Taxation Determination

TD 2022/6

Income tax: aggregated turnover - application of the public entity exception to the indirect control test

Please note that the PDF version is the authorised version of this ruling.

There is a Compendium for this document: TD 2022/6EC .

Table of Contents	Paragraph
Ruling	1
Example 1 - aggregated turnover calculations when applying the public entity exception to the indirect control test	6
Example 2 - entity ultimately owned by a listed company through interposed companies	24
Date of effect	40
Appendix - Explanation	41
Background to Subdivision 328-C	41
Meaning of 'connected with' an entity	43
The indirect control test	45
The public entity exception to the indirect control test	49

Relying on this Determination

This publication (excluding appendix) is a public ruling for the purposes of the Taxation Administration Act 1953.

If this Determination applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Determination. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Determination.

Ruling

1. All legislative references in this Determination are to the Income Tax Assessment Act 1997, unless otherwise indicated.

2. For the purposes of determining 'control' within the meaning of section 328-125, where an entity (the first entity) controls another entity (the second entity) and the second entity directly or indirectly controls a third entity, the first entity is taken to control the third entity.^[1]

3. However, the 'indirect control test' within the meaning of subsection 328-125(7) does not apply if a public entity is interposed between the first entity and the third entity. In these circumstances, the first entity will not control the third entity merely because of its interest in the interposed public entity.^[2]

4. For the purposes of this Determination, a 'public entity' is an entity outlined in subsection 328-125(8), being:

(a)

a company shares in which (except shares that carry the right to a fixed rate of dividend) are listed for quotation in the official list of an approved stock exchange;

(b)

a publicly traded unit trust;

(c)

a mutual insurance company;

(d)

a mutual affiliate company;

(e)

a company (other than one covered by paragraph (a)) all the shares in which are owned by one or more of the following:

(i): a company covered by paragraph (a);
(ii): a publicly traded unit trust;
(iii): a mutual insurance company;
(iv): a mutual affiliate company.

5. The mere presence of an interposed public entity does not result in a control chain being broken. If a public entity is interposed in an ownership structure, the first entity may still control the third entity through direct control.^[3]

Example 1 - aggregated turnover calculations when applying the public entity exception to the indirect control test

Facts

6. ABC Pty Ltd (ABC) needs to calculate its aggregated turnover for the 2020-21 income year to determine its eligibility for the loss carry back tax offset.

7. Under section 328-115, ABC's aggregated turnover includes its own annual turnover, together with the annual turnover of any entity that is connected with or an affiliate of ABC at any time during the income year.

8. ABC did not have any affiliates within the meaning of section 328-130 during the 2020-21 income year. To undertake its aggregated turnover calculation, ABC needs to identify any entities connected with it.

9. 62% of ABC's shares are held by Public Holdings Ltd (PHL). These carry the right for PHL to receive 62% of any distributions of income or capital made by ABC.

10. PHL is a public company whose shares are listed for quotation on the Australian Securities Exchange. Its shares do not carry the right to a fixed rate of dividend.

11. 38% of ABC's shares are held by various minority shareholders. Many of these minority shareholders are affiliates of DEF Pty Ltd (DEF). DEF's affiliates have a combined annual turnover of $1 billion.

12. DEF, together with its affiliates, owns equity interests in PHL that carry between them the right to exercise 55% of the voting power in PHL.

13. DEF, together with its affiliates, also owns equity interests in ABC that carry between them the right to exercise 29% of the voting power in ABC.

14. ABC has an annual turnover of $1.2 billion for the 2020-21 income year. PHL has an annual turnover of $2.6 billion for ABC's 2020-21 income year. DEF has an annual turnover of $2 billion for ABC's 2020-21 income year.

Facts

15. PHL directly controls ABC by virtue of PHL having a control percentage^[4] in ABC of 62%.

16. DEF directly controls PHL by virtue of DEF, together with its affiliates, having a control percentage^[5] in PHL of 55%.

17. In the absence of the public entity exception to the indirect control test, DEF would be taken to control ABC indirectly pursuant to subsection 328-125(7). This would be because the first entity (DEF) controls a second entity (PHL) and the second entity controls the third entity (ABC).

18. However, because PHL is a public company listed on the Australian Securities Exchange, the indirect control test does not apply pursuant to subsection 328-125(8), such that DEF will not be taken to control ABC indirectly.

19. Nonetheless, the mere presence of an interposed public entity does not result in a control chain being broken. The first entity may still control the third entity through direct control. However, DEF does not control ABC directly because DEF, together with its affiliates, only has a control percentage^[6] of 29%.

Aggregated turnover calculations

20. ABC's aggregated turnover includes its own annual turnover, together with the annual turnover of any entity that is connected with or an affiliate of ABC at any time during its 2020-21 income year.

21. On the facts, ABC is connected with PHL. Therefore, ABC's aggregated turnover for the 2020-21 income year is its own annual turnover ($1.2 billion) plus PHL's annual turnover ($2.6 billion), which totals $3.8 billion.

22. If PHL was required to calculate its aggregated turnover in the same scenario, its aggregated turnover would include its own annual turnover ($2.6 billion) plus the annual turnovers of ABC ($1.2 billion) and DEF ($2 billion). This is because PHL directly controls ABC, and PHL is directly controlled by DEF. This scenario would result in PHL having an aggregated turnover of $5.8 billion.

23. If DEF was required to calculate its aggregated turnover in the same scenario, its aggregated turnover would include its own annual turnover ($2 billion), the annual turnovers of its affiliates (collectively $1 billion) and the annual turnover of PHL ($2.6 billion). This is because DEF directly controls PHL. This would result in DEF having an aggregated turnover of $5.6 billion.

Note: It is assumed in Example 1 of this Determination that no relevant exclusion amounts pursuant to subsection 328-115(3) apply to the aggregated turnover calculations.

Example 2 - entity ultimately owned by a listed company through interposed companies

Facts

24. Aus Co needs to calculate its aggregated turnover for the 2020-21 income year to determine its eligibility for temporary full expensing.

25. Under section 328-115, Aus Co's aggregated turnover includes its own annual turnover, together with the annual turnover of any entity that is connected with or an affiliate of Aus Co at any time during the income year.

26. Aus Co did not have any affiliates within the meaning of section 328-130 during the 2020-21 income year. To undertake its aggregated turnover calculation, Aus Co needs to identify any entities connected with it.

27. 60% of Aus Co's shares are held by US Sub Co 2. These carry the right for US Sub Co 2 to receive 60% of any distributions of income or capital made by Aus Co.

28. 100% of US Sub Co 2's shares are held by US Sub Co 1. These carry the right for US Sub Co 1 to receive 100% of any distributions of income or capital made by US Sub Co 2.

29. 100% of US Sub Co 1's shares are held by US Listed Parent Co. These carry the right for US Listed Parent Co to receive 100% of any distributions of income or capital made by US Sub Co 1.

30. US Listed Parent Co is a public company whose shares are listed for quotation on the New York Stock Exchange. Its shares do not carry the right to a fixed rate of dividend.

Control

31. US Sub Co 2 directly controls Aus Co by virtue of US Sub Co 2 having a control percentage^[7] in Aus Co of 60%.

32. US Sub Co 1 directly controls US Sub Co 2 by virtue of US Sub Co 1 having a control percentage^[8] in US Sub Co 2 of 100%.

33. US Sub Co 1 indirectly controls Aus Co pursuant to subsection 328-125(7) because US Sub Co 1 (the first entity) directly controls US Sub Co 2 (the second entity) which directly controls Aus Co.

34. US Listed Parent Co directly controls US Sub Co 1 by virtue of US Listed Parent Co having a control percentage^[9] in US Sub Co 1 of 100%.

35. In the absence of the public entity exception to the indirect control test, US Listed Parent Co would also be taken to control Aus Co indirectly pursuant to subsection 328-125(7). This would be because the first entity (US Listed Parent Co) controls a second entity (US Sub Co 1) and the second entity indirectly controls Aus Co (via its direct control of US Sub Co 2 which directly controls Aus Co).

36. However, because US Sub Co 1 (the second entity) is a company, all the shares in which are owned by a company whose shares are listed for quotation on the New York Stock Exchange (US Listed Parent Co), the indirect control test does not apply pursuant to subsection 328-125(8), such that US Listed Parent Co does not control Aus Co indirectly.

37. The public entity exception to the indirect control test does not apply to US Sub Co 1's indirect control of Aus Co. This is because US Sub Co 2 (the second entity) is not a company covered by subsection 328-125(8). Specifically, US Sub Co 1, which owns all the shares in US Sub Co 2, is not a company whose shares are listed for quotation on an approved stock exchange.

Conclusion

38. On the facts, Aus Co is directly controlled by US Sub Co 2 and indirectly controlled by US Sub Co 1. It is therefore connected with US Sub Co 2 and US Sub Co 1.

39. Therefore, Aus Co will need to include its annual turnover, as well as the annual turnover of US Sub Co 2 and US Sub Co 1, in its aggregated turnover calculation.

Note 1: In accordance with paragraphs 328-115(3)(a) and (b), Aus Co's aggregated turnover does not include amounts derived by Aus Co, US Sub Co 2 or US Sub Co 1 from dealings between each other.

Note 2: Example 2 of this Determination does not examine whether US Sub Co 2 is an affiliate of US Listed Parent Co within the meaning of section 328-130, and therefore whether US Listed Parent Co directly controls Aus Co under subsection 328-125(2) via an affiliate.

Date of effect

40. This Determination applies both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10 Public Rulings).

Commissioner of Taxation
30 March 2022

Appendix - Explanation

This Explanation is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.

Background to Subdivision 328-C

41. Pursuant to Subdivision 328-C^[10], an entity will be a small business entity for an income year if it carries on a business and its aggregated turnover is under the relevant threshold.^[11] An entity's aggregated turnover for an income year is comprised of its annual turnover^[12], together with the annual turnover of each entity (including foreign resident) that is connected with^[13] it, or is an affiliate^[14] of it, at any time during the income year.^[15]

42. The concepts of small business entity and aggregated turnover in Subdivision 328-C are utilised in a number of provisions in the taxation law, including the temporary loss carry back^[16] and temporary full expensing^[17] measures. These measures extend the small business entity definition to include entities that would be a small business entity if the aggregated turnover threshold was $5 billion (instead of $10 million).^[18] As a result, the aggregation rules in Subdivision 328-C now apply to a broader range of business structures and entities, including large businesses and multinational entities.

Meaning of 'connected with' an entity

43. An entity is 'connected with' another entity if either entity controls the other entity in a way described in section 328-125 or both entities are controlled in a way described in that section by the same third entity.^[19] Subsection 328-125(2) sets out the test for determining whether an entity directly controls another entity, other than a discretionary trust^[20], as follows:

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 - own, or have the right to acquire the 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 - own, or have the right to acquire the 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.

44. The control test is based on legal ownership of an interest in an entity, rather than who benefits from the interest.^[21]

The indirect control test

45. An entity will also be connected with another entity if it indirectly controls that entity (or vice versa) within the meaning of subsection 328-125(7).

46. Subsection 328-125(7) states:

This section applies to an entity (the first entity ) that directly controls another entity (the second entity ) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or applications of this section, controlled by the second entity.

47. Subsection 328-125(7) therefore provides the principle that where a first entity controls a second entity and the second entity directly or indirectly controls a third entity, the first entity is taken to control the third entity.^[22]

48. The indirect control test is designed to look through business structures that include interposed entities.^[23]

The public entity exception to the indirect control test

49. Subsection 328-125(8) states:

However, subsection (7) does not apply if the second entity is an entity of any of the following kinds:

(a)
a company shares in which (except shares that carry the right to a fixed rate of dividend) are listed for quotation in the official list of an approved stock exchange;

(b)
a publicly traded unit trust;

(c)
a mutual insurance company;

(d)
a mutual affiliate company;

(e)
a company (other than one covered by paragraph (a)) all the shares in which are owned by one or more of the following:

(i)
a company covered by paragraph (a);

(ii)
a publicly traded unit trust;

(iii)
a mutual insurance company;

(iv)
a mutual affiliate company.

50. Subsection 328-125(8) therefore provides an exception to the indirect control test, providing a list of specific entities (broadly, public entities), the interposition of which results in the indirect control test not having application.

51. In other words, if a public entity is interposed between a first and a third entity, the first entity will not control the third entity merely because of its interest in the interposed public entity.^[24]

52. The reasoning behind the public entity exception to the indirect control test is that the very diffuse and regularly traded ownership of such entities means that it can be a complicated and difficult process to trace interests through such entities.^[25]

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Footnotes

[1]

See subsection 328-125(7).

[2]

See subsection 328-125(8).

[3]

See paragraph 2.58 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 (the EM).

[4]