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Controlled Private Company
What is a controlled private company?
A company is a controlled private company in relation to an individual if:
- the company is a designated private company, and
- the individual passes the private companies control test, or
- the individual passes the source test.
When deciding whether an individual passes the control or source tests reference must be had to the associates of the individual.
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Control test for a private company
The control test, in conjunction with the associates rule, is used to determine the level of control a stakeholder exercises in relation to a designated private company. Effective control of a private company generally rests with those persons who hold voting powers or governing director powers. This reflects the absolute power held by these people as they can retain profits within the structure, or reduce or eliminate profits by paying themselves higher wages or directors fees. They can also issue more shares to themselves, thus diluting the voting power of minority shareholdings. Control can rest with one person, a couple, or multiple stakeholders.
Factors for establishing whether a private company is a controlled private company with respect to an individual
VEA ?
The legislation includes the following criteria:
- the sum of the direct voting interests in the company that the person and the person's associates have is 50% or more,
- the person, alone or with associates, is beneficially entitled to 15% or more of the capital or dividends of the company,
- the company is sufficiently influenced by the person, an associate of the person or two or more entities covered by the preceding factors, or
- the person (alone or with associates) is in a position to exercise control over the company.
Treatment if no controller established
Where a person fails to pass any of the above criteria, the company will not be a controlled private company with respect to that individual. If no individual in respect of a designated private company meets any of the above criteria, no attribution percentage can therefore be made to any person (whether receiving Income Support payments or not). The asset and income assessment should then default to the net asset backing method of assessment that applied prior to 1 January 2002.
Treatment of non-controlling minority attributable stakeholder
However where one or more individuals is exerting control over a company, non-controlling minority shareholders should not be held to be attributable stakeholders of the company. Therefore no asset value should be maintained against them, unless the pensioner qualifies as a genuine investor in which case these provisions should apply.
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Example of a non-controlled private company
A company consisting of 100 issued ordinary shares has 10 shareholders holding 10 shares each. None of the shareholders are associates and no individual has governing director type powers, nor are they able to exert control over the company in any other way. In this instance, none of the above factors for establishing whether a private company is a controlled private company with respect to an individual have been satisfied. Therefore if any of these shareholders were to claim payment, the company would not be a controlled private company in respect to any individual and policy would then apply to assess the shareholder under the net asset backing method rules.
Controlled private companies
Company has the same meaning as in the Income Tax Assessment Act 1997.
According to section 52ZZC of the VEA, a company is a controlled private company in relation to an individual if the company is a designated private company and the individual passes either the:
According to Section 52ZZA of the VEA, a company is a designated private company at a particular time if the company:
- satisfies at least 2 of the following conditions in relation to the financial year that ended immediately before that time:
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gross operating revenue is less than $25 million;
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gross assets at the end of the financial year are less than $12.5 million;
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the company has fewer than 50 employees at the end of the financial year, or
- the company came into existence after the end of the financial year that ended immediately preceding that time, or
- the company is a declared private company (DPC) ,
and the company is not an excluded company.
There are two control tests, one is in relation to private trusts and the other one is in relation to private companies.
Control test (private companies)
An individual passes the control test in relation to a company if:
- the aggregate of the direct voting interests in the company held by individual or their associates is 50% or more,
- the aggregate of the direct control interests in the company held by an individual or their associates is 15% or more,
- the company is sufficiently influenced by the individual, their associates or 2 or more entities covered by the preceding dot points, or
- the individual, either alone or with associates is in a position to exercise control over the company.
Control test (private trusts)
According to section 52ZZH(2) of the VEA, an individual passes the control test in relation to a trust if:
- the individual, or their associate (VEA section 52ZZH(2)) (other than an associate covered by paragraph 52ZQ(1)(j) of the VEA), is a trustee,
- a group (VEA section 52ZQ(1)) in relation to the individual can remove or appoint the trustee/s,
- a group in relation to the individual can vary the trust deed or veto the trustee's decisions,
- the total of the direct or indirect beneficial interests in the body or income of the trust held by the individual or their associates is 50% or more,
- a group in relation to the individual had the power (by means of the group exercising any power of appointment, revocation or otherwise) to obtain, with or without the consent of any other entity, beneficial enjoyment of trust income or assets,
- a group in relation to the individual was able in any manner whatsoever, directly or indirectly, to control the application of the trust income or assets,
- a group in relation to the individual is capable under a scheme of gaining beneficial enjoyment or control of the application of the trust, or
- a trustee of the trust was accustomed, obliged (formally or informally) or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the individual.
An individual passes the source test in relation to a trust or company if:
- the individual has transferred property or services to the entity after 7.30 pm, by standard time in the Australian Capital Territory, on 9 May 2000, and
- the underlying transfer was made for no consideration or for a consideration less than the arm's length amount in relation to the underlying transfer.
Control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.
An associate of an individual for the purposes of private trusts and private companies has the meaning given by section 52ZQ of the VEA.
Control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.
At a particular time, an entity holds a direct voting interest in a company equal to the percentage of the voting power in the company in which the entity holds an interest at that time. Where multiple entities are involved, the calculation of direct voting interest should be made with reference to the formula in subsection 52ZZD(2) of the VEA.
Company has the same meaning as in the Income Tax Assessment Act 1997.
For the purposes of Part IIIB, Division 11A (means test treatment of private companies and private trusts), a company is sufficiently influenced by an entity or entities if the company, or its directors:
- are accustomed or under an obligation (whether formal or informal), or
- might reasonably be expected,
to act in accordance with the directions, instructions or wishes of the entity or entities.
An associate of an individual for the purposes of private trusts and private companies has the meaning given by section 52ZQ of the VEA.
Attribution percentage is the percentage of income or assets in the private trust or company that will be taken to be the income and assets of the pensioner for the purpose of the income and assets tests. This only applies if the pensioner (or spouse) is determined to be a controller of the private trust or company.
The net asset backing method provides the least complex and consistent basis for assessing the value of private companies. The method values the shares in a private company by calculating the:
- adjusted net asset position of the company, by deducting company liabilities from the current market value of the assets, and
- assessable value of shares by determining the amount of surplus capital that would accrue to each share if wound-up.
The calculation is based upon information in the company balance sheet and depreciation schedule taking into consideration the current market value rather than the historical value as may appear in the balance sheet.
According to section 52ZZJ of the VEA, a person is an attributable stakeholder if a company or trust is a controlled private company or trust in relation to the individual unless the Commission determines otherwise.
An individual will be treated as a genuine investor in a private company where:
- an actual injection of capital or equity has been made,
- the person who made the capital injection is not an attributable stakeholder of the company,
- the person receives shares in the company commensurate with the amount of capital injection,
- the person has a right to capital upon wind-up commensurate with the total capital injection,
- the person has a right to dividends reasonably commensurate with the total capital injection,
- the person is over 18 years of age at the time the capital injection was made, and
- in the opinion of the delegate, the injection of capital was genuine.
A genuine injection of capital in return for equity in a private trust can only occur where the trust is a fixed trust, and the person obtains units in return for the injection of capital. Genuine investors have the historical value of the injected equity capital assessed as their asset.
Control includes control as a result of, or by means of, trusts, agreements, arrangements, understandings and practices, whether or not having legal or equitable force and whether or not based on legal or equitable rights.
The net asset backing method provides the least complex and consistent basis for assessing the value of private companies. The method values the shares in a private company by calculating the:
- adjusted net asset position of the company, by deducting company liabilities from the current market value of the assets, and
- assessable value of shares by determining the amount of surplus capital that would accrue to each share if wound-up.
The calculation is based upon information in the company balance sheet and depreciation schedule taking into consideration the current market value rather than the historical value as may appear in the balance sheet.