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Edited version of your written advice
Authorisation Number: 1012781808359
Ruling
Subject: CGT - small business concessions - affiliate
Question
Is the applicant an affiliate of a company ('X Pty Ltd') within the definition in Section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
This ruling applies for the following period
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
• Your private ruling application.
The applicant is a company.
The company operated a property management business.
The shareholders of the applicant are also shareholders in a separate business venture conducted via a second company, X Pty Ltd.
The shareholders of the applicant hold the following portion of shares:
(a) A as trustee for A Family Trust - approximately 40%
(b) B Pty Ltd as trustee for B Family Trust - approximately 30%
(c) C as trustee for C Family Trust - approximately 15%
(d) D Pty Ltd as trustee for D Family Trust - approximately 15%
The shareholders of X Pty Ltd hold the following proportion of shares:
(a) A as trustee for A Family Trust - 25.00%
(b) B Pty Ltd as trustee for B Family Trust - 25.00%
(c) C as trustee for the C Family Trust - 25.00%
(d) D Pty Ltd as trustee for D Family Trust - 25.00%
The director of the applicant is BA.
The directors of X Holdings Pty Ltd are: BA, AA, CA and DA.
The director and shareholder of B Pty Ltd is BA.
The director and shareholder of D Pty Ltd is DA.
The shareholders in the applicant and in X Pty Ltd are not affiliates of each other. It is noted that the shareholders and their connected entities do control other business ventures together, as follows:
(a) DA and CA jointly control a company in Industry B.
(b) DA and CA jointly control a number of entities in Industry D.
(c) BA and AA jointly control a company in Industry B and a company in Industry D.
All of these other businesses are conducted independently and do not influence the behaviour of the directors or shareholders in their business dealings with the applicant or X Pty Ltd.
The individuals of BA, AA, CA and DA are not affiliates and do not have any significant relationship other than their business dealings with each other. It should be noted that the individuals have developed a friendship but the friendship is not strong enough to influence business decisions. It should also be noted that despite extensive business dealings with each other that this does not influence their independence in relation to business decisions.
The applicant and X Pty Ltd do not have an interdependency relationship, including for financial matters.
During its operational period the applicant was funded by its shareholders in proportions similar to their shareholding percentages.
X Pty Ltd is funded by its shareholders in proportions similar to their shareholding percentages.
The applicant and X Pty Ltd do not have integrated business operations.
The applicant and X Pty Ltd do not have employees. Contractors are however used. The two companies have on some occasions used the same contractors to complete tasks. These contractors are engaged separately by each company and the arrangement is always at arm's length. The contractors invoice each company separately.
The applicant managed properties based in region Y.
X Pty Ltd is developing a property in Z. Z is approximately 500km from Y.
The applicant and X Pty Ltd have separate bank accounts.
The applicant and X Pty Ltd do not engage in business-to-business transactions, nor is there a formal or informal agreement in place between the applicant and X Pty Ltd that requires any trade to occur between the two entities.
The individuals do not have a family or close personal relationship. Their relationship is a professional business relationship. Despite the individuals considering themselves' friends this does not influence their business decisions.
The applicant and X Pty Ltd do not have and have never had a financially interdependent relationship. The closest link financially is that the funding sources have come from the shareholders and directors or companies that they control. The funding is, where possible, in line with shareholding proportion percentages.
The applicant and X Pty Ltd do have common shareholders and one director in common however, after considering the relevant information, it is clear that no one party has overriding influence over the operations of the applicant or X Pty Ltd.
Despite the common director and shareholders, business decisions are made independently. This is considered particularly important by the shareholders because they hold different interests in the applicant and X Pty Ltd.
The separately operated business operations of the applicant and X are undertaken without regard to the directions or wishes of the other.
The businesses operate in different industries and have no shared resources. Some contractors are shared by the businesses however these are on an arm's length basis and are engaged independently by each company.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 328-130
Reasons for decision
An affiliate of an entity is defined by section 328-130 of the ITAA 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 their business affairs.
This is a question of fact dependent on all the circumstances of the particular case. No single factor will necessarily be determinative.
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
• financial relationships or dependencies
• relationships created through common directors, partners or shareholders
• the degree to which the entities consult with each other on business matters
• whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct certain aspects of their business with the other entity
• 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 entity 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, and
• conduct their business affairs independently in all regards.
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.
A person is not your affiliate merely because of the nature of a business relationship you and the entity share.
For example, companies are not affiliates of their directors and vice versa, merely because of the positions held. Directors of the same company are also not affiliates merely because one director acts, or could reasonably be expected to act, in accordance with the directions or wishes of another director, or in concert with another director, in relation to the affairs of the company. This is confirmed in the example in section 328-130 of the ITAA 1997.
The decision in AAT case Re Stephens and Federal Commissioner of Taxation [2008] AATA 176; 2008 ATC 10-008; (2008) 71 ATR 306 confirms the requirement that to be an affiliate the individual or company must act in accordance with the directions or wishes of the taxpayer in relation to the business affairs of the individual or company.
Application to your circumstances
In your case, to be an affiliate it must be that X Pty Ltd acts, or could reasonably be expected to act, in accordance with the applicant's directions or wishes, or in concert with the applicant in relation to its business affairs, or vice versa.
According to the facts provided there is insufficient evidence to determine that there was in fact an understanding or arrangement between the applicant and X Pty Ltd as to a common purpose or object, or that X Pty Ltd acts in accordance with the applicant's wishes, or vice versa. Furthermore, the majority of the shareholders in both companies are trustees of discretionary trusts and each trustee of each discretionary trust is required to act in the interest of their beneficiaries.
Therefore, we do not consider the applicant to be an affiliate of X Pty Ltd within the definition in Section 328-130 of the ITAA 1997.
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