Edited version of private ruling

Authorisation Number: 1011869313885

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Ruling

Subject: Affiliates

Question

Was the company your affiliate under section 328-130 of the ITAA 1997 during the period that it was using your property in its business?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a company and owned a property.

You had several shareholders who were individuals. These individuals are not related to each other.

Another company used the property in its business.

The above individuals are also the directors of this other company and the majority shareholders in its shareholder companies.

The primary reason for you acquiring the property was so that the other company could conduct its business operations from the property. The property was acquired by you, rather than the other company, for asset protection reasons.

You allowed the other company to use the property in the conduct of its business (until such time as the other company sold its business). There was no formal lease to reflect this, given that your directors and those of the other company are the same, and the close links between the shareholders of the two companies.

You provided security on a bank overdraft taken out by the other company. Additionally, you often lent money to the other company to reduce liabilities owed.

Rent was paid by the other company to you at a set amount but this did not reflect market value. A higher rent was charged to the purchaser of the business.

The other company was responsible for the payment of all outgoings in respect of the property (including those which would ordinarily be your responsibility, as lessor). Alterations have been made to the property over the years in order to facilitate the direction of the business. Such alterations were carried out under your direction, but at the other company's expense.

The above individuals were the key employees in the business operated by the other company, with each being involved in the management of the business. There were no other managerial employees.

The property has now been sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-130.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Section 328-130 of the ITAA 1997 provides the meaning of affiliate. This provision states that an individual or a company is an affiliate of yours if the individual or company 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 of the individual or company.

The requirements for an entity to be an affiliate within the meaning of the term in section 328-130 of the ITAA 1997 can be summarised as follows:

(a) the entity must be an individual or a company

(b) the entity must carry on a business and

(c) in relation to the affairs of the business of the individual or the company, the entity must act, or could reasonably be expected to act, in accordance with the directions or wishes, or in concert with, the entity.

We will now consider each of these requirements to determine whether the other company was an affiliate of yours during the period that it was using your property in its business.

Requirement (a)

The other company is a company and this requirement is satisfied.

Requirement (b)

This other company carried on a business for a period up to the sale of the business.

This requirement is therefore satisfied for this period.

Requirement (c)

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

Relevant factors that may support a finding that a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with a taxpayer, include:

(a) the existence of a relationship of control or influence, including family or other close personal relationships, financial relationships and dependencies, and relationships created through links such as common directors, partners or shareholders. However, even where such a relationship is present, it must be of sufficient strength to enable the entity to direct or influence the potential affiliates actions in relation to all or a substantial part of the affairs of the latter's business

(b) the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other

(c) 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 formal agreements or legal or fiduciary obligations and

(d) the actions of the parties.

In your case, there is a relationship that constitutes a relationship of control or influence through individuals who have links to both you and the other company. These individuals were your only shareholders and directors at all relevant times, and these individuals were also the directors of the other company. These individuals also held the majority shareholdings in the shareholder companies of the other company, and were also the key employees of, and were involved in the management of, the business operated by the other company.

The minds controlling you and the minds controlling the other company are the same. The other company also used your property to carry on its business and there was therefore a business relationship between you and the other company. There was also no formal rental agreement for the property, and the rent payable was not a market value rent.

It is considered that the other company in making its business decisions would act, or could reasonably be expected to act in the relevant way in relation to its business affairs, and you would act in concert with the other company in relation to matters that impact on both entities. The other company was therefore your affiliate for capital gains tax purposes

Although the way that you and the other company would act, or could reasonably be expected to act in relationship to each other would be dictated more by obligations imposed by law and fiduciary obligations of the directors and shareholders rather than any relationship between the individuals, this is not considered to be sufficient to determine that the other company was not your affiliate.

This requirement is therefore satisfied for the period during which the other company was using your property in its business.

Conclusion

As all of the requirements of section 328-130 of the ITAA 1997 are satisfied, the other company is considered to be your affiliate for the period during which the other company was using your property in its business.