The ‘tracing’ provisions cause a ‘person’, or a set of ‘associated persons’ to be grouped with a company if the person or associated persons has or have a controlling interest in the company.
In this section, ‘person’ means an individual, two or more individuals together, companies, trusts or partnerships.
‘Associated person’ means family members, partners in a partnership, private companies with common shareholders with majority interests, and trustees of trusts where there are common beneficiaries.
Fundamental Principle
A person or set of associated persons has a controlling interest in a company if it has:
a direct interest in excess of 50 per cent; or
an indirect interest in excess of 50 per cent; or
an aggregate of direct and indirect interests in excess of 50 per cent.
Examples of the Application of Fundamental Tracing Principles
Scenario 1: Direct Interest Exceeding 50 per cent
A direct interest exists if the entity can directly or indirectly:
exercise the voting power attached to the voting shares in the corporation;
control the exercise of voting power attached to the voting shares in the corporation; or
substantially influence the exercise of the voting power attached to the majority of voting shares in the corporation.
Example:
Entity A controls 80% of the voting shares in Company B; or
Entity A can control, or substantially influence, the use of voting power by the majority of shareholders of Company B.
Entity A could be a natural person, a company, a trustee or a partnership. In this case, Entity A has a direct interest in Company B and therefore has a controlling interest.
As a consequence, Entity A and Company B are grouped for payroll tax purposes.
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Scenario 2: Indirect Interest Exceeding 50 per cent
An indirect interest in a corporation exists if the entity is linked to that corporation by a direct interest in another corporation with a direct or indirect interest in the indirectly controlled corporation.
The value of an indirect interest in an indirectly controlled corporation is determined by multiplying the value of the entity’s direct interest in the directly controlled corporation by the value of the directly controlled corporation’s interest in the indirectly controlled corporation.
Example:
Entity A controls 90% of the voting shares in Company B;
Company B controls 90% of the voting shares in Company C;
Company C controls 80% of the voting shares in Company D.
Company D controls 50% of the voting shares in Company E.
As a consequence:
Entity A has a 90% direct interest in Company B;
Entity A has an 81% (90% x 90%) indirect interest in Company C
Entity A has a 64.8% (81% x 80%) indirect interest in Company D.
Entity A has a 32.4% (64.8% x 50%) indirect interest in Company E.
Entity A is grouped with Company B;
Entity A is grouped with Company C;
Entity A is grouped with Company D;
Entity A, Company B, Company C and Company D are subsumed into a single ‘master’ group; and
Company E remains ungrouped (unless grouped on another basis such as use of common employees or common control with any of the other companies or entities on the basis of common directors).
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Scenario 3: Aggregate (of Direct and Indirect Interests) Exceeding 50 per cent
An aggregate interest exists if an entity has a direct and an indirect interest or two or more indirect interests. The aggregate interest is the sum of the entity’s direct and indirect interests in the corporation.
Example 1:
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Entity A has a direct interest in
Corporation C of 40%.
Entity A also has an indirect interest in Corporation C of 15%
(that is, 25% x 60% = 15%).
The total aggregate interest that Entity A holds in Corporation C is 55%
(that is, 40% + 15% = 55%).
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Example 2:
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Mr Murray has a direct interest in Corporation A of 80%.
Mr Murray has a direct interest in
Corporation C of 45% and an indirect interest in Corporation C of 12% (through Corporation A and B, that is, 80% x 30% x 50% = 12%). Therefore, Mr Murray holds a total aggregate interest in Corporation C of 57%.
Corporation A, Corporation C and Mr Murray’s interest in both companies
is greater than 50%.
Corporation B cannot be part of the group because the level of interest in each of the entities is 50% or less.
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Exclusion from a Group
As previously highlighted, grouping is an automatic process depending on the status of each business that constitutes the group.
That is, grouping will automatically arise from any one or more of the following circumstances:
common (majority) control at the level of shareholder(s), director(s), partners, or trust beneficiaries;
controlling interests arising from direct interests, indirect interests or aggregation of interests; or
the use of common employees.
The PRTA recognises that in certain circumstances the strict application of these provisions may result in unintended consequences.
As a consequence, the PRTA makes provision for the Commissioner (with one exception) to exercise the discretion to exclude a business from a group when it would otherwise be part of the group.
Note: The one exception to this rule is where the business is grouped because it is a ‘related body corporate’ under section 50 of the Corporations Act 2001(Cth). In that circumstance the business remains grouped and the Commissioner has no capacity to consider exclusion. This also applies to groups created by subsuming of two or more groups with common members where the common member is itself grouped by reason of being a related body corporate.
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