The Commissioner of Taxation has issued Taxation Determination TD 2023/5 re aggregated turnover and connected entities and the Commissioner's discretion that an entity does not “control” another entity. The determination was previously issued in draft as Draft Taxation Determination TD 2023/D2. The finalised determination is substantially the same as the draft determination.
By way of background the Commissioner’s discretion allows the Commissioner to determine that an entity (the first entity) does not control another entity (the test entity) in circumstances where the first entity and its affiliates have a control percentage of at least 40% but less than 50% in the test entity, and the Commissioner is satisfied that the test entity is controlled by an entity or entities other than the first entity or any of the first entity’s affiliates.
The draft determination provides guidance on the following specific issues relating to the concept of “control” which the Commissioner has had to consider in administering the Commissioner's discretion:
- Requests for the Commissioner's discretion to be exercised where a third entity has sole or primary responsibility for day-to-day management of the affairs of the test entity, but holds relatively insignificant or no interests in the income or capital of the test entity, or in shares carrying voting rights (if the test entity is a company); and
- Applicants suggesting that their control percentage of between 40% and 50% should be disregarded because the remaining holders of interests in the test entity will together necessarily control the entity, irrespective of their number or relationship to each other.
In relation to the first issue:
- The Commissioner’s view is that sole or primary responsibility for the day-to-day management of the affairs of the test entity, while not irrelevant to the question of who controls that entity, does not of itself constitute control for the purposes of the Commissioner's discretion.
- Instead, the nature of control relevant for the Commissioner's discretion is control over those matters typically associated with ownership of a business entity. That is, entitlements to income and capital of the entity as well as participation in decision making on key matters affecting the entity's constitution, funding, structure and management.
In relation to the second issue:
- The Commissioner does not accept as correct that an entity's control percentage of between 40% and 50% should be disregarded on the basis that the remaining interest holders together necessarily control the test entity, irrespective of their number or relationship to each other.
- The Commissioner may look beyond a single third entity for relevant control, but the discretion would not be exercised merely on the basis of identifying a group of unrelated entities that, when individual control percentages are aggregated, holds interests in the test entity amounting to a control percentage of more than 50%.
- In order for the Commissioner to form a view that a group of third entities controls the test entity, the Commissioner would expect to see that the group has agreed to operate, and does operate, as a single controlling mind when it comes to decision making generally in respect of the test entity. This might be in accordance with proxy arrangements that put voting power in the hands of one member of the group, or other legal arrangements under which the entities are broadly bound to act jointly in respect of the affairs of the test entity.