1012722733655 | Legal database

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Edited version of your written advice

Authorisation Number: 1012722733655

Ruling

Subject: Affiliates

Question 1

Are Individual A and Individual B affiliates of or connected with Individual C and the entities that Individual C controls?

Answer

No.

Question 2

Are Individual A and Individual B affiliates of one another?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Individual A, Individual B and Individual C have a family relationship.

Individual A, Individual B and Individual C are partners in a partnership. Each partner holds an interest of X%.

Individual A purchased land some time ago.

This land has been used in the business that the partnership operates for the entire ownership period.

Individual B purchased land at approximately the same time and this land has also been used by the partnership.

Individual A and Individual B wish to retire from the partnership and sell their land to Individual C at market value.

Individual A and Individual B have both worked several days per week in the office of the business.

Individual A and Individual B have had no management input into the business.

Individual A and Individual B take agreed drawings from the business.

Individual A and Individual B do not receive rent for the land and have no input into what is grown on their land as its use is synchronised with all the other land that is used by the business which is owned by Individual C and their companies.

There is no formal lease agreement in relation to the use of the land.

Neither Individual A nor Individual B lives on the land.

The partnership has a turnover of more than $2 million per year.

The land owned by Individual A and Individual B is mortgaged to the bank to help secure the partnership banking facilities.

Individual A, Individual B and Individual C act together in the best interests of the business, but overall decision making and control of the partnership decision making process resides with Individual C.

Neither Individual A nor Individual B hold shares or are directors of any of Individual C's companies.

Individual A and Individual B do not operate or have any involvement in any other entities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 subsection 328-130(2)

Income Tax Assessment Act 1997 subparagraph 328-125(2)(a)(ii)

Reasons for decision

An affiliate is defined by section 328-130 of the Income Tax Assessment Act 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 the affairs of the individual or company.

Relevant factors that may support a finding that a person acts in such a manner 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.

Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company.

Whether a person is acting in concert with another is essentially a question of fact. The term 'acting in concert' involves at least an understanding between the parties as to a common purpose or object.

Subsection 328-130(2) of the ITAA 1997 states that an individual is not your affiliate merely because of the nature of the business relationship you and the individual share. For example, a partner is a partnership would not be an affiliate of another partner merely because the first partner acts, or could reasonably be expected to act, in accordance with the directions or wishes of the second partner, or in concert with the second partner, in relation to the affairs of the partnership.

When an entity is connected with you

An entity is connected with another entity if:

• either entity controls the other entity, or

• both entities are controlled by the same third entity.

An entity control another entity if it or its affiliates (or all of them together):

• owns, or has the right to acquire ownership of, interest in the other entity that give the right to receive at least 40% ( the control percentage) of

• any distribution of income or capital by the other entity, or

• if the other entity is a partnership, the net income of the partnership, or

• If the other entity is a company, owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company.

The meaning of an equity interest includes, but is not limited to a share in a company.

A partner may be connected with the partnership under subparagraph 328-125(2)(a)(ii) of the ITAA 1997 if the partner receives a distribution of 40% or more of the net income of the partnership in an income year.

Application to your circumstances

In this case, a close family relationship exists between Individual A, Individual B and Individual C who are siblings. There is no formal lease agreement in place between the owners of the property and the partnership. Further, Individual A and Individual B do not receive rent for the land. However, Individual A and Individual B have limited involvement in the partnership and have no involvement or ownership interests in the other entities owned by Individual C.

The information provided details that Individual A, Individual B and Individual C act together in the best interests of the business. As per subsection 328-130(2) of the ITAA 1997, an individual is not your affiliate merely because of the nature of the business relationship you and the individual share. The fact that Individual A, Individual B and Individual C are partners and may act in concert with one another in relation to the affairs of the partnership is insufficient to establish an affiliate relationship between the parties.

Therefore, we do not consider Individual A, Individual B and Individual C to be affiliates of one another.

Note that Individual A and Individual B cannot be connected with Individual C as an individual. Further, as Individual A, Individual B and Individual C are not affiliates; any entities connected with Individual C will not be taken to be controlled by either Individual A or Individual B.

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