Edited version of your private ruling

Authorisation Number: 1012615130564

Ruling

Subject: Meaning of a connected entity

Question

Will the Commissioner exercise his discretion under section 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to determine that your major shareholder does not control you for the purpose of section 328-125 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Income year ended 31 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are an Australian resident, public company listed on the Australian Stock Exchange. It has shares on issue of which:

1. One major shareholder, a company that owns x%;

2. Minor shareholders with each with less than x% shareholding in the company.

Your Board comprises three Directors. Clause x of your Constitution requires any questions arising at a meeting of Directors to be decided by majority vote. The Chairman has the right of a casting vote in the event of a tie. The Chairman is independent and not related to major shareholder. The Managing Director is also represented on the Board and makes the day to day decisions in respect of your operations. The Managing Director is also independent and not related to the major shareholder. The third director is a non-executive director and is a related party of major shareholder.

There is no shareholders agreement or other documentation that governs the relationship between shareholders or the Board members, other than the Constitution. A copy of the Constitution is provided for your reference.

You do not have any alternate debt or equity instruments on issue which convey rights to their holders, outside of those rights held by ordinary shareholders in accordance with the your Constitution.

You are not aware as to whether your major shareholder has 'turnover' for the purposes of Subdivision 328-C, or whether it is simply an investment entity. Further, you are not aware as to whether the major shareholder has a greater than 40% ownership interest in any other companies which carry on a business with turnover for the purposes of Subdivision 328-C.

You have four wholly owned subsidiaries with consolidated income for accounting purposes of $x during the 2013 financial year. We provide a copy of the your 2013 Annual Report to support the turnover figure. Included within this Annual Report is a "top 20 shareholders" list which provides your indicative ownership structure. You are of the opinion that you do not have any affiliates for the purposes of the Subdivision 328-C of the Act.

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 Section 328-130

Reasons for decision

Summary

There is no entity, other than the major shareholder, that controls you. Accordingly, the Commissioner will not exercise his discretion under subsection 328-125(6) of the ITAA 1997.

Detailed reasoning

The meaning of a connected entity is defined under section 328-125 of the ITAA 1997 which states as follows:

An entity is connected with another entity if:

(a) either entity controls the other entity in the 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 a company

Subsection 328-125(2) of the ITAA 1997 provides that an entity controls a company if the entity, its affiliates, or the entity together with its affiliates beneficially own:

• interests in the company that give them the right to receive at least 40% (the control percentage) of any distribution of income or capital; or

• equity interests in the company that carry between them the right to exercise at least 40% (the control percentage) of the voting power in the company.

An affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you (section 328-130 of the ITAA 1997).

Commissioner may determine that an entity does not control another entity

The Commissioner's discretion, as set out in subsection 328-125(6) of the ITAA 1997 states the following:

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.

The Advanced Guide to Capital Gains Tax Concessions for Small Business 2012-2013 NAT 3359 (Advanced Guide) discusses the application of the discretion contained in subsection 328-125(6) of the ITAA 1997.

The Advanced Guide provides that for the Commissioner to be able to consider the discretion in subsection 328-125(6) of the ITAA 1997 there must be a single, identifiable third entity that has a control percentage of at least 40% of the company. In working out the third entity's control percentage, the interests of any affiliates of the third entity are taken into account. The third entity must control the company in the way described in subsection 328-125(2) of the ITAA 1997. Unless the conditions of subsection 328-125(2) of the ITAA 1997 are met by a third entity, the Commissioner cannot determine that the first entity does not control the company.

This follows from the general statutory interpretation principle that when determining the meaning of a specific provision you do not view the words of the provision in isolation and instead must have regard to the context beyond the individual words (see Minister for Imigration and Multiculture Affair v. Khawar (2002) 210 CLR 1,36). It follows that S328-125(6) of the ITAA 1997 must be read in conjunction with the surrounding provisions specifically the definition of control provided in s328-125(2) of the ITAA 1997.

Application to your circumstances

You have provided that major shareholder owns x% of the share in you. The next largest shareholder in the company owns a x% of the company's shares. Consequently there is no other entity that has control of the company as defined under section 328-125(6) of the ITAA 1997.

It is inconsequential in the Commissioner's view that the remaining shareholders could hypothetically band together and exercise their voting power to oppose the decisions of your major shareholder, it is equally open that x% of the unrelated minor shareholders could vote with your major shareholder. Your major shareholder clearly controls you and is therefore a connected entity for the purpose of Subdivision 328-C.