Edited version of your private ruling

Authorisation Number: 1012481898851

Ruling

Subject: Connected entity test

Question 1

During the relevant period, did you control Company X in the way described in section 328-125(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Commissioner exercise his discretion under section 328-125(6) of the ITAA 1997 to determine that Company X is controlled by an entity other than you, or any of your affiliates?

Answer

No

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Company X is an Australian resident taxpayer.

The shareholding in Company X is as follows:

· You own approximately 0.50%

· Your spouse owns approximately 0.50%

· You and your spouse jointly (50/50) own approximately X%;

· A Co owns approximately Y%

· B Sub Co owns approximately Z%

All shares on issue in Company X are ordinary shares.

You were director of Company X for the entire period to which this ruling applies.

Your spouse was director of Company X until 1 June 20XX.

A Co and B Sub Co are unrelated to you and your spouse.

You and your spouse do not have any rights to acquire further shares in Company X.

You and your spouse did not carry on a business as partners at any time during the relevant income year.

A Co had required you and your spouse to enter into a shareholders' agreement (Shareholders' Agreement) as a condition to A Co purchasing shares in Company X. Pursuant to the terms of the Shareholder's Agreement:

(i) All shares in Company X conferred the same rights to distributions; and

(ii) Throughout the relevant period, A Co had the right to appoint 2/3 of Company X's directors.

The most recent dividend declared by Company X was fully paid in the 20YY income year. Company X did not declare or pay any further dividends or distributions in the 20ZZ income year, or in the 20VV income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Subsection 328-125(2)

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

Income Tax Assessment Act 1997 Subsection 328-130(1)

Reasons for decision

Question 1

Summary

You directly control Company X under section 328-125(2) of the ITAA 1997.

Detailed reasoning

Section 328-125 of the ITAA 1997 sets out the meaning of connected with an entity.

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.

A key word from the above provision is the notion of control. In looking at whether an entity controls another, subsection 328-125(2) of the ITAA 1997 describes direct control of an entity other than a discretionary trust.

An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust - beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (a control percentage) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership - the net income of the partnership; or

(iii) any distribution of capital by the other entity; or

(b) if the other entity is a company - 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.

You beneficially own approximately 25% of the interests in Company X that give you a right to distribution of income and that carry between them the right to exercise voting power. This is made up of interests that you own in your personal name, and interests you beneficially own by virtue of the joint tenancy with your spouse. Since you hold less than 40%, as a single entity, you do not alone, directly control Company X.

However, we must then consider whether you have an affiliate, and whether the affiliate or you together with the affiliate, control Company X by holding at least 40% of the right to distribution of income or the right to voting power.

Subsection 328-130(1) of the ITAA 1997 provides that an individual is an affiliate of yours if they act, 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.

Other shareholders of Company X include A Co, an unrelated entity, their wholly owned subsidiary B Sub Co, and your spouse. As you have provided that A Co and B Sub Co are unrelated to you, we will consider whether your spouse is an affiliate of yours.

Whilst it is acknowledged that neither your spouse nor you conduct business in your personal capacities, you both conduct business indirectly through the company vehicle by virtue of your directorship of Company X. Hence, this fact alone will not prevent your spouse from being your affiliate.

Whether a person acts, or could reasonably be expected to act, in accordance with a taxpayer's directions or wishes, or in concert with them is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative. Relevant factors that may support a finding that certain people are affiliates of one another 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 them rather than on formal agreements, or legal or fiduciary obligations; and

· the actions of the parties.

In your case, the following factors have been taken into account:

· there is a close family relationship as you are married; and

· the likelihood that the way you act, or could reasonably be expected to act would be based on your personal relationship rather than on formal agreements, or legal or fiduciary obligations.

Based on the above factors, it is considered that your spouse is an affiliate of yours under subsection 328-130(1) of the ITAA 1997. Your spouse beneficially owns approximately 25% of the interests in Company X that give a right to distribution of income and that carry between them the right to exercise voting power. This is made up of the interest that they own in their personal name, and the interest that they beneficially own by virtue of the joint tenancy with you.

As a result, you own, together with your affiliates, 50% of the equity interests in Company X that give a right to distribution of income and that carry between them the right to exercise, or control the exercise of, 50% of the voting power in it. You therefore control Company X under subsection 328-125(2) of the ITAA 1997, and are connected with the Company X under subsection 328-125.

Question 2

Summary

The Commissioner will not exercise discretion under subsection 328-125(6) of the ITAA 1997 to determine that you did not control Company X.

Detailed reasoning

Under subsection 328-125(6) of the ITAA 1997, if an entity's control percentage (as determined under subsections 328-125(2) or (4)) in another entity is at least 40% but less than 50%, the Commissioner may determine that the first entity does not control the other entity if he is satisfied that a third entity (not including any affiliates of the first entity), controls the other entity.

As it has been determined under subsection 328-125(2) of the ITAA 1997 that you have a control percentage of 50%, made up of the interest you beneficially own and the interest that your affiliate owns, the Commissioner is unable to exercise his discretion.