Edited version of your written advice

Authorisation Number: 1051413182045

Date of advice: 9 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 person 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 and its subsidiaries, to be public company for those years?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20XX, and

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1. The company is an Australian incorporated and tax resident company.

2. The company is listed on the Australian Securities Exchange (ASX).

3. It has an accounting period ending 30 June.

4. It has many employees.

5. Its listed shares are not entitled to a fixed rate of dividend.

6. 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.

7. The company’s shares are widely held by a variety of unrelated shareholders

Rights attached to shares

8. The rights attached to shares are set out in the Constitution.

Meetings of members

9. 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

10. The Constitution provides that 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.

Dividends

11. The Constitution provides that 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.

12. The payment of dividends is decided on a case by case basis with reasons explained at the time of release of the financial year end results. 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 the company.

Other characteristics of the company

13. It is not a co-operative company as defined by section 117 of the ITAA 1936.

14. It is not a mutual life insurance company.

15. It is not a friendly society dispensary.

16. It 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.

17. It is not a subsidiary of a public company.

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

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

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

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

Summary

In the event that the company 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 20XX (hereunder referred to as income years), the Commissioner may exercise his discretion under subsection 103A(5) to deem the company, and all of the company’s Australian wholly owned subsidiaries, to be public companies for the relevant income years.

Detailed reasoning

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

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.

The Commissioner has issued guidance as to the consideration of these factors and when the discretion will be exercised. This guidance considers the specific factors referred to above 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)

● 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.

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?

The company satisfies subsection 103A(2) by reason of paragraph (a) in that the shares are 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 the ASX and will remain listed on the ASX in the income years ended 30 June 20XX and 30 June 20XX.

The company does not satisfy any of the conditions at paragraphs (b) to (d) of subsection 103A(2) in relation to the income years.

As the company satisfies paragraph 103A(2)(a), it will be taken to be a public company in relation to the income years ending 30 June 20XX and 30 June 20XX, unless a subsequent provision of section 103A applies. The key issue, however, is whether the company 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.

By virtue of the application of subsection 103A(4), all wholly owned subsidiaries of the company 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 at subsection 103A(5) is granted to the company 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

Subject to subsection 103A(5), subsection 103A(3) would operate to prevent the company 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 the company (the 20 person 75% test).

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 nomineeship 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.

CITCM no.847 provides that in some cases a listed company may fail to meet the 20 persons 75% tests 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.

Specifically, paragraph 34 of the CITCM no. 847 provides that:

Unless there are exceptional circumstances which indicate that the exercise of the discretionary power would not be warranted, shares beneficially owned by public companies may be excluded when applying the “20 persons – 75 per cent” tests.

Paragraph 37 of CITCM no. 847 provides:

There will be instances in which a nominee company holds shares in the company which is seeking the exercise of the discretionary power to obtain public company status. In isolated cases, the tracing through the nominee company of the beneficial ownership of the shares in the company may facilitate the exercise of the discretionary power, e.g., where it is established that the shares are beneficially owned by a public company or by a number of unrelated individuals, who do not directly hold shares in the company.

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 detailed examination of each relevant factor referred to in subsection 103A(5) is necessary to determine whether the company 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 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 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.

The number of persons who beneficially held shares in the company at the end of the year of income

ATO ID 2004/760 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.

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. 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.

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).

Having considered all the relevant factors as outlined above, the Commissioner considers that the company reasonably falls within the concept of a public company and would exercise his discretion under subsection 103A(5) subject to the facts and assumptions outlined.