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  • Control interests in a company, trust or partnership

    Thin capitalisation control interests are used to determine whether an entity is an Australian controller of an Australian controlled foreign entity and also when an Australian entity is foreign controlled. They are also used to determine whether a foreign corporate limited partnership is Australian controlled.

    The concept of thin capitalisation control interest is not used to establish whether a foreign company or trust is Australian controlled. The terms 'controlled foreign company' and 'controlled foreign trust' are contained in Part X of the ITAA 1936 and the concept of control used in those definitions is also wholly contained in Part X.

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    An entity's thin capitalisation control interest is the total of all of the following at that time:

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    Thin capitalisation direct control interests

    In the case of a company, thin capitalisation direct control interests include the interests an entity directly holds, or is entitled to acquire (for example, through the exercise of options), in the company including, at that time, the:

    • total paid-up share capital of the company
    • total rights of shareholders to vote or participate in decision making about
      • making distributions of capital or profits
      • changes to the constituent documents of the company, or
      • variations to share capital
       
    • total rights to distributions of capital or income upon winding-up of the company
    • total rights to distributions of capital or income upon events other than winding-up of the company.

    There are some further rules dealing with determining the percentage of rights to distributions and direct control interests.

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    Example 1: Direct control interests in a company

    An Australian entity holds 75% of the issued share capital of a foreign entity.

    Example of direct control interests in a company

    The thin capitalisation direct control interest of the Australian entity would be 75%.

    End of example

    Interests in the income or corpus of trusts held by beneficiaries

    In the case of a trust, the thin capitalisation direct control interests are those interests in the income or corpus of trusts held by beneficiaries. Specifically, a thin capitalisation direct control interest in a trust is the percentage of interest an entity holds, or is entitled to acquire, in the income or corpus of the trust, whichever is the greater. There are some further rules dealing with determining the percentage of rights to income and capital.

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    Corporate limited partnerships and others

    In a corporate limited partnership, a general partner always has a thin capitalisation direct control interest of 100% in that partnership. If the partnership is not a corporate limited partnership, the thin capitalisation direct control interest equals the percentage control of voting power in the partnership.

    As an alternative for both corporate limited partnerships and other partnerships, the thin capitalisation direct control interest of a partner is equal to the percentage the partner holds, or is entitled to acquire, of any of the following:

    • the total amount of assets or capital contributed to the partnership
    • the total rights to distribution of capital, assets, or profits on dissolution
    • the total rights to distribution of capital, assets, or profits otherwise than on dissolution.

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    More than one type of direct control interest

    If an entity holds more than one type of thin capitalisation direct control interest (for example, the entity holds both the right to income and the right to capital), the greatest percentage is taken to be the thin capitalisation direct control interest.

    Example 2: Differing rights

    An entity holds 50% of the voting rights and a right to 25% of the capital of an entity. The thin capitalisation direct control interest in the entity is 50%.

    End of example

    Thin capitalisation indirect control interests

    An entity can have a thin capitalisation control interest in another entity, even though it does not hold any direct interest in that other entity. As outlined in Thin capitalisation direct control interests, a thin capitalisation control interest includes any thin capitalisation indirect control interests held in another entity. Such thin capitalisation indirect control interests are those interests an entity holds in another entity via direct interests held in an interposed entity.

    Example 3: Direct and indirect control interests

    Entity A holds a 100% thin capitalisation direct interest in entity B. Entity B holds a thin capitalisation direct control interest in entity C of 75%. Entity A has an indirect control interest in entity C of 75%, measured by tracing through the interest held through B.

    Example of TC indirect control interests

    End of example

    Interposed entities

    If the thin capitalisation control interest is being measured to determine whether an Australian entity is foreign controlled, an interest can be traced through an interposed entity only if the interposed entity is itself a foreign controlled Australian entity.

    If the thin capitalisation control interest is being measured to determine whether a foreign entity is Australian controlled or whether an Australian entity is an Australian controller of an Australian controlled foreign entity, an interest can be traced through an interposed entity only if the interposed entity is itself an Australian controlled foreign entity.

    In certain circumstances, the direct interest the entity holds in the interposed entity is taken to be 100% for the purpose of measuring indirect control.

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    Thin capitalisation direct and indirect interests of associate entities

    The total thin capitalisation control interests of an entity also include any thin capitalisation direct or indirect interests that are held by an entity's associate entities, subject to the two exceptions mentioned below. The effect of this is that an Australian entity can still be an Australian controller even though that Australian entity may not hold any thin capitalisation direct or thin capitalisation indirect control interests of its own.

    However, in two circumstances, the total thin capitalisation control interests of an entity will not include the thin capitalisation control interests of the entity's associate entities:

    1. If the associate entity is only an associate entity because of the rule contained in subsection 820-905(3B) of the ITAA 1997, the associate entity's thin capitalisation control interests are not included.

    Example 4: Associate entity because of the subsection 820-905(3B) rule

    Company A owns 100% of company B. Company B is an associate entity of company A under subsection 820-905(1) of the ITAA 1997. Company A is then an associate entity of company B under subsection 820-905(3B) of the ITAA 1997. When measuring company B's thin capitalisation control interest, any thin capitalisation control interests held by company A are ignored.

    End of example
    1. If the associate entity is a foreign entity and is only an associate entity because of the rule contained in subsection 820-905(3A) of the ITAA 1997, the associate entity's thin capitalisation control interest is also not included.

    Example 5: Associate entity because of the subsection 820-905(3A) rule

    A foreign company (For Co) has a 100% Australian subsidiary (Aust Co) and a 100% foreign subsidiary (FE Co). FE Co has several wholly owned foreign subsidiaries. Aust Co and FE Co are associate entities of each other under subsection 820-905(3A) of the ITAA 1997. When Aust Co calculates its thin capitalisation control interests in any foreign entities, it does not include any thin capitalisation control interests held by FE Co in FE Co's foreign subsidiaries. Also, Aust Co would also not include any thin capitalisation control interests held by its parent entity, For Co, because of the first rule outlined above.

    End of example

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    Last modified: 09 Mar 2016QC 48159