A small business affiliate is any individual or company that, in relation to their business affairs, acts or could reasonably be expected to act either:
- according to your directions or wishes
- in concert with you.
Trusts, partnerships and superannuation funds cannot be your affiliates. However, a trust, partnership or super fund may have an affiliate who is an individual or company.
When working out your eligibility for small business capital gains tax (CGT) concessions, you'll need to consider if additional entities may be your affiliates.
If these additional entities are considered your affiliate, this will affect the:
- calculation of your aggregated turnover
- calculation of the maximum net asset value test
- the application of the active asset test.
Whether a person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, depends on the circumstances of the 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 setting out 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.
Example: married couple acting in accordance as affiliates
Bernard and Saskia are married. Bernard has an events management business with an annual turnover of $1.7 million, and Saskia owns a consultancy business with an annual turnover of $1.8 million.
Both Bernard and Saskia act in accordance with each other's wishes because each values the relevant expertise the other can provide. Therefore, they are both small business affiliates because they are acting in accordance with directions in relation to their business.
Bernard and Saskia will need to count each other's business turnover when working out their businesses' aggregated turnover.End of example
A person is not your small business affiliate just because of the business relationship you 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 in relation to the affairs of the partnership.
Similarly, companies and trusts are not affiliates of their directors and trustees respectively, and vice versa, just because of the positions held.
Generally, another business would not be acting in accordance with you if they:
- have different employees
- have different business premises
- have separate bank accounts
- do not consult with you on business matters
- conduct all their business affairs independently.
Your spouse or child is not automatically your small business 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.
Example: married couple who are not small business affiliates
Matt and Sandy are married. Matt owns a cleaning business with an annual turnover of $1.9 million, and Sandy has a bakery with an annual turnover of $1.5 million.
They are not connected 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 to their businesses
- do not act according to the directions or wishes of their spouse.
As a result, neither Matt nor Sandy needs to include the annual turnover of the other’s business in calculating the aggregated turnover of their own business.End of example
Special affiliate rule
There is a special affiliate rule for spouses and children under 18 years old. This is when you own an asset that your spouse or child uses in a business they run as an individual, they are considered to be your small business affiliate for the purposes of the:
- active asset test
- maximum net asset value test
- $2 million aggregated turnover threshold for CGT concessions.
Your spouse or child may be considered your affiliate when an asset is owned by:
- you and that asset is used in a business run by an entity that your spouse (or child) owns or has an interest in
- an entity that you own or have an interest in, and that asset is used in a business run 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 treating your spouse or child as your affiliate, the business entity is considered to be an affiliate of, or connected with, the entity that owns the asset, then the special 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. This relates to:
- the basic eligibility for the small business CGT concessions
- calculating aggregated turnover and maximum net asset value.
If this second stage of the special 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 considered to be an affiliate of their spouse or child. However, it only applies for as long as both are true:
- the person is their spouse, or the child is under 18 years old
- any asset is passively held.
This affiliate rule for spouses and children should also be considered when working out if you have an active asset for CGT purposes.
This affiliate rule applies only if the business entity is not already an affiliate of, or connected with, the asset owner.
Example: spouse affiliates with passively-held assets
Philip owns 100% of Horse Farm Pty Ltd, which owns land. Horse Farm Pty Ltd does not run a business.
However, Philip’s spouse, Crystal, owns Pig Farm Pty Ltd, which uses Horse Farm Pty Ltd's land to run a business.
Philip also owns 30% of another entity, Carrot Pty Ltd. Crystal owns 70% of Carrot Pty Ltd.
Applying the affiliate rule
In determining whether Pig Farm Pty Ltd (the entity that uses the land in its business) is connected with Horse Farm Pty Ltd (the entity that owns the land), we need to apply the affiliate rule. Crystal, as Philip's spouse, is considered to be Philip's affiliate because an asset owned by Philip's entity (Horse Farm Pty Ltd) is used in Crystal's business (Pig Farm Pty Ltd).
Pig Farm Pty Ltd is connected with Horse Farm Pty Ltd because Philip:
- controls Horse Farm Pty Ltd, and
- together with his affiliate, Crystal, controls Pig Farm Pty Ltd.
This makes the land that Horse Farm Pty Ltd owns an active asset because it is used in the business of Pig Farm Pty Ltd which is controlled by the same third entity, Philip.
Affiliates, connected entities and small business CGT concessions access
Because Crystal is treated as Philip’s affiliate in determining whether Pig Farm Pty Ltd is an affiliate of, or connected with, Horse Farm Pty Ltd, Crystal is also treated as Philip’s affiliate for testing whether Carrot Pty Ltd is connected with Horse Farm Pty Ltd.
Carrot Pty Ltd is connected with Horse Farm Pty Ltd because Philip:
- controls Horse Farm Pty Ltd, and
- together with his affiliate, Crystal, controls Carrot Pty Ltd.
Horse Farm Pty Ltd needs to include the net assets of its affiliates and entities connected with it (Pig Farm Pty Ltd and Carrot Pty Ltd) when seeking access to the small business CGT concessions through the maximum net asset value test. Horse Farm Pty Ltd must not be running a business to qualify under this condition.
Horse Farm Pty Ltd can access the small business CGT concessions if:
- its maximum net asset value is not more than $6 million
- Pig Farm Pty Ltd’s aggregated turnover is less than $2 million.
Pig Farm Pty Ltd wants to seek access to the small business CGT concessions through the small business entity aggregated turnover test. Pig Farm Pty Ltd’s aggregated turnover would include the annual turnovers of its affiliates and entities connected with it. This includes Carrot Pty Ltd if it runs a business and has turnover.End of example
Franchisees are not necessarily small business affiliates of the franchisor simply because of the franchise relationship.
Whether the franchisee acts in concert with the franchisor about their franchise business depends on, among other things, the nature of the franchise agreement between them.
The affiliate relationship does not extend to the relationship between the controller of an entity and the entity itself – for example, a director and the company. The relationship in these situations is decided more by obligations imposed by law, formal agreements and fiduciary obligations.
Therefore, 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, or the partners in a partnership.How to include affiliates for small business CGT concessions.