Control interests in a company, trust or partnership

Thin capitalisation control interests

Thin capitalisation control interests are used to determine whether an entity is an Australian controller of an Australian controlled foreign entity and when an Australian entity is foreign controlled. They are also used to determine whether a foreign corporate limited partnership is Australian controlled.

The concept of thin capitalisation control interest is not used to establish whether a company is a controlled foreign company, or whether a trust is a controlled foreign trust. The terms 'controlled foreign company' and 'controlled foreign trust' are contained in Part X of the ITAA 1936 and the concept of control used in those definitions is also wholly contained in this part.

For more information, see sections 349-355 of the ITAA 1936.

An entity's thin capitalisation control interest is the total of all of the following at that time:

• thin capitalisation direct control interests held by the entity in a company, trust or partnership
• thin capitalisation indirect control interests held by the entity in a company, trust or partnership
• thin capitalisation direct and indirect control interests held by the entity's associate entities in a company, trust or partnership.

For more information, see section 820-815 of the ITAA 1997.

Thin capitalisation direct control interests

For a company (except a corporate limited partnership), a thin capitalisation direct control interest is equal to the greatest of the percentage that the entity holds, or is entitled to acquire (for example, through the exercise of options), of the total:

• paid-up share capital of the company
• rights of shareholders to vote or participate in decision making about
  • making distributions of capital or profits
  • changes to the constituent documents of the company
  • variations to share capital
• rights to distributions of capital or income upon winding-up of the company
• rights to distributions of capital or income upon events other than winding-up of the company.

For example, if an Australian entity holds 75% of the issued share capital of a foreign company, then the thin capitalisation direct control interest of the Australian entity would be 75%.

There are some further rules dealing with determining the percentage of rights to distributions and direct control interests.

For more information, see:

• section 820-855 of the ITAA 1997
• section 350 of the ITAA 1936.

Interests in the income or corpus of trusts held by beneficiaries

For a trust, the thin capitalisation direct control interests are those interests in the income or corpus of trusts held by beneficiaries. Specifically, a thin capitalisation direct control interest in a trust is the percentage of interest an entity holds, or is entitled to acquire, in the income or corpus of the trust, whichever is the greater. There are some further rules dealing with determining the percentage of rights to income and capital.

For more information, see:

• section 820-860 of the ITAA 1997
• section 351 of the ITAA 1936.

Corporate limited partnerships and others

For a corporate limited partnership, a general partner always has a thin capitalisation direct control interest of 100% in that partnership. If the partnership is not a corporate limited partnership, the thin capitalisation direct control interest equals the percentage control of voting power in the partnership.

As an alternative for both corporate limited partnerships and other partnerships, the thin capitalisation direct control interest of a partner is equal to the percentage the partner holds, or is entitled to acquire, of any of the following:

• the total amount of assets or capital contributed to the partnership
• the total rights to distribution of capital, assets, or profits on dissolution
• the total rights to distribution of capital, assets, or profits otherwise than on dissolution.

For more information, see section 820-865 of the ITAA 1997.

More than one type of direct control interest

If an entity holds more than one type of thin capitalisation direct control interest (for example, the entity holds both the right to income and the right to capital), the greatest percentage is taken to be the thin capitalisation direct control interest.

For example, if an entity holds 50% of the voting rights and a right to 25% of the capital of an entity, then the thin capitalisation direct control interest in the entity is 50%.

Thin capitalisation indirect control interests

An entity can have a thin capitalisation control interest in another entity, even though it does not hold any direct interest in that other entity. As outlined in Thin capitalisation direct control interests, a thin capitalisation control interest includes any thin capitalisation indirect control interests held in another entity. Such thin capitalisation indirect control interests are those interests an entity holds in another entity via direct interests held in an interposed entity.

Interposed entities

If the thin capitalisation control interest is being measured to determine whether an Australian entity is foreign controlled, an interest can be traced through an interposed entity only if the interposed entity is itself a foreign controlled Australian entity.

If the thin capitalisation control interest is being measured to determine whether a foreign entity is Australian controlled or whether an Australian entity is an Australian controller of an Australian controlled foreign entity, an interest can be traced through an interposed entity only if the interposed entity is itself an Australian controlled foreign entity.

In certain circumstances, the direct interest the entity holds in the interposed entity is taken to be 100% for the purpose of measuring indirect control.

For more information, see:

• section 820-870 of the ITAA 1997
• section 820-875 of the ITAA 1997.

Thin capitalisation direct and indirect interests of associate entities

The total thin capitalisation control interests of an entity also include any thin capitalisation direct or indirect interests that are held by an entity's associate entities, subject to the 2 exceptions mentioned below. The effect of this is that an Australian entity can still be an Australian controller even though that Australian entity may not hold any thin capitalisation direct or thin capitalisation indirect control interests of its own.

There are 2 circumstances where the total thin capitalisation control interests of an entity will not include the thin capitalisation control interests of the entity's associate entities:

• If the associate entity is only an associate entity because of the rule contained in subsection 820-905(3B) of the ITAA 1997, the associate entity's thin capitalisation control interests are not included.
• If the associate entity is a foreign entity and is only an associate entity because of the rule contained in subsection 820-905(3A) of the ITAA 1997, the associate entity's thin capitalisation control interest is also not included.

For more information, see sections 820-815 to 820-825 of the ITAA 1997.

Modified meaning of associate entity and TC control interests

The modification to the meaning of associate entity amends the reference to ‘an associate interest of 50% or more’ to ‘TC control interest of 10% or more’. Of particular note, is the fact that the determination of TC control interests does not include any interests held by an entity that was deemed to be an associate entity pursuant to 820-905(3A) or 820-905(3B) of the ITAA 1997.

For more information, see modified associate entity definition.