Private ruling: Small business concessions
Date of advice: 30 November 2018
Published: March 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the Company an affiliate of the Rulees under section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The Rulees are partners in a Partnership (the Partnership) with other family members. The Partnership owned freehold premises and gaming entitlements connected with the premises. The business run from the premises is operated by a company (the Company). Shareholders of the company are the same individuals in the same proportions as in the Partnership. The Company was incorporated at the time of purchasing the business assets and was given the right to operate the business immediately upon the acquisition of the assets by the Partnership. The gaming entitlements have been sold by the Partnership. The Company acted in accordance with the Partnership’s decision and restructured the business in a way that would allow it to operate without the gaming entitlements moving forward. There are no written agreements for the use of the Partnership’s assets in the Company’s business. Given the close family relationship, and the identical underlying ownership of the Company and the Partnership, it was decided that an informal arrangement for the use of the assets would be sufficient. Decisions at the Partnership and Company levels were also made in an informal manner. The activities of the Partnership and Company are viewed and operated as a single business by the owners.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Subsection 328-130(2)

Reasons for decision: Summary: Section 328-130 of the ITAA 1997 defines an ‘affiliate’ as an individual or company that 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. However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share (subsection 328-130(2) of the ITAA 1997). According to the ATO guide to the Small business CGT concessions (available on ato.gov.au), whether a person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, is a question of fact dependent on all the circumstances of the particular case. Relevant factors 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. Generally, another business would not be acting in concert with you if they: ● have different employees; ● have different business premises; ● have separate bank accounts; ● do not consult you on business matters; or ● conduct their business affairs independently in all regards. In the present case: ● the partners in the Partnership and the shareholders of the Company are the same family members so there is a close family relationship between the parties; ● there was no formal agreement or formal relationship between the Partnership and the Company dictating how they were to act in relation to each other; ● the Partnership owned the gaming entitlements and the business premises, and the Company carried on the business using these assets; and ● the gaming entitlements were directly linked to the operation of the pub business. Consequently, we consider that the Company acted, or could reasonably be expected to act, in accordance with the directions or wishes, or in concert with the partners in the Partnership, in relation to the affairs of the business. Therefore, the Company is an affiliate of the Rulees under section 328-130 of the ITAA 1997.