Neither a spouse nor a child is automatically your affiliate. You must consider whether they are acting according to your directions or wishes, or in concert with you, in relation to their business affairs.
However, where you own an asset that your spouse or child uses in a business they carry on as an individual, they will be taken to be your affiliate for the purposes of the:
- active asset test
- $6 million maximum net asset value test, and
- $2 million aggregated turnover test.
By child, we mean your child less than 18 years of age.
Your spouse or child may also be taken to be your affiliate where:
- an asset is owned by you and that asset is used in a business carried on by an entity that your spouse (or child) owns or has an interest in, or
- an asset is owned by an entity that you own or have an interest in, and that asset is used in a business carried on by your spouse (or child), or an entity that your spouse or child has an interest in.
Example: Spouse
Sue's spouse is taken to be her affiliate if she owns an asset that is used in the business of an entity her spouse owns. Similarly, Sue's spouse is taken to be her affiliate if an entity she owns leases an asset to an entity her spouse owns, and that entity uses the asset in business.
Your spouse or child is treated as your affiliate when working out whether the entity that owns the asset is an affiliate of, or connected with, the entity that uses the asset in their business. If by treating your spouse or child as your affiliate the result is that the business entity is taken to be an affiliate of, or connected with, the entity that owns the asset, then the affiliate rule will also apply to treat the spouse or child as an affiliate of the individual for the purposes of the small business CGT concessions in relation to:
- all the basic conditions for eligibility, and
- calculating aggregated turnover and net asset value.
This rule only applies in relation to eligibility for the small business CGT concessions, and not the other small business entity concessions.
If this second stage of the affiliate rule applies, it will also apply for any gain that arises from any asset that either the asset owner or the business entity, or the individual or their spouse or child, owns. This affiliate rule works both ways, so that the individual is also taken to be an affiliate of their spouse or child. However, it only applies for as long as:
- the person is their spouse or the child is under 18 years, and
- any asset is being passively held.
This affiliate rule for spouses and children also has application for the meaning of active asset.
This affiliate rule applies only if the business entity is not already an affiliate of, or connected with, the asset-owner.
The treatment of spouses and children as affiliates in certain circumstances changed as a result of the second round of changes for 2007-08 and later income years arising from the June 2009 amendments. If this would result in you being ineligible for the concessions, there is a transitional rule.
Under the first round of changes in 2007 to the meaning of affiliate for 2007-08 and later income years, spouses and children were not automatically affiliates. However, an asset held by a spouse or child was treated as an asset held by an affiliate for the purpose of the active asset test only. This was to ensure that an asset did not lose active asset status as a result of the amendments.
The term 'small business CGT affiliate' applied for the 2006-07 and earlier years. There are differences in the meanings of affiliate and 'small business CGT affiliate'. For 2006-07 and prior years, spouses and children were automatically 'small business CGT affiliates'.
Transitional rule
The transitional rule ensures you are not made ineligible for the concessions, for CGT events occurring prior to 19 March 2009, because of the June 2009 amendment to the affiliate rule and the retrospective application of that rule.
The affiliate rule that applied for spouses and children as a result of the June 2007 amendments applied only where the asset was held by an individual and was used in a business directly carried on by a spouse or child. It treated an asset used or held ready for use in or inherently connected with the business of a spouse or child as if it were used or held ready for use or inherently connected with a business carried on by your affiliate. This allowed your asset to be an active asset. However, this rule did not allow a CGT asset to be active where the taxpayer's spouse held an interest in an entity that used the CGT asset in its business, or the asset was not owned by an individual.
The June 2009 amendment to the affiliate rule expands the definition of affiliate to include a spouse or child of an individual, where an asset is held by one entity but used in the business of another. That entity could be an individual or a non-individual.
The transitional rule will apply if:
- you would satisfy the basic conditions as they existed following the June 2007 amendments, and
- you would not satisfy the basic conditions if the new rule about spouses and children applied to you following the June 2009 amendments.
If the transitional rule applies to you, then the following June 2009 amendments will only apply to CGT events that happen to your assets on or after 19 March 2009:
- the new basic conditions for passively-held assets and partner's assets
- the expanded definition of affiliate to include a spouse or child in passively-held asset cases.
If you are using the transitional rule, use the affiliate rule that applied following the June 2007 amendments for CGT events prior to 19 March 2009.
Example: Passively-held assets
Philip owns 100% of Horse Farm Pty Ltd, which owns land. Horse Farm Pty Ltd does not carry on a business. However, Philip's spouse, Crystal, owns Pig Farm Pty Ltd, which uses the Horse Farm land to carry on a business. In addition, Philip owns 30% of another entity, Carrot Pty Ltd, and Crystal owns 70% of Carrot Pty Ltd.
The amendments treat Crystal as Philip's affiliate in determining whether Pig Farm Pty Ltd (the entity that uses the land in its business) is connected with Horse Farm Pty Ltd (the entity that owns the land). The new affiliate rule applies because one entity (Horse Farm) owns a CGT asset that another entity (Pig Farm) uses in its business.
Pig Farm Pty Ltd is connected with Horse Farm Pty Ltd because Philip controls Horse Farm and Philip, together with his affiliate, Crystal, control Pig Farm. Horse Farm and Pig Farm are both controlled by the same third entity, Philip.
This makes the land that Horse Farm Pty Ltd owns an active asset. The land would also have to meet the requirements of the active asset test.
Therefore, Horse Farm Pty Ltd could access the small business CGT concessions if its maximum net asset value is not more than $6 million. Horse Farm could also access the concessions if Pig Farm's aggregated turnover is less than $2 million.
Because Crystal is treated as Philip's affiliate in determining whether Pig Farm is an affiliate of, or connected with, Horse Farm, Crystal is also treated as Philip's affiliate for testing whether Carrot Pty Ltd is connected with Horse Farm. Carrot is connected with Horse Farm because Philip controls Horse Farm and Philip, together with his affiliate, Crystal, control Carrot Pty Ltd.
In seeking access to the small business CGT concessions via the maximum net asset value test, Horse Farm Pty Ltd would need to include the net assets of its affiliates and entities connected with it (Pig Farm Pty Ltd and Carrot Pty Ltd).
In seeking access to the small business CGT concessions via the small business entity turnover test, Pig Farm's aggregated turnover would include the annual turnovers of its affiliates and entities connected with it (Carrot Pty Ltd if it carries on business and has turnover). Horse Farm Pty Ltd must not be carrying on business to qualify under this basic condition.
Are franchisees and franchisors affiliates?
Franchisees are not necessarily affiliates of the franchisor simply because of the franchise arrangement. Whether the franchisee acts in concert with the franchisor in respect of their franchise business depends on, among other things, the nature of the franchise agreement between them.
The affiliate relationship does not include the relationship between the 'controller' of an entity and the entity itself. The relationship in these situations is considered to be dictated more by obligations imposed by law, formal agreements and fiduciary obligations. Accordingly, companies, trusts and partnerships are not considered to be affiliates (and vice versa) of the various officers, persons and entities that are related to the company, trust or partnership in various capacities - for example, the trustees and beneficiaries of a trust, the directors and shareholders of a company, and the partners in a partnership.