Edited version of private advice

Authorisation Number: 1052220970778

Date of advice: 15 February 2024

Ruling

Subject: Public company status

Question

In the event that Company A 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 to 30 June 20XX (the relevant income years), will the Commissioner exercise his discretion under subsection 103A(5) of the ITAA 1936 to deem Company A, and all of Company A's Australian wholly owned subsidiaries to be public companies for the relevant income years?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company A is an Australian incorporated and tax resident company.

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

Company A is the head company of the group with a number of Australian wholly owned subsidiaries.

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

Capital structure

Company A's capital structure consists of ordinary shares.

Company A's top 20 legal shareholders as at 30 June 20XX to 30 June 20XX account for more than 75% of Company A's shares.

There are also a significant number of nominees that hold shares beneficially on behalf of investors. Company A's top 20 beneficial shareholders as at 30 June 20XX to 30 June 20XX account for more than 75% of Company A's shareholdings.

Company A has significant paid-up capital.

The market value of shares in Company A is significant.

Rights attaching to Company A's shares

The rights attaching to Company A's shares are set out in 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. These rights include:

•                     attend and vote at general meetings

•                     receive dividends when paid, and

•                     on winding up, to share in the property of Company A after payment of all debts and liabilities of Company A and costs of winding up in proportion to the number of shares held by them.

Dividend policy

Company A does not have a formalised dividend policy but 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 A.

Other characteristics of the company

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

Company A has been carried on for the purposes of profit or gain to its individual members.

Company A is not a mutual life insurance company.

Company A is not a friendly society dispensary.

Company A 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.

Company A is not a subsidiary of a public company.

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

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

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

Subsection 103A(1) states that a company is a private company if it is not a public company in relation to the year of income.

A company will be a public company in relation to the year of income if it satisfies one of the categories in subsection 103A(2).

Company A satisfies the condition in paragraph 103A(2)(a) on the basis that shares in Company A, 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 ASX and will remain listed on the ASX during the income years ending 30 June 20XX to 30 June 20XX.

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

As Company A satisfies paragraph 103A(2)(a), it will be taken to be a public company in relation to the income years ending 30 June 20XX to 30 June 20XX, unless a subsequent provision of section 103A applies. The key issue, however, is whether Company A satisfies the test in subsection 103A(3).

Subsection 103A(3)

Subsection 103A(3) has the effect that a company which meets the requirements of paragraphs 103A(2)(a) or (b) is not a public company unless 75% of the company's shares are held by, voting power is capable of being exercised by, and dividends are paid to more than 20 persons at all times during the year of income (the '20 persons/75% test').

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

The tests in subsection 103A(3) examine 'persons'.

Paragraph 103A(3)(a) refers to shares being 'held' by persons. Paragraph 103A(3)(b) refers to voting power being 'capable of being exercised' by persons. Paragraph 103A(3)(c) refers to dividends being 'paid' to persons.

The term 'person' is defined in subsection 6(1) to have the same meaning given by subsection 995-1(1) of the ITAA 1997.

Under subsection 995-1(1) of the ITAA 1997:

•                     'person' includes a company (which clarifies the scope of a person, rather than being a comprehensive definition)

•                     '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 ITAA 1936.

In interpreting the tests in subsection 103A(3), it is necessary to have regard to subsection 103A(7) which deems a person, his relatives, his nominees and the nominees of any of his relatives to be one person for the purposes of section 103A.

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 to be '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).

By virtue of the application of subsection 103A(4), all wholly owned subsidiaries of Company A 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 A for an income year, then this would be applied to all wholly owned subsidiaries as provided by subsection 103A(4).

Application of the 20 persons/75% test

Top 20 shareholders legally and beneficially own more than 75% of Company A shares as at XX Month 20XX.

Therefore, it is reasonable to conclude that Company A satisfies the tests in subsection 103A(3) for the income years ending 30 June 20XX to 30 June 20XX.

On the assumption that this will be the same during the income years ending 30 June 20XX to 30 June 20XX, it is reasonable to conclude that Company A cannot be a public company for the purposes of subsection 103A(1) unless the Commissioner exercises the discretion under subsection 103A(5) during the income years ending 30 June 20XX to 30 June 20XX.

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) 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;

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 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). 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 and weighing up all of the factors in subsection 103A(5), he would exercise his discretion under subsection 103A(5) of the ITAA 1936 to deem Company A and its wholly owned subsidiaries as public companies for each of the income years ending 30 June 20XX to 30 June 20XX.