Edited version of private advice

Authorisation Number: 1052004085381

Date of advice: 13 July 2022

Ruling

Subject: Public company status and imputation benchmark rule

Question 1

Will the Commissioner exercise the discretion under subsection 103A(5) of the Income Tax Assessment Act 1936 (ITAA 1936) to deem Entity A to be a public company for the purposes of subsection 103A(1) of the ITAA 1936 in relation to the relevant income year?

Answer

Yes.

Question 2

Will the franking periods for Entity A be determined in accordance with section 203-40 of the Income Tax Assessment Act 1997 (ITAA 1997), on the basis that Entity A is not a private company, as the six-month periods of the relevant income year?

Answer

Yes.

This ruling applies for the following period

XX Month 20XX to XX Month 20XX

The scheme commences on:

XX Month 20XX

Relevant facts and circumstances

Entity A was incorporated outside Australia and is listed on the ASX.

Entity A 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.

Entity A 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

Entity A's capital structure consists of ordinary shares and preference shares.

Entity B is the majority shareholder (majority shareholder). The majority shareholder holds the majority of Entity A's ordinary shares and preference shares on issue.

The remainder of Entity A's ordinary shares are held by a mixture of resident and non-resident investors. The interests of these minority shareholders are held in the form of CDIs.

The ordinary shares/CDIs are the only interests that carry voting rights.

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. 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.

Entity A has significant paid-up capital.

Entity A has widely-held registered CDI holders.

Market value of shares

The market value of shares in Entity A is significant.

Dividend policy

Entity A has a dividend policy in place.

Entity A paid a dividend in the current income year and declared another dividend to be paid in the current income year.

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.

Entity A 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.

As Entity A satisfies paragraph 103A(2)(a) of the ITAA 1936 it will be taken to be a public company in relation to the income year 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.

The test in subsection 103A(3) of the ITAA 1936 applies to 'persons'.

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:

(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.

Further, subsection 103A(7) deems a person (whether or not he or she holds shares in the company concerned), his or her relatives and his or her nominees and the nominees of any of his or her relatives as 'one person' for the purposes of section 103A.

In applying subsection 103A(7), it is necessary to have regard to the definition of 'nominee' in subsections 103(2) and (3) of the ITAA 1936

Entity A satisfies the test in subsection 103A(3) because 20 persons held 75% or more of its shares, voting power and dividend rights as at XX Month 20XX.

Accordingly, Entity A cannot be a public company for the purposes of subsection 103A(1) unless the Commissioner exercises the discretion under subsection 103A(5).

The Commissioner has a discretion under subsection 103A(5) to treat a company as a public company where it does not qualify as a public company under the preceding provisions of section 103A.

Subsection 103A(5) of the ITAA 1936 states:

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;

The Commissioner has issued guidance as to the consideration of the specific statutory factors and the other matters that the Commissioner thinks are relevant in deciding whether or not to exercise the discretion in subsection 103A(5) of the ITAA 1936. The key guidance is in:

• Public Information Bulletin Number 3 (PIB No 3) issued in April 1965
• Canberra Income Tax Circular Memorandum Number 847 (CITCM No 847) dated 15 December 1967
• 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)

The Commissioner has evaluated the factors in subsection 103A(5).

Conclusion

The Commissioner is of the opinion that, having regard to the four factors in subsection 103A(5), it is reasonable that Entity A should be treated as a public company for the purposes of subsection 103A(1) in relation to the relevant year of income.

Question 2

Summary

As Entity A is a public company, its franking periods are determined in accordance with section 203-40 of the ITAA 1997 as six-month periods in the relevant income year.

Detailed reasoning

Franking periods - where the entity is not a private company

The franking periods for a company differ depending on whether or not the company is a private company.

For a company that is not a private company, the franking periods are worked out in accordance with section 203-40 of the ITAA 1997.

Subsection 203-40(2) of the ITAA 1997 states that if an entity's income year is a period of 12 months, each of the following is a franking period for the entity in that year:

• the period of 6 months beginning at the start of the entity's income year;
• the remainder of the income year.

As established in Question 1, Entity A will be a public company for the relevant income year.

Therefore, under subsection 103A(1) of the ITAA 1936, Entity A will not be a private company, meaning that section 203-40 of the ITAA 1997 is relevant to working out its franking periods.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 103A(1)

Income Tax Assessment Act 1936 subsection 103A(2)

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)