Tax & ATO
What is Connected entity?
Entity connected with you
An entity is connected with you if you control it, it controls you, or the same third entity controls both. Control generally means a right to at least 40% of a company's voting power, or 40% of another entity's income or capital distributions. Connected entities are counted in your aggregated turnover.
The three ways entities become connected
Section 328-125 of the Income Tax Assessment Act 1997 sets out the test. An entity is connected with you where you control it, where it controls you, or where both of you are controlled by the same third entity. That third limb is the one people miss: two companies that have never traded with each other are connected if one person controls both.
Control is measured by a control percentage. For a company, it is holding at least 40% of the voting power. For other entities, it is a right to at least 40% of the income or capital distributions. The test looks at legal ownership of the interest rather than who ultimately benefits from it.
Control also passes down a chain. If you control one entity and that entity controls a second, you are taken to control the second as well, which is how a holding structure can connect entities several steps apart. There is an exception where a public entity sits in the chain.
The 40% to 50% grey area
40% is a threshold, not a verdict. Where someone's control percentage is at least 40% but under 50%, the Commissioner has a discretion under subsection 328-125(6) to decide that they do not in fact control the entity, because a third party actually does. That discretion is only available inside that band: a holding of 50% or more is outside it entirely, and a private ruling has confirmed the discretion could not be applied to a holding of exactly 50%.
The ATO has also said, in Taxation Determination TD 2023/5, that whether a third entity holds 40% may assist in working out whether that entity controls another, but it is not decisive. In other words the percentage opens the question rather than closing it, and two businesses with identical shareholdings can land on different answers on their facts.
Why it matters even when the businesses are unrelated
Connected entities exist in the tax law for one practical purpose: to stop a large business dividing itself into small pieces and claiming small business concessions on each. The effect on an ordinary family business is incidental but real. Two unrelated trades under common control are aggregated, and the combined figure decides whether either of them gets simplified depreciation, cash-basis GST, or the CGT concessions on a sale.
A different control percentage applies in some regimes. For the research and development tax incentive, for example, the connected entity rules are applied with 50% as the control percentage rather than 40%, so the same shareholding can connect entities for one purpose and not for another. Anyone structuring around these lines should get the answer from a registered tax agent for the specific concession in question.
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Connected entity frequently asked questions
Are two companies owned by the same person connected?
Generally yes. The test covers entities controlled by the same third entity, so one person holding at least 40% of the voting power in each company connects them, even where the two businesses are in different industries and have never dealt with each other. Their turnovers are then combined in each one's aggregated turnover.
What does control mean for a trust rather than a company?
For an entity other than a company, control comes from a right to at least 40% of the income or capital distributions, rather than from voting power. Discretionary trusts have their own rules, because no beneficiary has a fixed entitlement, so the position there turns on distributions actually made and on the trustee's exercise of discretion.
Can a 45% shareholding be treated as not controlling the company?
It can. Where the control percentage is at least 40% but under 50%, the Commissioner may determine under subsection 328-125(6) that the holder does not control the entity because a third party does. That discretion is confined to the 40% to 50% band: at 50% or above it is not available at all.
Last reviewed and updated: by Bishal Shrestha