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Ruling

Subject: CGT small business concessions - control - Commissioner's determination

Question 1:

Will the Commissioner determine that control of the company does not exist in accordance with subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

During the year ended 30 June 2011 you sold some shares in an Australian company. Just before the sale of the shares you held 45% of the shares, entity X held 40% of the shares and others held 15% of the shares.

No board member or senior management of entity X is connected to you or an affiliate of yours.

Voting rights for the company are aligned with the shareholding agreement in that you had 45% of the voting right at the sale of your shares.

The Board of Directors of the company consists of you, one company employee and two representatives of entity X.

You are actively involved in the company and in the day to day decision making of the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-125.

Income Tax Assessment Act 1997 Subsection 328-125(1).

Income Tax Assessment Act 1997 Paragraph 328-125(2)(b).

Income Tax Assessment Act 1997 Subsection 328-125(6).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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, 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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our 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:

o either entity controls the other in a way described within that section, or

o 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'.

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.

With regards to subsection 328-125(6) the Advanced guide to capital gains tax concessions for small business (The Guide) states that '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.' This confirms the Commissioner's view that control of a particular entity may in fact rest with more than one connected entity.

The Guide, however, goes on to state that in a case where there is more than one entity with a control percentage of at least 40% 'it would be necessary to consider additional factors to determine if the third entity controls it'. Such additional factors could include who is responsible for the day-to-day and strategic running of the company.

In your case, you held 45% of the shares and were a director to the company (out of four).

Entity X has a 40% interest and provides two directors to the board and one board member is a company employee.

You are actively involved in the day to day decision making of the company.

Although, you are only 25% of the board, you have a majority of the voting rights of the company, 45%. No other single shareholder had an interest greater than yours. You therefore had an active role in the company and did not have a passive role with respect to the shares that you held just before the sale of shares.

As the Commissioner is not satisfied that the company is controlled by entities that do not include you, the Commissioner will not make the determination under subsection 328-125(6).