Division 6C: What amounts to ‘control’? - KPMG Australia
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Division 6C: What amounts to ‘control’?

Division 6C: What amounts to ‘control’?

Peter Mallyon discusses the draft ATO Paper on Negative Control and the application of Division 6C, and a recent court case.


Partner, Corporate Tax

KPMG Australia


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Judge holding gavel in the courtroom

The meaning of the word “control” and of the phrase “control…the affairs or operations of another person” has been a much debated topic in the context of Division 6C. If a trust is taken to control the affairs or operations of another person who carries on a trading business, the trust will be a ‘trading trust’ and may be taxed akin to a company.

The The Australian Taxation Office (ATO) has taken the (initial) view that a power of veto over a number of matters could amount to ‘negative control’ and that ‘negative control’ is within the meaning of control for the purposes of Division 6C (see the draft ATO Guidance Paper: Negative Control and the application of Division 6C, 2 September 2015). In this paper, the ATO also stressed that “because the term ‘control’ is not defined for the purposes of Division 6C, it must be construed according to its natural meaning having regard to its context and the legislative purpose served by paragraph 102N(1)(b)” (see also Privatisation and Infrastructure – Australian Federal Tax Framework (Jan 2017 draft)).

In the recent High Court decision (in the capacity of the Court of Disputed Returns) finding of fact Re Day [2017] HCA 2, the Court was asked to consider whether Mr Bob Day controlled the affairs of a company.

Despite Gordon J finding that, at its highest, the evidence established:

  • “Mr Day was a person who made, or participated in making, decisions that affected a substantial part of the business of (the company)”; and
  • “although Mr Day was not validly appointed as a director, he is shown to have done acts in the position of a director”.

Gordon J found that even then, this did not even amount to “effective control” over the company, much less actual or legal control.

Whilst it should be noted that the hearing was only a finding of fact (i.e. Gordon J didn’t perform an analysis of whether the term could have some different legal meaning), it will be interesting to see whether the Tax Office’s position of what could amount to ‘control’ changes in light of Gordon J’s finding.

The Full High Court hearing is set down for 7 February.

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