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Ruling

Subject: Commissioner's discretion to deem a company to be a public company

Question

Will the Commissioner exercise his discretion under subsection 103A(5) of the Income Tax Assessment Act 1936 (ITAA 1936) to deem the company and its wholly owned subsidiaries as public companies for income tax purposes under subsection 103A(1) of the ITAA 1936, for the year ended 30 June 2012?

Advice/Answers

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

The company is an unlisted company and is the parent company of a number of wholly owned entities.

As at 31 July 2011, the company's top 20 shareholders held 70% of its shares. The largest shareholder and its related entities hold an ownership interest less than 30%.

The company currently has over 400 shareholders and over 70% of the shares are held by unrelated persons. Currently there are more than 100 million shares on issue.

The company currently has an estimated market capitalisation between $10m - $20m.

Financial statements for the year ended 30 June 2010 and 30 June 2011 were provided, with comparative information for 2009 and 2008.

The Constitution and an Information Memorandum were also provided.

Assumptions

That the company continues to meet the '20 persons/75% test' at all times during the income year ending 30 June 2012.

That the company continues to meet the minimum requirements for listing on the ASX at all times during the income year ending 30 June 2012.

Relevant legislative provisions

Subsection 103A(1) of the ITAA 1936

Subsection 103A(2) of the ITAA 1936

Subsection 103A(5) of the ITAA 1936

Reasons for decision

Subsection 103A(1) of the ITAA 1936 provides that 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.

The principle features of a public company are:

· 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 (the '20 persons/75% test').

Furthermore, a subsidiary of a public company is treated as a public company under subparagraph 103A(2)(d)(v) of the ITAA 1936.

In this instance, the company's shares are not quoted on the official list of a stock exchange.

Subsection 103A(5) of the ITAA 1936 provides the Commissioner with a discretion to treat a private company as a public company for income tax purposes even though the company does not satisfy one or more of the prescribed tests contained in section 103A of the ITAA 1936.

Subsection 103A(5) of the ITAA 1936 lists factors that need to be taken into account when determining whether or not the discretion should be exercised. Regard must be had to the following:

· 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;

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

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

· any other matters the Commissioner considers relevant.

ATO Interpretative Decision (ATO ID) 2004/760 provides that there is no specific quantum of shareholders or paid up capital that is required to have the discretion exercised. Rather, regard must be made to the overall position of the company. The main question to be considered when exercising the discretion is whether the company reasonably falls within the general concept of a public company.

ATO ID 2004/760 also states:

In April 1965, Public Information Bulletin No 3 (PIB No 3) was issued to give some guidance as to how the Commissioner's discretionary powers under section 103A of the ITAA 1936 would be exercised. In relation to an unlisted company, PIB No 3 stated:

... the discretionary power to treat such a company as a public company will be exercised where the company satisfies the tests for listing prescribed by the stock exchanges now operating in Australian capital cities but, for reasons unconnected with income tax, does not wish to have its shares listed. …

For an Australian company to satisfy the tests for listing prescribed by the ASX, the following conditions would need to be met:

· the 'profit test' or the 'asset test';

· shareholder spread;

· certain constitutional and corporate governance requirements;

· prospectus (or information memorandum); and

· a minimum issue price of $0.20.

The company does not currently meet the 'profit test'.

The 'asset test' requires that a company:

· Has net tangible assets of at least $2m, OR a market capitalisation of at least $10m;

· Has less than half of the company's total tangible assets in cash or in a form readily convertible to cash;

· A working capital of $1.5m (or if not, an amount that would be $1.5m if the company's budgeted revenue for the full financial year after listing was included in the working capital);

· Provides to the ASX financial statements and an audit report.

In this instance, the company advises that it meets the asset test requirements as it anticipates that the 2012 revenue will be at least, if not higher, than the 2011 revenue. Liquid assets are less than half of total tangible assets.

The ASX also requires a satisfactory spread of shareholders to be achieved. A company will meet this if it has at least:

500 shareholders who each hold shares with a value (based on the issue price) of at least $2,000; or

400 shareholders who each hold shares with a value (based on the issue price) of at least $2,000 provided that at least 25% of the company's shares are held by unrelated entities.

Currently, the company has over 400 shareholders and over 70% of the shares are held by unrelated persons. The company advised that its shareholding base would exceed 400 shareholdings of at least $2,000 and at least 25% of shares would be held by unrelated persons.

In this instance, the company is considered to reasonably fall within the general concept of a public company. This is because:

· The company meets the '20 persons/75% test';

· No one person or shareholder is capable of controlling the company;

· The company would satisfy the minimum requirements for listing prescribed by ASX.

Therefore the Commissioner will exercise his discretion under subsection 103A(5) of the ITAA 1936 to treat the company as a public company for the year ended 30 June 2012.

In accordance with subparagraph 103A(2)(d)(v) of the ITAA 1936, the company's wholly owned subsidiary companies will also be treated as public companies for the year ended 30 June 2012.