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Edited version of your written advice
Authorisation Number: 1051277315715
Date of advice: 4 September 2017
Ruling
Subject: Determination that an entity does not control another entity under subsection 328-125(6) of the Income Tax Assessment Act 1997
Question 1
Will the Commissioner exercise the power given to him by subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to determine that Company A was not controlled by Entity X?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commences on:
1 July 2016
Relevant facts and circumstances
Company A’s share capital is held 100% by a single entity, Company B.
Share capital in Company B is held by Y entities; Entity X and Entity Y.
Prior to a certain date in 2016, Entity Y held XX% and Entity X held YY% of shares in Company B.
On the same date, a transfer of shares from Entity X to Entity Y occurred which altered the share capital in Company B to XY% for Entity Y and XZ% for Entity X.
No changes have been made to share capital of Company B since the transfer of shares.
Entity Y holds a non-beneficial ownership in Company A.
Entity X holds a beneficial ownership in Company A.
With the exception of Company A, Entity Y has no relationship with or interest in other entities involving Entity X.
With the exception of Company A, Entity X has no relationship with or interest in other entities involving Entity Y.
Company A has X directors; Y of them whom were appointed by Entity Y and the other being Entity X.
Company A’s day to day management of the company is conducted by an arm’s length Chief Executive Officer.
The shareholders of Company A have established a shareholder’s agreement effective from a certain date in 2016. Summaries of the relevant clauses have been submitted.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 328-125(6)
Reasons for decision
Subsection 328-125(6) of the ITAA 1997 states the Commissioner may determine that an entity does not control another 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.
Application to your situation
The following facts were considered in determining whether Entity X has no control in Company A:
● Company A has X directors, Y of them were appointed by Entity Y and one being Entity X
● Company A’s day to day management is conducted by an arm’s length Chief Executive Officer
● The shareholder’s agreement allows Entity Y to appoint up to X directors, whereas Entity X is only entitled to appoint Y directors. Entity X may become a director of Company A without any prior approval or agreement. However, any additional director nominated by Entity X must receive prior approval or agreement from Entity Y
● The Agreement outlined that for each shareholder, director/ directors appointed by that shareholder would have a number of votes equal to the number of shares by that shareholder, regardless of number of directors present at the voting
● The Agreement provided that Entity Y had the sole right in determining the funding decision of Company A
● The Agreement presented in relation to Incentive Scheme of Company A, both Entity Y and Entity X must approve for the scheme to be implemented
From the above facts, it can be established that Entity X is capable of exercising some level of control with Entity Y on Company A. However, on balance, the commissioner is satisfied that Company A is ultimately controlled by Entity Y.
Under subsection 328-125(6) of the ITAA 1997, the Commissioner has determined that Entity X does not control Company A.
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