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Edited version of your private ruling
Authorisation Number: 1012463516547
Ruling
Subject: CGT - Commissioner's discretion
Question
For the purposes of the connected entity provisions in section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997) and the maximum net asset value test under section 152-15 of the ITAA 1997, will the Commissioner determine that you do not control the company in accordance with the discretion provided under subsection 328-125(6) of the ITAA 1997?
Answer
No
This ruling applies for the following periods
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You hold shares in the company.
The shareholding of the company consists of X ordinary shares. You hold X ordinary shares with another entity (Z), holding the remaining X. There is also X Class A and X Class B shares on issue to separate entities you and Z are related to.
You are considering selling your interest in the company.
The ordinary shares have voting rights, dividend rights and the right to capital surplus on the winding up of the company.
The Class A and Class B shares have a discretionary right to dividends if declared in respect of those shares, but do not have any voting rights. They also carry the right to the return of capital to the paid up amount on the shares, but no right to the capital surplus of the company beyond this amount on the winding up of the company.
Your role in the company has been operational. You do not generally initiate or control investment, strategic or financial matters, nor have you been the direct contact for customers of the business.
Z is the Chairman and Secretary of the company.
The company's Memorandum of Association and Articles of Association provide that in the case of general meetings, where there is an equality of votes, the chairman of the meeting is entitled to a "second vote or a casting vote".
In accordance with the company's Articles of Association, the chairman of a meeting will generally be the Chairman of the Board of Directors. However if the Chairman of the Board of Directors is not present at a general meeting or is unwilling to act, the members present may elect another chairman for the meeting.
Contracts and other documents are signed by Z, unless Directors' signatures are specifically required.
Voting is not carried out at company meetings, as it is recognised that Z would generally have the second vote or casting vote under the Memorandum of Association and Articles of Association.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 328-125,
Income Tax Assessment Act 1997 section 328-125(1),
Income Tax Assessment Act 1997 section 328-125(2) and
Income Tax Assessment Act 1997 section 328-125(6).
Reasons for decision
The meaning of a connected entity is defined under section 328-125 of the ITAA 1997 which states as follows:
An entity is connected with another entity if:
(a) either entity controls the other entity in the way described in this section; or
(b) both entities are controlled in a way described in this section by the same third entity.
With regard to companies, you may establish control via either the right to distribution control rule (paragraph 328-125(2)(a) of the ITAA 1997) or the voting power control rule (paragraph 328-125(2)(b) of the ITAA 1997).
Paragraph 328-125(2)(a) of the ITAA 1997 provides that you control a company if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, interests in the company that carry between them the right to receive a percentage (the control percentage) that is at least 40% of any distribution of income or capital by the company.
Paragraph 328-125(2)(b) of the ITAA 1997 provides that you control a company if you, your affiliates, or you together with your affiliates 'beneficially own, or have the right to acquire the beneficial ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company'.
If your control percentage in a company is at least 40% but less than 50% the Commissioner may determine under subsection 328-125(6) of the ITAA 1997, that you do not control the other entity if the Commissioner thinks that the entity is controlled by a third entity (other than your affiliate).
We have established that subsection 328-125(2) of the ITAA 1997 deals with control percentages and for a company these can be in terms of income, or capital, or voting shares. In the event that these percentages differ, the highest percentage would be considered for the purposes of determining access to subsection 328-125(6) of the ITAA 1997. If the highest percentage is not 'less than 50%' you cannot access the Commissioner's determination provisions.
In this case, the only share class that provides the right to participate in the surplus assets on the winding up of the company is the ordinary shares. You hold X% of the ordinary shares on issue and therefore the right to X% of a capital distribution.
In accordance with paragraph 328-125(2)(a) of the ITAA 1997, you hold a control percentage in the company of X%. Accordingly, as your control percentage is not 'less than 50%', the discretion contained in 328-125(6) of the ITAA 1997 is not available and the Commissioner is unable to determine that you do not control the company.
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