Private ruling: Capital gains tax
Date of advice: 23 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: The scheme has commenced

Ruling: Q1: Is company B an affiliate of the Trust? | A1: Yes. | Q2: Does the Trust satisfy the basic conditions for the small business capital gains tax (CGT) concessions? | A2: Yes.

Relevant facts and circumstances: The Trust is used to hold the family investment properties. The trustee is a company A. Individual A is the sole director and shareholder of this company. Individual A works in company B as a practice manager and is involved in the day to day running of the business. Company B is a business operated by individual B Individual A and B are related. The Trust purchased a property in 199X and began leasing it to company B. Company B occupied more than 50% of the property for more than 7 and a half years. The gross rent received for the excess space totalled $X for the 2013-14 financial year. Income earned from the business activity carried on by the company was $Y. The turnover of company B for the 2013-14 financial year was less than $2 million.

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

Reasons for decision: Summary: An affiliate is defined by section 328-130 of the Income Tax Assessment Act 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. Application to your circumstances In this case, we accept that company B is an affiliate of the Trust. To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied: • A CGT event happens in relation to a CGT asset of yours in an income year, • The event would have resulted in a gain, • The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and • At least one of the following applies; • you are a small business entity for the income year, • you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, • you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or • you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. Active asset test A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event. The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997. A number of assets cannot be active assets (subsection 152-40(4) of the ITAA 1997) including: • 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) • 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, the property owned by the Trust is used in the course of carrying on a business by company B. As discussed above, we accept that the company is an affiliate of the Trust. The property has been owned by the Trust for more than 15 years. Company B is a small business entity which has occupied at least 50% of the property for more than 7 and a half years during the ownership period. Given the area occupied by the company, we accept that the main use of the property is not to derive rent. The Trust does not carry on a business, but the property is used in a business carried on by a small business entity that is an affiliate of the trust. Therefore, the Trust has satisfied the basic conditions for the small business concessions.