Private ruling: Commissioners discretion under subsection 328-125(6) of the Income Tax Assessment Act 1997
Date of advice: 25 February 2016
Published: April 2016
Ruling period: Year ended 30 June 20XX | Year ended 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) to determine that shareholder X does not control the company as shareholder X's control percentage of the company is between 40% & 50%? | A1: Yes | Q2: If the company is entitled to a research and development (R&D) tax offset under section 355-100 of the ITAA 1997, will the company's rate of R&D tax offset be 45%, as determined by Item 1 in the table? | A2: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 328-115 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 355-100 | Income Tax Assessment Act 1997 Subsection 995-1

Reasons for decision: Summary: Item 1 of the table in subsection 355-100(1) of the ITAA 1997 states if the R&D entity's aggregated turnover for the income year is less than $20 million (and item 2 of this table does not apply) the rate of R&D tax offset is 45% 'Aggregated turnover' is defined in subsection 995-1 of the ITAA 1997 as having the meaning given by section 328-115 of the ITAA 1997. Subsection 328-115(1) of the ITAA 1997 states that your aggregated turnover for an income year is the sum of the relevant annual turnovers (see subsection (2)) excluding any amounts covered by subsection (3) Subsection 328-115(2) of the ITAA 1997 provides your relevant annual turnover is the combined annual turnover for the income year of you, of any entity (a relevant entity) that is connected with you at any time during the income year and of any entity (a relevant entity) that is an affiliate of yours at any time during the income year. However, subsection 328-115(3) of the ITAA 1997 excludes from your aggregated turnover for an income year any amounts that are dealings between connected and/or affiliated entities. Subsection 328-125(1) of the ITAA 1997 states an entity is connected with another entity if: a) either entity controls the other entity in a way described in this section; or b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 states an entity (the first entity ) controls another entity if the first entity, its affiliates or the first entity together with its affiliates: a) except if the other entity is a discretionary trust - beneficially own, or have the right to acquire the beneficial 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 - beneficially own, or have the right to acquire the beneficial 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. Subsection 328-125(6) of the ITAA 1997 states the Commissioner may determine that an entity does not control another entity: 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. In your case, despite shareholder X being a connected entity under subparagraph 328-125(2)(a)(i) of the ITAA 1997, the Commissioner is satisfied and determines, under subsection 328-125(6) of the ITAA 1997, that shareholder X does not control the company. If the company is entitled to an R&D tax offset under section 355-100 of the ITAA 1997, as it's aggregated turnover for both relevant financial years was less than $20 million, the rate of R&D tax offset will be 45%, as determined by Item 1 in the table.

Relevant facts: You are an Australian Proprietary Company, limited by shares. | At 1 July 20XX shareholder X owned between 40% & 50% of the company. | The shareholders are not tax exempt entities. | Shareholder X is a subsidiary of a larger group, which has a turnover in excess of the $20 million aggregated turnover threshold referred to in Item 1 of the table in section 355-100 of the ITAA 1997. | The class of shares held by shareholder X does not entitle it to vote nor does it have any rights to participate in the distribution of surplus assets in the event of a winding up, dissolution, deregistration, liquidation, share buyback or return of capital. | Shareholder X will never be issued dividends which are more than its holding percentage. | For the relevant financial years the company's annual turnover was less than $20 million.