Private ruling: Connected entities
Published: April 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 20XX

Ruling: Question and Answer | Will the Commissioner exercise his discretion pursuant to subsection 328-125(6) of the Income Tax Assessment Act 1997 that the Entity B is not controlled by Entity C? | Yes

Relevant facts and circumstances: The Companies Entity B Uses a substituted accounting period. Have two classes of shares on issue: preferred stock and common stock. Have two classes of shares on issue: preferred stock and common stock. • Preferred stock holders shall be entitled to vote on all matters on which the common stock holder are entitled to vote • Preferred stock holders are entitled to elect four members of the Board of Directors in a vote restricted to preferred stock holders • Common stock holders are entitled to elect two members to the board of Directors in a vote restricted to common stock holders, only of who shall be the current CEO • The holders of preferred stock and common stock are entitled to elect two members of the board of directors in a vote open to all stock holders. Holdings as at December 20XX Entity A Entity C Entity D Entity E Entity F Common Stock Shareholding % in Entity B >X% <X% <X% <X% <X% <X% Rights to distribution of income in Entity B (per terms of shareholding) Yes Yes Yes Yes Yes No Rights to distribution of capital Entity B (per terms of shareholding) Yes Yes Yes Yes Yes No Voting rights in Entity B (per terms of shareholding Yes Yes Yes Yes Yes Yes Holdings as at December 20XX Entity A Entity C Entity D Entity E Entity F Common Stock Shareholding % in Entity B >X% >X% <X% <X% <X% <X% Rights to distribution of income in Entity B (per terms of shareholding) Yes Yes Yes Yes Yes No Rights to distribution of capital Entity B (per terms of shareholding) Yes Yes Yes Yes Yes No Voting rights in Entity B (per terms of shareholding Yes Yes Yes Yes Yes Yes Entity A is a multi-stage venture capital firm, focusing on high-growth opportunities in technology, health care and clean energy sectors. Entity A is currently under the management of the following directors: • Alpha • Bravo • Charlie You note that the same person holds the position of venture partner at Entity A and is also the Chairman of the Entity B Board. Entity C is a global company with a focus on oil and gas exploration and production. Entity C Holding Inc is a subsidiary of the parent company Entity C Industries Limited. Reliance is currently under the management of the following directors: • Delta • Echo • Foxtrot • Golf • Hotel Entity D Venture Partners is an early stage venture capital firm, focusing on emerging technology companies. Entity E Venture Partners is an early-stage venture capital firm focused on investing in capital efficient technology companies. Entity F investors each hold a minor interest in Entity B. Relationships -Entity A and Entity C No Entity A board members service on the board of Entity C. There are no family or personal relationships between the board members of Entity C and Entity A. -Entity A, Entity D and Entity E You indicate that Entity D and Entity E are affiliates of Entity A as defined in section 328-130 as they act in concert. In practice and based on historic behaviour it is reasonable to expect that in their capacity as shareholders, Entity D and Entity E will act in concert with Entity A in relation to voting and shareholders' meetings. Furthermore this is supported by the following: • Entity A, Entity D and Entity E conduct a similar business, being all venture capital firms operating within proximity to each other. • Entity A, Entity D and Entity E share common customer or "limited partners'" (i.e. pension funds, high net-worth individuals). • Entity A, Entity D and Entity E shares common portfolio investments. Control of Entity B For 350 days of the fiscal reporting period, Entity A held a >X% interest in the company whereas Entity C held a Z% interest. Entity A together with its affiliates held majority rights at shareholders' meetings for the whole of 20XX. Entity A participated in the day to day management and control of the company, whereas Entity C did not participate for the whole of 20XX. Entity A exercises the control by virtue the Chairman of the Entity B Board. In his role as Chairman of the Board of Entity B, the Chairman holds all the powers typical of a Chairperson of the Board, including the casting vote in the event of a tie position. Entity A, Entity D and Entity E continue to act in concert and together hold a >X%% interest and have a majority vote at shareholders' meeting have a majority vote at shareholders' meetings. You state that Entity C was no more involved in the management and control of the company than before the increase in shareholding. Entity A has control of Entity B with regards to: • Setting strategic plans for the company; • Analysis and selection of projects; • The day to day running of Entity B; • The use of funds by Entity B; and • Access to the accounts of Entity B.

Relevant legislative provisions: Subsection 328-125(1) of the Income Tax Assessment Act 1997 | Subsection 328-125(2) of the Income Tax Assessment Act 1997 | Subsection 328-125(6) of the Income Tax Assessment Act 1997

Reasons for decision: Detailed Reasoning - Connected entities: Subsection 328-125(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an entity is connected with another entity if: (a) one of the entities "controls" the other entity; or (b) the 2 entities are "controlled" by the same third entity (in which case all 3 entities are connected). This means, for example, that an entity (A) is connected with another entity (B) if: (1) A controls B; (2) B controls A; (3) A's affiliate controls B; (4) A and an affiliate control B; (5) a third entity (C) controls both A and B; or (6) A controls C, which in turn controls B. | Detailed Reasoning - Connected entity: direct control test - general: Paragraph 328-125(2)(a) of the ITAA 1997 contains a connected entity direct control test which applies to all entities except discretionary trusts, and is based on a "control percentage" of at least X%. Under this general test, an entity (A) controls another entity (B) if A or its affiliates, or A together with its affiliates own, or have the right to acquire ownership of, interests in B that between them carry the right to receive at least X% of any distribution of income or capital by B. The direct control test means that where 2 unconnected entities each have a X% interest, both entities will be deemed to be controllers. Furthermore, as the rights described in paragraph 328-125(2)(a) of the ITAA 1997 are to any distribution of income or capital, this could result in an entity potentially having several direct controllers. Note that where A's control percentage is less than Y%, and the Commissioner concludes that a third party actually controls B, the Commissioner has a discretion to determine that A does not control B. In addition to the general direct control test in paragraph 328-125(2)(a) of the ITAA 1997, a specific rule applies in relation to the control of companies. This additional rule is based on voting power. Paragraph 328-125(2)(b) of the ITAA 1997 provides that an entity controls a company if the entity and/or its affiliates own, or have the right to acquire ownership of, equity interests in the company with at least X% of the voting power in the company. As the level of ownership in B corresponds to voting rights for entities A and C, we conclude under subsection 328-125(2) of the ITAA 1997: 1. A controls B from January 20XX to December 20XX. 2. Both A & C control B from December 20XX to December 20XX. | Detailed Reasoning - The Commissioner's Discretion: Where an entity C has an interest in a second entity B of at least X% but less than Y%, the Commissioner has the discretion to ignore C's interest if the Commissioner determines that another party A actually controls B: section 328-125(6) of the ITAA 1997. The Commissioner can exercise the discretion where: (a) C is entitled to at least X% but less than Y% of any income or capital distributed by B, or alternatively, where B is a company, A has at least X% but less than Y% of the voting power in B; and (b) the Commissioner is satisfied, or thinks it is reasonable to assume, that B is controlled by A. In exercising discretion, the Commissioner weighs the following facts to ignore C's interest: For 350 days of the fiscal reporting period, Entity A held a >X%% interest in the company whereas Entity C held a <X% interest. Entity A together with its affiliates held majority rights at shareholders' meetings for the whole of 20XX. Entity A participated in the day to day management and control of the company, whereas Entity C did not participate for the whole of 20XX. You state that Entity C was no more involved in the management and control of the company than before the increase in shareholding. Entity A has control of Entity B with regards to: • Setting strategic plans for the company; • Analysis and selection of projects; • The day to day running of Entity B; • The use of funds by Entity B; and • Access to the accounts of Entity B. The Commissioner is able to determine based on the facts for the period of this ruling B is controlled by A.