Connected Entities

An entity is connected with another entity if:

  • either entity controls the other entity, or
  • both entities are controlled by the same third entity.

The control test is 40%, meaning ownership (or the right to acquire such ownership) of 40% or more of distribution of income or capital – or 40% or more of equity interests (commonly shares) and consequently voting power.

In some cases, the threshold is lifted to 50% if there is a passive owner (such as a VC investor for example), but this is at the commissioner’s discretion. A private binding ruling can be sought to confirm this. In 2023 the ATO made a determination around the need for a third party to prove control if this discretional decision is sought – it is not sufficient to claim that an entity with 40% or more ownership does not control, there must be a different and separate entity shown to be in actual control.

To avoid dummy entities being interposed (put in between a controlling entity and the R&D entity to avoid the controlling entity turnover being included) then indirect control is also considered. The control test (and inclusion as a connected entity) is extended upwards and outwards unless the entity immediately above is a public entity.

We’ve created a diagram on the Aggregated Turnover page.