Private ruling: Commissioners discretion under subsection 328-125(6) in relation to the control test for aggregated turnover
Date of advice: 12 May 2020
Published: June 2020
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 328-125(6) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the control test for the aggregated turnover of the company? | A1: No. The Commissioner cannot exercise this discretion.

Relevant facts and circumstances: The taxpayer is an Australian private company (The Company). The company has two shareholders each holding 50% of the shares in The Company. All of the shares in The Company have equal: · voting rights and · income distribution rights and · capital distribution rights Details of shareholding: · 50% Shareholder 1 - an Australian private company as trustee for a trust controlled by an Individual taxpayer (the Individual taxpayer) · 50% Shareholder 2 - an Australian private company The Company's board of directors has four board members, two members for each shareholder. The Individual taxpayer is the board chairman and Managing Director and holds a casting vote. The Non-Executive Directors (NED) are: · NED 1 for Shareholder 1 · NED 2 for Shareholder 2 · NED 3 for Shareholder 2 The annual turnover for The Company is approximately $2 million. Shareholder 2 owns 50% of the shares in The Company and is a large company that has a turnover in excess of $XXXX. The GST grouping provisions are not applied to The Company. All the day to day running of the business and the strategic business decisions are performed by the Individual taxpayer. They have control over the following aspects of the organisation: · Development and execution of business plans and strategic development of The Company · Operational running of The Company · Financial and accounting control over The Company · Payroll control over The Company · HR control over The Company Shareholder 2 representatives attend quarterly board meetings in line with their investment interests in The Company. Shareholder 2 representatives participate as part of the board in ratifying board decisions as raised and reported by the Managing Director of The Company. Shareholder 2 does not have a role in daily operations or decisions of The Company and is a passive investor only.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-115 | Income Tax Assessment Act 1997 subsection 328-115(1) | Income Tax Assessment Act 1997 subsection 328-115(2) | Income Tax Assessment Act 1997 subsection 328-115(3) | 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: Summary: Section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the meaning of 'aggregated turnover'. Subsection 328-115(1) states that aggregated turnover for an income year is the sum of your relevant annual turnovers, excluding certain amounts covered by subsection 328-115(3). The relevant annual turnovers listed in subsection 328-115(2) are: (a) your annual turnover for the income year; (b) the annual turnover for the income year of any entity that is connected with you at any time during the year; and (c) the annual turnover for the income year of any entity that is an affiliate of yours at any time during the income year. | Detailed Reasoning - Meaning of connected with an entity: Section 328-125 of the ITAA 1997 contains the 'control' rules for determining whether an entity is connected with another entity. 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 section 328-125; or b) both entities are controlled in a way described in section 328-125 by the same third entity. Subsection 328-125(2) defines 'direct control' of an entity, other than a discretionary trust, and provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: a) own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of: (i) any distribution of income by the other entity; or (ii) if the other entity is a partnership - the net income of the partnership; or (iii) any distribution of capital by the other entity; or b) if the other entity is a company - 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, a percentage (the control percentage ) that is at least 40% of the voting power in the company. | Detailed Reasoning - Subsection 328-125(6) of the ITAA 1997: Under subsection 328-125(6) of the ITAA 1997, if the control percentage referred to in subsection 328-125(2) 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 other than, or by entities that do not include, the first entity or any of its affiliates. | Detailed Reasoning - Applying to your circumstances: Under subsection 328-125(2) of the ITAA 1997 The Company is controlled by Shareholder 2 as Shareholder 2 owns 50% of the shares in The Company which all have voting rights and income and capital distribution rights. Although Shareholder 2's control percentage is at least 40% it is not less than 50%. Therefore, the Commissioner cannot exercise his discretion under subsection 328-125(6) to determine that Shareholder 2 does not control The Company. The Commissioner can only exercise the discretion where the control percentage is less than 50% and since Shareholder 2's control percentage is 50% the discretion cannot be utilised. For JobKeeper purposes your aggregated turnover includes your annual turnover, plus the annual turnover of all the entities that are connected or affiliated with the Company. As Shareholder 2 is considered to be connected with the company in accordance with section 328-115 you are required to include Shareholder 2's annual turnover when determining the Company's aggregated turnover for the purposes of the JobKeeper measures.