A company [2] is a controlled private company [2] in relation to an individual if:
When deciding whether an individual passes the control [2] or source tests reference must be had to the associates [2] of the individual.
More ? [3]
The control test, in conjunction with the associates rule, is used to determine the level of control [2] 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.
VEA ? [4]
The legislation includes the following criteria:
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 [2] 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 [2] of assessment that applied prior to 1 January 2002.
However where one or more individuals is exerting control over a company, non-controlling minority shareholders should not be held to be attributable stakeholders [2] of the company. Therefore no asset value should be maintained against them, unless the pensioner qualifies as a genuine investor [2] in which case these provisions should apply.
More ? [5]
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 [2] 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 [2] rules.
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:
gross operating revenue is less than $25 million;
gross assets at the end of the financial year are less than $12.5 million;
the company has fewer than 50 employees at the end of the financial year, or
and the company is not an excluded company [2].
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:
Control test (private trusts)
According to section 52ZZH(2) of the VEA, an individual passes the control test in relation to a trust if:
An individual passes the source test in relation to a trust or company if:
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 [12].
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) [13] 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:
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 [12].
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:
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 [12], 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:
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 [2] 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:
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.
Links
[1] https://clik.dva.gov.au/user/login?destination=node/16402%23comment-form
[2] https://clik.dva.gov.au/%23
[3] https://clik.dva.gov.au/book/export/html/16402#tgt-cspol_part10_ftn423
[4] https://clik.dva.gov.au/book/export/html/16402#tgt-cspol_part10_ftn424
[5] https://clik.dva.gov.au/book/export/html/16402#tgt-cspol_part10_ftn425
[6] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/1036-attribution-guidelines-private-trusts-private-companies-01012002/associate-rule
[7] https://clik.dva.gov.au/book/export/html/16402#ref-cspol_part10_ftn423
[8] https://clik.dva.gov.au/service-eligibility-assistant-updates/all-determinations-order-date-signed-oldest-most-recent/determinations-under-vea
[9] https://clik.dva.gov.au/book/export/html/16402#ref-cspol_part10_ftn424
[10] https://clik.dva.gov.au/compensation-and-support-policy-library/part-10-types-income-and-assets/103-business-structures-and-trusts/10311-assessment-capital-injection-private-trust-or-company-01012002/capital-injection-return-equity-private-trust-or-company
[11] https://clik.dva.gov.au/book/export/html/16402#ref-cspol_part10_ftn425
[12] http://clik.dva.gov.au/legislation-library
[13] http://www.comlaw.gov.au/Series/C2004A03268