Taxation Ruling

IT 2502

Income Tax : Deductibility of Management and Investment Company Subscriptions Where a Broker Nominee Company is the Registered Subscriber.

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PREAMBLE

This Ruling is in response to queries concerning the tax deductibility of amounts paid on shares in licensed management and investment companies (MICs) to a broker's client where a broker nominee company is the registered subscriber for those shares under subsection 77F(4) of the Income Tax Assessment Act.

2. Section 77F allows a deduction for eligible capital subscriptions paid on shares in a licensed MIC by way of subscription moneys, i.e., application and allotment moneys, calls and any amount paid as share premiums. Only the initial subscriber is allowed a deduction. Subsection 77F(14) denies a deduction for subsequent purchasers. For the purposes of the section, "owner" includes a beneficial owner.

RULING

3. Nominee companies operated by stockbroking firms are non-trading companies used in the following circumstances :

(i)

where shares are to be bought by an identified client and the terms of the share issue require that the shares be taken up by a certain date, it may be necessary for the nominee company to make the initial subscription pending completion by the client of the necessary arrangements;

(ii)

where the broker's client would prefer that the client's name was not entered in the share register the nominee company may hold the shares in its own name on behalf of the client. The client makes any necessary payments in respect of the shares and effectively is the beneficial owner of the shares;

(iii)

where the broker is engaged in underwriting a share issue and there is a shortfall in subscriptions by the prospectus completion date, it again may be necessary for the nominee company to take up the shortfall pending location of interested buyers. Once buyers are located, the shares are transferred to the client.

4. In circumstances (i) and (ii) the nominee company is acting for an identified client and that client may be regarded as the initial purchaser of shares who is eligible for the MIC deduction under subsection 77F(4).

5. In circumstance (iii) there is no agency or trust relationship. However, the underwriting of shares is a common business practice and a means of distributing share issues to prospective buyers. To apply a literal approach could defeat the intention of the legislation by precluding any income tax deduction to the taxpayers intended to benefit from section 77F. Accordingly, provided the shares are merely allotted to a nominee company as a means of ensuring ultimate distribution to buyers, and provided the nominee company has no intention of claiming a sub-section 77F(4) deduction or of retaining the shares for its own purposes, the eventual buyer may be regarded as the initial subscriber and thus eligible to the deduction. Of course, the clawback provisions of the section would also apply on the same basis.

6. Answers to queries have reflected the above views. Enquirers have also been advised that there may be other circumstances in addition to the above where shares are allotted to the nominee company of a stockbroker and that each case would need to be considered in light of its own facts. In some circumstances it may be appropriate to treat the nominee company as the initial purchaser for section 77F purposes, for example, where the shares have been registered in the name of the company with a view to avoiding or reducing tax or as part of an arrangement to avoid or reduce tax.

COMMISSIONER OF TAXATION
27 October 1988

References

ATO references:
NO 88/1140-7

Date of effect:
Immediate

Subject References:
Management and Investment Companies
Broker Nominee Company

Legislative References:
77F