Example 2: transfer between individual taxpayers

Jack, a 70-year-old sole trader operating a dairy decides to sell the business assets to his grandson, Johnny. Johnny will take over Jack's dairy business. Jack and Johnny enter into a sale and purchase agreement, whereby all the business assets in the dairy will be sold to Johnny at a price based on an independent valuation. The payment consists of an Acknowledgment of Debt for 75% of the transferred price and cash for the remaining 25%.

Jack retires after the transfer. Johnny carries on the dairy business. Jack helps out in the dairy occasionally but is not otherwise involved in the business. Jack forgives some of the debt annually. Johnny requests that the Commissioner exercises the discretion under section EE 33(4)(a)(ii).

Jack and Johnny are associated persons in accordance with the definition of "relative" in section OB 1.

The Commissioner will exercise the discretion under section EE 33(4)(a)(ii) to allow Johnny to claim tax depreciation on the basis of the assets' transferred price. This is because:

1. The transaction is genuine: the transfer of the assets is the result of genuine negotiation between Jack and Johnny. Consideration has passed by Johnny to Jack for the transfer of business assets.
2. The transferred price is at a fair market value: the transferred price does not exceed the fair market value of the business assets.
3. The transfer of business assets is permanent: the parties to the transaction do not intend to lease or transfer the business assets of the dairy back to Jack.
4. The transferor does not continue to benefit from the transferred property: Jack does not have any control over the transferred assets in the dairy. Johnny runs the dairy business by himself. Jack only helps out occasionally.
5. The transfer is not tax driven: the main reasons for the transaction are to enable Jack to retire due to his old age and for succession planning.