Private ruling: Control
Published: August 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

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 the Director 1 does not control the company? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are an Australian resident company (the company). The company was founded by three directors. The shareholding of the company is as follows: Director 1 X% Director 2 Y% Director 3 Z% The company intends to apply for the Research and Development tax offset (R&D). Under the R&D provisions, only certain entities with an aggregated turnover of less than $20 million are eligible for the offset. The directors are not affiliated with each other.

Relevant legislative provisions: 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). | Income Tax Assessment Act 1997 Section 328-130.

Reasons for decision: Detailed Reasoning - Direct control of a company: Subsection 328-125(2) 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: • interests in the company that give them the right to receive at least 40% (the control percentage) of any distribution of income or capital; or • equity interests in the company that carry between them the right to exercise at least 40% (the control percentage) of the voting power in the company. 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 (section 328-130 of the ITAA 1997). A trust, partnership or superannuation fund cannot be an affiliate. | Detailed Reasoning - Commissioner may determine that an entity does not control another entity: The Commissioner's discretion, as set out in subsection 328-125(6) of the ITAA 1997 states the following: If the control percentage referred to in subsection (2) or (4) 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. The Advanced Guide to Capital Gains Tax Concessions for Small Business 2013-2014 NAT 3359 ( Advanced Guide ) discusses the application of the discretion contained in subsection 328-125(6) of the ITAA 1997. The Advanced Guide provides that for the Commissioner to be able to consider the 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 by a third entity, 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. It is necessary to consider the interpretation of section 328-125(6) of the ITAA 1997 with regard to the meaning of the term 'connected with you' as set out in section 328-125(1) of the ITAA 1997, and the concept of control as set out in section 328-125 of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: In this case, the remaining directors each hold a Y% interest in the company and are not affiliated with each other. Director 1 holds the majority of voting rights with X% of the company shares. As there is no third entity that could be taken to control the company in accordance with subsection 328-125(2) of the ITAA 1997, it is not necessary to consider additional factors such as which entity is responsible for the day to day and strategic running of the companies. Accordingly, the Commissioner will not exercise the discretion contained in subsection 328-125(6) of the ITAA 1997.