • the degree to which the entities consult with each other on business matters; or • whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity. | Detailed Reasoning - Application to your circumstances: You owned the property for more than 15 years, paragraph 152-35(1)(b) applies requiring the property to be an active asset for at least 7 ½ years. You leased the property to sibling B for their use in their primary production business for more than 7 ½ years, however, as you did not use the property in a business of your own, we need to consider if sibling B is your affiliate under section 328-130. While we accept there was a close family relationship this is not enough to establish an affiliate relationship, you were not involved in sibling B's business activities, and they did not consult you on business matters and conducted their business affairs independently. Therefore, sibling B did not act in accordance with your directions or wishes in relation to the affairs of the primary production business, so we do not consider sibling B to be an affiliate of yours under section 328-130. As a result, the active asset test in section 152-35 is not satisfied. Consequently, you do not satisfy the basic conditions in section 152-10 and Subdivision 152-A of the ITAA 1997 in respect of the capital gain made on the sale of the property and the small business concessions in Division 152 cannot be accessed in relation to the disposal of the property.

Unless otherwise stated, all legislative references below are to the Income Tax Assessment Act 1997 .