Edited version of private advice

Authorisation Number: 1051961514971

Date of advice: 22 March 2022

Ruling

Subject: Meaning of affiliate

Question

For the purposes of the active asset test, is Person A your affiliate as defined 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 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your parent, Person A, purchase a Property in joint names in 20XX. Person A conducted a primary production business on the Property as a sole trader. It was intended that you would eventually inherit the Property.

Over the years, due to drought conditions, you were unable to join in the primary production business, however you assisted from time to time on an ad hoc basis. You were not paid by person A during this time, however Person A paid various ongoing personal costs on your behalf. You supplemented your income by working various other jobs during this period.

During a brief period in 20XX, you managed the Property with Person A's counsel while they were recovering from surgery.

You agreed to transfer your share of the Property to Person A in the 20XX financial year for nil consideration.

You never formed a legal partnership with Person A to operate the primary production business. While you worked on the Property in various capacities, you were never employed on an indefinite basis. There was some consultation between yourself and Person A on business matters.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Summary

In your circumstances, it is not considered that Person A acted, or could have reasonably be expected to act, in accordance with your directions or wishes, or in concert with Person A in relation to the affairs of the business that Person A carried on. Person A is not your affiliate for the purposes of the active asset test.

Detailed reasoning

Both the basic conditions in section 152-10 of the ITAA 1997 and the meaning of active asset in section 152-40 of the ITAA 1997 make mention of affiliates. The following requirements must be met for an entity to qualify as the entity's affiliate (section 328-130 of the ITAA 1997):

a)            the entity must be an individual or company;

b)            the entity must carry on a business; and

c)            in relation to its business affairs, the entity must act, or could reasonably be expected to act according to the directions or wishes of the entity or in concert with the entity.

Importantly, subsection 328-130(2) of the ITAA 1997 provides that an individual is not your affiliate merely because of the nature of the business relationship shared by the individuals.

Acting "in concert" in relation to a potential affiliate's business affairs means there is a substantial degree of dependence on, or connection with, the taxpayer.

The SBE Explanatory Memorandum notes (at para 2.36) that the following factors may have a bearing on whether an individual or company acts in concert with the entity or according to the entity's directions or wishes:

• family or close personal relationships;

• financial relationships or dependencies (eg shared banking arrangements);

• relationships created through links such as common directors, partners, co-trustees or shareholders;

• the degree to which the entities consult with each other on business matters; and

• whether one entity is under a formal or informal obligation to purchase goods or services or conduct aspects of its business with the other entity.

Additional relevant factors - which were identified in Ruling TR 2002/6 (withdrawn) and the ATO guide (March 2015) - include:

• whether the entities have common employees, resources, facilities or services;

• any common flow of profits;

• any common ownership or capital backing;

• whether goods and/or services supplied by one entity to the other account for a large percentage of the potential affiliate's business and/or a large proportion of its income;

• whether a customer's overall business is shared; and

• whether the entities provide identical or similar goods or services.

Importantly, the affiliate relationship will not exist if the potential affiliate acts, or could reasonably be expected to act, as another entity directs or wishes, or in concert with it, only in relation to isolated transactions or on an irregular, ad hoc basis.

All relevant factors need to be considered in combination to determine whether an entity is an affiliate of the entity under section 328-130 of the ITAA 1997. None of these factors are determinative in their own right.

However, the ATO guide provides that, in general, 2 businesses will not be taken to be acting in concert if they:

• have different employees;

• have different business premises;

• have separate bank accounts;

• do not consult on business matters; and

• conduct their business affairs independently in all regards.

Application to your circumstances

In this case, Person A was a sole trader running a primary production business on the Property. While we accept there was a family relationship and some consultation on business matters this is not sufficient to establish an affiliate relationship between the parties.

You did not share bank accounts with Person A and while they did assist you in repaying some of your financial obligations this was a private arrangement not associated with the business dealings.

While the information provided suggests there was some consultation on business matters this appears to have been on an irregular or ad hoc basis. Further, there was no common flow of profits given Person A operated the primary production business as a sole trader.

On balance, given the information provided, it is not considered that your relationship with Person A or involvement in Person A's business would amount to Person A being considered your affiliate for the purposes of the active asset test.