Tracing

Tracing interests in corporations

Where a more complex business structure exists, the tracing rules identify the entity with a direct or indirect controlling interest (more than 50%) in more than one corporation. Corporations can be grouped when these common controlling interests are identified.

See the example below.

 

Mr and Mrs Smith are related persons. Other examples of related persons include:

• de facto partners
• brothers and sisters
• related companies.

Related persons are one category of associated persons, which also include:

• partners in a partnership
• private companies where common shareholders have a majority interest
• trustees with a common beneficiary.

A person or two or more associated persons are called a relevant entity. If a relevant entity has a controlling interest in two or more corporations, those corporations are grouped.

The example illustrates the different types of interests and how these provisions work.

Mr and Mrs Smith have a controlling interest in Orange Pty Ltd of 80%. This is called a direct interest.

Mr and Mrs Smith also have a 50% direct interest in Black Pty Ltd. They also have an indirect interest in Black Pty Ltd. The value of their indirect interest in Black Pty Ltd is:

Mr and Mrs Smith’s interest in Orange Pty Ltd multiplied by Orange Pty Ltd’s interest in Purple Pty Ltd multiplied by Purple Pty Ltd’s interest in Black Pty Ltd—which is 80% x 40% x 50% = 16% indirect interest.

The total value of Mr and Mrs Smith’s interests in Black Pty Ltd is the sum of the direct and indirect interests: 50% + 16% = 66%. This is called an aggregate interest.

Therefore, Mr and Mrs Smith have more than 50% interest in Black Pty Ltd (a controlling interest). As they also have a controlling interest in Orange Pty Ltd, Orange Pty Ltd and Black Pty Ltd are a group.

In this example, Purple Pty Ltd is not part of the group, as no other entity in that diagram has a controlling interest in Purple Pty Ltd.