Edited version of private advice

Authorisation Number: 1051965966397

Date of advice: 30 March 2022

Ruling

Subject: Affiliate relationship

Question

Will the taxpayer and his ex-spouse, who will hold Cross Collateralised Debt together, be affiliates pursuant to section 328-130 of the ITAA 1997, at the point in time the taxpayer disposes of certain real property?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer and their ex-spouse have recently divorced.

As part of the property settlement proceedings, the taxpayer and their ex-spouse intend to seek Federal Circuit and Family Court Orders in relation to the transfer and subsequent sale of certain assets.

The taxpayer, their ex-spouse and associated entities currently hold the following assets:

1.    Commercial accommodation business in a regional town, being the property and business owned by a trust (the Trust) controlled by a corporate trustee (the Company) owned and contolled by the taxpayer and their ex-spouse.

2.    Three primary production properties owned by a partnership of the taxpayer and their ex-spouse (the Partnership).

3.    A residential property owned by the taxpayer and their ex-spouse as tenants in common.

The taxpayer's ex-spouses' interests lie predominately with the commercial accommodation business while the taxpayer's interests lie with the primary production properties and business.

The accommodation business and primary production business operate completely independently of each other, both operationally and financially.

The residential property was the main residence of the taxpayer and their ex-spouse before they separated. It remains the main residence of the taxpayer's ex-spouse.

The taxpayer and his ex-spouse are in the process of separating their personal banking arrangements with their mortgagee (Bank A), other than the debt secured over assets.

Cross Collateralised Debt

Bank A has mortgages over the commercial accommodation, primary production properties and the residential property.

Bank A also has a business lines of credit and agribusiness loans with the Partnership, Trust and Company.

The debt owing to Bank A by the taxpayer, their ex-spouse, the Trust, the Company and the Partnership is cross collateralised over real property and businesses.

Each mortgage was initially given to secure the funds to acquire the property however the properties are now also collateral for the following bank loans with Bank A:

1.    Loans totalling an estimate $XXX to the Partnership.

2.    A loan of $XXX to the Trust.

3.    A loan of $XXX to the Company.

Proposed Federal Circuit and Family Court Orders and actions of the parties

It is proposed that the taxpayer and their ex-spouse will seek Federal Circuit and Family Court Orders in relation to the transfer and subsequent sale of real property and businesses as follows:

(a)  The Commercial accommodation and the residential premises to be transferred to the taxpayer's ex-spouse with the Trust vested.

(b)  The Primary production properties to be transferred to the taxpayer.

(c)   The taxpayer's shares in the Company be transferred to the taxpayer's ex-spouse.

(d)  The taxpayer to sell property and use the sale proceeds to partially repay Bank A, at which point the outstanding debt will be required to be refinanced by the taxpayer and their ex-spouse separately and all residual cross collateral security released.

Is it is proposed that the Family Court Orders (a), (b) and (c) relating to the transfer of real property and businesses between the taxpayer and their ex-spouse will be acted on and completed prior to the taxpayer selling property (d).

Following the carrying out the transfer of the real property and businesses as outline in the Family Court orders (a), (b) and (c) and prior to the sale of property by the taxpayer, it is proposed that the parties will conduct themselves as follows:

•         There will be no commercial dealings between the taxpayer's ex-spouse, who will own and conduct the accommodation business, and the taxpayer, who will conduct a primary production business.

•         The taxpayer and their ex-spouse will have no common resources for their respective businesses. Each will operate from separate premises, use separate assets and employ different staff.

•         The taxpayer will play no part in the management of the motel business conducted by the taxpayer's ex-spouse, and they will play no part in the management of the primary production business conducted by the taxpayer.

•         The profits from the businesses conducted by the taxpayer and their ex-spouse will be received by the individual conducting the relevant business. There will be no common flow of profits.

•         The taxpayer and their ex-spouse will each purchase the goods and services required for their individual businesses separately from each other.

•         The taxpayer and their ex-spouse will have separate customers.

•         The primary production business operated by taxpayer will have sufficient funds to meet the loan repayments for the loans that relate to the primary production business.

•         The accommodation business that will be conducted by the taxpayer's ex-spouse will have sufficient funds to meet the meet the loan repayments for the loans that relate to the accommodation business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-130

Reasons for decision

Summary

At the point in time when it is proposed that the taxpayer will sell property to reduce debt, neither the taxpayer nor their ex-spouse will act or could be reasonably be expected to act in accordance with each other's directions or wishes, or in concert with each other, in relation to each other's businesses. They will not be affiliates for the purpose of section 328-130 of the ITAA 1997.

Detailed reasoning

An affiliate is defined by subsection 328-130(1) of the Income Tax Assessment Act 1997 (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 the affairs of the individual or company.

However, subsection 328-130(2) of the ITAA 1997 states that an individual is not your affiliate merely because of the nature of the business relationship you and the individual share.

Whether a person is acting in concert with another is essentially a question of fact. The term 'acting in concert' involves at least an understanding between the parties as to a common purpose or object.

According to para 2.36 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 which introduced the definition of affiliate into the tax law, the following factors may have a bearing on whether an individual or company is an affiliate of an entity:

•         Family or close personal relationships.

•         Financial relationships or dependencies.

•         Relationships created through links such as common directors, partners, or shareholders.

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

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

In FC of T v. Peabody (1994) 181 CLR 359; 94 ATC 4663; (1994) 28 ATR 344 the full High Court, in considering the meaning of the phrase 'might reasonably be expected' as it appears in section 177C of the ITAA 1936, held that '[a] reasonable expectation requires more than a possibility'. In the High Court's view the phrase involves a prediction that must be sufficiently reliable for it to be regarded as reasonable.

Application to your circumstances

In relation to their business affairs, the taxpayer and their ex-spouse will be bound to act in accordance with the Federal Circuit and Family Court Orders and severing financial dependency.

There will be no commercial dealings between the taxpayer's ex-spouse, who will own and conduct a motel business, and the taxpayer, who will conduct a primary production business. The businesses are inherently different from each other and there will be no common flow of profits.

Neither individual will play any part in the management of the others business. Each business will operate from separate premises, use separate assets and employ different staff. They will each purchase the goods and services needed for their respective businesses separately and have separate customers.

The properties and the properties and business that will be transferred to the taxpayer and their ex-spouse will continue to be used as security for the loans until the taxpayer is able to sell assets, reducing it sufficiently to allow refinancing. However, the cross-collateralised debt is not considered a financial interdependency as during the interim period, each respective business will have sufficient operating funds to service its related debt,

On a balanced view of the facts and circumstances, it can be concluded that at time the taxpayer sells property to reduce the cross-collateral debt, that neither they nor their ex-spouse will act, or could reasonably be expected to act in accordance with each other's directions or wishes, or in concert with each other, in relation to each other's businesses.

The Commissioner accepts that at the relevant point in time prior the sale of assets, despite the existence of cross collateralised debt secured over assets held separately by the taxpayer and their ex-spouse, they will not be affiliates for the purpose of section 328-130 of the ITAA 1997.