Private ruling: Affiliate
Date of advice: 18 December 2015
Published: March 2016
Ruling period: Year ending 30 June 20VV
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the entity an affiliate of the Taxpayer within the definition in Section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Taxpayer is an incorporated entity. Based on the shareholding structure of the Taxpayer and the entity they are not controlled by the same third entity and neither entity has an interest of at least X% in the other. As such, both entities are not connected entities under section 328-15. The primary activity of the Taxpayer has been the provision of premises to the entity and the further provision of financial support to the entity to allow it to undertake its activities. The Taxpayer purchased a property to be used as business premises by the entity. The Property purchased by the Taxpayer is in a location that supports the operations of the business of the entity. The location of the property was significantly influenced by the needs of the entity and the Taxpayer was supportive by acquiring a property in the location. On settlement of the Property the entity occupied Y% of the building with the remaining Z% being occupied by an unrelated tenant for residential use. From the year 20WW, the entity occupied the entire Property as its business premises. The entity has been the sole tenant of the Property since the year 20WW. The Property has been used for commercial office, storage of materials and equipment and also parking by the entity. There were capital improvements undertaken to the Property by the entity since the year 20WW. The main capital works predominately involved around modernising the building for use as a commercial office and display purposes. There is no formal lease agreement in place between the Taxpayer and the entity. To provide some cash flow relief to the entity, the rent charged by the Taxpayer has been below the market rate. The entity processes the income and expenditure of the Taxpayer via its trading bank account. The Taxpayer does not operate its own trading bank account. The Taxpayer does have a loan account from the banking facility to purchase the property. The Taxpayer transactions are dealt with in the accounts of the entity via an intercompany loan balance. The Taxpayer has provided bank guarantees and indemnity to the entity for bank finance over many years to assist the entity in obtaining funding to meet its working capital requirements. Without this financial and security support, the entity would not have been able to take on some of the work that it has secured. The Taxpayer intends to sell the Property in 20VV. The sale of the business premises is due to the pending retirement of a director/employee/shareholder of the entity. Both the taxpayer and the entity are developing plans for the efficient and effective retirement of the entity employees/directors. Based on the shareholding structure of the Taxpayer and the entity, the Taxpayer and the entity are not controlled by the same third entity and neither entity has an interest of at least X% in the other. As such, both entities are not connected entities under section 328-125.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-130 1 On 19 December 2012 | 2 https://www.ato.gov.au/Forms/Capital-gains-tax-concessions-for-small-business-2015/?page=19#Who_is_an_affiliate_

Reasons for decision: Summary: An affiliate of an entity is defined by section 328-130 of the ITAA 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 their business affairs. This is a question of fact dependent on all the circumstances of the particular case. No single factor will necessarily be determinative. TD 2006/79 has been withdrawn 1 as you stated in your submission. The Notice of Withdrawal states as follows: …discussed in general terms the various aspects of the meaning of small business CGT affiliate. However, as part of the legislative changes associated with the Small Business Alignment measure applying to CGT events happening in the 2007-08 or later income years, Tax Laws Amendment (Small Business) Act 2007 repealed the small business CGT affiliate definition in section 152-25 of the ITAA 1997 and inserted a new definition of affiliate in section 328-130 of the ITAA 1997. The new definition is materially different to the former definition. In particular, an affiliate of an entity must act, or be reasonably expected to act, in accordance with the entity's directions or wishes, or in concert with the entity in relation to the affairs of the affiliate's business [emphasis added]. In other words, an affiliate must carry on business. The discussion in TD 2006/79 concerning the meaning of small business CGT affiliate does not have regard to this requirement. Capital gains tax concessions for small business 2015 2 states the current ATO view and describes factors that may support a finding that a person acts, or could be reasonably expected to act, in accordance with the taxpayer's directions or wishes or in concert with the taxpayer. These 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 entity 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, and • conduct their business affairs independently in all regards. A person is not your affiliate merely because of the nature of a business relationship you and the entity share. For example, companies are not affiliates of their directors and vice versa, merely because of the positions held. Directors of the same company are also not affiliates merely because one director acts, or could reasonably be expected to act, in accordance with the directions or wishes of another director, or in concert with another director, in relation to the affairs of the company. This is confirmed in the example in section 328-130 of the ITAA 1997. The decision in AAT case Re Stephens and Federal Commissioner of Taxation [2008] AATA 176; 2008 ATC 10-008; (2008) 71 ATR 306 confirms the requirement that to be an affiliate the individual or company must act in accordance with the directions or wishes of the taxpayer in relation to the business affairs of the individual or company. | Detailed Reasoning - Application to your circumstances: Section 328-130(2) of ITAA 1997 provides that an individual or a company is not an affiliate merely because of the nature of the business relationship shared by the entity and the individual or company. Other factors also need to be considered to determine whether EAH is an affiliate of the taxpayer. The individuals are the controlling shareholders of the taxpayer and together with their associates also control the entity. Although they do not have a family or close personal relationship they have had a professional business relationship over a 20 year period. The lack of any formal lease agreement between the parties and the fact that the entity has been charged lower than market rent by the taxpayer and provided with other financial support is an indicator that the parties act in concert. The taxpayer also has an interdependency relationship with the entity for financial matters. The entities do not engage in business-to-business transactions as the taxpayer does not carry on a business in its own right. It is mainly deriving rental income from the lease of the Property to the entity which carries on the business of construction. However, both entities operate from the same business premises. | Detailed Reasoning - Conclusion: There is sufficient evidence to determine that there is in fact an understanding or arrangement between the taxpayer and the entity as to a common purpose or object, or that the entity acts in accordance with the taxpayer's wishes, or vice versa. Therefore, we consider the entity is an affiliate of the taxpayer within the definition in Section 328-130 of the ITAA 1997. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-130 1 On 19 December 2012 2 https://www.ato.gov.au/Forms/Capital-gains-tax-concessions-for-small-business-2015/?page=19#Who_is_an_affiliate_