Edited version of your written advice

Authorisation Number: 1013098308614

Date of advice: 4 October 2016

Ruling

Subject: Commissioner’s discretion under subsection 103A(5) of the Income Tax Assessment Act 1936 (ITAA 1936).

Question 1

In the event that X Company does not satisfy the 20 person/75% test in subsection 103A(3) of the Income Tax Assessment Act 1936 (ITAA 1936) at any time during the relevant income years, will the Commissioner exercise his discretion under subsection 103A(5) of the ITAA 1936 to deem X Company, and all of X Company’s Australian wholly owned subsidiaries, to be public companies for the relevant income year(s)?

Answer

Yes.

This ruling applies for the following periods:

The relevant income years

The scheme commences on:

The relevant date

Relevant facts and circumstances

X Company is an Australian incorporated and tax resident company.

X Company is a public company limited by shares, and is listed on the Australian Securities Exchange (ASX).

X Company’s listed shares are not shares entitled to a fixed rate of dividend.

The largest shareholder In X Company, Shareholder A, has a post-listing shareholding of 57.7%.

The percentage shareholding of the top 20 shareholders immediately prior to listing was 99.34%.

The percentage shareholding of the top 20 shareholders immediately post- listing was 91.32%.

A number of the top 20 shareholders immediately post- listing as shown above were nominee companies which beneficially held shares for more than one underlying beneficial owner.

The top 20 shareholders at the time of the ruling application (held via nominee companies) held 76.27% of the shares.

The percentage holding of the top 20 legal shareholders at the time of the ruling application was 99.65%.

Rights Attaching to X Company Shares

The rights attaching to X Company’s shares are set out in the prospectus and Constitution for X Company (the Constitution) and are, in certain circumstances, regulated by the Corporations Act, the ASX Listing Rules, the ASX Settlement Operating Rules and the general law.

Meetings of members

Each shareholder is entitled to receive notice of, attend, and vote at, general meetings of the Company and to receive all notices, accounts and other documents required to be sent to shareholders under the Constitution, the Corporations Act and the ASX Listing Rules.

Voting

At a general meeting, every shareholder present in person or by proxy, representative or attorney has one vote on a show of hands and one vote on a poll for each fully paid share by the shareholder.

Dividends

The Board may by resolution either:

● Declare a dividend and fix the amount, the time for and method of payment; or

● Determine a dividend or interim dividend is payable and fix the amount, the time for and method of payment.

The Prospectus sets out X Company’s dividend policy. It states that subject to the future business conditions, available profits and franking credits and the financial position of X Company, it is the intention of the Board to pay dividends.

Transfer of shares

Subject to the Constitution, shares may be transferred by a proper transfer effected in accordance with the ASX Listing Rules or the ASX Settlement Operating Rules. Subject to compliance with the ASX Listing Rules and the ASX Settlement Operating Rules, shares may be transferred by a written instrument of transfer in any usual or common form or by any other form approved by the Directors.

The Board must refuse to register a transfer of shares when required to do so by the ASX Listing Rules.

Winding up

Without prejudice to the rights of the holders of shares issued on special terms and conditions, if the Company is wound up, the liquidator may, with the sanction of a special resolution of the Company, divide among the shareholders in kind all or any of the Company’s assets; and for that purpose, determine how it will carry out the division between the different classes of shareholders, but the liquidator may not require a shareholder to accept any shares or other securities in respect of which there is any liability.

Directors – appointment and removal

Under the Constitution, the minimum number of directors that may comprise the Board is three and the maximum number of directors is 10 unless determined otherwise by the Board. Directors are elected at general meetings of the Company. There are currently 6 directors, 2 of which are representatives of Shareholder A.

Retirement will occur on a rotational basis so that no director (excluding the managing director) holds office without re-election beyond the third annual general meeting following the meeting at which the director was last elected or three years, whichever is longer.

The directors may also appoint a director to fill a casual vacancy on the Board or in addition to the existing directors, who will then hold office until the next annual general meeting of the Company.

Directors – voting

Questions arising at a meeting of the Board will be decided by a majority of votes of the directors present at the meeting and entitled to vote on the matter. Subject to the ASX Listing Rules, in the case of an equality of votes on a resolution, the chairperson of the meeting has a casting vote in addition to a deliberative vote. The current chair person is not a representative of Shareholder A.

Other Characteristics of the Company

X Company is not a co-operative company as defined by section 117 of the Income Tax Assessment Act 1936.

X Company has been carried on for the purposes of profit or gain to its individual members. X Company is not a mutual life insurance company.

X Company is not a friendly society dispensary.

X Company is not a body constituted by a law of the Commonwealth or of a State or Territory and established for public purposes, not being a company within the meaning of the law in force in a State or Territory relating to companies, or a company in which such body has or ever had a controlling interest in.

X Company is not a subsidiary of a public company.

X Company has been, and will continue to be, carried on for the purposes of profit or gain to its individual members.

A family group do not control more than 50 per cent of the voting power of X Company.

Assumptions

At a time in the relevant income years X Company will not satisfy the 20 person/75% test in paragraph 103A(3)(a).

X Company remains listed on the ASX.

Relevant legislative provisions

Acts Interpretation Act 1951 subsection 22(1)

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 103

Income Tax Assessment Act 1936 subsections 103A(1) to (7)

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Regulations 1997, Schedule 5, regulation 995-1.05

Reasons for decision

Summary

In the event that X Company does not satisfy the 20 person/75% test in subsection 103A(3) of the Income Tax Assessment Act 1936 (ITAA 1936) (the Act) at any time during the relevant income years, the Commissioner will exercise his discretion under subsection 103A(5) of the ITAA 1936 to deem X Company, and all its Australian wholly owned subsidiaries, to be public companies for the relevant income year(s). This is because upon considering the applicant’s submissions with relation to its current underlying beneficial ownership; and the matters in subsection 103A(5) of the Act; the Commissioner is of the opinion that X Company reasonably falls within the concept of a public company for the relevant income years.

Detailed reasoning

As per subsection 103A(1) of the Act, a company is a private company in relation to a year of income if the company is not a public company in relation to the year of income.

Subject to the succeeding provisions of section 103A of the Act, a company will be a public company in relation to a year of income, if it satisfies at least one of the conditions in paragraphs (a) to (d) of subsection 103A(2) of the Act.

Specifically, subsection 103A(2) states:

For the purposes of subsection 103A(1), a company is, subject to the succeeding provisions of this section, a public company in relation to the year of income if:

(a) shares in the company, not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits, were listed for quotation in the official list of a stock exchange, being a stock exchange in Australia or elsewhere, as at the last day of the year of income;

(b) at all times during the year of income the company was a co-operative company as defined in section 117 of the ITAA 1936;

(c) the company has not, at any time since its formation, been carried on for the purposes of profit or gain to its individual members and was, at all times during the year of income, prohibited by the terms of its constituent document from making any distribution, whether in money, property or otherwise, to its members or to relatives of its members; or

(d) the company is:

(i) a mutual life assurance company;

(ii) a friendly society dispensary; …

(iii) a body constituted by a law of the Commonwealth or of a State or Territory and established for public purposes, not being a company within the meaning of the law in force in a State or Territory relating to companies;

(iv) a company in which a Government or a body referred to in subparagraph (iii) had a controlling interest on the last day of the year of income; or

(v) in relation to the year of income, a subsidiary of a public company.

X Company satisfies subsection 103A(2) by reason of paragraph (a) in that the shares in X Company, not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits, were listed for quotation on Australian Stock Exchange (ASX) and as per the assumptions above; the shares will remain listed on the ASX in the relevant income years. The ASX is listed as an approved stock exchange under regulation 995-1.05 of Schedule 5 of the Income Tax Assessment Regulations 1997.

X Company does not satisfy any of the conditions at paragraphs (b) to (d) of subsection 103A(2) above, as covered by the facts on which this Ruling is made.

As X Company has satisfied paragraph 103A(2)(a), it will be taken to be a public company in relation to the relevant income years unless a succeeding provision of section 103A of the Act applies.

The relevant succeeding provisions will be considered.

The 20 person/75% test (subsection 103A(3) of the Act):

Subsection 103A(3) of the Act prescribes tests that must be satisfied before a company, which would otherwise be a public company under subsection 103A(2), may be considered as a public company. Specifically, it states that:

Subject to subsection (5), a company is not, by virtue of paragraph (2)(a) or (b), a public company for the purposes of subsection (1) in relation to the year of income where:

(a) at any time during the year of income, one person or persons not more than 20 in number held, or had the right to acquire or become the holder or holders of, shares representing not less than three-quarters of the value of the shares in the company, other than shares entitled to a fixed rate of dividend only;

(b) at any time during the year of income, not less than three-quarters of the voting power in the company was capable of being exercised by one person or by persons not more than 20 in number;

(c) not less than three-quarters of:

(i) the amount of any dividend paid by the company during the year of income; or

(ii) if more than one dividend was paid by the company during the year of income—the total amount of all the dividends paid by the company during the year of income;

was paid to one person or to persons not more than 20 in number; or

(d) a dividend was not paid by the company during the year of income but the Commissioner is of the opinion that, if a dividend had been paid by the company at any time during the year of income, not less than three-quarters of the amount of that dividend would have been paid to one person or to persons not more than 20 in number.

The effect of subsection 103A(3) is that a public company is denied public company status, even if listed on the ASX, if at any time during the year 20 or fewer persons together own (or have the right to acquire) 75% or more of the equity capital in the company and have a right to 75% of the voting power and the dividends paid (the 20 person/75% test).

It should be noted further that subsection 103A(4) provides:

Subject to subsection (4D), a company is, for the purposes of this section, a subsidiary of a public company in relation to the year of income if:

(a) at all times during the year of income all the shares in the first-mentioned company were beneficially owned by a company which, or companies each of which, is a public company for the purposes of subsection (1) in relation to the year of income of that company (in this subsection referred to as the corresponding year of income) that corresponds with the first-mentioned year of income but which is not, or none of which is:

(i) a company to which paragraph (2)(c) applies in relation to the corresponding year of income; or

(ii) a subsidiary of a public company for the purposes of this section in relation to the corresponding year of income by reason of subsection (4B);

(b) the corresponding year of income, or each of the corresponding years of income, referred to in paragraph (a) ended on the same day as the year of income first-mentioned in that paragraph;

(c) at no time during the year of income was a person or were 2 or more persons in a position to affect rights of the relevant holding company or holding companies in connexion with the first-mentioned company so as to prevent the relevant holding company or holding companies from exercising for its or their own benefit the whole of the voting power in the first-mentioned company or from receiving for its or their own benefit the whole of any dividends that might be paid by the first-mentioned company or of any distribution that might be made of capital of the first-mentioned company; and

(d) no agreement was entered into before or during the year of income by virtue of which a person or 2 or more persons would be in a position after the year of income so to affect rights of the relevant holding company or holding companies in connexion with the first-mentioned company.

By virtue of the application of subsection 103A(4), all wholly owned subsidiaries of X Company will also be public companies for the purposes of subsection 103A(2) unless denied such status by the application of subsection 103A(3). In turn, if the Commissioner’s discretion (below) at subsection 103A(5) is granted to X Company for an income year, then this would be applied to all wholly owned subsidiaries as provided by subsection 103A(4).

Application of the 20 person/75% test to X Company:

As set out above, subject to subsection 103A(5), subsection 103A(3) of the Act would operate to prevent X Company from being a public company if at any time during the relevant year of income, 20 persons or fewer own (or have the right to acquire) 75% or more of the equity capital in the company and have a right to 75% or more of the voting power or dividends paid by X Company (the 20 person/75% test).

The relevant test periods for the purposes of this ruling for the 20 person/75% test are the relevant income years that are covered by this private ruling. As these years have not yet commenced, factual data relating to shareholdings has been provided for X Company for both before and after the IPO. Immediately before the IPO the top 20 shareholders legally held 99.34% of these shares. After listing, the top 20 shareholders legally held 91.32% of these shares. As at the time of the ruling application, of the shares on issue, the top 20 shareholders legally held 99.65% of shares.

Accordingly, in applying subsection 103A(3) to this shareholding status, it appears that X Company would breach the 20 person/75% test at this time.

However, the 3 member Board of Review case of E12 73 ATC 81 stands for the proposition that by virtue of the operation of subsection 103A(7), together with subsections 103(2) and (3), the Commissioner is required to look beyond the registered shareholdings in applying the 20 person/75% test because many of the registered shareholders would be ‘nominees’ as defined in subsections 103(2) & (3).

In Case E12, F.E. Dubout (Chairman) stated (at his paragraph 16):

“In the application of the several 20/75 tests in sec. 103A(3), it is to be remembered that that sub-section must be read in the light of, first, sub-sec. (2) and (3) of sec. 103, which apply for the purposes of the whole of Div. 7, and second, sub-sec. (7) of sec. 103A, which applies for the purposes of that section. To summarise sub-sec. (2) and (3) of sec. 103 in brief compass, sub-sec. (2) defines what is meant by a ``nominee'', and sub-sec. (3) is explanatory of an expression used in sub-sec. (2). It could be said as a general description of the function of sec. 103A(7) that it is a provision pursuant to which a plurality of persons shall in certain circumstances be deemed to be one person.”

The term ‘persons’ is defined in subsection 6(1) of the Act to have the same meaning as in the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 995-1(1) of the ITAA 1997 states that a person includes a company. Subsection 22C(1) of the Acts Interpretation Act 1901 provides that unless the contrary intention appears, expressions to denote persons generally (including the word person) shall include a body politic or corporate as well as an individual. Therefore, each company or body corporate in the shareholder structure of X Company will be considered a ‘person’ for the purposes of the test in subsection 103A(3).

Further, in interpreting the tests in subsection 103A(3), it is necessary to consider subsection 103A(7) which states that:

For the purposes of this section:

(a) a person, whether or not he or she holds shares in the company concerned;

(b) his or her relatives; and

(c) in relation to any shares in respect of which they are such nominees, his or her nominees and the nominees of any of his or her relatives;

shall be deemed to be one person.

The reference to ‘nominees’ in paragraph 103A(7)(c) is to have the meaning in sections 103(2) and (3) which read as follows:

Subsection 103(2):

For the purposes of this Division, a person is the nominee of another person in relation to shares if that first-mentioned person may be required to exercise his voting power in relation to those shares at the direction of, or holds those shares directly or indirectly on behalf of or for the benefit of, that second-mentioned person.

Subsection 103(3) is concerned with the meaning of ‘…holds those shares directly or indirectly on behalf of or for the benefit of,…’ in the second limb of subsection 103(2). The subsection states that:

“For the purposes of this Division, shares in a company shall be deemed to be held indirectly on behalf of or for the benefit of a person (not being a private company, trustee or partnership) if, in the event of the payment of a dividend on those shares, that person would, otherwise than as a shareholder of the company, receive the whole or a part of that dividend if there were successive distributions of the relative parts of that dividend to and by each of any private companies, trustees or partnerships interposed between the company paying the dividend and that person.”

Further, the decision in Case E12 73 ATC 81 held that nominee-ship is to be apportioned as between the different principals for whom a nominee is a nominee in relation to shares held by that nominee. This means that a nominee’s holdings should only be grouped together with each of its investors separately; and not grouped together with all investors and treated as one entity, for the purposes of subsection 103A(3).

In effect these provisions and guidance indicate that in determining the control of a company, regard should be had to the ultimate recipient of the beneficial interest in the shares held, rather than the nominal ownership of those shares. Accordingly, further analysis and consideration must be given to the underlying ownership of X Company to determine whether it breaches the 20 person/75% test at this time.

A list of the top 20 beneficial shareholders of X Company at the time of the ruling application has been provided. At least seven of the top 20 shareholders are nominee companies that held shares in X Company for two or more underlying beneficial owners. The exact percentage shareholdings of all underlying beneficial owners cannot be determined with certainty, as this information is not published or made available publicly. Therefore, the shareholder list shows the top 20 underlying beneficial shareholders of X Company tracing through nominees to the underlying owners as far as was practicable. The top 20 underlying beneficial shareholders held 76.27% of the interests in X Company.

However, this list does not include the underlying beneficial owners of Shareholder A. At the date of the ruling application, Shareholder A had not reduced its shareholding. Shareholder A is an unlisted limited partnership which has limited partners and one general partner. No investor has more than 5% interest in Shareholder A except for one investor which has been classified as a ‘Foreign Government’ entity and holds around 5.60% of Shareholder A. The average shareholding in Shareholder A is around 0.25%. The limited partners benefit from dividends and capital but only have limited voting rights in Shareholder A. For income tax purposes, Shareholder A is treated as a company.

Based on the facts supplied, including the shareholder listing which indicates that after tracing the top 20 underlying beneficial owners hold 76.27% of the shares (a figure close to 75%); and the applicant’s understanding of Shareholder A’s shareholdings; if it were possible to trace to the underlying beneficial owners of Shareholder A at this time, it is likely the top 20 shareholders as at the time of the ruling application would hold less than 75% of the shares in X Company. Therefore, after tracing through nominees to the underlying beneficial owners as far as practicable and then taking into account the impact of Shareholder A’s underlying ownership if it were traceable, it is likely the 20 person/75% test in section 103A(3) would not be breached.

Notwithstanding the above, it is possible that X Company may inadvertently fail the 20 persons/75% test during the relevant income years, given the percentage of shares held by its top 20 shareholders (without tracing through the nominee Companies) is above 75% and its shareholders are able to freely trade their shares via the ASX. Therefore it cannot be ascertained with certainty whether X Company would satisfy the 20 person/75% test in the relevant income years.

Therefore, for the purposes of this private ruling, an assumption has been made which states ‘at a time in the relevant income years X Company will not satisfy the 20 person 75% test in paragraph 103A(3)(a)’. This has been done so that the possible future application of the Commissioners discretion can be considered.

Application of the Commissioner’s Discretion (subsection 103A(5) of the Act) to X Company:

The 20 person/75% test contained within subsection 103A(3) is subject to the Commissioner's discretion under subsection 103A(5) of the Act. Under this provision the Commissioner has a discretionary power to treat a company as a public company even though it does not satisfy one or more of the prescribed conditions in section 103A.

Subsection 103A(5) provides that:

Where a company would not, under the preceding provisions of this section, be a public company for the purposes of subsection (1) in relation to the year of income but the Commissioner is of the option that, having regard to:

(a) the number of persons who were, at any time during the year of income, capable of controlling the company and whether any of those persons was a public company;

(b) the market value of the shares issued by the company before the end of the year of income;

(c) the number of persons who beneficially owned shares in the company at the end of the year of income; and

(d) any other matters that the Commissioner thinks relevant,

it is reasonable that the company should be treated as a public company for the purposes of subsection (1) in relation to the year of income, the company shall be deemed to be a public company for those purposes in relation to the year of income.

Further, subsection 103A(6) provides:

Notwithstanding anything in the preceding provisions of this section, the Commissioner may treat a company as not being, by virtue of paragraph (2)(a) or (b), a public company for the purposes of subsection (1) in relation to the year of income if the Commissioner is of the opinion that, by reason of:

(a) any provisions in the company's constituent document, or in any contract, agreement or instrument, authorizing the variation or abrogation of the voting rights or rights to dividends in respect of any shares in the company or relating to the conversion, exchange or redemption of any such shares;

(b) any contract, agreement, option or instrument under which a person has power to acquire shares in the company; or

(c) any power or authority in a person in relation to the voting rights or rights to dividends in respect of any shares in the company;

the voting rights or rights to dividends in respect of any shares in the company were, at any time during the year of income, capable of being varied or abrogated in such a manner (notwithstanding that they were not in fact varied or abrogated in that manner) that:

(d) not less than three-quarters of the voting power in the company would have been capable of being exercised by one person or by persons not more than 20 in number;

(e) not less than three-quarters of:

(i) the amount of any dividend paid by the company during the year of income; or

(ii) if more than one dividend was paid by the company during the year of income--the total amount of all the dividends paid by the company during the year of income;

would have been paid to one person or to persons not more than 20 in number; or

(f) in the case where the company did not pay a dividend during the year of income--if a dividend had been paid by the company at any time during the year of income, not less than three-quarters of the amount of that dividend would have been paid to one person or to persons not more than 20 in number.

The Commissioner has issued guidance as to the consideration of these factors and when the discretion will be exercised. This guidance considers the specific factors referred to above as well the other matters that the Commissioner thinks are relevant in deciding whether to exercise the discretion in subsection 103A(5). They include:

● Canberra Income Tax Circular Memorandum number 847 (CITCM no. 847).

● Public Information Bulletin number 3 (PIB no. 3).

● ATO Interpretative Decision ATO ID 2004/760 Income Tax: Private Company held as an investment by a superannuation fund: discretion to treat as public company (ATO ID 2004/760).

An overarching principle to be considered when exercising the Commissioner’s discretion is whether the company reasonably falls within the concept of a public company.

In ATO ID 2004/760 the principal features of a public company are noted as follows:

● that shares in the company (other than fixed rate preference shares) be quoted on the official list of a stock exchange at the end of the income year; and

● that 20 or fewer persons shall not at any time during the year of income own (or have the right to acquire) 75% of the equity capital in the company or have a right to 75% of the voting power or dividends paid (20 person 75% test).

X Company satisfies the first of the features as it is currently listed on the ASX, an approved stock exchange, and it is assumed for the purposes of this ruling that it will remain listed in the relevant income years.

As stated above, it is likely that X Company currently satisfies the 20 person/ 75% test under subsection 103A(3) after tracing through nominee companies to ascertain underlying beneficial ownership, if the underlying beneficial shareholding of Shareholder A is taken into consideration. However, given the percentage of shares held by its top 20 shareholders (without considering Shareholder A’s underlying ownership) is above 75% and its shareholders are able to freely trade their shares via the ASX, it is possible that X Company will fail the 20 person/75% test during the relevant income years. Therefore, an assumption has been made for the purposes of this ruling that X Company will not satisfy the test at all times under section 103A.

CITCM No. 847 provides that in some cases a listed company may fail to meet the 20 persons/75% test in subsection 103A(3) of the Act because substantial numbers of shares are held by public companies or nominee entities. In certain cases, shareholdings held by these entities may be excluded from the count of the top 20 shareholders or traced through to their underlying beneficial owners.

Specifically, paragraph 34 of the CITCM No. 847 provides that:

Unless there are exceptional circumstances which indicate that the exercise of the discretionary power would not be warranted, shares beneficially owned by public companies may be excluded when applying the “20 persons – 75 per cent” tests.

Paragraph 37 of CITCM No. 847 provides:

There will be instances in which a nominee company holds shares in the company which is seeking the exercise of the discretionary power to obtain public company status. In isolated cases, the tracing through the nominee company of the beneficial ownership of the shares in the company may facilitate the exercise of the discretionary power, e.g., where it is established that the shares are beneficially owned by a public company or by a number of unrelated individuals, who do not directly hold shares in the company.

The top 20 shareholders in X Company include several entities which are public companies or members of public company groups. However, as the public company status of a company for income tax purposes depends on numerous factors including their ability to satisfy the requirements of subsection 103A, it cannot be concluded with certainty whether any of those companies are public companies for income tax purposes and should be excluded from the count of the top 20 shareholders.

The Commissioner has considered the situation where a listed company temporarily fails to comply with the 20 persons/75% test at page 4 of PIB No. 3. Relevantly, PIB No. 3 provides:

There may, from time to time, be cases in which a company [listed on a stock exchange] temporarily fails to comply with the “20 persons/75 percent” test. This situation could occur without the knowledge of the company, for example, where a purchaser of shares has them registered in the name of a nominee and neither the directors nor the employees of the company are aware of the circumstances.

In the case of such accidental failures to comply with the test, sympathetic consideration will be given to the exercise of the discretion, especially where efforts are made as soon as reasonably practicable to remedy the position.

Based on the information available, the Commissioner finds that sympathetic consideration should be given to X Company regarding the exercise of the Commissioner’s discretion as X Company would potentially fall within the circumstance of accidental failures to comply with the 20 person/75% test.

In addition, it will be an unnecessary burden for X Company to monitor its shareholdings throughout the year to ensure that the 20 person/75% test is continuously satisfied. The Commissioner recognises this potential burden on listed companies at page 3 of PIB No. 3 where he states:

At this stage, it may be made clear that listed companies will not generally be required to establish by positive information that [the 20 persons 75%’ test] have been satisfied at all times during the year of income. If any other view were taken, companies that are clearly public companies could be put to a great deal of unnecessary trouble and expense.

In considering the information and facts provided, the Commissioner finds that X Company would fall within the circumstances referred to in paragraph 37 of CITCM No. 847 and page 4 of PIB No. 3 for the following reasons:

● A number of the shareholders in X Company are nominee companies which hold on behalf of two or more beneficial owners;

● Having regard to the most recently available shareholder information, the top 20 shareholders as at the time of the ruling application held 99.65% of the shares. However after considering the information with regard to underlying ownership and additional information regarding Shareholder A, it is likely the top 20 shareholders hold less than 75% of the shares.

● In the case of accidental failures to comply with the 20 persons/75% test, sympathetic consideration will be given to the exercise of the Commissioner’s discretion.

In relation to subsection 103A(6), the applicant has submitted that nothing in the Company’s constituent document or any other relevant contract, agreement or instrument has the effect of varying shareholder voting rights or rights to dividends such that the 20 persons 75% test would be breached. The Commissioner accepts this in support of the exercise of the discretion at subsection 103A(5).

Furthermore, the Commissioner has examined and considered the submissions presented by the applicant in relation to each of the following relevant factors referred to in subsection 103A(5) in order to ascertain whether X Company reasonably falls within the concept of a public company.

The number of persons capable of controlling the company and whether any of those persons was a public company:

In exercising his discretion, the Commissioner should have regard to the number of persons capable of controlling the company and whether any of those persons were a public company.

The phrase ‘capable of controlling’ is not defined, however the concept of controlling a company has been considered by the high court. It was held in (WP Keighery Pty Ltd v Federal Commissioner of Taxation (1957) 100 CLR 66) that control of a company generally resides in the voting power of its shareholders to carry out a resolution at a general meeting of the company.

According to Clause 38 of the X Company Constitution, questions arising at a general meeting must be decided by a majority of votes cast by the members present at the meeting. At a general meeting on a show of hands, every member present has one vote and on a poll, every member present has one vote for each share held, except for partly paid shares, each of which confers on a poll only the fraction of one vote which the amount paid bears to the total amounts paid and payable on the share.

Ordinary shares in X Company are the only shares in X Company that carry with them voting rights in the company.

As at the time of the ruling application, Shareholder A held 57.7% of the shares in X Company. Therefore, prima facie, this one entity is able to control the company. However, Shareholder A is a limited partnership which holds shares on behalf of its investors (limited partners and the General Partner). As such, considering Shareholder A’s shareholding without tracing through to the underlying shareholders does not portray an accurate position of who is able to control the Company. All limited partners and the General Partner of Shareholder A have voting rights although the General Partner’s voting rights are more substantial than the limited partners voting rights as the General Partner has the day to day operational control of the limited partnership.

In considering the question of “capable of controlling”, It is also useful to examine the policy objectives in relevant explanatory memorandums to amendments made to Division 103. In the Explanatory Memorandum to Income Tax Assessment Bill 1948, commentary was written about the concepts of what is a private company and a public company for the purposes of the application of the revenue law. In the previous section 103(1), “Private company” was defined to mean a company which is under the control of not more than seven persons, and which is not a company in which the public are substantially interested or a subsidiary of a public company. Further, the previous section 103(2)(c )provides that a company shall be deemed to be under the control of any persons where the major portion of the voting power or the majority of the shares is held by those persons or nominees of those persons or where the control is, by any other means whatever, in the hands of those persons. These definitions were successfully challenged before the Full High Court in Adelaide Motors Ltd. v. Federal Commissioner of Taxation (1942) 66 C.L.R. 436, and in Federal Commissioner of Taxation v. West Australian Tanners and Fellmongers Ltd. (1945) 70 C.L.R. 623. These decisions established that, where the shareholders of a company are more than seven in number, that company is not a private company unless control of the company is actually exercised by seven or less persons. If this actual control is not demonstrable, the company is not a private company as at present defined.

In considering the policy intent discussed, along with the submissions of the applicant and the number of shareholders that have voting rights, the Commissioner accepts these matters support the exercise of the discretion in subsection 103A(5).

The market value of the shares issued by the company before the end of the year of income

As part of their IPO, X Company issued X million new ordinary shares to the public at an issue price of $x or $x million. The percentage of the shares that were issued as part of the IPO represented 40% of the shares on issue after completion of the IPO. After listing, the total number of shares on issue was x million. The market value of these shares based on the issue price of $x at listing date was $x million.

The share price of X Company ordinary shares at the date of the ruling application was $x. The market value of X Company as at this date was $x million. Since listing, the share price has traded within a range of $x and $x.

As is evident by the share prices listed above, X Company’s market value is substantial and as such more indicative of a public company than a private company.

The Commissioner considers this to support the exercise of the Commissioner’s discretion to treat X Company as a public company.

The number of persons who beneficially held shares in the company at the end of the year of income

As the number of persons beneficially holding X Company shares at the end of the relevant years of income is unknown, the applicant has submitted information with regard to past trends to analyse this factor.

Following the issue of shares as a result of the listing of X Company on the ASX, the top 20 shareholders held the majority of shares in the Company (91.32%), thus it can be concluded the total number of shareholders in X Company was more than 20. It is noted that a number of the top 20 shareholders at that time were nominee companies that held shares in X Company for more than one underlying beneficial owner.

The number of persons who legally held shares in X Company according to the most current list was a number greater than 1,000.

ATO ID 2004/760 indicates that a larger number of shareholders is more indicative of a public company and states that:

Whilst a company with several hundred shareholders and a paid up capital of $20 million would generally be more likely to be accepted as a public company than a company with 30 shareholders and a small amount of paid up capital, there is no specific quantum of shareholders or paid up capital that is required to have the discretion exercised.

The large number of shareholders, the existence of the nominee companies and limited partnership holding shares for multiple underlying beneficial owners and the increase in the number of shareholders post listing indicates that there were a substantial number of persons who currently beneficially hold shares in X Company.

While it cannot be predicted whether this will change at the end of the relevant income years, after considering the shareholder lists in the attachments and the fact patterns outlined above the applicant has submitted that the number of shareholders is only likely to increase further as the company establishes itself further and any shares are sold down by Shareholder A and management.

The Commissioner has considered these submissions and finds they support the exercise of the discretion in subsection 103A(5).

Any other matters that the Commissioner thinks relevant

Both CITCM no. 847 and PIB no. 3 provide guidance as to how the discretion in subsection 103A(5) is to be exercised. In each instance, the guidance provides a number of factors that are to be considered. These factors are relevant to determining whether X Company falls within the general concept of a public company.

In the case of unlisted companies that satisfy the 20 persons/75 per cent control tests, CITCM no. 847 provides that the discretion in subsection 103A(5) may usually be exercised where:

(a) the company has sufficiently large paid-up capital and wide spread of shareholdings to enable it to obtain a listing on a stock exchange in an Australian capital city;

(b) the dividend policy of the company is consistent with what might be expected of a listed public company in similar general circumstances to the company;

(c) the company is not controlled by a family group for shareholders, i.e., the family group do not control more than 50 per cent of the voting power;

(d) the voting and dividend rights attached to the shares are in all material respects, comparable with rights normally attached to shares of a listed public company; and

(e) the appointment and rotation of directors is undertaken in the same manner as is done in the case of listed public companies.

X Company has sufficiently large paid-up capital and a wide spread of shareholdings to enable it to obtain a listing on a stock exchange in an Australian capital city. It remains listed on the ASX to date and it is assumed it will remain listed for the relevant income years.

The Prospectus (supplied with this ruling application) sets out X Company’s dividend policy from the date of IPO. It states that subject to the future business conditions, available profits and franking credits and the financial position of X Company, it is the intention of the Board to pay dividends. In addition, it states the Directors anticipate a final dividend will be declared in respect of the half year ending xxxx, and an interim dividend in respect of the half year ending xxxx in line with the target dividend payout ratio. No dividend is expected to be paid for the period to xxxx. It was the Board’s intention to target a dividend payout ratio within a specific range of annual statutory NPATA.

To date X Company has paid/declared 2 dividends. The applicant submits that this dividend policy is consistent with what might reasonably be expected of a listed public company in similar circumstances.

The largest shareholder in X Company is Shareholder A which held 57.7% of the shares in X Company as at the date of the ruling application. As Shareholder A holds shares in X Company on behalf of a number of its investors, the applicant submits that X Company is not controlled by a family group of shareholders and is instead widely held by a variety of (unrelated) shareholders.

The Constitution provides that at a general meeting, every shareholder has one vote for each share held (with adjusted voting rights for partly paid shares) and all dividends must be paid equally on all shares.

The Constitution provides that the company may issue preference shares (including preference shares which may be, or at the option of the company or holder are, liable to be redeemed) and may convert any issued shares into preference shares. Each preference share confers on its holder a right to convert the preference share into an ordinary share, and receive a dividend. However, a preference share does not entitle its holder to vote at any general meeting of the company except in certain circumstances. Note that to date no preference shares have been issued.

The applicant submits that these voting and dividend rights are comparable, in all material respects to rights normally attached to shares of a listed public company.

The appointment and retirement of directors is set out in the Constitution. The Constitution provides that:

● The Board is comprised of a minimum of three Directors and a maximum of 10, unless the shareholders pass a resolution varying that number at a general meeting.

● Directors are elected or re-elected at general meetings of the Company.

● No Director (excluding the managing director) may hold office without re-election beyond the third annual general meeting following the meeting at which the Director was last elected or re-elected.

● The Board may also appoint a Director, either as an addition to the existing directors or to fill a casual vacation. In this case, the total number of directors may exceed the maximum number fixed under this constitution.

Based on these matters, the applicant submits the appointment and rotation of directors in X Company is undertaken in a manner consistent with other listed public companies.

Page 6 of PIB No. 3 provides:

Expressed in very broad terms, the question [to be considered by the Commissioner when exercising his discretion] will be “Does the company reasonably fall within the general concept of a public company?” The prospects of the discretion being exercised to grant public company status will thus be enhanced if –

a) the dividend policy of the company; and

b) the dividend and voting rights attached to the particular class of shares,

are within the bounds of what could reasonably be expected in the case of a public company.

As noted above, X Company’s dividend policy and the voting and dividend rights attaching to its shares are consistent with what would be expected of a listed public company in similar circumstances.

The Commissioner considers these matters further support the exercise of the discretion in subsection 103A(5).

Conclusion

In determining whether to exercise the discretion to treat a company which does not satisfy one or more the prescribed conditions of a public company, the Commissioner must have regard to the matters in subsection 103A(5) for the relevant income years.

In considering the applicant’s submissions with relation the matters in subsection 103A(5), the Commissioner considers the following elements support the premise that X Company reasonably falls within the concept of a public company:

● The shares of X Company are listed on the official list of the ASX.

● The appointment and rotation of directors of X Company is consistent with what would be expected of a listed public company.

● The dividend policy of the company as shown by their IPO prospectus is consistent with what would reasonably be expected in the case of a public company.

● The voting rights and dividend rights attaching to the ordinary shares in X Company are within the bounds of what would reasonably be expected in the case of a public company.

● The number of beneficial owners in the issued capital of the company is likely to be very substantial and consistent with that of a listed public company, and

● The market value of the issued capital of the company is substantial and consistent with that of a public company.

Therefore, the Commissioner will exercise his discretion under subsection 103A(5) to treat X Company as a public company for the relevant income years.

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