Edited version of your written advice

Authorisation Number: 1051198006799

Date of advice: 2 March 2017

Ruling

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

Question

In the event that Company X does not satisfy the 20 person 75% test in subsection 103A(3) of the ITAA 1936 at any time during the income years ending 30 June 20XX and 30 June 20YY, would the Commissioner exercise his discretion under subsection 103A(5) of the ITAA 1936 to deem Company X, and all of Company X'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

Company overview

Company X is an Australian incorporated and tax resident company.

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

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

Percentage shareholding of the top 20 shareholders was XX.XX.

A number of top 20 shareholders are companies listed on the Australian and foreign stock exchanges and nominees which hold shares on behalf of other investors.

Percentage shareholding of the top 20 beneficial shareholders was XX.XX%.

Rights attaching to Company X shares

The rights attaching to Company X shares are set out in the Constitution for Company X (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 held.

Dividends

The directors may pay any interim and final dividends that, in their judgement, the financial position of the company justifies. The directors may pay any dividend required to be paid under the terms of issue of a share. The directors may also rescind a decision to pay a dividend if they decide, before the payment date, that the company's financial position no longer justifies the payment. Payment of a dividend does not require confirmation at a general meeting.

The Constitution sets out the Company X's dividend policy. It is the general intention of the Board to pay dividends subject to business conditions, available profits and franking credits and the financial position of Company X.

Winding up

The Constitution provides that if the company is wound up and the property of the company available for distribution among its members is more than sufficient to pay the excess must be divided among the members in proportion to the number of shares held by them, irrespective of the amounts paid or credited as paid on the shares.

Directors - appointment and removal

The Constitution provides that 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.

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.

Other characteristics of the company

1. Company X is not a co-operative company as defined by section 117.

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

3. Company X is not a friendly society dispensary.

4. Company X 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.

5. Company X is not a subsidiary of a public company.

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

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

Assumptions

At a time during the relevant income years Company X may not satisfy the 20 persons 75% test in paragraph 103A(3)(a) of the ITAA 1936.

Company X remains listed on the ASX.

Relevant legislative provisions

Acts Interpretation Act 1901 subsection 2C(1)

Income Tax Assessment Act 1936 subsection 6(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),and

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

Reasons for decision

All references refer to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated.

Summary

In the event that Company X does not satisfy the 20 person 75% test in subsection 103A(3) at any time during the income years ending 30 June 20XX and 30 June 20YY (hereunder referred to as income years), the Commissioner will exercise his discretion under subsection 103A(5) to deem Company X, and all of Company X's Australian wholly owned subsidiaries, to be public companies for the relevant income years.

Detailed reasoning

A private company is defined under subsection 103A(1) to be a company which is not a public company in relation to the year of income.

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). Subsection 103A(2) provides:

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 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.

Are any of the conditions in paragraphs (a) to (d) of subsection 103A(2) satisfied?

Company X satisfies subsection 103A(2) by reason of paragraph (a) in that the shares in Company X, 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) will remain listed on the ASX in the relevant income years.

Company X does not satisfy any of the conditions at paragraphs (b) to (d) of subsection 103A(2) in relation to the income years. Specifically:

● Company X does not satisfy paragraph (b) because it is not a co-operative company as defined by section 117.

● Company X does not satisfy paragraph (c) because it has been carried on for the purpose of profit or gain to its individual members.

● Company X does not satisfy paragraph (d) because it is not any of the following:

● a mutual life assurance company

● a friendly dispensary society

● 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 relation to companies, or a company in which such a body; or a Government had a controlling interest on the last day of the year of income, or

● a subsidiary of a public company in relation to the income years.

As Company X satisfies paragraph 103A(2)(a), it will be taken to be a public company in relation to the relevant income years, unless a subsequent provision of section 103A applies. The key issue, however, is whether Company X satisfies the test in subsection 103A(3).

Is subsection 103A(3) satisfied?

Subsection 103A(3) provides 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 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 test in subsection 103A(3) must be satisfied before a company, which would otherwise be a public company under subsection 103A(2), may be considered a public company.

Broadly, subsection 103A(3) requires that at all times during the year of income, more than 20 persons own (or have the right to acquire) 75% of the equity capital in the company and have a right to 75% of the voting power and dividends paid (the 20 person 75% test).

The effect of subsection 103A(3) is that a public company is denied public company status, even if it is listed on the ASX, if at any time during the year it fails the 20 person 75% test.

The test in subsection 103A(3) applies to “persons”. The term “persons” is defined in subsection 6(1) 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 2C(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 Company X will be considered a person for the purposes of the test in subsection 103A(3).

By virtue of the application of subsection 103A(4), all wholly owned subsidiaries of Company X 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 Company X 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 Company X

As set out above, subject to subsection 103A(5), subsection 103A(3) would operate to prevent Company X 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 Company X.

The relevant test periods for the purposes of this ruling for the 20 person 75% test are the relevant income years. As these years have not yet completed, the most recent factual data relating to shareholdings has been provided for Company X.

Of Company X shares on issue, the top 20 shareholders legally held XX.XX% of these shares.

As less than 20 persons held 75% or more of the shares in Company X, and on the assumption that it will be the same during the relevant income years, Company X does not satisfy the test in paragraph 103A(3)(a). As Company X does not satisfy the requirement of paragraph 103A(3)(a), Company X cannot satisfy the requirement of subsection 103A(3) and it is not necessary to consider paragraphs (b) to (d).

Although on the surface it appears that Company X may have failed the test prescribed by subsection 103A(3), the Commissioner is required to look beyond the nominal shareholdings of Company X.

The section indicates 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.

Related to this provision is subsection 103A(7) that discusses the nominee-ship of a person by another person or entity. The section determines that a person, his relatives and nominees and his relatives' nominees are deemed to be one.

A 'nominee' of another person in relation to shares is defined in subsection103(2) as a person who may be required to exercise his or her voting power in relation to those shares at the direction of that person, or who holds those shares directly or indirectly on behalf of or for the benefit of that person.

Subsection 103(3) deems shares to be held indirectly on behalf of or for the benefit of a person (not being a private company, partnership or trust) if, when a dividend is paid that person would (otherwise than as a shareholder of the company) receive the whole or 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).

The provisions and guidance indicate that in determining control of a company, regard should be had to the ultimate recipient of the beneficial interest in the shares held, rather than a nominee's ownership of those shares.

A list of the top 20 beneficial shareholders of Company X as at a pint in time provided shows that top 20 beneficial shareholders held XX.XX% thus satisfying the 20 persons 75% test.

However, as Company X shareholders are able to freely trade their shares via the ASX, it is possible that Company X may inadvertently fail the 20 persons 75% test during the years ended 30 June 20XX and 30 June 20YY given the percentage of shares held by its top 20 shareholders (without tracing through the nominee companies) is above 75%.

Therefore, this private ruling is made based on the assumption that at a time in relevant income years Company X will not satisfy the 20 persons 75% test in paragraph 103A(3)(a).

Application of the Commissioner's Discretion to Company X

The Commissioner has a discretionary power under subsection 103A(5) to treat a company as a public company even though it would not be so classified under the prescribed conditions in the preceding subsections of section 103A.

Subsection 103A(5) 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.

The principal 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.

Furthermore, the subsidiary of a public company is treated as a public company.

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.

Whilst there is no judicial guidance on exercise of Commissioner's discretion under subsection 103A(5), reference is made to the unanimous decision of the Full Court of the High Court of Australia in Stocks and Holdings (Constructors) Pty Limited v Federal Commissioner of Taxation (1973) 3 ATR 621. The court was asked to consider the operations of subsection 103A(5) when the Commissioner formed his opinion in order to enable additional tax to be imposed on the taxpayer company. Stephen J stated that:

Its function is not to enable onerous liabilities to be imposed upon a company but, instead, to confer a wide power upon the Commissioner to prevent unforeseen anomalies arising….

His honour went on to state that the provisions operate to:

…take out of the application of the application of onerous sections taxpayers who would otherwise be prejudicially affected by them and they do so when it appears reasonable to the Commissioner that this should occur.

The Commissioner has issued guidance as to when the discretion will be exercised. This guidance considers the specific factors referred to in subsection 103A(5) 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) (dated 31 August 1966)

● Public Information Bulletin Number 3 (PIB no. 3) (dated April 1965), and

● 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).

As an overarching principle ATO ID 2004/760 states that:

The main question to be considered when exercising the discretion is whether the company reasonably falls within the concept of a public company.

ATO ID 2004/760 notes that the principal 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 (20 person 75% test).

Furthermore, the subsidiary of a public company is treated as a public company.

It is noted that Company X satisfies the first of the features as it was listed on the ASX, an approved stock exchange and an assumption has been made for the purposes of this ruling that Company X will remain listed on the ASX.

As discussed under the heading “Application of the 20 person 75% test to Company X”, Company X initially satisfies the 20 persons 75% test under subsection 103A(3). However, given the percentage of shares held by its top 20 shareholders is close to 75% and its shareholders are able to freely trade their shares via the ASX; it is possible that Company X will fail the test during the relevant income years. Therefore, an assumption has been made for the purposes of this private ruling that Company X will not satisfy the test at all times under section 103A.

CITCM 847 provides that in some cases a listed company may fail to meet the 20 persons 75% test in subsection 103A(3) 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.

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 Company X regarding the exercise of the Commissioner's discretion as Company X 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 Company X to have 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 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 applicant's submission in relation to each of the relevant factors referred to in subsection 103A(5) is examined below to ascertain that Company X 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

The 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 (WP Keighery Pty Ltd v Federal Commissioner of Taxation (1957) 100 CLR 66).

In the case of Company X, according the Constitution, questions arising at a general meeting must be decided by a majority of votes cast by the members present at the meeting, except where a resolution requires a special majority. 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 Company X are the only shares in Company X that carry with them voting rights in the company and no shareholder is in a position to control the Company.

This factor supports the exercise of the Commissioner's discretion to treat Company X as a public company.

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

As guidance, ATO ID 2004/760 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. Rather, regard must be made to the overall position of the company.

Company X's share price was $X.XX per share, with more than X billion shares on issue and market capitalisation of $XXXm.

This factor, along with the public company listing with the ASX is considered to be indicative of a public company rather than a private company, and supports the exercise of the Commissioners discretion to treat Company X 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 Company X 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.

ATO ID 2004/760 provides that a company with several hundred shareholders and paid up capital of $20 million would generally be more likely to be accepted as a public company than a company of 30 shareholders and a small amount of paid up capital. However, 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.

Total number of persons who legally held shares in Company X was XX,XXX. The applicant submits that while they are unable to predict whether this will change at the end of the relevant income years, they suggest that the number of shareholders is only likely to increase further as the Company continues to expand.

This factor supports the exercise of the Commissioners discretion to treat Company X as a public company.

● Any other matters that the Commissioner thinks relevant

The guidance in CITCM 847 and PIB No 3 provides a number of factors which need to be considered by the Commissioner in applying the discretion under subsection 103A(5) where an unlisted company satisfies the 20 persons 75% test. These factors are relevant to determine whether Company X falls within the general concept of a public company.

The factors listed at paragraph 44 of the CITCM no 847 provides that the discretion in subsection 103A(5) may usually be exercised where:

(a) sufficient paid up capital and wide spread shareholdings to enable the company to obtain a listing

(b) a dividend policy consistent with a listed public company

(c) the company is not controlled by a family group of shareholders (i.e. the family group do not control more than 50% 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 company, and

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

These factors and how they apply to the circumstances of Company X are considered below.

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

Company X had X million shares on issue with market capitalisation of $XXX,XXX,XXX.

Company X does not have a formalised dividend policy in place and the Constitution does outline Company X's general dividend policy.

The taxpayer's dividend policy as outlined and as stated in the Constitution would appear fairly indicative of that of a public company.

Company X is not controlled by a family group of shareholders and is instead widely held by a variety of unrelated shareholders.

The Constitution of Company X 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 are, or at the option of the company or holder are, liable to be redeemed or convertible into ordinary shares. Each preference share confers on its holder a right to receive a preferential dividend, in priority to the payment of any dividend on the ordinary shares. 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 Constitution sets out the appointment and retirement of directors and 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 factors, the applicant submits the appointment and rotation of directors in Company X is considered to be undertaken in reasonably the same manner as is done in the case of listed public companies.

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, as a public company, the Commissioner must have regard to the factors in subsection 103A(5).

For the purposes of this ruling, it is assumed that at some point during the relevant income years, Company X, a listed company fails the 20 person 75% test and remains listed on the ASX.

In line with PIB no. 3, the Commissioner finds that sympathetic consideration should be given to Company X regarding the exercise of the discretion in subsection 103A(5).

Having considered all the relevant factors as outlined above, the Commissioner considers that Company X reasonably falls within the concept of a public company and would exercise his discretion under subsection 103A(5) to treat Company X as a public company for the relevant income years.