Edited version of private advice

Authorisation Number: 1051583098483

Ruling

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

Question 1

Will the Commissioner exercise his discretion under subsection 103A(5) of the Income Tax Assessment Act 1936 (ITAA 1936) to deem the Company to be a public company for the income year.

Answer

Yes

Question 2

Are the franking periods for the Company determined in accordance with section 203-40 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that the Company is not a private company.

Answer

Yes

Relevant facts and circumstances

The company was incorporated outside Australia and is listed on the ASX. The Company is and will continue to be carried on for the purpose of profit or gain to its individual members and is not prohibited from making distributions to its members.

The Company is not:

·        a co-operative company as defined by section 117 of the ITAA 1936

·        a mutual life insurance company,

·        a friendly society dispensary,

·        a body constituted by a law of the Commonwealth or of a State or Territory established for public purposes, or has or ever had such a body have a controlling interest in it,

·        a subsidiary of a public company, or

·        controlled by a family group having more than 50% of the voting power.

Capital structure

The company's capital structure consists of ordinary shares and preference shares.

A limited liability company is the majority shareholder (majority shareholder). The majority shareholder holds the majority of the Company's ordinary shares and preference shares on issue.

The balance of the Company's ordinary shares are held by a nominee company as CHESS depository Interests (CDIs) acquired by investors on the ASX.

The ordinary shares and CDIs carry the following rights:

·        to receive dividends that may be declared out of funds legally available for dividend payments,

·        to attend and vote at general meetings of the Company. Each ordinary shareholder has one vote for each share they hold and each CDI holder has one vote for every CDI they hold, and

·        on winding up, to share in all assets remaining after payment of all debts and other liabilities subject to the prior rights of the preference shares.

The Company has significant paid up capital in excess of $1 billion.

The Company has several thousand registered CDI holders.

Board Charter & Corporate Governance Guidelines

The Company has adopted a Board Charter and Corporate Governance Guidelines. The Corporate Governance Guidelines:

·        set out that the Board should comprise a majority of independent non-executive directors and comprise directors with a broad range of skills, expertise and experience from a diverse range of backgrounds.

·        do not establish a limit on tenure because the Board does not want to lose the contribution of experience developed over time.

·        authorise permanent standing Committees of the Board

The Company has established several governing committees. Each committee has at least X members, all of whom are non-executive directors and a majority of whom are independent directors, and are chaired by an independent director, who is not the chair of the Board.

Appointment of directors

Board appointment offers must be made by the Board's Chairperson only after consulting with all directors and recommendations from the Compensation and Nominating Committee being circulated to all directors.

The Corporate Governance Statement states that the Company's Board is appointed by the shareholders.

To date, the majority shareholder has not elected to apply the board designation rights it has that are attached to its preference shares.

The Board of the Company currently consists of Y directors, X of which are independent directors. The Board's Chairperson is an independent non-executive director.

Dividend policy

The Company has a dividend policy in place.

The Company paid a dividend in the current income year and declared another dividend to be paid in the current income year.

Market value of shares

The market value of shares in the Company is in excess of several billion dollars.

Disclosure

Information is communicated to the Company's shareholders by announcements to the ASX made in accordance with continuous disclosure obligations, including quarterly reports, half and full-year results and an Annual Report.

Assumption

An assumption was made for this ruling that there would be no material changes in the relevant and material facts and circumstances for the duration of time covered by this Ruling.

Reasons for decision

Question 1

A private company is defined under subsection 103A(1) of the ITAA 1936 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) of the ITAA 1936. Paragraph 103A(2)(a) of the ITAA 1936 provides that a company, subject to the succeeding provisions of section 103A of the ITAA 1936, is a public company in relation to a year of income if:

...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.

The Company satisfies paragraph 103A(2)(a) of the ITAA 1936 on the basis that its shares, not being shares entitled to a fixed rate of dividend 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 year to which this ruling applies.

As the Company satisfies paragraph 103A(2)(a) of the ITAA 1936 it will be taken to be a public company in relation to the income year to which this ruling applies unless a subsequent provision of section 103A applies.

Broadly, subsection 103A(3) 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. Subsection 103A(3) of the ITAA 1936 states:

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 the 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) of the ITAA 1936 applies to 'persons'. The term 'persons' is defined in subsection 6(1) of the ITAA 1936 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.

The term company is defined in subsection 995-1(1) of the ITAA 1997 as follows:

company means: (a) a body corporate; or (b) any other unincorporated association or body of persons; but does not include a partnership or a * non-entity joint venture.

Note 1: Division 830 treats foreign hybrid companies as partnerships.

Note 2: A reference to a company includes a reference to a corporate limited partnership: see section 94J of the Income Tax Assessment Act 1936.

Therefore, each company in the shareholder structure of the Company will be considered a person for the purposes of the test in subsection 103A(3) of the ITAA 1936.

The majority shareholder is a limited liability company and meets the definition of company and is considered a person for the test in subsection 103A(3) of the ITAA 1936.

In these circumstances, less than 20 people own 75% of the shares, voting and dividend rights in the Company. Therefore, the Company is not a public company. As a result, Company is a private company unless the Commissioner exercises the discretion in subsection 103A(5) of the ITAA 1936.

Subsection 103A(5) of the ITAA 1936

The Commissioner has a discretionary power under subsection 103A(5) of the ITAA 1936 to treat a company as a public company even though it does not satisfy one or more of the prescribed conditions in section 103A of the ITAA 1936.

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 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 as the other matters that the Commissioner thinks are relevant in deciding whether to exercise the discretion in subsection 103A(5) of the ITAA 1936. 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) of the ITAA 1936 to determine 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)

The company satisfies the first of these features as it is listed on the ASX. The ASX is listed as an approved stock exchange under regulation 995-1.05 of Schedule 5 of the Income Tax Assessment Regulations 1997. However the Company does not pass the 20 person 75% test, as concluded above.

A detailed examination of each relevant factor referred to in subsection 103A(5) of the ITAA 1936 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 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 circumstances where the majority shareholder satisfies the definition of 'company' and the definition of 'person' as discussed above the Commissioner will not look through to its members. Therefore, one 'person' holds the majority of the voting power in the Company.

It is also noted that the majority shareholder is a controller of the Company under section 50AA of the Corporations Act and therefore has continuous disclosure requirements under the ASX listing rules.

Notwithstanding continuous disclosure requirements, the circumstances in relation to this factor do not support the exercise of the Commissioner's discretion in subsection 103A(5) of the ITAA 1936.

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 not 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 market value of shares in the Company is in excess of several billion dollars.

The Company's circumstances in relation to this factor are considered to be indicative of a public company rather than a private company and do support the exercise of the Commissioner's discretion in subsection 103A(5) of the ITAA 1936.

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

The Company has several thousand registered CDI holders.

The Company's circumstances in relation to this factor support the exercise of the Commissioner's discretion in subsection 103A(5) of the ITAA 1936.

Any other matters that the Commissioner thinks relevant

Both CITCM no. 847 and PIB no. 3 provide guidance as to how the discretion in subsection 103A(5) of the ITAA 1936 is to be exercised, including a number of factors that 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) the company has sufficiently large paid-up capital and wide spread of shareholdings to enable it to obtain a listing on a 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 to the company;

(c) the company is not controlled by a family group for 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 shares 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.

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

ASX listed

The Company has significant paid up capital in excess of $1 billion. The Company has sufficiently large paid-up capital and wide spread of shareholdings to enable it to be ASX listed. Therefore, the Company's circumstances in relation to this factor support the exercise of the discretion in subsection 103A(5) of the ITAA 1936.

Dividend policy

The Company has a published dividend policy. In accordance with this policy it paid a dividend in the current income year and declared a further dividend to be paid in the current income year.

It is considered that the Company's dividend policy is consistent with what might reasonably be expected of a listed public company in similar circumstances. Therefore, the Company's circumstances in relation to this factor support the exercise of the Commissioner's discretion in subsection 103A(5) of the ITAA 1936.

Family Group

The Company is not controlled by shareholders from a family group. This fact does support the exercise of the Commissioner's discretion in subsection 103A(5) of the ITAA 1936.

Voting and dividend rights

All CDIs and ordinary shares carry dividend and voting rights. This is considered to be comparable, in all material respects to rights normally attached to shares of a listed public company. The rights attaching to preference shares are considered to not have a material effect on the dividend and voting rights attached to the CDIs and ordinary shares.

The Company's circumstances in relation to this factor supports the exercise of the Commissioner's discretion in subsection 103A(5) of the ITAA 1936.

Appointment of directors

The Company does not have a policy imposing tenure on the term of directors. However, the Company has established several governance committees. Each committee has at least X members, all of whom are non-executive directors and a majority of whom are independent directors, and are chaired by an independent director, who is not the chair of the board. The Board's chairperson is an independent non-executive director.

At the time of this decision, the majority shareholder has not elected to apply the board designation rights it has as holder of the preference shares and will not exercise these rights for the period this ruling applies to.

It is considered that the Board Charter and Corporate Governance Guidelines, and the appointment of directors are reasonably within the manner in which a listed public company operates. Therefore, the Company's circumstances in relation to this factor support the exercise of the Commissioner's discretion in subsection 103A(5) of the ITAA 1936.

Conclusion

In determining whether to exercise the discretion to treat a company, which does not satisfy one or more of the prescribed conditions of a public company, as a public company, the Commissioner must have regard to the factors in subsection 103A(5) of the ITAA 1936. In cases such as the present, where some of the factors support the exercise of the discretion and others do not, it is necessary to balance the factors to reach a conclusion as to whether the company reasonably falls within the concept of a public company.

Whilst only the majority shareholder is capable of controlling the Company, it is considered that other relevant factors in this case, such as the Company's ASX listing, dividend policy, market value, number of shareholders, Board composition and governance arrangements are consistent with those that are expected of a public company.

Having regard to the factors provided in subsection 103A(5) of the ITAA 1936, the Commissioner is of the opinion that it is reasonable that the Company should be treated as a public company for the income year and will exercise the discretion under that subsection.

Question 2

Detailed Reasoning

The company has an income year of 12 months.

Pursuant to subsection 203-40(1) of the ITAA 1997, section 203-40 of the ITAA 1997 is used to work out the franking periods for an entity in an income year where the entity is not a private company in that income year. Subsection 203-40(2) of the ITAA 1997 specifies that if an entity's income year is a period of 12 months, each of the following is a franking period in that year:

(a) the period of 6 months beginning at the start of the entity's income year;

(b) the remainder of the income year.

For the reasons set out in relation to Question 1 of this Ruling, the Commissioner is of the opinion that it is reasonable that the Company should be treated as a public company for the income year and will exercise the discretion under subsection 103A(5) of the ITAA 1936 to treat the Company as such.

Accordingly, the Company's franking periods are worked out under section 203-40 of the ITAA 1997. It follows from the application of subsection 203-40(2) of the ITAA 1997 that the franking periods for the Company in the income will be as follows:

·        the period of six months commencing at the start of the income year, and

·        the remainder of the Company's income year.