Issue
Does a company have a 'controlling individual' under subsection 152-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if an individual owns 50% of the A class shares which are the only class of shares on issue, apart from one D class share owned by another individual, in respect of which the directors can choose to pay a dividend?
Decision
No. Even though 50% of the A class shares are held by a particular individual, a company does not have a 'controlling individual' under subsection 152-55(1) of the ITAA 1997 if another type of share in respect of which the directors can choose to pay a dividend, is owned by another individual.
Facts
A company has on issue A class shares and one D class share. The A class shares have full voting and distribution rights. The D class share has dividend rights which are only payable at the discretion of the directors.
The D class share is owned by a key employee. A different individual owns 50% of the A class shares.
Reasons for Decision
Under subsection 152-55(1) of the ITAA 1997 an individual is a 'controlling individual' of a company if they hold the legal and equitable interests in shares (other than redeemable shares) that carry between them the right to exercise at least 50% of the voting power in the company and the right to receive at least 50% of any distribution of income and capital that the company may make.
Therefore a company can have a 'controlling individual' only if it has an individual shareholder who holds shares that carry between them the right to receive at least 50% of any distribution the company may make.
In this situation, the individual that holds 50% of the A class shares may receive 50% of an income distribution if the directors' discretion to make part of the distribution to the D class shareholder is not exercised. However, they will receive less than 50% of the distribution if the discretion is exercised. Accordingly, they do not hold shares that carry between them the right to receive at least 50% of any distribution made. Their 'notional' 50% interest is reduced to below 50% by the existence of the discretion to distribute income to the D class shareholder.
In these circumstances, the company does not have a 'controlling individual' under subsection 152-55(1) of the ITAA 1997.
In any case, if there was potential to make a distribution on the D class share separate to any other distribution that might be made on the other shares, the company will also not have a controlling individual because the A class shareholder will not have the right to receive at least 50% of the potential D class distribution.