Concepts
Associate
An associate is a person or entity closely linked to you, such as a relative, partner or related company, and tax rules often treat dealings between associates with extra scrutiny.
In tax law, an associate is someone with a relationship to you that is close enough that dealings between you might not be on normal commercial terms. Typical associates include relatives, business partners, companies you control, trusts you influence and the trustees of those trusts. The detailed definition varies depending on which part of the tax law is being applied, so the same person may be an associate for one rule and not another.
The reason associates matter is the risk that transactions are not conducted at arm's length. If a company pays a director's spouse a wage that is far above market rate, or a business sells an asset to a relative at an artificially low price, the tax outcome might not reflect the real value. To deal with this, the law often substitutes market value, limits deductions or treats amounts as if they were received.
Several areas of tax use the concept. Capital gains tax can use market value for disposals between related parties. Rules about the payment of wages to relatives require them to be reasonable for the work done. Division 7A, which deals with private company loans, payments and debt forgiveness to shareholders and their associates, is a well-known example of an associates-based rule that can create a deemed dividend if the proper steps are not followed.
For GST, the concept appears where a supply is made to an associate for little or no consideration. In some situations, such as a supply of goods or services made without consideration to an associate, the law deems the value to be the market value, so GST might apply even though no money was paid. The detail depends on the type of supply and whether the parties are registered and entitled to credits.
A practical way to manage the risk is to treat associate dealings the same way you would treat a stranger. Use written agreements, charge and pay market-based prices, document how a price was set, and keep invoices and payment records. If wages or loans are involved, keep timesheets and loan agreements. This helps show that the transaction reflects commercial reality and makes any review easier.
A common misunderstanding is believing that dealing with family automatically triggers adverse tax outcomes. It does not, provided the dealings are properly documented and at market value. The risk arises when amounts do not reflect genuine commercial terms. Another is overlooking that a company or trust you control is also an associate. This is general information only, so confirm how the rules apply to you with the ATO or a registered tax professional.
Worked example
A business owner hires his adult daughter to do bookkeeping for 10 hours a week. The market rate for similar work is $45 an hour, which is $450 a week. If he pays her $450, the wages are likely to be a reasonable deduction. If he pays $1,500 for the same work, the ATO may treat the excess of $1,050 as not deductible because it is not a commercial payment.
Practical tips
- Deal with associates on documented, market-based terms and keep the records.
- Remember that companies and trusts you control are associates too, and that loans from a private company to you can be caught by special rules.
- Ask a professional before undervaluing a sale or transfer to a relative.