Private ruling: CGT - SBC - control test
Date of advice: 1 April 2016
Published: May 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) to determine that you do not have control over the company? | A1: Yes. | Q2: Are you and the company deemed to be connected, or affiliates, for the purposes of the maximum net asset value test? | A2: No.

Relevant facts and circumstances: The company was formed by a number of individuals, including yourself and A. A was installed as Chief Executive Officer/Managing Director at the time. The other directors have since resigned from the company, leaving just yourself and A. You currently hold X% of the shares in the company, with A holding the remaining Y%. You have provided detailed lists of roles completed by yourself and A. A has control of the day to day operations of the company while you provide the relationship to the customer base.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-15 , | Income Tax Assessment Act 1997 Section 328-125 and | Income Tax Assessment Act 1997 Section 328-130.

Reasons for decision: Summary: 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. | Detailed Reasoning - Direct control of a company: Paragraph 328-125(2)(b) of the ITAA 1997 provides that an entity controls a company if the entity, its affiliates, or the entity together with its affiliates beneficially own 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. In this case, you currently hold X% of the shares in the company. In accordance with subsection 325-125(2) of the ITAA 1997, you control the company. | Detailed Reasoning - Commissioner may determine that an entity does not control another entity: If an entity's 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 the first entity does not control the other entity if the Commissioner thinks that the entity is controlled by a third entity (other than an affiliate of the first entity). For the Commissioner to be able to consider the exercise of discretion in subsection 328-125(6) of the ITAA 1997 there must be a single, identifiable third entity that has a control percentage of at least 40% of the company. In working out the third entity's control percentage, the interests of any affiliates of the third entity are taken into account. The third entity must control the company in the way described in subsection 328-125(2) of the ITAA 1997. Unless the conditions of subsection 328-125(2) of the ITAA 1997 are met the Commissioner cannot determine that the first entity does not control the company. If there was a third entity with a control percentage of 40% or more it would then be necessary to consider additional factors such as who is responsible for the day to day and strategic running of the company to determine if the third entity controls it. It is possible that both of the entities having a control percentage of at least 40% may control the company if such responsibilities are shared. In this case, for the Commissioner to consider the exercise of the discretion contained in subsection 328-125(6) of the ITAA 1997 there would need be a single, identifiable third entity that would have a control percentage (including the interests of its affiliates) in the company of more than 40%. In this case, the Commissioner acknowledges that A holds Y% shareholding in the company. Further, the Commissioner accepts that A is responsible for the day to day and strategic operations of the company. Accordingly, the Commissioner will exercise his discretion under subsection 328-125(6) of the ITAA 1997 to determine that you do not control the company at the time of the sale of the shares. | Detailed Reasoning - Maximum Net Asset Value Test: Section 152-15 of the ITAA 1997 explains that you satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6 million: a) the net value of the CGT assets of yours; b) the net value of the CGT assets of any entities connected with you; c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). Connected entity As discussed above, an entity is connected with you if the entity controls the company (section 328-125 of the ITAA 1997). An entity controls a company if the entity, its affiliates, or the entity together with its affiliates beneficially own 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. As concluded in the discussion above, the Commissioner is satisfied that the company is not controlled by you, but is instead controlled by A with a controlling percentage of Y%. Therefore you would not be considered to be connected with either the company. Affiliate Under subsection 328-130(1) of the ITAA 1997, an affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you. However, subsection 328-130(2) of the ITAA 1997 points out that an individual or company is not your affiliate merely because of the nature of the business relationship. For example, companies and trusts are not affiliates of their directors and trustees respectively and vice versa, merely because of the positions held. There is nothing to suggest that A, or the company acts, or could be reasonably expected to act in accordance with your directions or in concert with you in relation to their business affairs. Therefore, you are not considered to be connected with the company or an affiliate of A or the company for the purposes of the maximum net asset value test.