Edited version of private advice

Authorisation Number: 1052234380375

Date of advice: 21 March 2024

Ruling

Subject: Aggregated turnover - 'connected with' and 'affiliate'

Question 1

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997) for each of the income years ending 31 December 20XX and 31 December 20XX (Income Years), was A Co 'connected with' X Co under subsection 328-125(1) of the ITAA 1997 during each of the Income Years?

Answer

Yes.

Question 2

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 of the ITAA 1997 for each of the Income Years, was A Co 'connected with' Y Co under subsection 328-125(1) of the ITAA 1997 at any time during each of the Income Years?

Answer

No.

Question 3

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 of the ITAA 1997 for each of the Income Years, was A Co 'connected with' Z Co under subsection 328-125(1) of the ITAA 1997 at any time during each of the Income Years?

Answer

No.

Question 4

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 of the ITAA 1997 for each of the Income Years, was Y Co an 'affiliate' of A Co under section 328-130 of the ITAA 1997 at any time during each of the Income Years?

Answer

No.

Question 5

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 of the ITAA 1997 for each of the Income Years, was Z Co an 'affiliate' of A Co under section 328-130 of the ITAA 1997 at any time during each of the Income Years?

Answer

No.

This ruling applies for the following periods:

Year ending 31 December 20XX

Year ending 31 December 20XX

The scheme commenced on:

1 January 20XX

Relevant facts and circumstances

A Co

1.     A Co is an Australian resident company that supplies products in Australia.

2.     The Board of Directors of A Co is comprised of the following members:

a.    Individual B (who is also the Chief Executive Officer (CEO) of A Co);

b.    Individual C;

c.     Individual D;

d.    Individual E; and

e.    Individual F.

3.     The majority shareholder in A Co is X Co, which holds over 90% of the ordinary shares in A Co. The remaining shares are held by Individual B and Individual C.

4.     Ordinary shares in A Co provide holders with the right to exercise one vote for every share they hold at any meeting of members.

5.     A Co's bank account signatories are Individual B, Individual C and Individual F.

X Co

6.     X Co is a holding company registered in Country S.

7.     X Co does not engage in any trading activities and has no commercial dealings in Australia, apart from its shareholding in A Co.

8.     The Board of Directors of X Co is comprised of the following members:

a.    Individual F;

b.    Individual C;

c.     Individual D; and

d.    Individual G.

9.     The ordinary shares in X Co are held by Individual D, Individual C, Individual G and M Co. Each shareholder holds less than 40% of the shares in X Co.

10.  Shareholder, M Co, is an investment company registered in Country S. The ordinary shares in M Co are owned by Individual F and their spouse, who has a familial relationship with Individual C.

11.  Individual F is the sole signatory for the bank account of X Co.

Y Co

12.  Y Co is an Australian resident wholesaling company that purchases products from a variety of suppliers in Australia, including A Co. Y Co processes the products in its factory for sale domestically and for export to Z Co overseas.

13.  The Board of Directors of Y Co is comprised of the following members:

a.    Individual B (who is also the CEO of Y Co);

b.    Individual C; and

c.     Individual H.

14.  The majority shareholders in Y Co are Individual I and Individual H, who each hold more than 40% of the ordinary shares in Y Co. The remaining shareholder is Individual B, who holds less than 5% of the shares in Y Co.

15.  Ordinary shares in Y Co provide holders with the right to exercise one vote for every share they hold at any meeting of members.

16.  Individual B, together with Y Co's administrative staff, are responsible for the day-to-day operations of Y Co.

17.  The signatories of the bank accounts of Y Co are Individual B, Individual C and Individual H.

Z Co

18.  Z Co is a company registered in Country S. Z Co imports and trades various products and is one of the major buyers of Y Co's products.

19.  The Board of Directors of Z Co is comprised of the following members:

a.    Individual C (who is also the CEO of Z Co);

b.    Individual I; and

c.     Individual H.

20.  The ordinary shares in Z Co are held in the following proportions:

a.    Individual C: more than 40%;

b.    Individual I: less than 40%; and

c.     Individual H: less than 40%.

21.  Ordinary shares in Z Co provide holders with the right to exercise one vote for every share they hold at any meeting of members.

Relationship between A Co and Y Co

22.  A Co supplies products to Y Co at market price. Y Co is not obligated to purchase products from A Co, and A Co does not have any input or influence over where the products are sold once they are delivered to Y Co.

23.  During the relevant years, more than 90% of A Co's revenue was derived from sales of its products to Y Co, and Y Co sourced 30% of its products from A Co.

24.  Y Co also provides administrative services to A Co, which are on-charged to A Co. The companies do not have a formal agreement for the recovery of these costs.

25.  As part of this administrative function, A Co's registered office and principal place of business for regulatory purposes is located at Y Co's registered office address (Y Co Address). Individual B works out of the Y Co Address in their capacity as the CEO of both A Co and Y Co. No other employees of A Co work from this address.

26.  Apart from Individual B (in their capacity as the CEO of Y Co), no employees of A Co have participated in the day-to-day operational management of, or decision-making processes for, Y Co.

27.  A Co and Y Co are not grouped for payroll purposes, and they maintain separate bank accounts and financial statements.

28.  Apart from Individual B and Individual C, A Co and Y Co do not have any common employees or directors.

Relationship between A Co and Z Co

29.  A Co and Z Co have not had any direct business or commercial dealings with each other, or any formal or informal arrangements in place for the supply of goods or services to one another.

30.  The business affairs of Z Co have been kept separate from A Co and have not been discussed during meetings of the Board of Directors of A Co.

31.  Other than Individual C (in their capacity as the CEO and a director of Z Co), no employees or directors of A Co have participated in the day-to-day operational management, or in meetings of the Board of Directors, of Z Co.

32.  Apart from Individual C, A Co and Z Co do not have any common employees or directors.

33.  A Co and Z Co do not share any common business premises, facilities, assets or services for the operation of their respective businesses.

34.  Z Co has not obtained access to any funding (including any loans or guarantees) from A Co.

Relationship between X Co and Y Co

35.  The CEO and majority shareholders of Y Co have not been involved in, or consulted in relation to, the business affairs of X Co, including participating in meetings of the Board of Directors.

36.  The shareholders and directors of X Co have not had any direct business or commercial dealings with the shareholders, directors or employees of Y Co in relation to the business affairs of either company.

37.  X Co and Y Co do not share any common business premises, facilities, assets or services for the operation of their respective businesses.

38.  X Co has not obtained access to any funding (including any loans or guarantees) from Y Co.

Relationship between X Co and Z Co

39.  The business affairs of X Co have not been discussed during meetings of the Board of Directors of Z Co.

40.  Other than using Z Co's registered office address (located in Country S) as X Co's registered office address:

a.    X Co and Z Co have not had any direct commercial dealings, and do not have any formal or informal agreements in place with respect to the business carried on by X Co; and

b.    there are no shared business premises, facilities, assets or services between X Co and Z Co for the operation of their respective businesses.

41.  X Co has not obtained access to any funding (including any loans or guarantees) from Z Co.

Other matters

42.  Individual D and Individual E are both personal friends of Individual C.

43.  Individual C has a close familial relationship with both Individual I and Individual H.

44.  The following individuals do not carry on their own business:

a.    Individual H;

b.    Individual I;

c.     Individual C;

d.    Individual G; and

e.    Individual D.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 subsection 328-125(2)

Income Tax Assessment Act 1997 subsection 328-125(7)

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 subsection 328-130(1)

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

Income Tax Assessment Act 1997 subsection 974-75(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

All legislative references in these reasons for decision are to the ITAA 1997, unless stated otherwise.

Question 1

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 for each of the Income Years, was A Co 'connected with' X Co under subsection 328-125(1) during each of the Income Years?

Summary

A Co was 'connected with' X Co under subsection 328-125(1) during each of the Income Years, as X Co directly controlled A Co under paragraph 328-125(2)(b) during each of the Income Years.

Detailed reasoning

Meaning of 'aggregated turnover'

An entity may need to aggregate its 'annual turnover' with that of other entities to determine its eligibility for certain tax concessions or other tax treatment.

1.    Section 328-115 provides the meaning of 'aggregated turnover' as follows:

(1)  Your aggregated turnover for an income year is the sum of the relevant annual turnovers (see subsection (2)) excluding any amounts covered by subsection (3).

...

(2)  The relevant annual turnovers are:

(a)    your *annual turnover for the income year; and

(b)    the annual turnover for the income year of any entity (a relevant entity) that is *connected with you at any time during the income year; and

(c)    the annual turnover for the income year of any entity (a relevant entity) that is an *affiliate of yours at any time during the income year. ...

2.    Subsection 328-125(3) sets out amounts which are not included in an entity's aggregated turnover for an income year.

3.    With respect to the meaning of 'annual turnover', subsection 328-120(1) states that:

(1)  An entity's annual turnover for an income year is the total *ordinary income that the entity *derives in the income year in the ordinary course of carrying on a *business.

Meaning of 'connected with' an entity

4.    By virtue of paragraph 328-115(2)(b), an entity's aggregated turnover includes the annual turnover for the income year of any entity that is 'connected with' it at any time during the relevant income year.

5.    Subsection 328-125(1) states:

(1)  An entity is connected with another entity if:

(a)    either entity controls the other entity in a way described in this section; or

(b)    both entities are controlled in a way described in this section by the same third entity.

...

6.    For the test for determining whether an entity directly controls another entity (other than a discretionary trust), subsection 328-125(2) states:

(2)  An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a)    except if the other entity is a discretionary trust-own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

                                            (i)        any distribution of income by the other entity; or

                                           (ii)        if the other entity is a partnership-the net income of the partnership; or

                                          (iii)        any distribution of capital by the other entity; or

(b)    if the other entity is a company-own, or have the right to acquire the ownership of, *equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

7.    An entity will also be 'connected with' another entity if it indirectly controls the entity (or is indirectly controlled by the entity) within the meaning of subsection 328-125(7). Subsection 328-125(7) (which operates subject to subsection 328-125(8)) states:

(7)  This section applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or applications of this section, controlled by the second entity.

Whether A Co was 'connected with' X Co

8.    For the purposes of subsection 328-125(2), X Co will directly control A Co where X Co, its affiliates, or X Co together with its affiliates:

a.    own, or have the right to acquire the ownership of, interests in A Co that carry between them the right to receive at least 40% of any distributions of income or capital by A Co (paragraph 328-125(2)(a)); or

b.    own, or have the right to acquire the ownership of 'equity interests' in A Co that carry between them the right to exercise, or control the exercise of, at least 40% of the voting power in A Co (paragraph 328-125(2)(b)).

9.    At all times during each of the Income Years, X Co owned over 90% of the ordinary shares on issue in A Co.

10.  An 'equity interest' in a company is defined in subsection 995-1(1) as having the meaning given by Subdivision 974-C. Under item 1 of the table in subsection 974-75(1), an equity interest includes an interest in a company as a member or stockholder of the company.

11.  As the ordinary shareholders of A Co are members of the company, the ordinary shares in A Co constitute 'equity interests' for the purposes of subsection 974-75(1).

12.  Ordinary shares in A Co provide holders with the right to exercise one vote for every share they hold at any meeting of members.

13.  Therefore, X Co satisfied the direct control test in paragraph 328-125(2)(b) in relation to A Co for each of the Income Years.

Conclusion

14.  For the purposes of determining A Co's aggregated turnover for each of the Income Years, A Co was 'connected with' X Co under subsection 328-125(1) during each of the Income Years.

Question 2

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 for each of the Income Years, was A Co 'connected with' Y Co under subsection 328-125(1) at any time during each of the Income Years?

Summary

A Co was not 'connected with' Y Co under subsection 328-125(1) at any time during each of the Income Years as neither entity controlled the other entity, nor were they controlled by the same third entity, in a way described in section 328-125.

Detailed reasoning

1.     To determine whether A Co was 'connected with' Y Co under subsection 328-125(1) at any time during each of the Income Years, one of the following control tests must be satisfied:

a.    Y Co had 'direct control' of A Co under subsection 328-125(2) or 'indirect control' of A Co under subsection 328-125(7);

b.    A Co had 'direct control' of Y Co under subsection 328-125(2) or 'indirect control' of Y Co under subsection 328-125(7); or

c.     the companies were controlled (directly or indirectly) by the same third entity.

Control Test 1: Whether Y Co controlled A Co

Whether Y Co directly controlled A Co

2.     For the purposes of subsection 328-125(2), Y Co directly controlled A Co during each of the Income Years if Y Co, its affiliates, or Y Co together with its affiliates, owned, or had the right to acquire the ownership of, interests in A Co that carried between them the right to receive at least 40% of any distributions of income or capital by A Co, or the right to exercise, or control the exercise of, at least 40% of the voting power in A Co.

3.     During each of the Income Years, Y Co did not have the requisite ownership interests in A Co in its own right (or together with any of its affiliates) for the purposes of subsection 328-125(2).

4.     However, as X Co directly controlled A Co for the purposes of subsection 328-125(2) during each of the Income Years, by virtue of the affiliate-inclusive test in subsection 328-125(2), Y Co will have directly controlled A Co during the Income Years if X Co was an affiliate of Y Co for each of the Income Years.

Meaning of 'affiliate'

5.     The meaning of 'affiliate' is set out in section 328-130 as follows:

(1)  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.

(2)  However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

Note: For small business relief purposes, a spouse or a child under 18 years may also be an affiliate under section 152-47.

Example: A partner in a partnership would not be an affiliate of another partner merely because the first partner acts, or could reasonably be expected to act, in accordance with the directions or wishes of the second partner, or in concert with the second partner, in relation to the affairs of the partnership.

Directors of the same company, or the company and a director of that company, would be in a similar position.

6.     The first limb of the definition considers the actual acts of the potential affiliate to see if it has acted in accordance with the entity's directions or wishes, or in concert with the entity, in relation to the potential affiliate's business affairs. The second limb considers whether the potential affiliate could reasonably be expected to have acted in the relevant way despite not actually having done so.

7.     The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 (the EM), which introduced section 328-130, explains (at paragraph 2.35) that the affiliate rules are designed to ensure that entities that genuinely carry on independent businesses are not aggregated.

8.     In accordance with subsection 328-130(2) and paragraph 2.39 of the EM, an individual or company is not automatically an affiliate merely because of a 'business relationship'. In this regard, in accordance with the example to section 328-130, directors are not automatically affiliates of the company of which they are a director, nor would the company automatically be an affiliate of the director. The 'affiliate' test requires something more than an entity acting in the relevant way merely because of the nature of its formal business relationship with another entity.

9.     Further, subsection 328-130(1) makes it explicit that the 'affiliate' definition is only to be considered 'in relation to the affairs of the business' of the relevant individual or company. Therefore, an entity that does not carry on their own business cannot be an 'affiliate' for the purposes of section 328-130.

10.  The 'affiliate' test must be assessed on an entity-by-entity basis. This means that it is possible for one entity (the first entity) to be an affiliate of another entity (the second entity) even though the second entity is not itself an affiliate of the first entity.

Meaning of 'could reasonably be expected'

11.  In Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, the full High Court held (at 385) that '[a] reasonable expectation requires more than a possibility'. In the High Court's view, a reasonable expectation (for the purposes of section 177C of the Income Tax Assessment Act 1936) involves a prediction that must be sufficiently reliable for it to be regarded as reasonable.

12.  Withdrawn Taxation Ruling TR 2002/6 Income tax: Simplified Tax System: eligibility - grouping rules (*STS affiliate, control of non fixed trusts) (TR 2002/6) also considered the meaning of 'could reasonably be expected' in the context of the definition of 'STS affiliate' in former subsection 328-380(8). TR 2002/6 explained whether an entity was eligible to be a Simplified Tax System (STS) taxpayer for the purposes of the former STS regime. As the STS regime was subsequently repealed, TR 2002/6 was withdrawn by Taxation Ruling TR 2002/6W Income tax: Simplified Tax System: eligibility - grouping rules (*STS affiliate, control of non fixed trusts).

13.  However, the 'affiliate' definition in subsection 328-130(1) includes similar requirements to the former 'STS affiliate' definition, including the 'could reasonably be expected' and 'in concert' requirements. Accordingly, while not binding, the Commissioner's views on these requirements, as set out in TR 2002/6, remain relevant in considering the 'affiliate' test in subsection 328-130(1). However, the former 'STS affiliate' definition did not contain an equivalent provision to subsection 328-130(2), noting that former subsection 328-380(9) only applied in respect of partners in a partnership.

14.  In the context of the former 'STS affiliate' definition, TR 2002/6 states (at paragraph 51) that it can reasonably be expected that a potential affiliate will act, or would have acted, in the relevant way where the other entity stands in a relationship of control or influence over the potential affiliate for the relevant income year. The conclusion that such a relationship exists or existed in the relevant income year may be based on:

a.    inferences drawn from events, transactions or patterns of behaviour which show that the entity has been, is, or will be able to direct or influence the potential affiliate's behaviour; and

b.    the presence of a relationship between the two entities which enables or has enabled the entity to influence or direct the potential affiliate (TR 2002/6, at paragraph 52).

15.  The types of relationships that may constitute a relationship of control or influence include:

a.    family or other close personal relationships;

b.    financial relationships and dependencies; and

c.     relationships created through links such as common directors, partners or shareholders (TR 2002/6, at paragraph 53).

16.  For a company, this relationship depends on whether the majority shareholders and/or directors of the company act, or can reasonably be expected to act, in the relevant way. This requires an examination of the nature of the relationships between the company and the majority shareholders and/or directors, together with the nature of the relationships between those shareholders and directors (TR 2002/6, at paragraph 107).

17.  However, even where such a relationship is present, it must be of sufficient strength to enable the entity to direct or influence the potential affiliate's actions in relation to all or a substantial part of the affairs of the potential affiliate's business. If, having regard to the full facts and circumstances of the particular case, it is evident that, despite that relationship the potential affiliate cannot reasonably be expected to act in the relevant way, then it will not satisfy this particular limb of the 'affiliate' definition (TR 2002/6, at paragraph 54).

18.  The kinds of considerations which may show that a potential affiliate cannot reasonably be expected to act in the relevant way, notwithstanding the strength of a particular relationship, include:

a.    a pattern of conduct which shows that despite the presence of a relevant relationship, it is the entities' practice not to involve themselves in each other's business affairs;

b.    a pattern of conduct which shows that despite the presence of a relevant relationship and attempts to influence or direct the potential affiliate, it is the potential affiliate's practice not to act as the other entity wishes or directs;

c.     whether the potential affiliate has an overriding relationship with another entity that will prevent it from acting as the entity directs or wishes;

d.    whether the potential affiliate is bound by obligations which prevent it from acting as the other entity wishes in relation to the overall affairs of the business; and

e.    whether to act as the other entity wishes would be inconsistent with the interests of the potential affiliate (TR 2002/6, at paragraph 55).

Meaning of 'in concert'

19.  An individual or a company will also be an entity's affiliate if they act 'in concert' with the entity, or could reasonably be expected to do so, in relation to the affairs of their business.

20.  The term 'in concert' is not defined in the ITAA 1997 and must therefore be interpreted according to its ordinary meaning and legislative context. The Macquarie Dictionary (online edition) defines the phrase 'in concert' to mean: 'in a coordinated or organised way; together'.

21.  In the context of the former 'STS affiliate' definition, TR 2002/6 states (at paragraph 59) that, to ensure that the 'in concert' test only operates to group entities that are sufficiently related to warrant grouping, a potential affiliate will only be regarded as acting 'in concert' with another entity where:

a.    it is acting together with the other entity in pursuit of a common goal or objective; and

b.    that common goal or objective is the carrying on of a business by the potential affiliate with a substantial degree of connection with, or dependence on, the business carried on by the other entity.

22.  The overall degree of that connection must be such that the potential affiliate cannot be viewed as operating independently of the other entity (TR 2002/6, at paragraph 60).

23.  The EM (at paragraph 2.36) provides the following list of factors that may have a bearing on whether an individual or a company is an affiliate of an entity to the extent that they show that two or more entities are acting in concert:

a.    family or close personal relationships;

b.    financial relationships or dependencies;

c.     relationships created through links such as common directors, partners, or shareholders;

d.    the degree to which the entities consult with each other on business matters; or

e.    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.

24.  However, none of these factors are determinative in their own right (the EM, at paragraph 2.37).

25.  TR 2002/6 (at paragraph 65) also details a number of non-exhaustive factors which can be taken into account when determining whether two entities are acting in concert with each other. These include:

a.    the nature and extent of commercial dealings between the two entities;

b.    the extent to which the entities share common resources, facilities or services for the operation of their businesses;

c.     the extent to which an entity actively participates in the managerial decisions and day-to-day management of the potential affiliate's business;

d.    whether there are financial interdependencies between the entities;

e.    whether the profits from the businesses carried on by the entities are ultimately received by the same entities, and the source of the capital underpinning the two entities is the same;

f.      whether the entities coordinate their orders for goods or services, or the potential affiliate is under an obligation to order through the other entity;

g.    whether the entity directs customers to the potential affiliate or uses it to obtain custom; and

h.    whether the entities provide similar goods or services, or the nature of their businesses are inherently different.

26.  None of these factors are decisive in their own right, nor does each one necessarily need to be given the same weight. Rather, determining whether a potential affiliate is acting in concert with an entity in relation to its own business affairs will be a matter of overall impression (TR 2002/6, at paragraph 65).

27.  In the context of the former 'STS affiliate' definition, TR 2002/6 states (at paragraph 64) that it is sufficient if the potential affiliate's business has the required degree of connection with, or dependence on, the other entity's business. It is not necessary for the other entity's business to also have a substantial degree of connection with, or dependence on, the potential affiliate's business.

Whether X Co was an 'affiliate' of Y Co

28.  To determine whether X Co was an affiliate of Y Co, it is necessary to consider the nature of any relationships or links between the entities which might indicate a relationship of control or influence and provide a mechanism by which Y Co could seek to direct or influence the actions of X Co.

29.  X Co and Y Co share one common director, being Individual C. Whilst the companies do not have any common shareholders, there are shareholders of both companies who have a familial or other personal relationship with Individual C.

30.  However, for X Co to be an 'affiliate' of Y Co, these common relationships and links must be of sufficient strength to enable Y Co to direct or influence X Co's actions in relation to all, or a substantial part of, the affairs of its business.

31.  Therefore, to determine whether Y Co stood in a position of control or influence over X Co in relation to the conduct of its business, it is also necessary to have regard to the pattern of conduct, practices and other dealings relevant to the relationship between the companies.

32.  The facts relating to the relationship between X Co and Y Co do not indicate that the presence of the common links and relationships between the companies enabled Y Co to direct or influence X Co's conduct or actions in relation to its business affairs, or that the shareholders and directors of Y Co attempted to do so during the Income Years. Rather, based on the facts, it was the companies' practice not to involve themselves in each other's business affairs.

33.  Similarly, the facts do not establish that the business of X Co had a substantial degree of connection with, or dependence on, the business of Y Co, such that the two companies were acting together in pursuit of the common objective of the carrying on of the business of X Co. Rather, the two companies appear to operate independently, with separate management and decision-making processes, and no coordination or consultation between them.

34.  Accordingly, based on the relevant facts and circumstances, X Co did not act, nor could it reasonably have been expected to act, in accordance with Y Co's directions or wishes, or in concert with Y Co, in relation to its business affairs during the Income Years. Therefore, X Co was not an affiliate of Y Co under section 328-130 during the Income Years.

35.  As a result, Y Co did not directly control A Co in accordance with subsection 328-125(2) during the Income Years.

Whether Y Co indirectly controlled A Co

36.  As A Co was directly controlled by X Co during the Income Years, it is necessary to consider whether Y Co controlled X Co.

37.  During each of the Income Years, Y Co did not have the requisite ownership interests in X Co in its own right (or together with any of its affiliates), nor did it directly control X Co by virtue of any affiliates, for the purposes of subsection 328-125(2). Therefore, Y Co did not indirectly control A Co under subsection 328-125(7) during the Income Years.

Control Test 2: Whether A Co controlled Y Co

Whether A Co directly controlled Y Co

38.  During each of the Income Years, A Co did not have the requisite ownership interests in Y Co in its own right (or together with any of its affiliates) for the purposes of subsection 328-125(2).

39.  However, as it is also possible for A Co to directly control Y Co for the purposes of subsection 328-125(2) by virtue of its affiliates, it is necessary to consider whether any other entities - which had the requisite ownership interests in Y Co during the Income Years - were affiliates of A Co during the Income Years.

Whether Individual I or Individual H were 'affiliates' of A Co

40.  Based on the facts, Individual I and Individual H each directly controlled Y Co under paragraph 328-125(2)(b) during the Income Years. Therefore, it is necessary to consider whether Individual I or Individual H were affiliates of A Co during the Income Years.

41.  As the 'affiliate' test in section 328-130 only applies in respect of 'the affairs of the business' of the potential affiliate, an individual that does not carry on their own business cannot be an affiliate of another entity. As Individual I and Individual H do not carry on their own businesses, they cannot be affiliates of A Co for the purposes of section 328-130.

42.  Accordingly, A Co did not directly control Y Co under subsection 328-125(2) during the Income Years.

Whether A Co indirectly controlled Y Co

43.  As the majority shareholders in Y Co are Individual I and Individual H, who each hold their shares in Y Co in their individual capacities, the indirect control test in subsection 328-125(7) does not apply in relation to determining whether any entities indirectly controlled Y Co.

44.  Therefore, A Co did not indirectly control Y Co under subsection 328-125(7) during the Income Years.

Control Test 3: Whether A Co and Y Co were controlled by the same third entity

45.  The third control test to determine whether A Co and Y Co were 'connected' under subsection 328-125(1) is whether they were controlled (directly or indirectly) by the same third entity, in accordance with paragraph 328-125(1)(b).

46.  A Co and Y Co were controlled by the same third entity during the Income Years if they were both controlled by X Co (as the direct controller of A Co), or by Individual H and/or Individual I (as the direct controllers of Y Co).

Whether Individual H or Individual I were 'affiliates' of X Co

47.  X Co directly controlled Y Co if either Individual H or Individual I were an affiliate of X Co under section 328-130 during each of the Income Years.

48.  As Individual I and Individual H do not carry on their own businesses, they cannot be affiliates of X Co for the purposes of section 328-130.

Whether X Co was an 'affiliate' of Individual H or Individual I

49.  Individual H and/or Individual I will have directly controlled A Co if X Co was an affiliate of Individual H and/or Individual I under section 328-130 during each of the Income Years.

50.  Individual H and Individual I have not been involved in, or consulted in relation to, the business affairs of X Co, including participating in meetings of the Board of Directors.

51.  The facts do not indicate that the familial and personal relationships between X Co and Y Co enabled Individual H or Individual I to influence or direct the actions of X Co in relation to its business affairs. Rather, the facts indicate that despite the presence of these relationships, it was the entities' practice not to involve themselves in each other's business affairs.

52.  Accordingly, based on the facts, X Co did not act, nor could it reasonably have been expected to act, in accordance with Individual H's and/or Individual I's directions or wishes, or in concert with Individual H and/or Individual I, in relation to X Co's business affairs during the Income Years. Therefore, X Co was not an affiliate of either Individual H or Individual I during the Income Years.

53.  Consequently, A Co and Y Co were not controlled by the same third entity under paragraph 328-125(1)(b) during the Income Years.

Conclusion

54.  For the purposes of determining A Co's aggregated turnover for each of the Income Years, A Co was not 'connected with' Y Co under subsection 328-125(1) during each of the Income Years, as neither entity controlled the other entity, nor were they controlled by the same third entity.

Question 3

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 for each of the Income Years, was A Co 'connected with' Z Co under subsection 328-125(1) at any time during each of the Income Years?

Summary

A Co was not 'connected with' Z Co under subsection 328-125(1) at any time during each of the Income Years as neither entity controlled the other entity, nor were they controlled by the same third entity, in a way described in section 328-125.

Detailed reasoning

1.     To determine whether A Co was 'connected with' Z Co under subsection 328-125(1) at any time during each of the Income Years, one of the following control tests must be satisfied:

a.    Z Co had direct control of A Co under subsection 328-125(2), or indirect control of A Co under subsection 328-125(7);

b.    A Co had direct control of Z Co under subsection 328-125(2), or indirect control of Z Co under subsection 328-125(7); or

c.     the companies were controlled (directly or indirectly) by the same third entity.

Control Test 1: Whether Z Co controlled A Co

Whether Z Co directly controlled A Co

2.     During each of the Income Years, Z Co did not have the requisite ownership interests in A Co in its own right (or together with any of its affiliates) for the purposes of subsection 328-125(2).

3.     However, as X Co directly controlled A Co for the purposes of subsection 328-125(2) during each of the Income Years, by virtue of the affiliate-inclusive test in subsection 328-125(2), Z Co will have directly controlled A Co if X Co was an affiliate of Z Co for each of the Income Years.

Whether X Co was an 'affiliate' of Z Co

4.     Common relationships or links between an entity and the potential affiliate may support a conclusion that the potential affiliate will act as the entity directs or wishes, or in concert with the entity, in respect of the potential affiliate's business affairs. In particular, such links may reveal that each entity is ultimately controlled or owned by the same group of individuals and may give the entity the ability to influence or direct the way in which the potential affiliate conducts its business (see TR 2002/6, at paragraph 105).

5.     X Co and Z Co share one common director and shareholder, being Individual C (who is also the CEO of Z Co). Further, there are shareholders and directors of both companies who have a familial or other personal relationship with Individual C.

6.     However, it is necessary to examine whether these common relationships and links amounted to a relationship of control or influence of sufficient strength to enable Z Co to direct or influence X Co's actions in relation to all, or a substantial part of, the affairs of its business.

7.     Therefore, it is necessary to have regard to the full facts and circumstances to determine whether, despite the presence of these relationships and links, X Co acted, or could reasonably have been expected to act, in the relevant way during the Income Years.

8.     The relevant facts and circumstances relating to the relationship between X Co and Z Co do not indicate that the presence of the common links and relationships between X Co and Z Co enabled Z Co to direct or influence X Co's conduct or actions in relation to its business affairs, or that the shareholders and directors of Z Co attempted to do so during the Income Years.

9.     Likewise, the facts do not establish that the business of X Co had a substantial degree of connection with, or dependence on, the business of Z Co, such that the two companies were acting together in pursuit of the common objective of the carrying on of X Co's business. Apart from having the same registered office address, X Co and Z Co appear to operate as separate businesses and do not coordinate or consult with each other in respect of their business affairs.

10.  Accordingly, based on the relevant facts and circumstances, X Co did not act, nor could it reasonably have been expected to act, in accordance with Z Co's directions or wishes, or in concert with Z Co, in relation to its business affairs during the Income Years. Therefore, X Co was not an affiliate of Z Co under section 328-130 during the Income Years.

11.  As such, Z Co did not directly control A Co under subsection 328-125(2) during the Income Years.

Whether Z Co indirectly controlled A Co

12.  It is also necessary to consider whether Z Co indirectly controlled A Co within the meaning of subsection 328-125(7) during the Income Years. As A Co was directly controlled by X Co during the Income Years, it is necessary to consider whether Z Co controlled X Co.

13.  During each of the Income Years, Z Co did not have the requisite ownership interests in X Co in its own right (or together with any of its affiliates), nor did it directly control X Co by virtue of any affiliates, for the purposes of subsection 328-125(2).

14.  Therefore, Z Co did not indirectly control A Co under subsection 328-125(7) during the Income Years.

Control Test 2: Whether A Co controlled Z Co

Whether A Co directly controlled Z Co

15.  During each of the Income Years, A Co did not have the requisite ownership interests in Z Co in its own right (or together with any of its affiliates) for the purposes of subsection 328-125(2).

16.  However, as it is also possible for A Co to directly control Z Co for the purposes of subsection 328-125(2) by virtue of its affiliates, it is necessary to consider whether any other entities - which had the requisite ownership interests in Z Co during the Income Years - were affiliates of A Co during the Income Years.

Whether Individual C was an 'affiliate' of A Co

17.  Based on the facts, Individual C directly controlled Z Co under paragraph 328-125(2)(b) during the Income Years. Therefore, it is necessary to consider whether Individual C was an affiliate of A Co during the Income Years.

18.  As Individual C does not carry on their own business, they cannot be an affiliate of A Co for the purposes of section 328-130.

19.  Accordingly, A Co did not directly control Z Co under subsection 328-125(2) during the Income Years.

Whether A Co indirectly controlled Z Co

20.  As the majority shareholder in Z Co is Individual C in their individual capacity, the indirect control test in subsection 328-125(7) does not apply in relation to determining whether any entities indirectly controlled Z Co.

21.  Therefore, A Co did not indirectly control Z Co under subsection 328-125(7) during the Income Years.

Control Test 3: Whether A Co and Z Co were controlled by the same third entity

22.  The third control test to determine whether A Co and Z Co were 'connected' under subsection 328-125(1) is whether they were controlled (directly or indirectly) by the same third entity, in accordance with paragraph 328-125(1)(b).

23.  A Co and Z Co were controlled by the same third entity during the Income Years where they were both controlled by X Co (as the direct controller of A Co), or by Individual C (as the direct controller of Z Co).

Whether Individual C was an 'affiliate' of X Co

24.  For the purposes of subsection 328-125(2), X Co will have directly controlled Z Co if Individual C was an affiliate of X Co under section 328-130 during each of the Income Years.

25.  As Individual C does not carry on their own business, they cannot be an affiliate of X Co for the purposes of section 328-130.

Whether X Co was an 'affiliate' of Individual C

26.  For the purposes of subsection 328-125(2), Individual C directly controlled A Co if X Co was an affiliate of Individual C during each of the Income Years.

27.  In accordance with subsection 328-130(2), an individual or company is not automatically an affiliate merely because of the formal position they hold or the formal business relationship they share with the other entity. For example, subsection 328-130(2) states that a company and its directors are not affiliates by reason only of the nature of the business relationship they share.

28.  Therefore, the mere fact that Individual C is a director and shareholder of X Co does not, in itself, lead to the conclusion that X Co was an affiliate of Individual C if it acted, or could reasonably have been expected to act, in the relevant way due to the nature of that business relationship.

29.  Based on the relevant facts and circumstances, there is nothing to suggest that X Co acted, or could reasonably have been expected to act, in the relevant way beyond this business relationship with Individual C. As a result, X Co was not an affiliate of Individual C under section 328-130 during the Income Years.

30.  Accordingly, A Co and Z Co were not controlled by the same third entity under paragraph 328-125(1)(b) during the Income Years.

Conclusion

31.  For the purposes of determining A Co's aggregated turnover for each of the Income Years, A Co was not 'connected with' Z Co under subsection 328-125(1) during each of the Income Years, as neither entity controlled the other entity, nor were they controlled by the same third entity.

Question 4

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 for each of the Income Years, was Y Co an 'affiliate' of A Co under section 328-130 at any time during each of the Income Years?

Summary

Y Co was not an 'affiliate' of A Co under section 328-130 at any time during each of the Income Years, as Y Co did not act, nor could it reasonably have been expected to act, in accordance with A Co's directions or wishes, or in concert with A Co, in relation to Y Co's business affairs.

Detailed reasoning

Whether Y Co acted, or could reasonably have been expected to act, in accordance with A Co's directions or wishes

1.    To determine whether Y Co acted in the relevant way in the Income Years, it is necessary to examine the actual conduct and actions of Y Co and A Co, including the decision-making processes followed by Y Co and whether they were directed or influenced by A Co.

2.    Based on the relevant facts and circumstances, there is no evidence to indicate that Y Co acted in accordance with A Co's directions or wishes in relation to Y Co's business affairs during the Income Years. However, it is also necessary to consider whether Y Co could reasonably have been expected to act in the relevant way during the Income Years, despite not actually having done so.

3.    It can reasonably be expected that a potential affiliate would have acted in the relevant way where the other entity is in a relationship of control or influence over the potential affiliate (see TR 2002/6, at paragraph 51). The conclusion that such a relationship existed may be based on inferences drawn from events, transactions or patterns of behaviour which show that the entity has been able to direct or influence the potential affiliate's behaviour, and the presence of a relationship between the entities which has enabled the entity to influence or direct the potential affiliate in relation to its business affairs (see TR 2002/6, at paragraph 52).

4.    Accordingly, the Commissioner has considered any common relationships or links between A Co and Y Co which might indicate a relationship of control or influence and provide a mechanism by which A Co could seek to direct or influence the actions of Y Co.

5.    In this regard, the companies share common directors, and Individual B is the CEO and a minority shareholder of both companies. There are also familial and other personal relationships between the directors and shareholders of the companies.

6.    However, even where such relationships or links are present, they must be of sufficient strength to enable the other entity to direct or influence the potential affiliate's actions in relation to all, or a substantial part of, the affairs of the potential affiliate's business (see TR 2002/6, at paragraph 54). Therefore, it is necessary to consider any other factors and circumstances relating to the relationship between the entities which might indicate that the potential affiliate could not reasonably have been expected to act in the relevant way, despite the presence of these common relationships and links.

7.    While Individual B and Individual C are common directors of Y Co, the facts indicate that Y Co conducted its business separately from A Co, and A Co's practice was not to involve itself in the business affairs of Y Co, including its day-to-day management and decision-making processes.

8.    Based on this evidence of the actual practices between A Co and Y Co, the presence of the common links and relationships between the companies is not a sufficient basis to conclude that A Co was able to direct or influence Y Co's conduct or actions in relation to all, or a substantial part of, its business affairs.

9.    Therefore, based on the relevant facts and circumstances, Y Co could not reasonably have been expected to act in accordance with A Co's directions or wishes in relation to Y Co's business affairs during the Income Years.

Whether Y Co acted, or could reasonably have been expected to act, in concert with A Co

10.  Y Co will be regarded as acting 'in concert' with A Co in relation to Y Co's business affairs where Y Co and A Co acted, or could reasonably have been expected to act, together in pursuit of a common goal or objective - with that common goal or objective being the carrying on of Y Co's business with a substantial degree of connection with, or dependence on, the business carried on by A Co. The degree of that connection must be such that the business carried on by Y Co cannot be viewed as separate or independent from the business carried on by A Co.

11.  Further, an 'affiliate' relationship will only exist where Y Co acted, or could reasonably have been expected to act, in the relevant way in relation to its own business affairs.

12.  While the facts and circumstances relating to the relationship between Y Co and A Co demonstrate that there was a degree of coordination and cooperation between Y Co and A Co, the nature of the relationship between the companies is such that this was largely directed towards the business affairs of A Co.

13.  On balance, the facts do not establish that Y Co's business had a substantial degree of connection with, or dependence on, the business of A Co or that the two companies were acting together in pursuit of the common objective of the carrying on of the business of Y Co. Rather, A Co was not involved in the business affairs of Y Co.

14.  Accordingly, based on the full facts and circumstances, there is not a sufficient basis to conclude that Y Co acted, or could reasonably have been expected to act, in concert with A Co, in relation to its business affairs during the Income Years.

Conclusion

15.  For the purposes of determining A Co's aggregated turnover for each of the Income Years, Y Co was not an affiliate of A Co under section 328-130 at any time during the Income Years.

Question 5

For the purposes of determining the 'aggregated turnover' of A Co under section 328-115 for each of the Income Years, was Z Co an 'affiliate' of A Co under section 328-130 at any time during each of the Income Years?

Summary

Z Co was not an 'affiliate' of A Co under section 328-130 at any time during each of the Income Years, as Z Co did not act, nor could it reasonably have been expected to act, in accordance with A Co's directions or wishes, or in concert with A Co, in relation to Z Co's business affairs.

Detailed reasoning

Whether Z Co was an 'affiliate' of A Co

1.     With respect to any common relationships and links between Z Co and A Co, Individual C is a director and minority shareholder of A Co and a director, shareholder and the CEO of Z Co. The other directors and shareholders of Z Co have a close familial relationship with Individual C. There are also familial or other personal relationships between some of the shareholders and directors of A Co and Individual C.

2.     However, for an entity to be an 'affiliate', these relationships and links between the entities must be of sufficient strength to enable the other entity to direct or influence the potential affiliate's actions in relation to all, or a substantial part of, the affairs of the potential affiliate's business.

3.     Therefore, it is necessary to have regard to evidence of events, transactions or patterns of behaviour relating to the relationship between A Co and Z Co to determine whether Z Co acted, or could reasonably have been expected to act, in the relevant way during the Income Years, notwithstanding the presence of these relationships and links.

4.     Viewed together, the facts relating to the relationship between Z Co and A Co indicate that the companies operate as independent businesses, with no direct consultation or coordination with each other and no involvement by A Co in the management or operation of Z Co, including participating in meetings of the Board of Directors.

5.     Further, despite the common links and relationships between the two entities, there is no evidence to suggest that A Co has been involved in, or attempted to direct or influence, Z Co's conduct or actions in respect of all, or a substantial part of, its business affairs.

6.     Accordingly, based on the relevant facts and circumstances, there is not a sufficient basis to conclude that Z Co acted, or could reasonably have been expected to act, in accordance with the directions or wishes of A Co, or in concert with A Co, in relation to its business affairs during the Income Years.

Conclusion

7.     For the purposes of determining A Co's aggregated turnover for each of the Income Years, Z Co was not an 'affiliate' of A Co under section 328-130 at any time during the Income Years.