Relevance

There are many basic requirements which need to be satisfied by an entity to gain access to the Small Business CGT Concessions.  These include the either the CGT Small Business Entity Test or the Maximum Net Asset Value Test as well as the Active Asset Test.

Each of these tests refer to connected entities and affiliates in some way.

Affiliates

An affiliate of an entity can only be an individual or company, which carries on a business, and only if the individual or company acts, or could reasonably be expected to act, in accordance with the entity’s directions or wishes, or in concert with the entity, in relation to the affairs of the business of the individual or company.

Now there’s a lot in that, so let’s break it down.

Firstly, an affiliate can only be an individual or company.  So this excludes partnerships, trusts and superannuation funds.  And trusts and superannuation funds remain excluded even if they have an individual or company trustee.

Secondly, to be an affiliate the individual or company has to carry on a business.  If it doesn’t, it can’t be an affiliate.

Thirdly, to be an affiliate the individual or company has to either:

1. Act or reasonably be expected to act in accordance with the entity’s directions or wishes in relation to the affairs of the business of the individual or company; or

2. Act or reasonably be expected to act in concert with the entity in relation to the affairs of the business of the individual or company.

So for both of these requirements the “actions” are undertaken by the potential affiliate in relation to their business, based on some kind of influence from the entity or where working together with the entity.

But this doesn’t extend to cover actions that are undertaken merely because of business relationships that might be shared.  For example, partners in a partnership or directors in a company would not automatically be affiliates.

The factors that are generally considered when assessing whether potential affiliate relationships exists include:

1. Whether there are close family relationships between the parties;

2. Whether there are any formal agreements or relationships between the parties dictating how the parties are to act in relation to each other;

3. Whether the way the parties act in relation to each other would be based on the relationship between the parties rather than based on formal agreements or legal or fiduciary obligations; and

4. The actions of the parties.

Connected entities

Entities are connected with each other if either entity controls the other entity or both entities are controlled by the same third entity.

The test for whether an entity controls another entity depends on the type of entity being controlled.

For companies, an entity should control a company where the entity and its affiliates own interests in the company that carry rights to at least 40% of distributions of income, distributions of capital or voting power.

For unit trusts, an entity should control a unit trust where the entity and its affiliates own interests in the unit trust that carry rights to at least 40% of distributions of income or distributions of capital.

For partnerships, an entity should control a partnership where the entity and its affiliates own interests in the partnership that carry rights to at least 40% of the net income of the partnership.

For discretionary trusts, an entity should control a discretionary trust where either:

1. The trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity and its affiliates; or

2. The percentage of income or capital that has been paid or applied to the entity and its affiliates is at least 40% of the total income or capital paid or applied by the trustee in any one of the four tax years immediately before the relevant tax year.

If an entity has a control percentage in another entity of 40% or more but less than 50% the Commissioner has a discretion to determine that the first entity does not control the second entity, but this will only apply if the Commissioner is satisfied that the second entity is controlled by another entity that is not the first entity nor the first entity’s affiliates.

Spouse or child under 18 affiliate rule

In broad terms, this rule operates where:

1. An entity (the “asset owner”) owns a CGT asset;

2. The CGT asset is used, or held ready for use, in the course of carrying on a business by another entity (the “business entity”); and

3. The business entity is not otherwise an affiliate of, or connected with, the asset owner.

Where those conditions are met, we must retest whether or not the business entity would be an affiliate of or connected with the asset owner if a test individual’s spouse and child under 18 years of age were taken for testing purposes to be the individual’s affiliate.

If as a result the business entity would become an affiliate of or connected with the asset owner, then:

1. The business owner will be taken to be an affiliate of or connected with the asset owner for the purpose of the Small Business CGT Concessions; and

2. The individual’s spouse or child is also taken to be an affiliate for the purpose of the Small Business CGT Concessions, including for testing which entities are connected with each other.

Disclaimer – The above is intended as commentary and general information only.  It should not be relied upon as taxation advice.  Formal taxation advice should be sought for particular transactions or on matters of interest arising from the above.