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  • Connected with you

    An entity is connected with another entity if:

    • either entity controls the other, or
    • both entities are controlled by the same third entity.

    For example, an entity is connected with you if that entity:

    • is controlled by you
    • controls you
    • is controlled by another entity that also controls you
    • is controlled by your affiliate
    • is controlled by you together with your affiliate
    • is controlled by an entity that you control (see the indirect control test).

    You work out whether a control relationship exists between entities using the control rules.

    CGT concessions

    When working out your aggregated turnover for the small business capital gains tax (CGT) concessions, an entity can be taken to be connected with another entity in certain circumstances – see Small business CGT concessions.

    Find out about:

    Control of a company

    You must consider whether you have an interest in any company and whether your affiliates have an interest in any companies.

    You control a company if you, your affiliates, or you together with your affiliates have either:

    • shares and other equity interests in the company that give you and/or your affiliates at least 40% of the voting power in the company
    • the right to receive at least 40% of any income or capital the company distributes.

    Example: Control of a company

    Lucy is a sole trader. Her interests in Cool Computers give her 30% of the voting rights in that company.

    Sean is Lucy's affiliate. He also owns interests in Cool Computers that gives him 30% of the voting rights in that company.

    Lucy controls Cool Computers because Lucy's interests and Sean's interests together give them the right to exercise more than 40% of the voting rights in Cool Computers. Lucy must include Cool Computers' and Sean's annual turnover when working out her aggregated turnover.

    End of example

    Control of a partnership

    You control a partnership if you, your affiliates, or you together with your affiliates have the right to 40% or more of the partnership's net income or capital.

    Example: Control of a partnership

    Olivia and Jill are partners in a professional practice. As they each have a 50% interest in the partnership, they each control the partnership and would, therefore, need to include the partnership's annual turnover when determining their eligibility.

    End of example

    Trusts

    There are specific aggregation rules applied to trusts and they can differ based on the type of trust.

    Control of a trust (other than a discretionary trust)

    You control a trust if you, your affiliates, or you together with your affiliates have the right to receive 40% or more of any income or capital the trust distributes.

    Control of a discretionary trust

    There are two tests for control of a discretionary trust. You control a discretionary (non-fixed) trust if you meet either of these tests.

    Distribution test

    You will meet the distribution test if, in any of the previous four income years, you, your affiliates or you together with your affiliates received a trust distribution of 40% or more of the total income or capital the trust distributed for that income year.

    Example: Control of a trust

    Gavin is working out whether he is an eligible small business for the 2017–18 financial year. In the 2014–15 income year, Gavin received a distribution from a discretionary trust which constituted 70% of the total amount of the income the trust distributed in that income year. Gavin controls that trust because he received a distribution of income in 2013–14 that was more than 40% of the total amount of income distributed that year. When working out his aggregated turnover, Gavin must include the annual turnover of the trust.

    End of example

    Influence over trustee test

    You meet the influence over the trustee test if the trustee either acts, or might reasonably be expected to act, according to the directions or wishes of you, your affiliate or you together with your affiliates.

    You must consider all the circumstances to work out whether you satisfy this test. For example, to prove that you had no influence over the trustee, it would not be enough for the trust deed to say the trustee must ignore your directions or wishes.

    Some factors you might consider include:

    • the way the trustee has acted in the past
    • the relationship between you and/or your affiliates and the trustee
    • the amount of property or services you and/or your affiliates transferred to the trust
    • any arrangement or understanding between you and any person who has benefited under the trust in the past.

    Control of a discretionary trust – trustee did not make a distribution

    Where the trustee of a discretionary trust did not make a distribution because the trust had a tax loss or no taxable income, the trustee can nominate up to four beneficiaries as controllers of the trust for that income year.

    The implications of being a nominated controller are different for the aggregation rules and the active asset test. For the purposes of the aggregation rules, if you are a nominated controller, you are not connected with the trust. This means that you do not have to include either the trust's annual turnover for the aggregated turnover test or the value of the trust's net assets when considering whether you meet the maximum net asset value test.

    For the purposes of the active asset test, if you are a nominated controller, you are connected with and are taken to control the trust for that income year. This means that an asset you hold can qualify as your active asset (and potentially be eligible for the CGT concessions) where it is used or held ready for use in the business of the trust. Additionally, if the asset you hold is an intangible asset such as goodwill, it can be your active asset if it is inherently connected with the business of the trust.

    Transitional rule – control of a discretionary trust

    Transitional rules can apply to stop you losing access to the former simplified tax system (STS) concessions because of the introduction of the 40% distribution test for discretionary trusts. These rules only apply for the purpose of accessing the following concessions.

    • Simplified depreciation rules
    • Simplified trading stock rules
    • Deductibility of prepaid expenses
    • Two-year amendment period

    This transitional rule allows you to use the distribution test that existed under the STS grouping rules rather than the 40% distribution test. Under the STS grouping rules, you control a discretionary trust if, in any of the previous four income years, the trustee of that trust made a distribution of $100,000 or more to you, your affiliates, or you and your affiliates together.

    Under the transitional rule, you do not control the trust if the distribution was greater than 40% but less than $100,000. This rule will only apply for distributions made before the 2007–08 income year. This provision will cease to have effect for the 2011–12 and later income years.

    Tax exempt entities and deductible gift recipients can never control a discretionary trust, regardless of the percentage of distributions they receive.

    The indirect control test

    This test is designed to look through business structures that include interposed entities. For example, where you directly control a second entity, and the second entity either directly or indirectly controls a third entity, you are taken to also control the third entity.

    Flowchart of the Indirect control test: A small business entity has 50% direct interest in Company A and a 50% direct and indirect interest in Company B and 30% direct and indirect interest in Company C.

    In the above figure, the small business has more than 40% direct and indirect interest in Companies A and B. Therefore, the small business controls Companies A and B but not Company C.

    Public entity exception

    The indirect control test does not apply if an entity controls a public entity and that public entity controls a third entity – unless the first entity actually controls the third entity (for example, because it holds 50% of the voting rights in the third entity, excluding interest held indirectly through the public entity).

    The types of public entities are:

    • companies whose shares are listed for quotation in the official list of an approved stock exchange, unless those shares are of a type that carry the right to a fixed dividend rate
    • publicly traded unit trusts
    • mutual insurance companies
    • mutual affiliate companies
    • any company where all of its shares are beneficially owned by one or more of any of the entities listed above.

    Discretion about the control test

    If you meet the 40% threshold under one of the control tests, we may determine that you do not control an entity if:

    • your control percentage is less than 50%, and
    • we are satisfied, or think it is reasonable to assume, that another entity actually controls the entity.

    However, it is possible that both you and another person or entity jointly control an entity if you each have a control percentage of at least 40% and you share the responsibilities.

    Example: Discretion about the control test

    Lachlan owns 48% of the shares in a private company. He plays no part in the day-to-day or strategic decision-making of the business. Daniel beneficially owns the other 42% of the shares in the company. The other 10% does not take part in the management of the business. All shares carry the same voting rights and Daniel makes all day-to-day and strategic decisions for the company. Even though Lachlan owns 48% of the shares in the company, he would not be taken to control the company if the Commissioner of Taxation was satisfied that the company is controlled by Daniel.

    End of example
    Last modified: 25 Jun 2018QC 50239