Edited version of your written advice

Authorisation Number: 1012740087229

Ruling

Subject: Affiliate

Question and answer

Is Company X your affiliate within the meaning of section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Company X (the company) is the trading entity for the family business.

Various land holdings that relate to the business are owned by you, you and your spouse, your parents and a family trust.

The company was established some 30 years ago. Your parents were the directors and you, your siblings and a grandparent were also shareholders.

Your parents own the management shares in the company with parent X owning the majority. Only the management shares carry a right to vote.

You owned a different class of shares which gave you equal dividend and winding up rights but no voting rights.

You were employed by the company for some 30 years and were actively involved in the business.

You were the only one of your siblings that worked in the business.

Business decisions were made almost exclusively by you and parent X with parent Y having a minimal involvement.

There were no written agreements between any of the family members or the company in regard to the business.

For the 30 or so years the company had been in existence, neither you nor parent X actively worked in any business other than the business conducted by the company.

The company did not pay dividends and both you and parent X worked for minimal remuneration for many years.

Over time, various additional land holdings were purchased and added to the aggregation of the operation. The funds for the purchases were largely borrowed and these borrowings were on an interest only basis.

The interest on all borrowings was paid by the company in lieu of paying rent on the land.

You ultimately owned four land holdings in your name solely, one in joint names with your spouse and one in joint names with parent X.

Because the various land holdings were purchased for the long-term benefit of the enterprise as a whole, the family agreed that the total debt of the enterprise should be shared between the various owners on a per acre basis.

You have provided various statements in regard to your involvement with the business including:

• Your life revolved around the physical and financial needs of the farming operation.

• With each successive year you gained more experience and took on more responsibility.

• You shared responsibilities, decision making and business goals with parent X.

• You began to view your contribution as a partner and assistant manager, especially after your first land purchase and death of your grandparent.

• You were paid on a random type basis by parent X.

• You were never paid overtime, even for work on weekends, public holidays or during busy periods where you worked up to 100 hours per week for as long as six weeks running.

• You did not receive leave loading or long service leave.

• Although there was flexibility between you as a family, it was never considered that you should have any defined hours, conditions or entitlements as you were considered responsible for the property like parent X and therefore 'on call' at all times.

• Land purchased in your name was used for the benefit of the company.

• You secured bank debt personally for the financial benefit of the company.

• You were a guarantor on bank loans for your parent's borrowings.

• You and parent X managed the operation as a management team with parent X overseeing one part of the business and you overseeing another aspect of the business.

• You believe that you were an integral person in the family business during your time there and much of the success achieved was aided by your contribution.

You decided to exit the family business and entered into an agreement with your parents in which you disposed of the majority of your land holdings, paid a certain amount off borrowings relating to the land and disposed of your shareholding in the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 328-130(1)

Reasons for decision

Subsection 328-130(1) of the ITAA 1997 defines an affiliate as an individual or company that 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.

However, a person is not your affiliate merely because of the nature of a business relationship you and the person share. For example, companies are not affiliates of their directors, and vice versa, merely because of the positions held.

Whether a person acts, or could reasonably be expected to act, in accordance with a taxpayer's directions or wishes, or in concert with a taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative.

According to the Advanced Guide to capital gains tax concessions for small business 2013-14, relevant factors that may support a finding that an individual or a company acts, or could reasonably be expected to act, in accordance with another entity's directions or wishes, or in concert with the entity, 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.

Generally, another business would not be acting in concert with an entity if they:

• have different employees;

• have different business premises;

• have separate bank accounts;

• do not consult the other entity on business matters; and

• conduct their business affairs independently in all regards.

In your case, you worked for your family business for many years which was your sole occupation and source of income. Your parents were the directors of the company and you were a shareholder and employee of the company.

From the information provided, it appears that that there was a close family relationship between yourself and your parents/company directors and you have stated that there was no formal agreement between the family members or the company in regard to the business.

Further, your working conditions such as hours worked, being on call, method of remuneration and lack of the usual employee benefits indicate a relationship between you and the company that was not based on a formal agreement or legal or fiduciary obligation.

In regard to the actions of the parties:

• you purchased land that was used for the benefit of the company;

• secured loans over the purchased land that was used for the benefit of the company;

• you guaranteed various bank loans that benefitted the company even though you were not a director of the company;

• the company paid the interest on your land related borrowings;

• you made business decisions along with parent X; and

• you were almost entirely responsible for one aspect of the business.

From the above, it is considered that the company acted in accordance with your directions or wishes to a reasonable extent and acted in concert with you to a considerable extent.

Therefore, the company is considered to be your affiliate within the meaning of section 328-130 of the ITAA 1997.

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