Edited version of private advice

Authorisation Number: 5010102003892

Date of advice: 21 June 2024

Ruling

Subject: Aggregated turnover

Question 1

For the purposes of calculating the "aggregated turnover" of Company A under section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997)for the year ended DD MM YYYY and for the period DD MM YYYY to DD MM YYYY, and absent the exercise by the Commissioner of Taxation of his discretion under subsection 328-125(6) of the ITAA 97, does Company B "control" Company A under subsection 328-125(2)?

Answer

Yes.

Question 2

For the purposes of calculating the "aggregated turnover" of Company A under section 328-115 of the ITAA 1997 for the year ended DD MM YYYY and for the period DD MM YYYY to DD MM YYYY, will the Commissioner exercise his discretion under subsection 328-125(6) of the ITAA 1997 to determine that Company B does not "control" Company A?

Answer

Yes.

Question 3

For the purposes of calculating the aggregated turnover of Company A under section 328-115 of the ITAA 1997 for the year ended DD MM YYYY and for the period DD MM YYYY to DD MM YYYY, is Company B an "affiliate" of Company A under section 328-130 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

DD MM YYYY TO DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

The scheme that is the subject of this private ruling is identified and described in the following:

• Balance sheets of the Group of companies received on DD MM YYYY.
• Executed Shareholders' Agreement dated DD MM YYYY.
• Amendments to the Shareholders' Agreement dated:

o   DD MM YYYY

o   DD MM YYYY

• Company A Constitution dated DD MM YYYY.
• Irrevocable Proxy Agreement between Person A and Person B dated DD MM YYYY.
• Circular Resolution of Directors dated DD MM YYYY.

Company A was incorporated on DD MM YYYY.

The 'Group' comprises:

• Company A
• Company C
• Company D
• Company E.

The Group was established with the purpose of carrying on a mining technology business and generating profit. Its operations are substantial and conducted in a business-like manner.

The Group is not consolidated for tax purposes.

Company A owns 100% of the ordinary shares in Company D. Company D is an Australian resident company. Its directors have taken steps to deregister this company.

Company A owns 100% of the shares in Company E. Company E is a dormant corporation incorporated in the xxx.

Person A and Person B are the only directors of Company C and Company D. Person B is the company secretary of Company C and Company D.

Company A only has ordinary shares on issue that are held in the following proportions:

Table 1: Company A has ordinary shares on issue that are held in the following proportions:

Company B is a subsidiary of xxx Corporation, an entity listed on the xxx Stock Exchange.

Company B's investment in Company A has been undertaken for passive investment purposes.

The Company A Shareholders' Agreement (Shareholders' Agreement) dated DD MM YYYY frames the obligations of Company A, Company B, Person A and Person B.

The Shareholders' Agreement was amended by the Deed of Amendment and Restatement of Shareholders' Agreement dated DD MM YYYY.

Control of voting rights in Company A - Shareholders' Agreement

Each shareholder must exercise its rights as a holder of shares to ensure that management of Company A vests in the Board under clause 4.1 to clause 4.3.

Each shareholder must exercise its rights to ensure Company A conducts its business in accordance with its business plan and the Board approves and adopts a business plan before the start of each financial year under clause 4.3.

A quorum for a meeting of shareholders requires at least one representative of Company B to be present, in addition to Person A and Person B under clause 6.12.

Clause 16.1(a) provides Person A and Person B with a put option to require Company B to purchase their Company A shares at any time after the earlier of the Transfer Restriction Date, or a change of control event.

Clause 16.1(b) provides Company B with a call option to require Person A and Person B to sell their Company A shares to Company B at any time after the earlier of the Transfer Restriction Date, or a change of control event.

The Amendment to Shareholders' Agreement, effective as of DD MM YYYY, amended Clause 16.1(b) to extend the date Company B may exercise its call option to after DD MM YYYY. The Amendment to Shareholders' Agreement entered into as of DD MM YYYY, amends Clause 16.1(b) again to extend the date Company B may exercise its call option to after DD MM YYYY.

Board voting of Company A

Company B may appoint an additional 'Representative Director' however, no formal appointments have been made under Clause 6.3 of the Shareholders' Agreement.

The directors made a decision on DD MM YYYY (recorded in writing on DD MM YYYY) to not appoint any additional directors for the period DD MM YYYY to DD MM YYYY.

The Board of Company A does not report to the Board of Company B. The two boards function separately with no directors in common.

Each director has one vote to cast on Board resolutions for Company A.

The Chairman is entitled to a second or casting vote in matters where equal votes are cast by directors under clause 7.3 of the Shareholders' Agreement. This does not extend to shareholder meetings.

•         During the period DD MM YYYY to DD MM YYYY, no additional directors and therefore no Chairman was appointed to the Board of Company A.

•         As there were only three directors during the period in question, there was no possibility of equal votes being cast by directors and therefore there would never be a situation where a Chairman's vote was required.

The matters dealt with by the Board have been limited to reporting in relation to the agreed business plan and the financial data.

All Board meetings have been held in Australia via teleconference to allow the xx resident Company B appointed director (Company B's representative) to attend.

Person A and Person B typically set the agenda and run the Board meetings. Person C's involvement (as Company B's representative) has been limited to asking questions about the financial information.

The Deed of Amendment and Restatement of Shareholders' Agreement dated DD MM YYYY amended the threshold required to pass matters previously classed as requiring a Special Resolution or Unanimous Approval of Shareholders to only requiring an Ordinary Resolution under clause 2. As Person A and Person B hold the voting majority of Company A, most resolutions can be passed by a vote of Person A and Person B only.

Control of the Group

The strategic direction, decision making, and actions of the Group is determined by Person A and Person B. This is always done prior to the Board meetings and does not include the involvement of Company B's appointed director.

Person A and Person B are the Group's executive management team.

Company A is operated in accordance with a business plan that was developed by the executive management team and approved by the Board of Company A under Clause 4.3(b) of the Shareholders' Agreement. The executive management team ensures that the business plan is followed as part of the day-to-day operations.

The decision making and management of the day-to-day operations, including administration, legal and finance functions of the Group rests with Person A and Person B.

Person B oversees the day-to-day operations of the Group. Person A is responsible for the management of the R&D activities of the Group.

Person A and Person B established their own Advisory Committee for the Group:

•         The Advisory Committee consists of Person A and Person B and two independent advisors who are engaged on a permanent part-time basis.

•         The two independent advisors have no relationships with Company B.

•         Meetings are held for 1 hour weekly.

Person A and Person B and Company A's finance manager are the only signatories on the Group's bank accounts. No Company B representative is eligible to transact on the bank accounts.

Relationship between Company B, Company A and Company C.

Company B has provided debt funding to the Group of approximately $XXX. This is the only financial relationship between the Group and Company B.

Company B is required to provide the Group with access to its distribution channels under Clause 4.4 of the Shareholders' Agreement. However, in practice the Group has never utilised Company B to access these distribution channels.

The Group has also had direct dealings with some of Company B's distributors. These dealings have been negotiated without any direct or indirect assistance or involvement from Company B.

The only business dealing the Group has with Company B is the use of one of Company B's products in its R&D activities. Company B is not involved in these activities. The product provided by Company B is a standard product that has been modified by Company C, as it could be by any other customer.

The Group and Company B do not share common resources and do not operate together. In particular:

•         They use different accounting systems.

•         The Group is not dependent on Company B for access to loans or guarantees.

•         They do not share common banking facilities and are not signatories on each other's accounts.

•         There are no common flows of revenues. Revenues of each entity are derived and received separately.

•         Although they might share several suppliers, they purchase goods and services independently of each other and are not provided with any volume purchasing discounts.

•         They maintain separate client bases.

•         They have different employees.

•         They do not seek to pursue marketing opportunities through each other.

•         Company B does not communicate or negotiate with suppliers, clients or other key external stakeholders on behalf of the Group.

•         There are no close personal relationships between any key employees, including Board members and directors. There are no common directors.

•         There are no financial dependencies between the two groups.

•         Their affairs are conducted independently of each other.

Relationship of Person A and Person B

Person A and Person B are married to each other.

Person A and Person B always vote in the same way in relation to all decisions of the Group, in both their capacity as directors and shareholders.

Person A and Person B have entered into an agreement stating that they will vote as a block in respect of Board matters and shareholder matters.

Relationship between Company B, Person A and Person B

No personal relationships, financial dependencies or shared strategic decision making exists between Company B, Person A and Person B. There is nothing to indicate that Person A and Person B could be expected to act in accordance with the directions or wishes of, or in concert with, Company B, or vice versa.

Relationship between Company B's appointed director and Person A and Person B

Company B's appointed director (Person C) has no family or close personal relationships with Person A and Person B.

There are no circumstances to indicate Person A and Person B could be expected to act in accordance with the directions or wishes of, or in concert with, Company B in relation to the business of the Group, or vice versa.

There are no other relationships between these parties other than the requirements outlined in the Shareholders' Agreement.

Assumptions

That the Circular Resolution of Directors signed by Person A and Person B and Person C (Directors) on DD MM YYYY has the effect (among other things) that the Directors were prevented from appointing any additional directors pursuant to clause 6.3 of the Shareholders' Agreement dated DD MM YYYY from DD MM YYYY to DD MM YYYY.

Relevant Legislation

Income Tax Assessment Act 1997

•         Section 328-C

•         Subsection 328-115

•         Subsection 328-125

•         Section 328-130

•         Section 995-1.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Question 1

For the purposes of calculating the "aggregated turnover" of Company A under section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997)for the year ended DD MM YYYY and for the period DD MM YYYY to DD MM YYYY, and absent the exercise by the Commissioner of Taxation of his discretion under subsection 328-125(6) of the ITAA 1997, does Company B "control" Company A under subsection 328-125(2)?

Answer

Yes.

Relevant Legislation

Subsection 328-125(1) 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.

Direct control of an entity other than a discretionary trust, such as a company, is outlined in subsection 328-125(2).

Under paragraph 328-125(2)(b), an entity controls a company where an entity and/or its affiliates own or have the right to acquire the ownership of equity interests in the company that carry between them the right to exercise or control the exercise of at least 40% of the voting power in the company (the control percentage).

Application to your circumstances

Company B owns XX.X% of the shares Company A and so satisfies the control percentage requirement in paragraph 328-125(2)(b). As such Company B satisfies the direct control test contained in subsection 328-125(2).

Question 2

For the purposes of calculating the "aggregated turnover" of Company A under section 328-115 of the ITAA 1997 for the year ended DD MM YYYY and for the period DD MM YYYY to DD MM YYYY, will the Commissioner exercise his discretion under subsection 328-125(6) of the ITAA 1997 to determine that Company B does not "control" Company A?

Summary

The Commissioner is satisfied that Person A and Person B control Company A and its subsidiaries, Company C, Company D, and Company E (through their control of Company A). Therefore, the Commissioner will exercise his discretion under subsection 328-125(6) and determine that Company B does not control Company A.

Relevant Legislation

Subsection 328-125(6) of the ITAA 1997 states:

Commissioner may determine that an entity does not control another entity

328-125(6) 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.

Tax Determination 2023/5 Income tax: aggregated turnover and connected entities - Commissioner's discretion that an entity does not 'control' another entity provides guidance on the administration of the discretion in subsection 328-125(6).

There are three primary questions that test the connection between the entities based on 'control' as described in section 328-125. As see in paragraph 12 of the TD 2023/5:

•         who owns interest carrying rights to the economic benefits flowing from the entity in the form of income and capital distributions

•         who owns relevant interest carrying rights to exercise, or control the exercise of, voting power

•         who controls those responsible for managing the affairs of the business entity.

Paragraph 11 of TD 2023/5 states that:

Sole or primary responsibility for the day-to-day management of the affairs of the test entity, while not irrelevant to the question of who controls that entity, does not of itself constitute control for the purposes of the Commissioner's discretion in subsection 328-125(6). The context of the aggregated turnover rules in Subdivision 328-C, and the concept of 'control' that underpins the primary control tests, support this view.

Paragraph 13 provides that the nature of control relevant for the Commissioner's discretion is control over those matters typically associated with ownership of a business entity. That is, entitlement to income and capital of the entity as well as participation in decision-making on key matters affecting the entity's constitution, funding, structure and management. The latter would ordinarily include matters such as:

•         decision-making on the composition and oversight of the management team

•         amending the entity's constitution documents

•         deciding on capital and entity restructuring proposals, the issue of new ownership interests or winding up, and

•         authorising significant changes in the direction of the entity's business operations.

Paragraph 27 provides in order to form a view that a group of third entities controls the test entity, we would expect to see that the group has agreed to operate, and does operate, as a single controlling mind when it comes to decision-making generally in respect of the test entity. This might be in accordance with proxy arrangements that put voting power in the hands of one member of the group, or other legal arrangements under which the entities are broadly bound to act jointly in respect of the affairs of the test entity.

Paragraph 28 provides that while control by a group of entities could be established without the existence of a formal agreement to act jointly, strong evidence would be required to support assertions that there is joint control in such circumstances. We would closely scrutinise the nature of the relationship between the entities and ongoing patterns of behaviour in relation to the test entity to determine if there is a sound evidentiary basis for the Commissioner to think there is control of the test entity by a group.

Application to your circumstances

Control percentages

•         Company B

Company B has a control percentage of 43.7% under subsection 328-125(2). As this control percentage is between 40% and 50%, the Commissioner may exercise his discretion under subsection 328-125(6) to determine that Company B does not control Company A.

The Commissioner will need to be able to determine who has control of Company A and be satisfied that it is controlled by an entity other than, or by entities that do not include, Company B or any of its affiliates.

•         Person A and Person B

Person A and Person B each hold 28.15% of the shares in the Company. Person A and Person B control Company A as together they control the right to exercise 56.3% of the voting power in the Company and occupy two of the three positions as director. They have entered into an agreement stating that they will vote as a block in respect of Board matters and shareholder matters.

Control of Company A

In determining control of Company A, the Commissioner will consider who has actual control of the Company, looking at to the following matters:

•         Who owns interest carrying rights to the economic benefits flowing from the entity in the form of income and capital distributions.

•         Who owns relevant interest carrying rights to exercise, or control the exercise of, voting power.

•         Who controls those responsible for managing the affairs of the business entity.

Who owns interest carrying rights to the economic benefits?

Three shareholders, Person A and Person B and Company B holds rights to the economic benefits of Company A.

Who owns relevant interest carrying rights to exercise?

The strategic direction, decision making, and actions of Company A and subsidiaries is set by the Board of the Company. The Commissioner has considered the Shareholders' Agreement and the Directors' Circular Resolution.

The Board of Company A from DD MM YYYY comprised:

•         Person A, as Australian managing director

•         Person B, as Australian managing director

•         Person C, Company B appointed director.

Person A and Person B can vote together to control the decisions made by the Board by combining the one vote that they each have. They cannot be defeated by a vote by the Company B appointed Director, even if this Director is the Chairman as the Chairman only has a casting vote in a situation where there are equal votes.

Person A and Person B can also vote together as shareholders in the event a shareholders meeting is called. Person A and Person B hold XX.X% of the shareholder voting rights. They can also vote together on matters that require an Ordinary Resolution under the Shareholders' Agreement. The Chairman is not entitled to a second or casting vote at Shareholder meetings. As such, Person A and Person B can pass or block resolutions for Schedule 2 matters at shareholder meetings in relation to the strategic direction of Company A.

Person A and Person B can vote together at the Board level and control Board decisions. They can vote together as shareholders to control strategic decisions requiring an Ordinary Resolution. Person A and Person B have demonstrated that they can control the strategic decisions of Company A without the involvement of Company B.

Who controls those responsible for managing the affairs of the business entity?

In their role as executive managers, Person A and Person B control the decision making and management of the day to day operations, including administration, legal and finance functions of Company A.

Person A and Person B form the executive management team along with two independent advisors who are engaged on a monthly retainer. The independent advisors have no relationships with Company B.

Company A has a business plan, and this business plan is monitored on a regular basis at monthly meetings by Person A and Person B.

Person A and Person B do not act on the instructions of Company B or their appointed director, nor do they report to them.

Person A and Person B and Company A's finance manager are the only signatories on Company A and the Group's bank accounts, and there is no one from Company B eligible to transact on those accounts.

All operational, engineering and R&D business matters of Company A and the Group are handled without any input from Company B.

The Group and Company B do not undertake business dealings with each other except for the use of one product which the Group is using as part of its R&D activities. Company B has no involvement in these activities, and the product provided by Company B was a standard product that has been modified by Company A.

As such Person A and Person B can, without involvement of Company B control the day to day operations of Company A. Company B's involvement in Company A is limited to the actions of a passive investor. It participates in shareholder and Board meetings to review the agenda items and the financial results. It has no direct involvement or control over the day to day activities of Company A, or its subsidiaries.

Question 3

For the purposes of calculating the aggregated turnover of Company A under section 328-115 of the ITAA 1997 for the year ended DD MM YYYY and for the period DD MM YYYY to DD MM YYYY, is Company B an "affiliate" of Company A under section 328-130 of the ITAA 1997?

Answer

Company B was not an affiliate of Company A under section 328-130.

Relevant Legislation

Meaning of affiliates

Section 995-1 provides that 'affiliate' has the meaning given by section 328-130.

Section 328-130 provides the meaning of affiliate.

328-130              Meaning of affiliate

328-130(1) An individual or a company is an affiliate of yours if the individual or 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 individual or company.

328-130(2) However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

Example: ...

Directors of the same company, or the company and a director of the company, would be in a similar position.

If a company is an affiliate of yours, you are required to calculate an aggregated turnover as required by section 328-115.

328-115 Meaning of aggregated turnover

328-115(1) Your aggregated turnover for an income year is the sum of the relevant annual turnovers (see subsection (2)) excluding any amounts covered by subsection (3).

328-115(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.

Application to your circumstances

Meaning of 'could reasonably be expected'

To determine whether Company B is an affiliate of Company A, consideration must be given to whether Company B could reasonably be expected to act in concert with Company A in respect to the affairs of the business of Company B.

The Full High Court, in Commissioner of Taxation (Cth) v Peabody [1994] HCA 43, held that the phrase 'might reasonably be expected' requires more than a possibility.

An entity, the first entity, 'could reasonably be expected' to act in accordance with another entity's, the second entity's, wishes where the second entity has a relationship of control or influence over the first entity. Such a relationship can be evidenced by the entities' behaviours and the presence of any influential relationships, such as:

(a) family or other close personal relationships;

(b) financial relationships and dependencies; and

(c) relationships created through links such as common directors, partners or shareholders.

For a company, this relationship depends on whether the majority shareholders and/or directors of the company can reasonably be expected to act in accordance with another entity's directions.

Is Company B an affiliate of Company A

There is nothing in the facts provided to suggest that Company B (through its shareholders and/or directors) will act in accordance with Company A's wishes or that they will act in concert with each other in relation to the affairs of the business of Company B. Company A and Company B undertake businesses that are unrelated and operate independently of each other with separate directors and separate Boards. Company B is a subsidiary of xxx Corporation, an entity listed on the xxx Stock Exchange. The principal relationship between Company A and Company B is that Company B holds a substantial shareholding in Company A. It could not reasonably be expected that Company B would act in accordance with the wishes of Company A, or in concert with Company A, in relation to the affairs of the business of Company B.

Therefore, Company B is not an affiliate of Company A under section 328-130.

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