CGT small business concessions - small business CGT affiliate

If a taxpayer owns land on which their brother operates a farming business, is the taxpayer's brother a small business CGT affiliate of the taxpayer under paragraph 152-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. In the circumstances described, the brother is the taxpayer's small business CGT affiliate under paragraph 152-25(1)(b) of the ITAA 1997. As the brother's business is carried on with a substantial degree of dependence on the taxpayer's agreement to allow him to use the land, the brother could reasonably be expected to act in concert with the taxpayer in accordance with paragraph 152-25(1)(b) of the ITAA 1997.

The taxpayer owns a 25% interest in land acquired after 19 September 1985. The taxpayer's brother owns the other 75% interest. They acquired their interests under their father's will and own the land as tenants in common. The land has been owned by family members for over 50 years and has been actively farmed during that time.

With the taxpayer's consent, all of the property is used to conduct a farming business by a partnership (the taxpayer's brother and his spouse). This arrangement has been in place since the property was acquired from their father's estate and is based on family considerations. The taxpayer is not involved in the operation of the farming business and derives no income from the land. The taxpayer's brother makes all the decisions regarding the use and maintenance of the land.

One of the basic conditions of the small business CGT concessions in Division 152 of the ITAA 1997 is that the active asset test must be satisfied (paragraph 152-10(1)(d) of the ITAA 1997). A CGT asset is an active asset if, among other things, it is owned by the taxpayer and 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 spouse or child of the taxpayer under 18 years is a small business CGT affiliate. A person is also 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.

Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative.

Relevant factors that may support a finding that a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer include: • the existence of a close family relationship between the parties, • the lack of any formal agreement between the parties prescribing 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 and • the actions of the parties.

In this case, a very close family relationship exists between the parties. The taxpayer owns an interest in the land which, with their consent, is used by their brother (in partnership with his spouse) to carry on the farming business. Farming operations were previously conducted on the land for many years by the taxpayer's father. The arrangement in respect of the use of the land is based on family considerations.

Although the taxpayer is not involved in the operation of the farming business the brother's business is carried on with a substantial degree of dependence on the taxpayer's agreement to allow him to use the taxpayer's share of the land. There is clearly an understanding between them about the use of the land.

In these circumstances, it is accepted that the brother acts or could reasonably be expected to act in concert with the taxpayer. Therefore, the brother is the taxpayer's small business CGT affiliate under paragraph 152-25(1)(b) of the ITAA 1997 and the taxpayer's interest in the land is an active asset.