Are spouses and children affiliates?
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
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Neither a spouse nor a child 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.
By child, we mean your child less than 18 years of age.
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.
Sue's spouse is taken to be her affiliate if she owns an asset that is used in the business of an entity her spouse owns. Similarly, Sue's spouse is taken to be her affiliate if an entity she owns leases an asset to an entity her spouse owns, and that entity uses the asset in business.
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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.
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Are franchisees and franchisors affiliates?
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.
Last modified: 30 Mar 2021QC 44192