Edited version of your private ruling

Authorisation Number: 1012555872767

Ruling

Subject: Aggregated turnover

Question 1

For the purposes of calculating 'aggregated turnover' in sub-paragraph 230-455(4)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997), will the Commissioner exercise the discretion in sub-section 328-125(6) of the ITAA 1997 and determine that Company 2 does not control the Company in the 2013 and 2014 income years?

Answer

No

Question 2

For the purposes of calculating 'aggregated turnover' in sub-paragraph 230-455(4)(a)(ii) of the ITAA 1997, is Company 2 an affiliate of the Company under section 328-130 of the ITAA 1997 in the 2013 and 2014 income years?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 2013

Income year ending 30 June 2014

The scheme commences on:

01 July 2012

Relevant facts and circumstances

The Company is a proprietary company limited by shares.

All of the issued shares in the Company are ordinary shares.

Each share carries equal voting power.

The Company has two major shareholders; Company 3 (over 50%), and Company 2 (over 40%)

The Company has X Directors on its Board of Directors.

Y of the Directors were appointed by Company 3, Y were appointed by Company 2, and Ywere appointed by the Board.

The Company has a Managing Director.

Each Director has a right to one vote.

The Company has a business plan

The Business plan must be approved by the Board

The Board is responsible for the direction of the Company

The Board cannot undertake business without a quorum

There is no quorum unless one Director appointed by Company 2 is present and one Director appointed by Company 3 is present.

A resolution of the Board cannot be passed unless it is approved by one Director appointed by Company 2 and one Director appointed by Company 3.

The day to day operation of the Company is managed by the Managing Director.

The Company and Company 2 are in different areas of business.

The Company and Company 2 do not have business dealings with each other.

None of the Directors of the Company are Directors of Company 2.

Company 2 does not consult with the Company with regard to its business affairs.

The Company does not attempt to influence the business affairs of Company 2.

The Company and Company 2 are independent of each other, and do not share employees, business premises and bank accounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 230-455,

Income Tax Assessment Act 1997 Section 328-115,

Income Tax Assessment Act 1997 Section 328-125,

Income Tax Assessment Act 1997 Section 328-130 and

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Sub-paragraph 230-455(4)(a)(ii) of the ITAA 1997 provides that the Taxation of Financial Arrangement provisions in Division 230 of the ITAA 1997 will not apply if:

(ii) the entities aggregated turnover for the immediately preceding income year (worked out at the end of the immediately preceding income year) is less than $100 million if the income year is an income year after the one in which the entity comes into existence…

Section 995-1 of the ITAA 1997 states that 'aggregated turnover' has the meaning given by section 328-115 of the ITAA 1997, which provides:

(1) Your aggregated turnover for an income year is the sum of the relevant annual turnovers…

(2) The relevant annual turnovers are:

a) your annual turnover for the income year; and

b) the annual turnover for the income year of any entity (a relevant entity) that is connected with you at any time during the income year; and

c) the annual turnover for the income year of any entity (a relevant entity) that is an affiliate of yours at any time during the income year.

Entity that is connected with you

Sub-section 328-125(1) of the ITAA 1997 provides that an entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

Sub-section 328-125(2) of the ITAA 1997 provides that an entity controls a company if the entity, its affiliates, or the entity and its affiliates together, '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'.

It is accepted that Company 2 controlled the Company for the purposes of sub-section 328-125(2); Company 2 held at least 40% of the voting power in the Company in both years.

However, sub-section 328-125(6) of the ITAA 1997 gives the Commissioner power to determine that an entity with a control percentage of at least 40% but less than 50% in another entity does not control that other entity:

If the control percentage referred to in subsection (2) or (4) is at least 40%, but less than 50%, the Commissioner may determine that the first entity does not control the other entity if the Commissioner thinks that the other entity is controlled by an entity other than, or by entities that do not include, the first entity or any of its affiliates.

For the Commissioner to exercise the power to determine that an entity does not control another entity there must be a third entity that has a control percentage of at least 40 % in the other entity. That is, the third entity must control the other entity in the way described in sub-section 328-125(2). Where two entities have a control percentage in another entity of at least 40%, it is open to the Commissioner to determine that both of those entities control the other entity. In these circumstances, the Commissioner will not exercise the power under sub-section 328-125(6), as there is no one entity which controls the other entity.

Company 3 also held a control percentage in the Company of at least 40%. As such, both Company 2 and Company 3 control the Company in the way described in sub-section 328-125(2) of the ITAA 1997. In deciding whether to exercise the power in sub-section 328-125(6), it is necessary for the Commissioner to consider additional factors, such as who is responsible for the day to day and strategic decisions of the company, to determine if the other entity is controlled by a third entity.

Company 2 and Company 3 can appoint two directors to the Board of the Company. The Company has a Board with X Directors. Each Director has a right to one vote.

The Company is operated in accordance with a business plan, which must be approved by the Board of the Company. The Board is responsible for the direction of the Company. The Board cannot undertake business without a quorum, and for there to be a quorum there must be present at least one Director appointed by Company 2 and one Director appointed by Company 3. A resolution of the Board cannot be passed unless the resolution is approved by at least one Director appointed by Company 2 and one Director appointed by Company 3. The day to day operation of the Company is managed by the Managing Director.

The above shows that the strategic direction of the Company is set by its Board, Company 2 and Company 3 have equal influence over the Board, the Board can not consider a matter without a Company 2 Director and a Company 3 Director being present, and strategic decisions can not be made without the approval of both a Company 2 Director and a Company 3 Director.

The Commissioner considers that Company 2 and Company 3 share control of the Company. As such, the Commissioner will not exercise the power in sub-section 328-125(6) of the ITAA 1997.

Company 2 is 'connected with' the Company and its annual turnover should be included in the aggregated turnover of the Company.

Question 2

As discussed in question 1, the term 'aggregated turnover' as used in sub-paragraph 230-455(4)(a)(ii) of the ITAA 1997 has the meaning given in section 328-115 of the ITAA 1997, and includes 'the annual turnover for the income year of any entity (a relevant entity) that is an affiliate of yours at any time during the income year'.

Affiliate

Sub-section 328-130(1) of the ITAA 1997 provides that a company is an affiliate of yours if the company:

… acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the … company.

Sub-section 328-130(2) of the ITAA 1997 states that a company is not your affiliate merely because of the business relationship you and the company share.

Whether a company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, is a question of fact dependent on all the circumstances of the particular case. No single factor will necessarily be determinative.

Relevant factors that may support a finding that a company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, include:

· the existence of a close family relationship between the parties

· the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other

· the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations

· the actions of the parties.

Generally, a company is not acting in concert with you if it:

· has different employees

· has different business premises

· has separate bank accounts

· does not consult the other entity on business matters

· conducts its business affairs independently in all regards.

The Company and Company 2 operate in different areas of business and have no business dealings. There are no common Directors that manage the affair of both companies, and no common business arrangements between the two companies (they don't share premises, employees, bank accounts). Company 2 does not formally or informally seek out the Company for consultancy or advice, and the Company does not attempt to influence the business affairs of Company 2.

The relationship between Company 2 and the Company is based on a decision of Company 2 to invest in the Company. There is no evidence that there is anything other than a business relationship between the two companies.

The Commissioner does not consider that Company 2 would act, or could reasonably be expected to act in accordance with the Company's wishes or directions, or that Company 2 would act in concert with the Company, in relation to its business affairs. Company 2 is not an affiliate of the Company.

Although Company 2 is not an affiliate of the Company, it is an entity connected with the Company, as discussed in question 1, and the annual turnover of Company 2 should be included in determining the aggregated turnover of the Company.

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