Edited version of your private ruling

Authorisation Number: 1011957752010

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Public company status

Question

Will the Commissioner confirm that Company X will be a public company as defined in subparagraph 103A(2)(d)(iv) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes. Company X will be a public company as defined in subparagraph 103A(2)(d)(iv) of the ITAA 1936 where the controlling interest in Company X is held by the Country Y Government on the last day of the income year for which this ruling applies.

This ruling applies for the following periods:

1 July 2011 to 31 December 2011

1 January 2012 to 31 December 2012

1 January 2013 to 31 December 2013

1 January 2014 to 31 December 2014

1 January 2015 to 31 December 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Company X is an Australian resident company for tax purposes.

Company X is in a business of supplying specialised equipment and allied services.

Company X provides a comprehensive and diverse range of equipment.

The group structure involving Company X is that Company Y is holding 100% of Company X indirectly through a chain of wholly owned subsidiary companies.

Company Y is established and owned by the Country Y Government, a foreign government.

Relevant legislative provisions

Income Tax Assessment Act 1936

Subsection 6(1)

Division 7 of Part III

Section 103A

Subsection 103A(1)

Subsection 103A(2)

Paragraph 103A(2)(d)

Subparagraph 103A(2)(d)(iii)

Subparagraph 103A(2)(d)(iv)

Part X

Income Tax Assessment Act 1997

Division 820

Section 995-1

Acts Interpretation Act 1901

Reasons for decision

Division 7 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) draws a distinction, for the purposes of that Division, between public companies and private companies.

Subsection 103A(1) of the ITAA 1936 provides the definition of 'private company' and states that, for the purposes of Division 7 of Part III of the ITAA 1936, a company is a private company in relation to an income year if the company is not a public company for that year.

Subsection 103A(2) of the ITAA 1936 states that, subject to the succeeding provisions of section 103A (which are not relevant in this case), a company will be a public company for the purposes of subsection 103A(1) if it falls within any of the categories listed in subsection 103A(2).

Paragraph 103A(2)(d) of the ITAA 1936 relevantly stipulates that a company will be a public company if:

(d) the company is:

(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

It has been suggested that the placement of the words 'referred to in subparagraph (iii)' in subparagraph 103A(2)(d)(iv) of the ITAA 1936 above gives rise to an ambiguity, and consequently, to alternative and conflicting interpretations.

One view is that a company will be a public company under subparagraph 103A(2)(d)(iv) of the ITAA 1936 where the company is:

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

· 'a company in which … a body referred to in subparagraph (iii) had a controlling interest on the last day of the year of income'.

Under this interpretation, the meaning of 'Government' is contingent upon the scope of subparagraph 103A(2)(d)(iii) of the ITAA 1936.

The alternative interpretation is that a company will be a public company under subparagraph 103A(2)(d)(iv) of the ITAA 1936 where the company is:

· 'a company in which a Government … had a controlling interest on the last day of the year of income'; or

· 'a company in which … a body referred to in subparagraph (iii) had a controlling interest on the last day of the year of income'.

Whether the term 'Government' in subparagraph 103A(2)(d)(iv) of the ITAA 1936 includes a foreign government is somewhat dependent on which of these interpretations is correct.

As explained below, the legislative context and the policy behind subparagraph 103A(2)(d)(iv) of the ITAA 1936 lends support to the alternative interpretation.

Connection with subparagraph 103A(2)(d)(iii)

Subparagraph 103A(2)(d)(iii) of the ITAA 1936 refers to 'a body constituted by a law of the Commonwealth or of a State or Territory and established for public purposes …'. While the reference to a law of the Commonwealth, State or Territory is relevant to the constitution of that body, it is the actual body that is the subject of the provision.

It cannot be said that subparagraph 103A(2)(d)(iii) of the ITAA 1936 in fact makes reference to any 'Government'. Consequently, if subparagraph 103A(2)(d)(iv) meant 'a company in which a Government…referred to in subparagraph (iii) had a controlling interest', that part of subparagraph 103A(2)(d)(iv) would have no effect.

The Explanatory Memorandum (EM) to the Income Tax and Social Services Contribution Assessment Bill (No. 3) 1964, which introduced subsection 103A(2) of the ITAA 1936, provides some clarification on this point. It states:

Paragraph (d) lists a number of other classes of companies that may qualify as public companies without the necessity of satisfying the test of stock exchange listing.

They are -

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

(iv)  a company in which a Government or a body established for public purposes has a controlling interest;

The EM avoids the ambiguity that arises in the legislation as a result of the inclusion and placement of the words 'referred to in subparagraph (iii)'. The EM treats the words 'a body established for public purposes' as synonymous with 'a body referred to in subparagraph (iii)'. It seems clear from the wording of item (iv) of the EM that the words 'referred to in subparagraph (iii)' in subparagraph 103A(2)(d)(iv) of the ITAA 1936 relate only to a body established for public purposes, and do not relate to the word 'Government'.

Accordingly, in establishing whether a company in which a Government has a controlling interest is a public company, it is not necessary to consider subparagraph 103A(2)(d)(iii) of the ITAA 1936.

Application of subparagraph 103A(2)(d)(iv) of the ITAA 1936 to the circumstances of Company X

In the present case, in establishing whether Company X is considered to be a public company for the purposes of subparagraph 103A(2)(d)(iv) of the ITAA 1936, the issues that need to be considered include, firstly whether the foreign government, namely the Country Y Government, satisfies the term 'Government'. Secondly, whether the indirect interest held by the Country Y Government in Company X amounts to a 'controlling interest' where the interest is held through a chain of subsidiary companies.

Whether 'Government' includes a foreign government

As there is no definition of 'Government' or 'government' in either Division 7 of Part III of the ITAA 1936, subsection 6(1) of the ITAA 1936, section 995-1 of the Income Tax Assessment Act 1997 or the Acts Interpretation Act 1901, the ordinary meaning of the term must be used.

The Macquarie Dictionary defines 'government' as 'the governing body of persons in a state, community, etc; the executive power; the administration …'

As this definition does not exclude a foreign government, 'Government' as used in subparagraph 103A(2)(d)(iv) of the ITAA 1936 can include a foreign government.

This conclusion is supported by a number of EMs to Bills which introduced amendments to Division 7 of Part III of the ITAA 1936, including the EM to the Income Tax Assessment Bill (No. 3) 1972, which refers to the distinction between private and public companies and describes public companies as 'very broadly, those in which there is substantial public interest'. Where a government (whether it be an Australian or foreign government) has a controlling interest in a company, the company will be one in which there is substantial public interest.

In this instance, as the meaning of 'Government' in subparagraph 103A(2)(d)(iv) of the ITAA 1936 extends to a foreign government, the Country Y Government who has an indirect interest in Company X through a chain of wholly owned subsidiary companies is regarded as a Government for the purposes of subparagraph 103A(2)(d)(iv) of the ITAA 1936.

Whether an interest in a company amounts to a 'controlling interest' where the interest is held indirectly through a chain of subsidiary companies

The term 'controlling interest' is not defined in Australia's income tax legislation. It therefore takes its ordinary meaning.

The High Court has considered the term 'controlling interest' in the context of other provisions of the income tax legislation and concluded that the ordinary meaning of the term can include an interest held through a chain of subsidiary companies.

In Mendes v. Commissioner of Probate Duties (Victoria) (1967) 122 CLR 152 at 162 Kitto J stated:

...a company A, which by virtue of its voting power in a general meeting of company B controls that company, has a controlling interest in company C if company B holds the majority of votes in the general meeting of company C.

Mason J in Kolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation (1973) 130 CLR 64 adopted that statement of Kitto J and said at 78:

It is now beyond question that company A has a controlling interest in company C if, having control of company B, it has the majority voting power in company C by means of the votes attaching to its shares in company C and those attaching to the shares held in company C by company B. It is consistent with this approach to say that a parent company has a controlling interest in another company, its sub-subsidiary, even though it holds no shares in the sub-subsidiary, provided that it controls the majority in voting power in its subsidiary which in turn controls the majority voting power in the sub-subsidiary.

This tracing approach to determine whether a controlling interest exists was also applied in Cooper Brookes (Wollongong) Pty. Limited v. Federal Commissioner of Taxation (1981) 147 CLR 297 where Aickin J stated at 326:

The ordinary meaning of "controlling interest'' in a company includes the interest of a holding company not only in its direct subsidiaries but in all companies in a chain of subsidiaries, however long. The same is true of each subsidiary in the chain in respect of all subsidiaries below it...

Subsequently, a number of Explanatory Memoranda demonstrate that the ordinary meaning of the term 'controlling interest' includes interests held directly and interests held through a chain of subsidiary companies, where those interests are sufficient to amount to a controlling interest.

For instance, the controlled foreign companies provisions in Part X of the ITAA 1936 and the thin capitalisation provisions in Division 820 of the Income Tax Assessment Act 1997 relate to control of other entities, and they apply to interests which are held directly as well as interests which are held indirectly through chains of interposed entities. Although the term 'controlling interest' does not appear in the relevant legislation, the related Explanatory Memoranda use that term to refer to all interests which are the subject of those provisions.

In the present case, the Country Y Government owns Company Y, who in turn owns 100% of Company X indirectly through a chain of wholly owned subsidiary companies. Hence, Company Y has the controlling interest of Company X. Consequently, the Country Y Government is considered to have held a 100% indirect control interest in Company X through Company Y and that interest held is sufficient to amount to a controlling interest for the purpose of subparagraph 103A(2)(d)(iv).

In conclusion, Company X may be regarded as a public company in the income years that are the subject of this ruling under subparagraph 103A(2)(d)(iv) of the ITAA 1936, where the controlling interest in Company X is held by the Country Y Government on the last day of the relevant income year.