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An entity controls another entity if it, its affiliates, or all of them together:
- beneficially own/s or has/have the right to acquire beneficial ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity, or
- if the other entity is a company, beneficially own/s, or has/have the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company.
The way in which an entity can directly control a company has been expanded from 2007-08 by replacing the term shares with equity interests. The meaning of an equity interest includes, but is not limited to, a share in a company.
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Olivia and Jill conduct a professional practice in partnership. As they each have a 50% interest in the partnership, they each control the partnership. The partnership is, therefore, connected with each partner, and Olivia and Jill are each connected with the partnership.
Yusef is a sole trader. He also owns shares in a company that carry 50% of the voting power in the company. The net value of his CGT assets (apart from the shares in the company) is $3 million. In determining whether he satisfies the maximum net asset value test, Yusef must take into account the net value of his CGT assets ($3 million) and the net value of the company's CGT assets because the company is connected with him. He does not include the market value of his shares in the company in the net value of his CGT assets because this amount is already reflected in the net value of the company's CGT assets.
At least 40% but less than 50% control
If an entity's control percentage in another entity is at least 40% but less than 50%, the Commissioner may determine that the first entity does not control the other entity if he is satisfied that a third entity not (including any affiliates of the first entity), controls the other entity.
For an entity to be controlled by a third entity, the third entity must also have a control percentage of at least 40% in the entity. That is, it must control the entity in the way described above. In working out the third entity's control percentage, the interests of any affiliates of the third entity are taken into account.
In other words, for the Commissioner to be able to determine that an entity does not control another entity (despite holding at least 40% interest in it), there must be a third entity that has a control percentage (including the interests of any affiliates) of at least 40% in the other entity.
Alternatively, it is possible that both of the entities with a control percentage of at least 40% may control the company if such responsibilities are shared.
X Co conducts a business and has 10 shareholders. Y Co owns 45% of the shares in X Co. The other shareholders each own between 2% and 20% of the shares in X Co. The shareholder holding 20% of the shares runs the company. All the shares have equal voting and distribution rights and none of the shareholders is an affiliate of another shareholder.
In this case, the next largest shareholder in X Co after Y Co owns 20%. As there is no third entity with a control percentage of at least 40%, the Commissioner cannot determine that Y Co does not control X Co.
If there was a third entity with a control percentage of at least 40% (that is, there were two shareholders with a control percentage of at least 40%) it would be necessary to consider additional factors to determine if the third entity controls it. Such additional factors could include who is responsible for the day-to-day and strategic running of the company.
Lachlan owns 45% of the shares in a private company. He plays no part in the day-to-day or strategic running of the business. Daniel owns the other 55% of the shares in the company. All shares carry the same voting rights and Daniel runs the company. Even though Lachlan owns 45% of the shares in the company, he would not be taken to control the company because the Commissioner would be satisfied that the company is controlled by Daniel.
Last modified: 20 Apr 2011QC 23096