An affiliate is an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act:
- in accordance with your directions or wishes, or
- in concert with you.
Trusts, partnerships and super funds can't be your affiliates. However, a trust, partnership or super fund may have an affiliate who is an individual or company.
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Bob and Shirley are married. Bob has an events management business with an annual turnover of $1.7 million, and Shirley owns a consultancy business with an annual turnover of $1.8 million.
Bob acts in accordance with Shirley's wishes because he values her consultancy and business expertise. As a result, Bob is Shirley's affiliate because he acts in accordance with her directions and wishes in relation to his business. Shirley will need to count Bob's turnover in working out her aggregated turnover.
However, Shirley is not Bob's affiliate, because she does not act in accordance with his wishes or in concert with him in relation to her own business.
End of example
Example: Not affiliates
Matt and Sandy are married and share in the running of their household. Matt owns a cleaning business with an annual turnover of $1.7 million, and Sandy has a bakery with an annual turnover of $1.8 million.
They have nothing to do with each other’s businesses. They have:
- separate bank accounts for their businesses
- different business locations
- their own employees.
Neither Matt nor Sandy controls the management of the other’s business.
Even though Matt and Sandy are married, neither is an affiliate of the other because they:
- do not act in concert with each other in respect of their businesses, and
- do not act according to the directions or wishes of their spouse.
As a result, neither Matt nor Sandy has to include the annual turnover of the other’s business in calculating the aggregated turnover of their own business.
End of example
Acting in accordance or in concert
A person is not your affiliate merely because of the nature of a business relationship you and the person share. For example, if you're a partner in a partnership, another partner is not your affiliate merely because they act, or could reasonably be expected to act, in accordance with your directions or wishes in relation to the affairs of the partnership.
Similarly, companies and trusts are not affiliates of their directors and trustees respectively, and vice versa, merely because of the positions held.
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
- 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
- conduct their business affairs independently in all regards.
Spouses and children
Neither your spouse nor child (that is, your child under 18) is automatically your affiliate. You must consider whether they are acting according to your directions or wishes, or in concert with you, in relation to their business affairs.
However, where you own an asset that your spouse or child uses in a business they carry on as an individual, they will be taken to be your affiliate for the purposes of the:
- active asset test
- $6 million maximum net asset value test, and
- $2 million aggregated turnover test.
Your spouse or child may also be taken to be your affiliate where:
- an asset is owned by you and that asset is used in a business carried on by an entity that your spouse (or child) owns or has an interest in, or
- an asset is owned by an entity that you own or have an interest in, and that asset is used in a business carried on by your spouse (or child), or an entity that your spouse or child has an interest in.
Your spouse or child is treated as your affiliate when working out whether the entity that owns the asset is an affiliate of, or connected with, the entity that uses the asset in their business. If by treating your spouse or child as your affiliate the result is that the business entity is taken to be an affiliate of, or connected with, the entity that owns the asset, then the affiliate rule will also apply to treat the spouse or child as an affiliate of the individual for the purposes of the small business CGT concessions in relation to:
- all the basic conditions for eligibility, and
- calculating aggregated turnover and net asset value.
This rule only applies in relation to eligibility for the small business CGT concessions, and not the other small business entity concessions.
If this second stage of the affiliate rule applies, it will also apply for any gain that arises from any asset that either the asset owner or the business entity, or the individual or their spouse or child, owns. This affiliate rule works both ways, so that the individual is also taken to be an affiliate of their spouse or child. However, it only applies for as long as:
- the person is their spouse or the child is under 18 years, and
- any asset is being passively held.
This affiliate rule for spouses and children also has application for the meaning of active asset.
This affiliate rule applies only if the business entity is not already an affiliate of, or connected with, the asset-owner.
Example: Passively-held assets
Philip owns 100% of Horse Farm Pty Ltd, which owns land. Horse Farm Pty Ltd does not carry on a business. However, Philip’s spouse, Crystal, owns Pig Farm Pty Ltd, which uses the Horse Farm land to carry on a business. In addition, Philip owns 30% of another entity, Carrot Pty Ltd, and Crystal owns 70% of Carrot Pty Ltd.
Crystal is treated as Philip’s affiliate in determining whether Pig Farm Pty Ltd (the entity that uses the land in its business) is connected with Horse Pty Ltd (the entity that owns the land). The affiliate rule applies because one entity (Horse Farm) owns a CGT asset that another entity (Pig Farm) uses in its business.
Pig Farm Pty Ltd is connected with Horse Farm Pty Ltd because Philip controls Horse Farm and Philip, together with his affiliate, Crystal, control Pig Farm. Horse Farm and Pig Farm are both controlled by the same third entity, Philip.
This makes the land that Horse Farm Pty Ltd owns an active asset. The land would also have to meet the requirements of the active asset test.
Therefore, Horse Farm Pty Ltd could access the small business CGT concessions if its maximum net asset value is not more than $6 million. Horse Farm could also access the concessions if Pig Farm’s aggregated turnover is less than $2 million.
Because Crystal is treated as Philip’s affiliate in determining whether Pig Farm is an affiliate of, or connected with, Horse Farm, Crystal is also treated as Philip’s affiliate for testing whether Carrot Pty Ltd is connected with Horse Farm. Carrot is connected with Horse Farm because Philip controls Horse Farm and Philip, together with his affiliate, Crystal, control Carrot Pty Ltd.
In seeking access to the small business CGT concessions via the maximum net asset value test, Horse Farm Pty Ltd would need to include the net assets of its affiliates and entities connected with it (Pig Farm Pty Ltd and Carrot Pty Ltd).
In seeking access to the small business CGT concessions via the small business entity turnover test, Pig Farm’s aggregated turnover would include the annual turnovers of its affiliates and entities connected with it (Carrot Pty Ltd if it carries on business and has turnover). Horse Farm Pty Ltd must not be carrying on business to qualify under this basic condition.
End of example
Franchisees and franchisors
Franchisees are not necessarily affiliates of the franchisor simply because of the franchise arrangement. Whether the franchisee acts in concert with the franchisor in respect of their franchise business depends on, among other things, the nature of the franchise agreement between them.
The affiliate relationship does not include the relationship between the 'controller' of an entity and the entity itself. The relationship in these situations is considered to be dictated more by obligations imposed by law, formal agreements and fiduciary obligations. Accordingly, companies, trusts and partnerships are not considered to be affiliates (and vice versa) of the various officers, persons and entities that are related to the company, trust or partnership in various capacities – for example, the trustees and beneficiaries of a trust, the directors and shareholders of a company, and the partners in a partnership.
An affiliate is an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you.