ATO ID 2003/162: Public Trading Trust - meaning of control
Date of decision: 20 February 2003
Year of income: Year ended 30 June 2001 Year ended 30 June 2002
Business line: Public Groups and International

Issue
Does the power of veto give a trustee control or the ability to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business for the purpose of paragraph 102N(b) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. The power of veto does give a trustee control or the ability to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business for the purpose of paragraph 102N(b) of the ITAA 1936.

Facts
The taxpayer is the trustee of a public unit trust. A unit trust acquired a shareholding in a private company. The private company was carrying on a trading business. Under an agreement between the shareholders of the private company, written consent must be obtained from the trustee before the company can take certain actions in relation to the business. In particular, the trustee's consent is necessary for any decision which will change how the company operates it's business. The agreement takes precedence over the company's constitution in the event of any inconsistency.

Reasons for decision
Summary: Paragraph 102N(b) of the ITAA 1936 provides that: For the purposes of this Division, a unit trust is a trading trust in relation to a year of income if, at any time during the year of income, the trustee: ...; or controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business. There is no definition of the terms 'controlled' or 'able to control' in Division 6C of the ITAA 1936. The Macquarie Dictionary , Revised 3rd Edition, 2001, defines 'control' as '1. to exercise restraint or direction over; dominate, command. 2. to hold in check; curb'. In Re Application of News Corp Ltd (1987) 15 FCR 227 the Federal Court was concerned with the meaning of the phrase 'being in a position to exercise control directly or indirectly of a company' for the purposes of subsections 90G(1) and 92D(1) of the Broadcasting and Television Act 1942 . Bowen CJ, with whom Lockhart J agreed, said (at FCR 242-3) It was argued that a power of veto does not constitute control in the relevant sense. Control, it was said, exists only where there is a power to get one's own will. I do not agree that the concept of control is so limited. The Oxford English Dictionary defines "control" as to "exercise restraint or direction". A power to veto is a power to restrain, and hence control. In this case, the agreement effectively gives the trustee the power of veto over decisions in relation to the operation of the company's business. This is a power to restrain and comes within the ordinary meaning of 'control'. Paragraph 102N(b) of the ITAA 1936 requires control '...in respect of the carrying on by that other person of a trading business' Normally the carrying on of a company's business is controlled by the directors ( Federal Commissioner of Taxation v. Commonwealth Aluminium Corp Ltd (1980) 143 CLR 646; 80 ATC 4371; (1980) 11 ATR 42). However, the agreement takes precedence over the constitution of the company and requires that the directors must obtain the approval of the taxpayer before making key decisions in relation to the operation of the business. In these circumstances the taxpayer has control in respect of the carrying on, by the company, of their business for the purposes of paragraph 102N(b) of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 paragraph 102N(b) Division 6C
Case references: Re Application of News Corp Ltd (1987) 15 FCR 227
Other references: Macquarie Dictionary, Revised 3rd Edition, 2001
Subject references: Eligible investment business Entities & taxpayer groups Public trading trusts Trading trusts Trusts Unit trusts