Edited version of your written advice

Authorisation Number: 1051413143644

Date of advice: 28 August 2018

Ruling

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

Question

In the event that the Company does not satisfy the ‘20 persons/75%’ test in subsection 103A(3) of the ITAA 1936 at any time during the future income years, will the Commissioner exercise his discretion under subsection 103A(5) of the ITAA 1936 to deem the company to be public company for those income years?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20XX, and

Income year ending 30 June 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1. The Company is an Australian resident company incorporated in Australia.

2. The Company has been listed on the Australian Securities Exchange (ASX).

3. The Company only has ordinary shares on issue. These shares carry equal voting and dividend rights. These shares are not entitled to a fixed rate of dividend.

4. The Company’s shares are widely held by a variety of unrelated shareholders. A number of these shareholders are nominees which hold shares on behalf of other investors.

5. The market value of the Company’s shares are substantial.

Voting and dividends rights attaching to the Company’s shares

6. The voting and dividend rights attaching to the Company’s shares are set out in the Company’s Constitution.

Voting

7. The Constitution provides that notice of every general meeting must be given to every shareholder.

8. At any general meeting a resolution put to the vote of the meeting is decided on a show of hands of all shareholders entitled to vote unless a poll is demanded according to the Constitution.

9. In respect of a vote on a show of hands, every shareholder present has one vote in respect of the total number of shares carrying the right to vote held by that shareholder and on a poll, every shareholder present has one vote for each share carrying the right to vote held by that shareholder.

Dividends

10. The Constitution provides that directors alone may determine to pay a dividend and may decide the terms on which the dividend is to be paid. However, no dividend may be paid except as allowed by the Corporations Act 2001.

11. All dividends are apportioned and paid proportionately to the amounts paid or credited as paid on the shares in proportion to the relevant issue price for the shares.

Appointment and removal of directors

12. The Constitution sets out the appointment and retirement of directors of the Company and provides that:

● the Board is generally comprised of a minimum of three directors and a maximum of 10

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

● a director (excluding the managing director) may not hold office (without re-election) past the third annual general meeting following the director’s appointment or three years, whichever is longer

● the directors have power at any time to appoint any person to be a director, either to fill a casual vacancy or as an addition to the existing directors. The directors must not make an appointment so that the total number of directors at any time exceeds the maximum number fixed in accordance with the Constitution.

Other characteristics of the Company

13. The Company has an accounting and income tax year end of 30 June.

14. The Company has a dividend policy consistent with other public listed companies.

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

16. The Company has been, and will continue to be, carried on for the purposes of profit or gain to its individual members, and has not been prohibited by the terms of its constituent document from making distributions to its members or to relatives of its members.

17. The Company is not a mutual life assurance company.

18. The Company is not a friendly society dispensary.

19. The 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.

20. The Company is not a subsidiary of a public company.

21. A family group does not control more than 50 percent of the voting power of the Company.

Assumptions

1. At a time during the income years to which this ruling applies, the Company will not satisfy the ‘20 persons/75%’ test in paragraph 103A(3)(a) of the ITAA 1936.

2. The Company remains listed on the ASX.

Relevant legislative provisions

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)

Reasons for decision

Public company

Subsection 103A(5) of the ITAA 1936 provides the Commissioner with a discretion to treat a company as a public company even though it does not satisfy one or more prescribed conditions in section 103A of the ITAA 1936.

In accordance with subsection 103A(1) of ITAA 1936, 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 ITAA 1936, a company will be a public company in relation to a year of income, if it satisfies at least one of the conditions in subsection 103A(2) of the ITAA 1936.

Subsection 103A(2) of the ITAA 1936 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 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 satisfies the condition in paragraph 103A(2)(a) of the ITAA 1936 as its shares are listed on the ASX and it has been assumed for the purposes of this ruling that the shares will remain listed. Therefore, as the Company has satisfied at least one of the conditions in subsection 103A(2) of the ITAA 1936, it will be a public company for the relevant income years, unless a subsequent provision of section 103A of the ITAA 1936 applies.

20 persons/75% test

Subsection 103A(3) of the ITAA 1936 prescribes tests that must be satisfied before a company, which would otherwise be a public company under subsection 103A(2) of the ITAA 1936, may be considered as a public company.

Broadly, subsection 103A of the ITAA 1936 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 persons/75%’ test).

The effect of subsection 103A(3) of the ITAA 1936 is that a 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 persons/75%’ test.

It has been assumed for the purposes of this ruling that at a time during the income years to which this ruling applies, the Company will not satisfy the ‘20 persons/75%’ test in paragraph 103A(3)(a) of the ITAA 1936.

Therefore, the Company would not be considered a public company for the purposes of subsection 103A(1) of the ITAA 1936 unless the Commissioner exercises the discretion in subsection 103A(5) of the ITAA 1936 to treat the Company as a public company for those income years.

The Commissioner’s discretion

Subsection 103A(5) of the ITAA 1936 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 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.

The Commissioner has issued guidance as to how the discretion in subsection 103A(5) of the ITAA 1936 is to be exercised. The guidance considers the specific factors referred to subsection 103A(5) of the ITAA 1936 as well the other matters that the Commissioner thinks are relevant in deciding whether to exercise the discretion. This guidance includes:

● 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).

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.

This requires balancing all the relevant factors referred to in subsection 103A(5) to determine whether the company reasonably falls within the concept of a public company. These factors are considered below.

(a) The number of persons capable of controlling the company and whether any of those persons was 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.

The Full High Court decision in Adelaide Motors Ltd v. Federal Commissioner of Taxation (1942) 66 CLR 436, and in Federal Commissioner of Taxation v. West Australian Tanners and Fellmongers Ltd (1945) 70 CLR 623, 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 presently defined.

(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 income year

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

(d) Any other matter that the Commissioner thinks relevant

CITCM No. 847 and PIB No.3 sets out a number of other factors which need to be considered by the Commissioner in exercising the discretion in subsection 103A(5) of the ITAA 1936. These factors are relevant to determining whether the Company falls within the general concept of a public company.

CITCM No. 847 provides that the discretion in subsection 103A(5) of the ITAA 1936 may usually be exercised where:

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

(c) the company is not controlled by a family group of 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 share 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.

Conclusion

Having regard to all the matters set out in subsection 103A(5) of the ITAA 1936, the Commissioner considers that it is reasonable that the Company should be treated as a public company.

Therefore, subject to the facts and assumptions set out above, in the event the Company does not satisfy the ‘20 persons/75%’ test in subsection 103A(3) of the ITAA 1936 at any time during the income years to which this ruling applies, the Commissioner would exercise the discretion under subsection 103A(5) of ITAA 1936 to deem the Company to be a public company for those income years.