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Edited version of your written advice
Authorisation Number: 1012784050275
Date of advice: 26 March 2015
Ruling
Subject: Connected entity - company – between 40% and 50% control – Commissioner’s determination
Question
Will the Commissioner make a determination under subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) that Entity A (together with its affiliates) does not control Entity B?
Answer
No
This ruling applies for the following period
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commences on
1 January 2015
Relevant facts and circumstances
The current ownership structure of Entity B is divided into three equivalent ownership interests held by Entity A, Entity C, and Entity D.
Following a proposed ownership restructure and share issue, the ownership interests will be held by Entity A, Entity C, and Entity D in different proportions. Entity A will own at least 40% but not more than 50% of Entity B. Neither Entity C nor Entity D will hold at least 40% of Entity B.
While the owners of Entity B will be entitled to receive distributions of income and capital in line with their new ownership interests, the voting rights of the owners will not change.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 328-115(1)
Income Tax Assessment Act 1997 subsection 328-115(2)
Income Tax Assessment Act 1997 section 328-125
Income Tax Assessment Act 1997 subsection 328-125(1)
Income Tax Assessment Act 1997 subsection 328-125(2)
Income Tax Assessment Act 1997 subsection 328-125(6)
Reasons for decision
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 section 328-125 of the ITAA 1997, or
(b) both entities are controlled in a way described in section 328-125 of the ITAA 1997 by the same third entity (subsection 328-125(1) of the ITAA 1997).
Control of an entity
Direct control of a company
The way an entity (the first entity) will directly control a company (the other entity) is described in subsection 328-125(2) of the ITAA 1997, which provides that an entity (the first entity) controls a company (the other entity) if the first entity, its affiliates, or the first entity together with its affiliates own, or have the right to acquire the ownership of:
● interests in the company that carry between 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, or control the exercise of, at least 40% (the control percentage) of the voting power in the company.
In summary, an entity (the first entity) will control a company in a way described in section 328-125 of the ITAA 1997 if the first entity has a control percentage in the company of at least 40%. If there is no entity that controls the company in a way described in section 328-125 of the ITAA 1997 then no entity controls the company.
Commissioner may determine that an entity does not control another entity
If the control percentage referred to in subsection 328-125(2) of the ITAA 1997 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 (a third entity) other than, or by entities that do not include, the first entity or any of its affiliates (subsection 328-125(6) of the ITAA 1997).
It is the Commissioner’s view that, for a determination to be made that an entity does not control a company (despite holding at least a 40% in it), there must be a single identifiable third entity (together with its affiliates) that controls the company in a way described in section 328-125 of the ITAA 1997. That is, unless the third entity (together with its affiliates) has a control percentage of at least 40% in the company, the Commissioner cannot determine that the first entity does not control the company.
Commissioner’s determination
No third entity will hold a control percentage of at least 40% in Entity B after the proposed share issue and ownership restructure.
As there is no third entity (alone or together with their affiliates) that controls entity B in a way described in section 328-125 of the ITAA 1997 the Commissioner will not make a determination under subsection 328-125(6) of the ITAA 1997 that Entity A (together with its affiliates) will not control Entity B after the proposed share issue and ownership restructure.