Edited version of private advice

Authorisation Number: 1052145631372

Date of advice: 21 July 2023

Ruling

Subject: Private company

Question 1

Was the Company a private company for purpose of subsection 103A(1) Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Does section 205-70(5) of Income Tax Assessment Act 1997 (ITAA 1997) apply to prevent a reduction in the franking credit otherwise available?

Answer

Yes

This ruling applies for the following period:

Income years ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.         The Company was a proprietary company until 20XX and was an unlisted public company for Australian Securities and Investment Commission purposes from 20XX onwards.

2.         In 20XX, the Company was demerged from Group A. Group A is listed on the ASX. Group A shareholders become proportionate shareholders of the Company. At the same time, the Company was converted to a public company for Corporations Law purposes.

3.         The Company is not a subsidiary of any other company.

4.         The Company has ordinary and preference shares on issue with a minimal paid-up capital.

5.         The major asset of the Company is located in a foreign jurisdiction.

6.         For a number of years, the Company has been engaged in arbitration to seek compensation for the asset.

7.         There is no active market for the shares. The Company's only material asset was cash.

8.         At 30 June 20XX, a group of 20 shareholders held approximately 64% of the ordinary shares; a group of 10 shareholders held more than 50% of the ordinary shares and a group of 6 persons held more than 40% of the ordinary shares of the Company.

9.         In 20XX, the Company received a compensation settlement.

10.      The Company paid a partially franked dividend during the year ended 30 June 20XX.

11.      At 30 June 20XX, the Company had a franking deficit. Franking deficit tax was paid.

12.      The Company will be placed into members voluntary liquidation.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 103A(1)

Income Tax Assessment Act 1936 subsection 103A(2)

Income Tax Assessment Act 1936 paragraph 103A(2)(a)

Income Tax Assessment Act 1936 paragraph 103A(2)(b)

Income Tax Assessment Act 1936 paragraph 103A(2)(c)

Income Tax Assessment Act 1936 paragraph 103A(2)(d)

Income Tax Assessment Act 1936 subsection 103A(3)

Income Tax Assessment Act 1936 subsection 103A(4)

Income Tax Assessment Act 1936 subsection 103A(5)

Income Tax Assessment Act 1936 subsection 103A(7)

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

Reasons for decision

Question

Was The Company a private company for purpose of subsection 103A(1) Income Tax Assessment Act 1936 (ITAA 1936) for the year ended 30 June 20XX?

Subsection 103A(1) of the ITAA 1936 states:

For the purposes of this Division, a company is a private company in relation to the year of income if the company is not a public company in relation to the year of income.

Subsection 103A(2) of the ITAA 1936 defines a public company for the purposes of subsection 103A(1):

For the purposes of subsection (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 by section 117;

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.

The Company's shares were not 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 on income.

The Company is not a co-operative company as defined under section 117 of the ITAA 1936.

The Company is not prohibited under its Constitution from making distributions to its members or relatives of its members.

The Company is not a mutual life insurance company.

The Company is not a friendly society dispensary.

The Company is not a body established for public purposes and was not constituted by a Commonwealth, State or

Territory law.

The Company is not owned by members who would represent a government body and which has a controlling interest in the taxpayer.

The Company is not a subsidiary of a public company.

As The Company does not satisfy any part of subsection 103A(2) of the ITAA 1936, it will not be regarded as a public company unless the Commissioner exercise his discretion under subsection 103A(5) of the ITAA 1936.

Subsection 103A(5) of the ITAA 1936 states:

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 opinion 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.

Having regard to the matters listed in subsection 103A(5) of the ITAA 1936, and considering the circumstances of the Company, the Commissioner is of the opinion that it is not reasonable that the Company should be treated as a public company for the purposes of subsection 103A(1) of the ITAA 1936.

Therefore, the Company will be a private company pursuant to subsection 103A(1) of the ITAA 1936 in relation to the year ended 30 June 20XX.

Question 2

Does section 205-70(5) of Income Tax Assessment Act 1997 (ITAA 1997) apply to prevent a reduction in the franking credit otherwise available?

Section 205-70 applies to prevent a reduction in the franking credit otherwise available.

Subsection 205-40(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that when there are more

franking debits than credits in the franking account, there is a franking deficit.

If an account of an entity is in deficit at the end of an income year, subsection 205-45(2) of the ITAA 1997 provides that the entity is liable to pay franking deficit tax. Franking deficit tax is an amount equal to the amount of the deficit in the franking account.

Subsection 205-70(1) of the ITAA 1997 provides that a corporate tax entity is entitled to a tax offset arising from a franking deficit tax liability for an income year for which it meets certain residency requirements if at least one of the following applies:

•                     the entity has incurred a liability to pay franking deficit tax in that year

•                     the entity incurred a liability to pay franking deficit tax in a previous income year for which it did not satisfy the residency requirements, and the entity has not already received a tax offset in relation to it, or

•                     when the entity was last entitled to a tax offset under the section for a previous income year, that offset exceeded the amount that would have been its income tax liability for that year if it did not have that offset (but had all its other tax offsets).

The amount of the tax offset is usually equal to the amount of the franking deficit tax liability. However, the offset will be reduced by 30% in certain circumstances. The 30% reduction applies where the franking deficit tax liability attributable to certain debits that arose in the franking account for a year is greater than 10% of the total franking credits that arose in the franking account for that year.

Subsection 205-70(5) of the ITAA 1997 provides that the 30% offset reduction does not apply if:

a)            the entity is a private company for the relevant year; and

b)            if the company did not have the tax offset (but had all its other tax offsets) it would have had an income tax liability for the relevant year; and

c)            the company has not had an income tax liability for any income year before the relevant year; and

d)            the amount of the liability referred to in paragraph (b) is at least 90% of the amount of the deficit in the company's franking account at the end of the relevant year.

The Company was a private company in accordance with subsection 103A(1) of ITAA 1936 as at 30 June 20XX as outlined in question 1 of this ruling. Therefore subsection 205-70(5)(a) is satisfied.

The Company also satisfies the other requirements under subsection 205-70(5):

•                     The Company has not had an income tax liability for any other income years. The company paid partially franked dividends utilising franking credits that would arise when the 20XX income tax was paid.

•                     The Company had a franking deficit and franking deficit tax was duly paid.

•                     The 20XX income tax return disclosed tax payable and included a claim for the Tax Offset.

Given The Company satisfies all the requirements set out in subsection 205-70(5)(a) 30% offset reduction does not apply to the Tax Offset.

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