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Edited version of your written advice
Authorisation Number: 1012700811790
Ruling
Subject: Small business concessions
Question
Will the Commissioner exercise his discretion under subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to determine that Individual A did not control, and is not connected with, Company A, Company B and Company C?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
• the application for private ruling, and
• the information provided with the application.
Individual A was involved in a business activity and a number of companies were incorporated to carry out the activity. Each of these companies took on a different role in the operations.
Individual A held X% of the shares in Company A and C.
Individual A held 2 held X% of the shares in Company B.
The remaining shares in each company were held by Company D
Individual A died during the 200X financial year. At the time of Individual A's death, Individual A held 45% of the shares in Company A, Company B and Company C
Individual A's health had deteriorated considerably in the last year and half before they died and was too sick to be involved in the activities of companies.
Probate of Individual A's last will and testament was granted during the 200X financial year.
The executors of the estate transferred Individual A's shares in Company A to Company D Investments in 20XX.
The Estate transferred Individual A's shares in Company B to Company D Investments in the 20YY financial year.
The estate transferred Individual A's shares in Company C and the units in the Unit Trust more than 2 years after Individual A passed away.
While the sale of the Company B and Company C shares occurred more than 2 years after Individual A's death, a private ruling issued to you to extend the 2 year period.
The shares and units in Company A, Company C, Company B and the Company A trust were sold by the executors of the estate for $X million.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 328-125
Income Tax Assessment Act 1997 paragraph 328-125(2)(a)
Income Tax Assessment Act 1997 paragraph 328-125(2)(b)
Reasons for decision
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.
With regard to companies, you may establish control via either the right to distribution control rule (paragraph 328-125(2)(a) of the ITAA 1997) or the voting power control rule (paragraph 328-125(2)(b) of the ITAA 1997).
Paragraph 328-125(2)(a) of the ITAA 1997 provides that you control a company if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, interests in the company that carry between them the right to receive a percentage (the control percentage) that is at least 40% of any distribution of income or capital by the company.
Paragraph 328-125(2)(b) of the ITAA 1997 provides that you control a company if you, your affiliates, or you together with your affiliates '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'.
If your control percentage in a company is at least 40% but less than 50% the Commissioner may determine under subsection 328-125(6) of the ITAA 1997, that you do not control the other entity if the Commissioner thinks that the entity is controlled by a third entity (other than your affiliate).
In this case, the deceased held more than 40 but less than 50% of the shares in Company A, Company B and Company C just prior to their death. We accept that at this time the deceased was no longer involved in the day to day operations of each company. Company D held the remaining shares in each company. Given the information provided, we consider that Company A, Company B and Company C were all controlled by Company D. Therefore, the Commissioner will exercise his discretion under subsection 328-125(6) of the ITAA 1997 and determine that the deceased did not control, and was not connected with, Company A, Company B and Company C just prior to their death.