Peter Johnson, director of Advisers Digest, said if “you control an entity that controls another entity, you control that bottom entity”.
Johnson was responding to a question regarding whether shares in a trading company owned by an SMSF represent an in-house asset.
“The situation is as follows, the company has 100 shares in total, we have three parties owning two shares each, so that’s six shares, and then one entity owns the remaining 94 shares,” Johnson explained.
“There is one director secretary, which is assumed is behind the entity which owns the 94 shares. All of the shareholders work within this entity, except one of the shareholders with two shares. Ninety-eight of the shares are owned by employees within the organisation.”
Johnson continued the question related to ascertaining whether with one majority holder, the 50 per cent control test applies, therefore making it an in-house asset.
“The 50 per cent control test always applies, and so therefore the person that owns the 94 shares controls the company. There’s no doubt about that – they can appoint and remove directors and they control it,” he said.
“Now this control test is different to the control test for the small business CGT concessions, because under the Small Business CGT concessions, you control a company with 40 per cent.
“If you’re selling the shares in the company, you control it at 20 per cent but here you control the company if you’ve got more than 50 per cent.”
However, in this scenario, the 94 shares are owned by another entity which changes the way in which control is defined, he said.
“If someone controls that company, that company controls this company. There’s no doubt about it. So, whoever controls that company controls this company,” he said.
“Now you might have 51 per cent of this company, which gives you control of that company, which gives you 94 per cent of this company. You might go, ‘Well, then it’s only 47-48 per cent but if you control this entity, and that entity controls this entity, then you control this entity. “
He continued that for an SMSF, if related parties control “this company that owns that company”, and wants to buy some shares directly in this company, it’s an in-house asset.
“For small business CGT concessions, it’s different than it is for foreign persons. For trusts, like foreign persons, the land is owned by this company, and then they actually apportion it all the way up. But for control, if you control an entity that controls another entity, you control that bottom entity,” he said.
“Of course, with 51 per cent here you can control the directors of this company. When you control the directors of a company, it controls the directors of the other company. You’ve got to look at the whole corporate tree. It’s different for control for an SMSF to the small business CGT concessions, and then it’s different to foreign shareholders, and then consolidations would be different again.”
He added that control is also a question of fact, not just numbers.
“You could have two per cent of a company and still control it if the directors of the company are accustomed to taking direction from you, or you might have 20 per cent and you control everything because everybody else said it’s up to you,” he said.
