Edited version of private advice

Authorisation Number: 1052309046811

Date of advice: 1 October 2024

Ruling

Subject: Aggregated turnover - connected with

Question 1

For the purposes of determining the 'aggregated turnover' of Company A and Company B under section 328-115 of the Income Tax Assessment Act 1997 for each of the income year ending 30 June 2022, were Company A and Company B 'connected with' Trust A or Trust B under section 328-125?

Answer

Yes.

Question 2

For the purposes of determining the 'aggregated turnover' of Holding Company under section 328-115 of the Income Tax Assessment Act 1997 for the income year ending 30 June 2023, was Holding Company 'connected with' Trust A, Trust B or Trust C under section 328-125?

Answer

Holding Company is 'connected with' Trust A and Trust B; not Trust C for the income year ending 30 June 2023.

This ruling applies for the following periods:

Year ended 30 June 2022

Year ended 30 June 2023

Relevant facts and circumstances

Company A

Company A is an Australian resident company.

The shareholders in Company A were, up until the restructure, Trust A and Trust B, which each hold 50% of the ordinary shares.

The shareholder agreement does not state that any particular entity has final decision making power, with final decisions made by simple majority vote.

Company B

Company B is an Australian resident company.

The shareholders in Company B were, up until the restructure, Trust A and Trust B, which each held 50% of the ordinary shares.

The shareholder agreement does not state that any particular entity has final decision making power, with final decisions made by simple majority vote.

Holding Company

On 1 July 2023 a third shareholder (Trust C) bought into the business. To accommodate this there was a restructure of the business where Holding Company was created as the head entity owning 100% of Company A, Company B and a newly formed company, Company C.

Holding Company is an Australian resident company.

The majority shareholders in Holding Company are Trust A and Trust B, which held 40% each of the ordinary shares. The remaining 20% of ordinary shares are held by Trust C.

The shareholder agreement does not state that any particular entity has final decision making power, with final decisions made by simple majority vote.

Other relevant facts

The shareholders of Holding Company are unrelated to each other and they are not affiliated entities.

None of the abovementioned companies are beneficiaries of any of the abovementioned trusts.

The abovementioned trusts are not beneficiaries of each other.

The abovementioned trusts are discretionary trusts.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Summary

For the purposes of determining the 'aggregated turnover' of Company A and Company B under section 328-115 for each of the income years ending 30 June 2021 and 30 June 2022, Company A and Company B are 'connected with' Trust A and Trust B under section 328-125.

Detailed reasoning

Section 328-115 provides that your aggregated turnover for an income year includes the annual turnover of any entity that is 'connected with' you at any time during the income year.

Subsection 328-125(1) provides that:

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.

Direct control of an entity other than a discretionary trust, such as a company, is outlined in subsection 328-125(2).

Relevantly, subsection 328-125(2) provides that an entity controls a company where an entity and/or its affiliates own or have the right to acquire the ownership of equity interests in the company that carry between them the right to exercise or control the exercise of:

•         at least 40% of:

­   the distribution of income by the company, or

­   any distribution of capital by the company; or

•         at least 40% of the voting power in the company (the control percentage).

In this case, both Trust A and Trust B each held 50% of the shareholdings in both Company A and Company B. Thus, for the income years ending 30 June 2021 and 30 June 2022, they each had a control percentage of at least 40% in both companies and thus 'control' of those companies according to subsection 328-125(2). Therefore, both trusts are 'connected with' both companies under subsection 328-125(1) for the income years ending 30 June 2021 and 30 June 2022.

Question 2

Summary

For the purposes of determining the 'aggregated turnover' of Holding Company under section 328-115 for the income year ending 30 June 2023, Holding Company is 'connected with' Trust A and Trust B, but not Trust C, under section 328-125?

Detailed reasoning

As Trust A and Trust B each held 40% of the ordinary shareholdings in Holding Company during the income year ended 30 June 2023, they had 'control' of the company as described in subsection 328-125(2) and are therefore 'connected with' Holding Company under subsection 328-125(1) for the year ended 30 June 2023.

Trust C has less than 40% of the ordinary shareholdings during the income year ended 30 June 2023, so does not meet the control test under paragraph 328-125(2)(b).

In relation to a discretionary trust, section 328-125 states:

(3) An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its * affiliates, or the first entity together with its affiliates.

(4) An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a) the trustee of the trust paid to, or applied for the benefit of:

(i) the first entity; or

(ii) any of the first entity's * affiliates; or

(iii) the first entity and any of its affiliates;

any of the income or capital of the trust; and

(b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

As Trust C has made no distribution/s to Holding Company, the trust is not controlled by the company under subsection 325-125(4). Further, we have no evidence that Trust C acts, or could reasonably expected to act, in accordance with the directions or wishes of Holding Company, its affiliates or together with its affiliates. As such, we do not consider Trust C is controlled by Holding Company pursuant to subsection 328-125(3) for the income year ended 30 June 2023.

As Trust C does not hold at least 40% of Holding Company, subsection 328-125(6) which allows the Commissioner to make a determination about control of an entity by another, does not apply in this circumstance.

There are no other tests that we consider applicable for establishing whether there is 'control' of either Trust C or Holding Company by the other. Therefore, Trust C is not 'connected with' Holding Company for the income year ended 30 June 2023.