Capital Gains Tax: CGT small business relief: small business CGT affiliate

Is a company owned and directed by the taxpayer's children the taxpayer's small business CGT affiliate for the purposes of the small business CGT concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The company will be the taxpayer's small business CGT affiliate. As the taxpayer has actively participated in their children's farming business, the company could reasonably be expected to act in concert with the taxpayer in accordance with section 152-25 of the ITAA 1997.

The taxpayer and their spouse were partners in a partnership which acquired farmland in 1986. They formulated a succession plan to enable their children to take over the farming operations. In accordance with the plan, a new company was formed which was owned and directed by the taxpayer's children ('the company'). The company then acquired the stock and plant and entered into a lease agreement (which imposed certain restrictions on their farming activities) for use of the farmland.

With the company owning the stock and plant of the farming business the children could make their own decisions relating to the farm program. The taxpayer, however, retained financial control through provision of working capital and the use of the farmland via the lease agreement. The children consult with the taxpayer before making decisions concerning the farming business. The taxpayer has continued to work unpaid on the farm performing duties such as driving machinery, machinery maintenance, fencing, and general farm work.

One of the basic conditions for the small business CGT concessions is that the active asset test must be satisfied (section 152-10 of the ITAA 1997). Amongst other things, an asset will be an active asset if it is used or held ready for use in the course of carrying on a business by a small business CGT affiliate (subparagraph 152-40(1)(c)(i) of the ITAA 1997).

The term 'small business CGT affiliate' is defined in section 152-25 of the ITAA 1997. A person is a small business CGT affiliate of a taxpayer if the person acts, or could reasonably be expected to act in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer. Section 995-1 of the ITAA 1997 defines 'person' to include a company.

In this case the farmland is held by the taxpayer for use in the farming business conducted by the company. The company's activities are limited by the finance that the taxpayer provides and are also constrained by the clauses in the lease agreement. In addition the taxpayer continues to work on the farm for no remuneration and the children refer to the taxpayer for advice on matters concerning the running of the farming business.

As the taxpayer is actively involved in the business and is consulted in business decisions it is considered that the company acts or could reasonably be expected to act in concert with the taxpayer. Therefore the company owned and directed by the taxpayer's children is considered to be the taxpayer's small business CGT affiliate. The following paragraph was deleted from the Reasons for Decision as it contained general statements which were not relied on in making the decision in this ATO ID. Extensions to the small business CGT concessions were outlined in the Treasurer's Press Release No. 76 of 1998. The Press Release explains the additional situations that the CGT small business concessions should now apply to. It was the intention of the Government at the time of introducing these additional measures that the concessions were to apply to small businesses where a non-operating entity held some of the business assets providing these assets were used actively in a business.