Edited version of your private ruling

Authorisation Number: 1012505350121

Ruling

Subject: Small business entity - affiliate

Question 1

Is XXX an affiliate of you under section 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

QuEstion 2

Are the other non-trust shareholders of XXX affiliates of you under section 328-130 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

· Financial year ended 30 June 2013, and

· Financial year ended 30 June 2014.

The scheme commenced on:

1 July 2012.

Relevant facts and circumstances

You are a private company incorporated in Australia.

You are 100% jointly owned by A and spouse, as Trustees for their family trust.

Your directors are A and spouse.

The beneficiaries of the family trust are the family members of A including the spouse and children.

You are one of a number of shareholders of XXX that are contracted by XXX to obtain business in the name of XXX.

XXX is a private company that provides general advice and arranges products.

You and each of the other shareholders of XXX carry on a business.

Each XXX shareholder entity works independently of each other and maintains a portfolio of clients on behalf of XXX and in the name of XXX.

There is no crossover in respect of each client portfolio that is managed by the XXX shareholders for XXX.

ZZZ has now acquired less than 50% of the shares in XXX (the transaction).

As part of the transaction, you disposed of less than 50% of your shares in XXX to ZZZ.

The consideration provided to you by ZZZ for the disposal of the shares in XXX was cash in the amount of $xxx.

In respect of the disposal of shares in XXX, you are seeking to apply Division 152 of the ITAA 1997 to reduce your resulting capital gain.

For the purpose of the Maximum Net Asset Value and Small Business Entity tests, you are required to determine your affiliates for the purpose of grouping assets and turnover. In particular, you are seeking to determine whether XXX or any other non-trust shareholders in XXX are considered to be affiliates of yours for the purpose of accessing the small business concession under Division 152 of the ITA 1997.

Prior to the transaction, XXX had a number of employees. These staff members comprise account managers, account representatives and account assistants. These account employees are employed by XXX. Each of the account employees is responsible to one of the five shareholders and there is no crossover of staff members between shareholders.

You have only two employees comprising A and spouse.

The shareholders of XXX are not employees of XXX. Commission and brokerage fees derived by XXX for advice and the sale of products are on-paid to the XXX shareholders. The payment is based on the portfolio of clients managed by the relevant shareholder entities of XXX. Commission and brokerage paid to each XXX shareholder is calculated independently of each other, and the commission amount paid is not contingent upon the performance of the other XXX shareholders.

None of the shareholders of XXX are related to one another.

None of the shareholder entities of XXX have common directors or shareholders between them.

Each XXX shareholder holds one vote at any meeting of the shareholders. Therefore, you held one of the shareholder votes.

The Chairman at any meeting of the shareholders does not have any casting vote in addition to a deliberate vote.

The Board of Directors of XXX (the Board) is composed of the directors who have been nominated by each of XXX shareholders.

A is one of the directors of XXX, being your nominated director.

Each XXX director is responsible for the nominator shareholder's client portfolio, also known as the Director's book of clients.

Each XXX director holds one vote at any meeting of the Board and all decisions of the Board are made by a simple majority vote.

In exercising their power as a director of XXX, each director has performed his fiduciary obligations as required, in the best interests of XXX.

The management of XXX is vested in the Board. The Managing Director of XXX, appointed by the Board, manages the day-to-day operations of XXX and is responsible to the Board for XXX's activities and operations.

The Managing Director, with the exception of being on the Board of XXX with you, is otherwise unrelated to you.

In exercising shareholder votes, each XXX shareholder acts independently in relation to all decisions in the best interests of their respective brokerage business affairs.

Business expenses of XXX are on-charged to each of the shareholder entities of XXX on a reasonable basis, which is approved by the majority of directors.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152.

Income Tax Assessment Act 1997 section 328-130.

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

Reasons for decision

To access the small business capital gains tax concessions under Division 152 of the ITAA 1997, you must meet certain aggregated turnover or asset threshold tests of those entities connected with you and who are your affiliates.

Section 328-130 of the ITAA 1997 defines an affiliate to be an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act:

· in accordance with your directions or wishes, or

· in concert with you.

The affiliate rules are designed to ensure that entities that genuinely carry on independent businesses are not aggregated.

The Advanced guide to capital gains tax concessions for small business 2012-13 (NAT 3359), provides a number of relevant factors the Commissioner considers may support a finding that a person is an affiliate of a taxpayer as follows:

· 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 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.

Whether an individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, is a question of fact dependent on all the circumstances of the particular case. No single factor will necessarily be determinative.

Based on the facts in this case the relationship between you and XXX is considered to be limited to one of a formal nature only. There are no family relationships between you and XXX. Although there is a common director, the directorship is a formal relationship only. In exercising power as a director of XXX, A has performed fiduciary obligations as required, in the best interests of XXX. This business relationship of common directorship is specifically excluded from being an affiliate by virtue of subsection 328-130(2) of the ITAA 1997 which provides that common directorship itself does not constitute an affiliation.

For XXX to be an affiliate of you, there would need to be a relationship that involves control or influence by you over XXX, outside of your 'formal relationships', where such control or influence is in relation to the business affairs of XXX.

You are one of a number of XXX shareholders who each had equal voting power in any shareholders' meeting of which a majority vote is required to pass any resolution. In exercising your vote as a shareholder, you acted independently in relation to all decisions in the best interests of your own business affairs. As such, it is considered there is insufficient voting power to establish that XXX acts in accordance with your directions or wishes or in concert with you.

A is a common director of you and XXX. A's directorship role does not include managing the day-to-day operations of XXX. A is one of a number of directors of XXX who each had equal voting power in any meeting of which a majority vote is required to pass any resolution. Each director was nominated by one of the shareholder entities whom each operate independently from one another in pursuit of benefiting their respective businesses. As such, it is considered there is insufficient voting power for you to exert control or influence over XXX and to establish that XXX acts in accordance with your directions or wishes or in concert with you.

The only agreements between you and XXX, whether formal or informal, verbal or written, are the formal agreements of the Shareholder's Deed and Articles of Association of XXX, that encompass all terms and conditions of any agreement, including income/expense sharing and decision-making processes. The Shareholder's Deed and Articles of Association of XXX, coupled with legal obligations under the relevant legislation and fiduciary obligations of the directors encompass all terms and conditions under which parties are to act in relation to each other. That is, there is no informal agreement between parties.

The key persons who used to be employees of the businesses became employees of XXX who were then allocated out on a permanent basis to each of the shareholder entities of XXX. There is no crossover of XXX employees between shareholder entities. You have only two employees, being A and spouse. With the exception of the common director, you and XXX have no common employees.

You have separate bank accounts to those of XXX and the XXX shareholders.

You and XXX share only one company director and a business premise from which all parties operate.

It is considered you conduct your business affairs independently from XXX and other XXX shareholder entities.

The parties are likely to act, or could reasonably be expected to act, in relation to each other in accordance with their formal agreements, legal and fiduciary obligations only.

Given that the parties conduct themselves in accordance with formal agreements only and conduct their respective businesses independently of one another, it is considered the parties do not act in accordance with each other's wishes or in concert with one another in relation to their respective business interests. Accordingly, you and XXX are not affiliates for the purposes of section 328-130 of the ITAA 1997.

For other non-trust XXX shareholders to be an affiliate of you, there would need to be a relationship that involves control or influence by you over these shareholders in relation to their business affairs, outside of your 'formal relationships'.

Based on the facts in this case the relationship between you and the other non-trust shareholders is considered to be limited to one of a formal nature only. All XXX shareholders are unrelated to one another and there are no family relationships between them. There are no common shareholders or directors between you and the other XXX shareholders.

The only agreements between you and other XXX shareholders, whether formal or informal, verbal or written, are the formal agreements of the Shareholder's Deed and Articles of Association of XXX, that encompass all terms and conditions of any agreement, including income/expense sharing and decision-making processes. The Shareholder's Deed and Articles of Association of XXX, coupled with legal and fiduciary obligations of the directors encompass all terms and conditions under which parties are to act in relation to each other. That is, there is no informal agreement between the parties.

All interactions between you and other XXX shareholders are in accordance with formal agreements, legal obligations and fiduciary duties only.

Although XXX conducts its business with all of the XXX shareholders, each shareholder carries on their respective businesses independently of one another.

Consultation between you and other non-trust shareholders is limited to consultation in respect of the business of XXX. This level of consultation is necessary for the normal commercial operations of XXX's business and is in satisfaction of formal agreements and legal obligations.

The key persons who used to be employees of the businesses became employees of XXX who were then allocated out on a permanent basis to each of the shareholder entities of XXX. There is no crossover of XXX employees between entities. As such, you do not have any common employees with any of the other XXX shareholders.

You have separate bank accounts to the other XXX shareholders.

You and the other XXX shareholders share only one business premise from which all parties operate.

It is considered you conduct your business affairs independently from XXX and other XXX insurance broker entities.

XXX shareholders are likely to act, or could reasonably be expected to act, in relation to each other in accordance with their formal agreements, legal and fiduciary obligations only.

Given that the XXX shareholders conduct themselves in accordance with formal agreements only and conduct their respective businesses independently, it is considered the parties do not act in accordance with each other's wishes or in concert with one another in relation to their respective business interests. Accordingly, you and the other non-trust shareholders of XXX are not affiliates for the purposes of section 328-130 of the ITAA 1997.