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Edited version of private ruling
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Ruling
Subject: Control of entity
Will the Commissioner determine that the rulee does not control the company in accordance with subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997)?
No.
This ruling applies for the following period<s>:
1 July 2009 to 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
The rulee owns 49.9% of the issued shares in the company. All of the remaining shares are held by another entity. The rulee is not related or associated in any way to other entity other than through the ownership in a common entity (the company).
Prior to the introduction of the rulee as a shareholder in the company, all shares were owned by the other entity.
A 'Heads of Agreement' was put into place when the rulee took up an ownership interest in the company. You have provided a copy of this document and it forms part of the facts for this private ruling. The main points to come from that document appear below:
An individual associated with the rulee has been and will continue to be CEO:
· the rulee is entitled to purchase up to 49.9% of the issued shares; and
· the rulee will be entitled to nominate one director of the company whilst the other entity will be entitled to nominate two directors.
The rulee's representative was appointed a director some time ago. At this time the company had three directors, being the two founding directors and their relative. On the appointment of the rulee's representative, the founding directors' relative resigned from the board.
Later, the founding directors resigned and were replaced by their relative and the company's external accountant. The external accountant is also the accountant of the other entity, but does not act for the rulee.
Board meetings are held every two months at which an external party records minutes. At these meetings, major decisions are reviewed and confirmed, including approval of the annual capital expenditure budgets.
The other entity arranged to retain a majority interest in the company as well as a majority of directors on the board.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 328-125.
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not fully considered the application of Part IVA of the ITAA 1936 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 of the ITAA 1936 applies we will first 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 of the ITAA 1936, go to our website www.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-avoidance rule for income tax.
Reasons for decision
All legislative references are to the ITAA 1997 unless otherwise specified.
Subsection 328-125(1) provides that an entity is connected with another if:
· either entity controls the other in a way described within that section; or
· both entities are controlled by the same third entity in a way described by that section.
Paragraph 328-125(2)(b) provides that one entity controls a company if that entity owns or has 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 that is at least 40% of the voting power in the company. This percentage is referred to as the 'control percentage'.
In your case, the discretionary trust holds 49.9% of the shares in the company and therefore meets the control test.
Subsection 328-125(6) provides that where the control percentage in the company is between 40% and 50%, the Commissioner may determine that the first entity does not control the company if he is satisfied that a third entity (not including any affiliates of the first entity) controls the company.
For an entity to be controlled by a third entity, that third entity must also have a control percentage in the company of at least 40%. That is, it must control the company in the way described by section 328-125.
Alternatively, it is possible that both of the entities with a control percentage of at least 40% may control the company if such responsibilities are shared.
In your case, you hold 49.9% of the shares and have provided one director to the company (out of three). The director that you have provided is also the CEO.
The other entity has a 50.1% interest and provides two directors to the board.
Although, the rulee has less voting power compared to the other entity, management responsibilities are shared. This is evidenced by the fact that whilst the rulee only provides one director to the board (and whose decisions could be overruled), that director is the CEO and does have active input into the management of the company. The rulee does not have a passive role with respect to the shares that it holds in the target company.
Therefore, in the case, it is considered that both entities control the company together. As such, the Commissioner will not make a determination under subsection 328-125(6).