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Edited version of your written advice
Authorisation Number: 1013030958774
Date of advice: 8 June 2016
Ruling
Subject: Small business concessions - control - Commissioner's Determination
Question:
Will the Commissioner's discretion be exercised under subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to determine that you did not exercise control over an entity before the sale of your shares?
Answer:
Yes
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commenced on:
1 July 2015
Relevant facts and circumstances
An entity was incorporated.
The shareholders in the entity were as follows:
• you
• your spouse
You held more than 40% of the shares.
There were no other classes of share issued.
The terms of the ordinary shares provided that each shareholder had the right to vote, an entitlement to dividends and a right to capital surplus on the winding up of the entity.
You held the positions of director and secretary of the entity.
From the date of incorporation the entity undertook minimal activities and was effectively a shelf company.
A few years ago the share composition of entity was updated and you only held 40% of the shares and voting rights in the entity.
Your spouse ceased being a shareholder and a director of the entity.
Person X held more than 50% of the shares and voting rights in the entity.
The entity acquired a business along with its assets.
Person X was appointed a director and the Chief Executive Officer (CEO) of the entity.
The CEO of entity was responsible for the following activities:
• the strategic running and day-to-day operations of the business
• growth and evolution of the business
• liaising with clients of the business
• supervising employees of the business
• overseeing the financial accounts and income tax returns of the business.
Your role in entity was to undertake your responsibilities as a director.
You provided minimal assistance in relation to the day-to-day running of the business and its strategic direction.
You disposed of your shareholding in the entity.
You ceased being a director of the entity.
Person X is not your affiliate.
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 subsection 328-125(2)
Income Tax Assessment Act 1997 subsection 328-125(6)
Reasons for decision
Note: all subsequent legislative references are to the ITAA 1997 unless otherwise stated.
The legislation
The meaning of a connected entity is defined under section 328-125 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 under paragraph 328-125(2)(a) or the voting power control rule under paragraph 328-125(2)(b).
Paragraph 328-125(2)(a) 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 of the company.
Paragraph 328-125(2)(b) 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) 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).
Application of the legislation to your circumstances
Under subsection 328-125(2) of the ITAA 1997, you would be considered to have controlled the entity as you held 40% of the shareholding in it. However, as Person X held more than 50% of the shareholdings in the entity it is considered they had the controlling percentage or vote in the entity.
Further as Person X was also responsible for the strategic running of the entity as well as the day to day operations of the business in their role as CEO, the Commissioner is prepared to exercise his discretion to determine that you did not exercise control over the entity under subsection 328-125(6). This control was exercised by Person X for the reasons noted above.