Identify if you're connected with another entity including affiliates, and if a control relationship exists between entities.
When working out your aggregated turnover for small business concessions, an entity can be considered to be connected with you if it:
- 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).
To work out whether you control a company, you must consider both 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 (or the right to acquire them) in the company that give you and/or your affiliates at least 40% (the control percentage) of the voting power in the company
- interests (or the right to acquire them) with the right to receive at least 40% (the control percentage) of any income or capital the company distributes.
Example: working out 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 give 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 that company.
Lucy must include Cool Computers' and Sean's annual turnover when working out her aggregated turnover.End of example
You control a partnership if you, your affiliates, or you together with your affiliates, own interests (or the right to acquire interests) to receive 40% (the control percentage) or more of the partnership's income, net income or capital.
There are specific control rules for trusts that 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 (or the right to acquire) to receive 40% (the control percentage) or more of any income or capital the trust distributes.
Control of a discretionary trust
The 2 tests for determining control of a discretionary trust are the:
- distribution test
- influence over trustee test.
You control a discretionary trust if you meet either of these tests.
You meet the distribution test if in any of the previous 4 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.
Amounts paid to, or applied for the benefit of, the beneficiary or their affiliates are included in the calculations of trust distributions received. Distributions of income and capital are considered separately (that is, not added together) to determine if the 40% threshold is reached.
Public entities can also be considered to control a discretionary trust if distributions to them meet the 40% control percentage.
Tax-exempt entities and deductible gift recipients cannot control a discretionary trust using the distribution test. This is regardless of the percentage of distributions they receive.
Where a discretionary trust contributes to a superannuation fund for an employee who is also a beneficiary of the trust, this payment is not considered to be a distribution of income or capital of the trust. This is because the payment is made for the person in their capacity as employee and not in their capacity as beneficiary.
Example: working out control of a trust
Gavin is working out whether he is an eligible small business entity for the current income year.
Gavin must look at the trust distributions received by himself (and any of his affiliates) up to the 4 years prior to the current year to determine control in the current year.
Gavin received a distribution from a discretionary trust 3 years ago which is made up of 70% of the total amount of the income the trust distributed in the same income year.
Gavin controls that trust in the current financial year because he received a distribution of income 3 years ago that was more than 40% of the total amount of income distributed that year.
When working out his aggregated turnover to determine if he is a small business entity for the current income year, Gavin includes the annual turnover of the trust.End of example
Influence over trustee test
You meet this test if the trustee either acts, or might reasonably be expected to act, according to directions or wishes of you, your affiliate or you together with your affiliates.
You must consider all the circumstances to work out whether you meet 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 or your affiliates (or both) and the trustee
- the amount of property or services you or your affiliates (or both) transferred to the trust
- any arrangement or understanding between you and any person who has benefited under the trust in the past.
Trustee did not make a distribution
For the purposes of the small business CGT concessions, the trustee of a discretionary trust can also nominate up to 4 beneficiaries as controllers of the trust for an income year where:
- the trustee did not make a distribution of income or capital
- the trust had a tax loss or no taxable income.
The trustee may wish to make the nomination to ensure that a particular CGT asset is treated as an active asset for that income year. The nomination must be in writing and signed by the trustee and each nominated beneficiary.
A nominated beneficiary is connected with the trust (and the trust is connected with the nominated beneficiary) for the purposes of the:
- maximum net asset value test
- the aggregated turnover test
- active asset test.
If you meet the 40% threshold under one of the control tests, we may determine that you do not control an entity if both:
- your control percentage is less than 50%
- we are satisfied, or think it is reasonable to assume, that another entity controls the entity.
Whether or not a third entity has a control percentage of at least 40% may assist in determining whether the third entity controls the other entity, but it is not decisive.
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 is not taken to control the company if the Commissioner of Taxation is satisfied that the company is controlled by Daniel.End of example
This test is designed to determine control of 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 considered to also control the third entity.
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 that in turn controls a third entity.
However, you will still control the third entity if you have a control percentage in that entity - for example, because you directly hold more than 40% of the voting rights in the 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 have the right to a fixed dividend rate
- publicly traded unit trusts
- mutual insurance companies
- mutual affiliate companies
- any company where all its shares are beneficially owned by one or more of any of the entities listed above.