ATO Interpretative Decision

ATO ID 2003/846

Income Tax

CGT small business concessions: net asset test - connected entities - Commissioner's discretion to determine control of entity
FOI status: may be released

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Issue

If one shareholder in a company has a control percentage under paragraph 152-30(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) of at least 40% but less than 50%, can the Commissioner determine under subsection 152-30(3) of the ITAA 1997 that that shareholder does not control the company if there is no other shareholder with a control percentage of at least 40%?

Decision

No. If one shareholder in a company has a control percentage of at least 40% but less than 50%, the Commissioner cannot determine under subsection 152-30(3) of the ITAA 1997 that that shareholder does not control the company if there is no other shareholder with a control percentage of at least 40%.

Facts

Company A conducts a business. It has 10 shareholders. Company B owns 45% of the shares in company A. The other shareholders each hold between 0.5% and 20% of the shares in company A. None of the shareholders are small business CGT affiliates of each other.

Company A has five directors, two of whom are also directors of company B.

The day-to-day operations of the company are the responsibility of its managing director who has no other association with company B. The directors of company B are not involved in the day-to-day operations of company A.

The net value of company B's CGT assets exceeds $5 million.

Company A sold an asset and made a capital gain.

Reasons for Decision

One of the basic conditions that must be satisfied to qualify for small business relief in Division 152 of the ITAA 1997 is the maximum net asset value test in section 152-15 of the ITAA 1997.

A taxpayer will satisfy the maximum net asset value test if, just before the CGT event that results in the capital gain, the net value of the CGT assets of the taxpayer and the following entities does not exceed $5 million:

•: any entities connected with the taxpayer,
•: any small business CGT affiliates of the taxpayer and any entities connected with a small business CGT affiliate of the taxpayer (subject to certain exclusions).

An entity is connected with another entity if either entity controls the other or both entities are controlled by the same third entity (subsection 152-30(1) of the ITAA 1997).

An entity controls a company if it, its small business CGT affiliate or both of them together beneficially own, or have the right to acquire beneficial ownership of, shares in the company that give at least 40% (the control percentage) of the voting power in the company (paragraph 152-30(2)(b) of the ITAA 1997).

If an entity's control percentage in a company is at least 40% but less than 50%, the Commissioner may determine under subsection 152-30(3) of the ITAA 1997 that the first entity does not control the company if the Commissioner is satisfied, or thinks it reasonable to assume, that the company is controlled by a third entity (other than a small business CGT affiliate of the first entity).

For the company to be controlled by a third entity the third entity must have a control percentage of at least 40% in the company. That is, it must control the company in the way described in subsection 152-30(2) of the ITAA 1997. The interests of several entities are not added together to determine this control percentage (apart from the interests of any small business CGT affiliates of the third entity).

In other words, for the Commissioner to be able to consider the exercise of the discretion in subsection 152-30(3) of the ITAA 1997 there must be a single, identifiable third entity that has a control percentage (including the interests of any small business CGT affiliates) of at least 40% in the company. If this is not the case the Commissioner cannot determine that the first entity does not control the company.

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 then be necessary to consider additional factors such as who is responsible for the day to day and strategic running of the company to determine if the third entity controls it. In this situation it is possible that both of the entities having a control percentage of at least 40% may control the company if such responsibilities are shared.

In this particular case, the next largest shareholder in company A after company B holds 20%, and none of the shareholders are small business CGT affiliates of each other. As there is no third entity with a control percentage of at least 40%, the Commissioner is not able to determine that company B does not control company A.

Company B is therefore connected with company A and the net value of its CGT assets must be included in the maximum net asset value test for company A. As the net value of company B's CGT assets by itself exceeds $5 million, company A does not satisfy the maximum net asset value test, and accordingly the small business CGT concessions are not available.

Date of decision: 21 August 2003

Year of income: Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 152-15
   section 152-30
   subsection 152-30(1)
   subsection 152-30(2)
   paragraph 152-30(2)(b)
   subsection 152-30(3)

Keywords
Basic conditions for relief
Capital gains tax
CGT small business relief
Connected entity
Maximum net asset value test

Business Line: Losses and CGT Centre of Expertise

Date of publication: 19 September 2003

ISSN: 1445-2782

history

	Date:	Version:
You are here	21 August 2003	Original statement
	11 March 2005	Archived

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