18.104.22.168 Determining a Controlled Private Company from 01/01/2002
Date of effect
This topic has effect to designated private companies from 1 January 2002.
In this topic
This topic contains the following information:
- determining a controlled private company,
- control test for private companies, and
- factors for establishing control of a private company.
Determining 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 control test, OR
- the individual passes the source test.
Note: When deciding whether an individual passes the control or source tests the assessor must have reference to the associates of the individual.
Act reference: SSAct section 1207Q Controlled private companies, section 1207N Designated private companies, section 1207Q(3) Controlled private companies - Source test, section 1207C Associates
Control test for private companies
The control test, in conjunction with the associate's 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 director's fees. They can also issue more shares to themselves, thus diluting the value 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
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, OR
- the person, alone or with associates, is beneficially entitled to 15% or more of the capital or dividends of the company, OR
- the company is sufficiently influenced by the person, an associate of the person or 2 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.
Note: Where an income support recipient 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 can therefore be made to any person (whether receiving Centrelink payments or not) and the asset and income assessment should default to the 'net asset backing' method of assessment as prior to 1 January 2002.
Example: 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' rules.
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 and therefore no asset value should be maintained against them, unless the income support recipient qualifies as a genuine investor in which case these provisions should apply.
Act reference: SSAct section 1207X Attributable stakeholder, asset attribution percentage and income attribution percentage, section 1207D When a company is sufficiently influenced by an entity, section 1207E Majority voting interest in a company