Entities connected with you and control relationships

Control determines entities connected with you

An entity may be connected with you if you have a control relationship with it. This is important to know when working out your aggregated turnover for small business concessions. You may have a control relationship with another entity if:

• you control it
• you are controlled by it
• you and the entity are controlled by another entity
• it's controlled by your affiliate
• it's controlled by you and your affiliate together
• it is controlled by an entity that you control (see the indirect control test).

Control of a company

You control a company if you and/or your affiliates have shares and other interests in the company (or the right to acquire them) that together give you a right to:

• exercise or control 40% or more of the voting power in the company

40% or more of any distribution of income (for example, dividends) or capital of the company.

Control of a partnership

You control a partnership if you and your affiliates own, or have the right to acquire, interests in the partnership that give you both together a right to 40% or more of the partnership's net income (for tax purposes), distribution of income or capital of the partnership.

Control of trusts

The control rules for trusts depends on the type of trust.

Control of a trust (other than a discretionary trust)

You control a trust (other than a discretionary trust) if you and your affiliates together own, or have the right to acquire, interests in the trust that give you the right to 40% or more of any distribution of income, net income or capital by the trust.

Control of a discretionary trust

There are 2 tests to determine if you control a discretionary trust, the:

• distribution test
• influence over trustee test.

If you meet either of these tests, you control a discretionary trust.

Distribution test

You meet the distribution test if:

• in any of the previous 4 income years, you and your affiliates together were paid, or had applied for you or your affiliate's benefit, 40% or more of either:
  • the income of the trust applied or paid in that year
  • the capital of the trust applied or paid in that year
• you're not a tax-exempt entity or deductible gift recipient.

Your control percentage is the highest of the percentage of the income or capital of the trust paid to, or applied for you, or your affiliates benefit in the prior 4 years.

Influence over trustee test

You meet this test if the trustee either acts, or might reasonably be expected to act, in accordance with you or your affiliates directions or wishes, or the wishes of you and your affiliates acting together.

You must consider all the relevant circumstances to work out whether you and your affiliates together, or alone satisfy this test, including:

• the trust deed, including whether the trustee has and does act in accordance with any clauses requiring it to ignore any directions or wishes you, or your affiliate, may communicate to it
• the manner in which the trustee has acted in the past, including how it has responded to any directions, instruction or wishes you or your affiliates have given it, whether directly or indirectly
• the nature of the relationships between you, your affiliates and the trustee, for example if the trustee is a natural person are they related to you; if an entity, do you control that entity, or is the trustee completely independent
• the amount of property or services you or your affiliates (or both) transferred or provided to the trust
• any arrangement or understanding between you and any person who has benefited under the trust in the past who may have influence over the trustee.

Trustee did not make a distribution

For the purposes of the small business CGT concessions, the trustee of a discretionary trust can also nominate up to 4 beneficiaries as controllers of the trust for an income year if:

• the trustee did not make a distribution of income or capital, and
• the trust had a tax loss or no taxable income.

The trustee may wish to make the nomination to ensure that a particular CGT asset is treated as an active asset for that income year. The nomination must be in writing and signed by the trustee and each nominated beneficiary.

A nominated beneficiary is connected with the trust (and the trust is connected with the nominated beneficiary) for the purposes of the small business CGT concessions:

• maximum net asset value test
• the aggregated turnover test
• active asset test.

Commissioner's discretion if you control an entity, but your control percentage is less than 50%

If you control an entity under one of the control tests because you have a control percentage of 40% or more, the Commissioner may determine that you don't control an entity if:

• your control percentage in the entity is less than 50%
• the Commissioner thinks that another entity or group of entities, not including your affiliates, actually controls the entity.

The discretion is not available if you control a discretionary trust, because you pass the influence over trustee test.

In considering whether another entity (or group of entities) actually controls the entity, the Commissioner will have regard to the facts and circumstances of each case.

The nature of control relevant for the Commissioner's discretion, is control over matters typically associated with ownership of a business entity. Such as:

• entitlements to income and capital of the entity
• participation in decision-making on key matters affecting the entity's constitution, funding, structure and management-this includes matters such as:
  • decision-making on the composition and oversight of the management team
  • amending the entity's constituent documents
  • deciding on capital and entity restructuring proposals, the issue of new ownership interests or winding up
  • authorising significant changes in the direction of the entity's business operations.

Whether or not another entity (or group of entities) has a control percentage of at least 40% may assist in determining whether it controls the entity, but it is not decisive.

Sole or primary responsibility for the day-to-day management of the affairs of the entity, while not irrelevant to the question of who controls that entity, doesn't constitute control for the purposes of the discretion. For example, a person who is appointed as the day-to-day manager of an entity doesn't control it, if they don’t have a controlling ownership interest in it. They are subject to the supervision and direction of the owners as to how the entity is to be managed.

For more information, see TD 2023/5: Income tax: aggregated turnover and connected entities - Commissioner's discretion that an entity does not 'control' another entity.

Indirect control test

Under the indirect control test, you control an entity that is controlled directly or indirectly, by another entity you control (whether directly or indirectly). This test is designed to determine control of structures that include interposed entities. For example, where you directly control a second entity, and the second entity either directly or indirectly controls a third entity, you are considered to also control the third entity.

In the following figure , the business entity:

• controls Company A as it owns more than 40% of Company A's ordinary shares.
• Company A controls Company B as it owns more than 40% of Company B's ordinary shares.
• Company B doesn't control Company C as it owns less than 40% of Company C's ordinary shares.
• neither Company A nor the business entity controls Company C because Company B owns less than 40% of Company C's ordinary shares.

So the business entity controls companies A and B, but not company C.

 

Public entity exception

The indirect control test doesn't apply to cause you to control entities controlled by a public entity you control. However, you may still control these entities if you, or your affiliates together, have ownership interests, or rights to acquire ownership interests in these entities that cause you to meet one of the primary control tests.

A public entity means:

• a company whose shares are listed for quotation in the official list of an approved stock exchange, unless those shares have the right to a fixed dividend rate
• a publicly traded unit trusts
• a mutual insurance companies
• a mutual affiliate companies
• any company, in which all the shares are beneficially owned by one or more of any of the entities previously listed.