ATO Interpretative Decision

ATO ID 2009/22

Income Tax

Issue

Is a contract of sale to sell shares in a company an arrangement under which, the purchaser, from the time of entering into that contract, may become in a position to affect the voting rights attached to those shares for the purposes of paragraph 334A(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. A contract of sale to sell shares in a company is an arrangement under which the purchaser, from the time of entering into that contract, may become in a position to affect the voting rights attached to those shares for the purposes of paragraph 334A(1)(b) of the ITAA 1936.

Facts

The taxpayer is an Australian resident company for Australian income tax purposes.

The taxpayer is the legal and beneficial owner of the shares in a non-resident company before entering into the contract of sale.

These shares carry the right to exercise the voting power in the non-resident company within the meaning of section 334A of the ITAA 1936.

The taxpayer entered into a contract of sale to sell these shares to a third party (the purchaser).

Reasons for Decision

Subsection 334A(1) of the ITAA 1936 provides that for the purposes of section 334A of the ITAA 1936, a company is taken to have a 'voting interest' in another company if:

(a)

the first-mentioned company is the beneficial owner of shares (other than eligible finance shares or widely distributed finance shares) in the other company that carry the right to exercise any of the voting power in the other company; and

(b)

there is no arrangement in force at the relevant time by virtue of which any person is in a position, or may become in a position, to affect that right;

Subsection 334A(2) of the ITAA 1936 provides that for the purposes of paragraph 334A(1)(b) of the ITAA 1936:

a person is taken to be in a position to affect a right of a company if that person has a right, power or option (whether by virtue of any provision in the constituent document of any company or by virtue of any agreement or instrument or otherwise) to acquire that right or do an act or thing that would prevent the first-mentioned company from exercising that right or receiving any benefits accruing by reason of that right.

Subsection 334A(5) of the ITAA 1936 provides that 'arrangement' in section 334A of the ITAA 1936 includes:

(a)

any agreement, arrangement, understanding, promise or undertaking, whether expressed or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b)

any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The definition of 'voting interest' in section 334A of the ITAA 1936 was taken from former section 160AFB of the ITAA 1936. Paragraphs 334A(1)(a) and 334A(1)(b) and subsections 334A(2) and 334A(5) of the ITAA 1936 were taken respectively from former paragraphs 160AFB(4)(a) and 160AFB(4)(b) and subsections 160AFB(5) and 160AFB(7) of the ITAA 1936.

In relation to former subsection 160AFB(5) of the ITAA 1936, the Commissioner of Taxation stated in Taxation Ruling IT 2555 under paragraph 14:

Subsection 160AFB(5) thus envisages the direct unencumbered exercise by an Australian company of the voting rights which attach to the shares in a foreign company that are beneficially owned by the Australian company. It therefore requires the Australian company to be the beneficial owner of at least 10% of the voting shares of the foreign company and that it is able to directly and freely exercise the voting rights attaching to those shares.

The Commissioner considers that the contract of sale that the taxpayer entered into to sell its shares in the non-resident company, is an 'arrangement' for the purposes of subsection 334A(5) of the ITAA 1936.

The transfer from the taxpayer to the purchaser of the shares to which the voting rights in the non-resident company are attached, is inherent to the contract of sale of those shares.

As a consequence, the purchaser may become, from the time of entering into the contract of sale, in a position to have the power or do an act or thing that would prevent the taxpayer from exercising those voting rights or receiving any benefits accruing by reason of those rights. This means that from that time the taxpayer ceases to have the direct unencumbered exercise of those voting rights.

Accordingly, the contract of sale to sell shares in the non-resident company is an arrangement by virtue of which from the time of entering into that contract, the purchaser may become in a position, to affect the voting rights attached to those shares for the purposes of paragraph 334A(1)(b) of the ITAA 1936.

In the context of a foreign non-portfolio dividend, section 23AJ of the ITAA 1936 would not apply to a dividend paid by the non-resident company to the taxpayer from the time of entering into the contract of sale considering the taxpayer would not have the required 'voting interest' within the meaning of section 334A of the ITAA 1936 from that date.

Year of income:  Year ended 30 June 2009

Legislative References:
Income Tax Assessment Act 1936
   section 23AJ
   section 160AFB (repealed as of 24 September 2007)
   subsection 160AFB(4) (repealed as of 24 September 2007)
   paragraph 160AFB(4)(a) (repealed as of 24 September 2007)
   paragraph 160AFB(4)(b) (repealed as of 24 September 2007)
   subsection 160AFB(5) (repealed as of 24 September 2007)
   subsection 160AFB(7) (repealed as of 24 September 2007)
   section 334A
   subsection 334A(1)
   paragraph 334A(1)(a)
   paragraph 334A(1)(b)
   subsection 334A(2)
   subsection 334A(5)

Related Public Rulings (including Determinations)
Taxation Ruling IT 2555

Keywords
Disposal of shares
Dividend income
Foreign income
International tax
Non portfolio foreign income
Non-assessable non-exempt income
Ownership, interests, control & rights

Siebel/TDMS Reference Number:  6103542

Business Line:  Public Groups and International

Date of publication:  24 April 2009

ISSN: 1445-2782