Private ruling: Affiliates and connected with entities
Date of advice: 25 August 2025
Published: 27 October 2025
Ruling period: Income year ended 30 June 20XX

Ruling: Q1: Are any of Mr A, Mrs A, Mr B and Mrs B 'affiliates' of one another as defined in section 328-130 of the Income Tax Assessment Act 1997 ( ITAA 1997 )? | A1: No | Q2: Are any of Mr A, Mrs A, Mr B and Mrs B 'affiliates' of the Company as defined in section 328-130 of the ITAA 1997? | A2: No | Q3: Are any of Mr A, Mrs A, Mr B and Mrs B 'connected with' the Company as defined in section 328-125 of the ITAA 1997? | A3: No

Relevant facts and circumstances: The Company 1. The Company was incorporated in an Australian state in 19XX and has XXXX ordinary shares on issue. 2. The Company conducts a business of supply and distribution of food products ( the Business ). 3. The Company owns operating assets including the building and land on which it conducts the Business. The shareholders and directors of the Company 4. The current directors of the Company consist of Mr A, Mrs A, Mr B and Mrs B. They have been directors of the Company since the company's incorporation. 5. Since 19XX, Mr A, Mrs A, Mr B and Mrs B have also been equal shareholders of the Company, holding XXXX ordinary shares each (i.e. 25% interest) (collectively, the Shareholders ). 6. Mr A and Mrs A are married to each other. Mr B and Mrs B are also married to each other. There is no family relationship between the As and the Bs. 7. The Shareholders are all Australian residents for tax purposes. 8. In terms of operating a business, none of the Shareholders hold specialised academic qualifications or knowledge other than the practical experience they have gained over the years in the course of running various businesses. 9. None of the Shareholders carry on a business as a sole trader or have registered themselves for an ABN. The Shareholder Agreement 10. The Shareholders are formally governed by the Company's Shareholder Agreement ( Agreement ), setting out their individual involvement with respect to the structure and management of the Company. The Agreement also outlines the separation of roles between them. 11. Notably, the terms of the Agreement reflect the formal relationships of the parties and the implied terms under which the Shareholders have conducted themselves in relation to their roles since 19XX. 12. Broadly, under the Agreement, no significant decisions can be made by one or more Shareholders at the exclusion of others. 13. The Agreement further provides the following terms: • Directors are responsible for managing the daily operations of the Company and Shareholders can be employed by the Company if required. • The board meeting must occur at least on a quarterly basis. • The unanimous agreement of all Shareholders is required in instances of acquisition, improvement or addition to any company property, including funding of such acquisitions, improvements or additions. • Except for the unanimous decision of the Shareholders, no Shareholder is allowed to encumber any shares held by that Shareholder in the Company. • Apart from what is expressly provided for in the Agreement, no Shareholder can assume authority to act for or to create or assume any duty, responsibility or obligation for another Shareholder, nor to incur obligations on behalf of or pledge the credit of the other Shareholders in any way. • None of the Shareholders can be construed as constituting any Shareholder as the partner, agent, employee or representative of any other Shareholder or the company. • Under the non-competition clauses no exiting Shareholder can engage in a similar business to the Company in the following 5 years from exiting. • Any disagreement between and among the Shareholders must be resolved through mediation. • Where any inconsistency exists between the constitution of the Company and the Agreement, the Agreement is to prevail and the constitution of the Company is to be interpreted as being modified by and subjected to the express terms of the Agreement. • Any failure to satisfy the terms and conditions of the Agreement may result in a compulsory transfer of shares from the Shareholder that eventually fails with the agreed terms. • Additionally, each Shareholder agrees to indemnify the other Shareholders and the Company from losses caused by any breach of the Agreement. Day-to-day operations 14. Apart from their capacity as directors and Shareholders, Mr B and Mrs B are also employees at the Company. 15. Mr B is primarily responsible for the day-to-day management of the Business (in conjunction with other managers). The scope of his duty includes overseeing the stock management, working on the floor (i.e. unloading trucks) and other general management duties. 16. Mrs B assists with bookkeeping functions. 17. Mr B and Mrs B are also responsible for the accounting and tax affairs of the Company including liaising with tax agents or advisors. Mr B is authorised to prepare and sign the tax return and BAS lodgment statements for the Company upon the review and consideration by all directors. Decision-making of the directors and Shareholders 18. As Mr B and Mrs B perform the managerial functions of the Business, they are authorised to make everyday routine and strategic business decisions in accordance with the set goals and standards that have been unanimously agreed upon by all directors. This may include stock and staff management to ensure the smooth function of the Business. 19. Unlike Mr B and Mrs B, Mr A and Mrs A are less involved in the day-to-day business management decisions. Nevertheless, all significant business decisions are communicated and collectively considered by all directors/Shareholders at periodic board meetings - these may include business issues arising out of the ordinary course of the Business or where decisions relating to the strategic direction of the Business exceed the delegated authority. 20. The Company's financial statements are also signed by all directors. 21. The directors may convene meetings on an ad hoc basis to discuss other matters including business reports, policy development, administrative and maintenance decisions. 22. The directors/Shareholders independently exercise their decision-making function at board meetings. It is submitted that no Shareholder exercises control or influence over another Shareholder's decision. Shareholder interests in other entities 23. Aside from the Company, Mr A and Mrs A have interests in other entities. They jointly hold direct and indirect ownership interests in various related entities comprising companies, a partnership and a self-managed superannuation fund ( related entities ). 24. Mr A and Mrs A are partners in the A Partnership ( the Partnership ). The Partnership does not have a formal written agreement, however Mr A and Mrs A have a clear mutual understanding regarding the distributions of partnership profits and losses (50:50), management roles, capital contributions and decision-making processes. 25. In their capacity as partners of the Partnership, Mr A and Mrs A own property which is leased to Company B pursuant to a share farming arrangement between Company B and the Partnership. There is no written agreement in place between Company B and the Partnership in respect of the lease or share farming arrangements. 26. In their capacity as partners of the Partnership, Mr A and Mrs A also own 4 other properties (passive investments) from which the Partnership derives rental income. 27. Mr A is the sole director of Company B, a company incorporated in 20XX. Company B is the main trading entity which runs the primary production business activities. Mr A and Mrs A both have backgrounds in farming having gained farming experience working with their respective parents. 28. Company B is wholly owned by Company C, a company incorporated in 19XX, in which Mr A and Mrs A are directors and equal shareholders. Company C's business activities are comprised of: • the lease of plant and equipment to Company B for use in Company B's primary production business activities; and • the contract hire of heavy equipment, trucks and cranes to unrelated third parties. 29. Mr A and Mrs A are also the directors and equal shareholders in the trustee of their self managed superannuation fund. 30. Although Mr A and Mrs A carry on the businesses of the related entities jointly, they each have specific and distinct roles/functions based on their respective expertise, skill base and experience. Mrs A is largely responsible for day-to-day decisions in respect of the bookkeeping, financial information and administration, while Mr A is responsible for the day-to-day operational decisions, is involved in the organisation of staff, driving excavators and cranes and managing farm operations. 31. Although Mr A and Mrs A meet regularly to discuss the business affairs of the related entities and all significant decisions relating to the related entities are discussed between them, neither Mr A and Mrs A influences or relies on the other to make such decisions, such that they act independently in respect of decision-making, make decisions individually and no one acts or is expected to act at the direction of the other. 32. The related entities are entirely separate from the Company in terms of operations, business premises and bank accounts. Each entity has its own bank accounts and operates its respective activities through their accounts. The financial accounts and bookkeeping relating to the Company and each of the related entities are also independent of each other. 33. Mr B and Mrs B have their own self managed superannuation fund. 34. Mr B and Mrs B do not have interests nor involvement in other entities, including Mr A and Mrs A's related entities. 35. There are no other investments made by the Shareholders that have a commercial relationship with the Company. The Company owns all property it uses to operate the Business (including land, buildings and operating assets).

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 328 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(1) | Income Tax Assessment Act 1997 paragraph 328-125(1)(a) | Income Tax Assessment Act 1997 paragraph 328-125(2)(b) | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 subsection 328-130(1) | Income Tax Assessment Act 1997 subsection 328-130(2) | Income Tax Assessment Act 1997 former subsection 328-380(8) | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: All subsequent legislative references are to the ITAA 1997 . | Summary: None of Mr A, Mrs A, Mr B and Mrs B are affiliates of one another nor of the Company pursuant to section 328-130. They are also not connected with the Company pursuant to section 328-125. | Detailed Reasoning - Affiliate: The meaning of 'affiliate' is set out in subsection 328-130(1) which provides that: An individual or a company is an affiliate of yours if the individual or company 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 of the individual or company. The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 (the EM ), which introduced section 328-130, explains (at paragraph 2.35) that the affiliate rules are designed to ensure that entities that genuinely carry on independent businesses are not aggregated. In accordance with subsection 328-130(2) and paragraph 2.39 of the EM, an individual or company is not automatically an affiliate merely because of a 'business relationship'. In this regard, directors of the same company are not automatically affiliates of each other, nor are directors automatically affiliates of the company of which they are a director, or the company automatically an affiliate of the director. Similarly, a partner in a partnership would not automatically be an affiliate of another partner. [1] The 'affiliate' test requires something more than an entity acting in the relevant way merely because of the nature of its formal business relationship with another entity. Further, subsection 328-130(1) makes it explicit that the 'affiliate' definition is only to be considered 'in relation to the affairs of the business' of the relevant individual or company. Therefore, an entity that does not carry on their own business cannot be an 'affiliate' for the purposes of section 328-130. In the current circumstances, it is necessary to consider further the reference to ' in relation to the affairs of the business of the individual or company '. In particular, in this case whether this phrase would encompass the individual's business affairs of the partnership. The term 'partnership' is defined in section 995-1 to include 'an association of persons carrying on business as partners.' This aspect of the definition imports the common law meaning of partnership, being the relationship which exists between persons carrying on business in common with a view to profit. A partnership is not a separate legal identity. Each partner of a partnership is carrying on the partnership business. It follows that, where a partnership is carrying on a business, each partner of that partnership is considered to be carrying on the business (as noted in ATO Interpretative Decision 2003/359 ). Therefore, it would appear reasonable to conclude that when considering the 'affairs of the business of the individual', this would include an individual's business affairs as a partner in a partnership. Meaning of 'could reasonably be expected' In FC of T v Peabody (1994) 181 CLR 359; 94 ATC 4663; (1994) 28 ATR 344, the full High Court of Australia held that the meaning of the phrase 'might reasonably be expected' requires more than a possibility and involves a prediction that must be sufficiently reliable for it to be considered as reasonable. Withdrawn Taxation Ruling TR 2002/6 Income tax: Simplified Tax System: eligibility - grouping rules (*STS affiliate, control of non fixed trusts) ( TR 2002/6 ) also considered the meaning of 'could reasonably be expected' in the context of the definition of 'STS affiliate' in former subsection 328-380(8). [2] While the STS regime was subsequently repealed, and hence TR 2002/6 withdrawn, the 'affiliate' definition in subsection 328-130(1) includes similar requirements to the former 'STS affiliate' definition, including the 'could reasonably be expected' and 'in concert' requirements. Accordingly, while not binding, the Commissioner's views on these requirements, as set out in TR 2002/6, remain relevant in considering the 'affiliate' test in subsection 328-130(1). In the context of the former 'STS affiliate' definition, TR 2002/6 states (at paragraph 51) that it can reasonably be expected that a potential affiliate will act, or would have acted, in the relevant way where the other entity stands in a relationship of control or influence over the potential affiliate for the relevant income year. The conclusion that such a relationship exists or existed in the relevant income year may be based on: • inferences drawn from events, transactions or patterns of behaviour which show that the entity has been, is, or will be able to direct or influence the potential affiliate's behaviour; and • the presence of a relationship between the 2 entities which enables or has enabled the entity to influence or direct the potential affiliate. [3] The types of relationships that may constitute a relationship of control or influence include: • family or other close personal relationships; • financial relationships and dependencies; and • relationships created through links such as common directors, partners or shareholders. [4] However, even where such a relationship is present, it must be of sufficient strength to enable the entity to direct or influence the potential affiliate's actions in relation to all or a substantial part of the affairs of the potential affiliate's business. [5] If, having regard to the full facts and circumstances of the particular case, it is evident that, despite that relationship the potential affiliate cannot reasonably be expected to act in the relevant way, then it will not satisfy this particular limb of the 'affiliate' definition. [6] The kinds of considerations which may show that a potential affiliate cannot reasonably be expected to act in the relevant way, notwithstanding the strength of a particular relationship, include: • a pattern of conduct which shows that despite the presence of a relevant relationship, it is the entities' practice not to involve themselves in each other's business affairs; • a pattern of conduct which shows that despite the presence of a relevant relationship and attempts to influence or direct the potential affiliate, it is the potential affiliate's practice not to act as the other entity wishes or directs; • whether the potential affiliate has an overriding relationship with another entity that will prevent it from acting as the entity directs or wishes; • whether the potential affiliate is bound by obligations which prevent it from acting as the other entity wishes in relation to the overall affairs of the business; and • whether to act as the other entity wishes would be inconsistent with the interests of the potential affiliate. [7] Meaning of 'in concert' The expression 'in concert' is not defined in the ITAA 1997, and therefore needs to be interpreted according to its ordinary meaning and in keeping with the purpose and scope of Division 328. [8] In Excellar Pty Ltd v FC of T (2015) ATC 10-391 , Senior Member Lazanas considered the meaning of the term 'in concert' to mean 'at least an understanding between the parties as to their common purpose or object' ( citing Adsteam Building Industries Pty Ltd v The Queensland Cement and Lime Co Ltd (No 4) [1985] 1 Qd R 127) . In the context of the former 'STS affiliate' definition, TR 2002/6 states (at paragraph 59) that, to ensure that the 'in concert' test only operates to group entities that are sufficiently related to warrant grouping, a potential affiliate will only be regarded as acting 'in concert' with another entity where: • it is acting together with the other entity in pursuit of a common goal or objective; and • that common goal or objective is the carrying on of a business by the potential affiliate with a substantial degree of connection with, or dependence on, the business carried on by the other entity. The overall degree of that connection must be such that the potential affiliate cannot be viewed as operating independently of the other entity. [9] TR 2002/6 also details a number of non-exhaustive factors which can be taken into account when determining whether 2 entities are acting in concert with each other. [10] These include: • the nature and extent of commercial dealings between the 2 entities; • the extent to which the entities share common resources, facilities or services for the operation of their businesses; • the extent to which an entity actively participates in the managerial decisions and day-to-day management of the potential affiliate's business; • whether there are financial interdependencies between the entities; • whether the profits from the businesses carried on by the entities are ultimately received by the same entities, and the source of the capital underpinning the 2 entities is the same; • whether the entities coordinate their orders for goods or services, or the potential affiliate is under an obligation to order through the other entity; • whether the entity directs customers to the potential affiliate or uses it to obtain custom; and • whether the entities provide similar goods or services, or the nature of their businesses are inherently different. None of these factors are decisive in their own right, nor does each one necessarily need to be given the same weight. Rather, determining whether a potential affiliate is acting in concert with an entity in relation to its own business affairs will be a matter of overall impression. [11] | Detailed Reasoning - Connected with: Subsection 328-125(1) provides that: An entity is connected with another entity if: (a) either entity controls the other entity in a way described in this section; or (b) both entities are controlled in a way described in this section by the third party. In accordance with paragraph 328-125(2)(b), an entity (the first entity) controls another entity that is a company if the first entity, its affiliates, or the first entity together with its affiliates own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage that is at least 40% of the voting power in the company. | Detailed Reasoning - Application: The fact that Mr A, Mrs A, Mr B and Mrs B share a business relationship in the capacity of directors (and Shareholders) in the Company does not automatically make them affiliates of each other or the Company under section 328-130. As the 'affiliate' test in section 328-130 only applies in respect of 'the affairs of the business' of the potential affiliate, an individual that does not carry on their own business cannot be an affiliate of another entity. As Mr B and Mrs B do not carry on their own businesses, they cannot be affiliates of any entity for the purposes of section 328-130, including each other, Mr A, Mrs A or the Company. Whilst Mr A and Mrs A are partners considered to be carrying on the business of the Partnership, the example at subsection 328-130(2) confirms that they are not each other's affiliate merely because they act, or could reasonably be expected to act, in accordance with the directions or wishes of the other, or in concert with the other, in relation to the affairs of the Partnership. As Mr A and Mrs A do not carry on any other business in their personal capacity and the facts provided for the purposes of this ruling do not indicate in any way that Mr A or Mrs A act, or could reasonably be expected to act, in accordance with the directions or wishes of any of Mr B, Mrs B or the Company, or in concert with any of Mr B, Mrs B or the Company, in relation to their business affairs as partners of the Partnership, none of Mr B, Mrs B or the Company are an affiliate of Mr A or Mrs A for the purposes of section 328-130. One or more of the Shareholders are connected with the Company pursuant to paragraph 328-125(1)(a) if they control the Company in the way described under paragraph 328-125(2)(b). That is, where a Shareholder, the affiliates of the Shareholder or the Shareholder together with their affiliates beneficially own, or have the right to acquire the beneficial ownership of, equity interests in the Company that carry between them at least 40% of the voting power in the Company. Each of the Shareholders owns a 25% equal share in the Company which provides them each with 25% of the voting power in the Company and, for the reasons mentioned above, none of the Shareholders are an affiliate of the other. Therefore, none of the Shareholders are connected with the Company in the way described under paragraph 328-125(2)(b) on the basis that it cannot be said that they, their affiliates, or they together with the affiliates own, or have the right to acquire beneficial ownership of, at least 40% of the voting power in the Company. [1] See example to section 328-130. [2] TR 2002/6 explained whether an entity was eligible to be a Simplified Tax System ( STS ) taxpayer for the purposes of the former STS regime. [3] TR 2002/6, at paragraph 52. [4] TR 2002/6, at paragraph 53. [5] TR 2002/6, at paragraph 54. In the context of the former 'STS affiliate' definition, TR 2002/6 states (at paragraph 31) that the definition did not apply where the potential affiliate acts, or could reasonably be expected to act, in the relevant way only in relation to isolated transactions or on an irregular, ad hoc basis. [6] TR 2002/6, at paragraph 54. [7] TR 2002/6, at paragraph 55. [8] The Macquarie Dictionary (online edition) defines the phrase 'in concert' to mean 'in a coordinated or organised way; together'. [9] TR 2002/6, at paragraph 60. [10] TR 2002/6, at paragraph 65. [11] TR 2002/6, at paragraph 65.