Private ruling: Commissioner’s discretion under subsection 103A(5) of the Income Tax Assessment Act 1936 (ITAA 1936)
Date of advice: 28 February 2017
Published: April 2017

Ruling: Q1: Would 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 relevant income year if it does not meet the test in subsection 103A(3) of the ITAA 1936 at a time during that income year? | A1: Yes.

Relevant facts and circumstances: The Company is an Australian tax resident company listed on the Australian Securities Exchange (ASX). The Company has one class of ordinary share. This class of share carries equal voting and dividend rights. The Company complies with its Australian Securities and Investments Commission and ASX listing obligations, including preparation of Corporate Governance Council Principles and Recommendations Reports, appointment of an independent auditor to audit its accounts, holding of AGMs and other ASX listing requirements. The Company provides guidance as to its profitability and announces its investor day presentations and significant transactions in accordance with ASX Continuous Disclosure Requirements. In addition, the Company has established and maintained various committees consistent with public companies, including an audit committee, a remuneration committee and a risk committee among its executive and non-executive directors. The number of beneficial owners in the issued capital of the Company is substantial. This number has increased steadily over time since listing. The top twenty shareholders held over 75% of the shares on issue in the Company. However, a number of the top 20 shareholders of the Company were nominee companies which beneficially held shares for more than one underlying beneficial owner. After tracing through these nominee shareholders to their underlying beneficial owners, the top 20 shareholders still held more than 75% of the interests in the Company. The Company has sufficiently large paid-up capital. The top twenty shareholders in the Company include several widely-held Limited Investment Companies (LICs) The voting rights and dividend rights attaching to the ordinary shares in the Company are within the bounds of what could reasonably be expected in the case of a public company. The Company maintains a dividend policy of paying out fully-franked dividends from its post-tax operating cash flow generated from its business. The Company is not controlled by a family group of shareholders. The number of persons capable of controlling the Company was more than seven in the relevant year. Management and operation of the Company, the conduct of general meetings, appointment and remuneration of directors, distribution of profits and winding up provisions would be comparable to other publicly listed companies. The Company is not a co-operative company as defined by section 117 of the ITAA 1936. The Company is not a mutual life insurance company. The Company 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. The Company is not a subsidiary of a public company.

Relevant legislative provisions: Acts Interpretation Act 1901 subsection 2C(1) | Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 103(1) | Income Tax Assessment Act 1936 subsection 103(2) | Income Tax Assessment Act 1936 subsection 103(3) | 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(5) | Income Tax Assessment Act 1936 subsection 103A(6) | Income Tax Assessment Act 1936 subsection 103A(7) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Regulations 1997 Schedule 5, Regulation 995-1.05

Reasons for decision: Summary: All subsequent references refer to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated. In accordance with subsection 103A(1) of the ITAA 1936, a company is a private company in relation to a year of income if the company is not a public company in relation to the year of income. Subject to the succeeding provisions of section 103A of the ITAA 1936, 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 whether 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. The Company satisfies paragraph (a) of subsection 103A(2) because shares in the Company, 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 in the official list of the ASX as at the last day of the year of income. As the Company has satisfied at least one of the conditions in subsection 103A(2), it will be a public company in relation to the year of income, unless a subsequent provision of section 103A applies. Relevantly, the Company will also need to satisfy subsection 103A(3). | Detailed Reasoning - The 20 person 75% test: Subsection 103A(3) of the ITAA 1936 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 effect of subsection 103A(3) is that a public company is denied public company status, even if listed on the ASX, if at any time during the year, twenty or fewer persons together own (or have the right to acquire) 75% or more of the equity capital in the company and have a right to 75% of the voting power and the dividends paid (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. Subsection 2C(1) of the Acts Interpretation Act 1901 provides that expressions used to denote persons generally (including the word person) shall include a body politic or corporate as well as an individual. Therefore, each company or body corporate in the shareholder structure of the Company will be considered a person for the purposes of the test in subsection 103A(3). The top twenty shareholders held over 75% of the shares on issue in the Company. Thus, it appears that the Company has breached the test prescribed by subsection 103A(3) during the income year. However, by virtue of the operation of subsection 103(3), the Commissioner is required to look beyond the nominal shareholdings in the Company. The section indicates that 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. Subsection 103A(7) discusses the nomineeship of a person by another person or entity. The section determines that a person, their relatives and their relatives' nominees are deemed to be one person. The reference to ‘nominees’ in paragraph 103A(7)(c) is to have the meaning in subsections 103(2) and 103(3). Subsection 103(2) reads as follows: For the purposes of this Division, a person is the nominee of another person in relation to shares if that first-mentioned person may be required to exercise his or her voting power in relation to those shares at the direction of, or holds those shares directly or indirectly on behalf of or for the benefit of, that second-mentioned person. Subsection 103(3) is concerned with the meaning of ‘… holds those shares directly or indirectly on behalf of or for the benefit of…’ in the second limb of subsection 103(2). The subsection states that: For the purposes of this Division, shares in a company shall be deemed to be held indirectly on behalf of or for the benefit of a person (not being a private company, trustee or partnership) if, in the event of the payment of a dividend on those shares, that person would, otherwise than as a shareholder of the company, receive the whole or a 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. Further, the decision in Case E12 73 ATC 81 held that nomineeship is to be apportioned as between the different principals for whom a nominee is a nominee in relation to shares held by that nominee. In Case E12 , F.E. Dubout (Chairman) stated (at his paragraph 16): In the application of the several 20/75 tests in sec. 103A(3), it is to be remembered that that sub-section must be read in the light of, first, sub-sec. (2) and (3) of sec. 103, which apply for the purposes of the whole of Div. 7, and second, sub-sec. (7) of sec. 103A, which applies for the purposes of that section. To summarise sub-sec. (2) and (3) of sec. 103 in brief compass, sub-sec. (2) defines what is meant by a ``nominee'', and sub-sec. (3) is explanatory of an expression used in sub-sec. (2). It could be said as a general description of the function of sec. 103A(7) that it is a provision pursuant to which a plurality of persons shall in certain circumstances be deemed to be one person. The effect of this decision, for present purposes, is that a nominee should not be grouped together with all of its investors and treated as one entity for the purposes of subsection 103A(3). Therefore, although the Company appears to breach the 20 person 75% test, subsection 103(3) directs the Commissioner to look at the underlying ownership of the Company. | Detailed Reasoning - Application of the Commissioners discretion: The 20 person 75% test contained within subsection 103A(3) of the ITAA 1936 is subject to the Commissioner’s discretion under subsection 103A(5) of the Act. Under subsection 103A(5), the Commissioner has a discretionary power to treat a company as a public company even though it 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 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. Further, subsection 103A(6) provides: Notwithstanding anything in the preceding provisions of this section, the Commissioner may treat a company as not being, by virtue of paragraph (2)(a) or (b), a public company for the purposes of subsection (1) in relation to the year of income if the Commissioner is of the opinion that, by reason of: (a) any provisions in the company's constituent document, or in any contract, agreement or instrument, authorizing the variation or abrogation of the voting rights or rights to dividends in respect of any shares in the company or relating to the conversion, exchange or redemption of any such shares; (b) any contract, agreement, option or instrument under which a person has power to acquire shares in the company; or (c) any power or authority in a person in relation to the voting rights or rights to dividends in respect of any shares in the company; the voting rights or rights to dividends in respect of any shares in the company were, at any time during the year of income, capable of being varied or abrogated in such a manner (notwithstanding that they were not in fact varied or abrogated in that manner) that: (d) not less than three-quarters of the voting power in the company would have been capable of being exercised by one person or by persons not more than 20 in number; (e) 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; would have been paid to one person or to persons not more than 20 in number; or (f) in the case where the company did not pay a dividend during the year of income -- 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 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). The overarching principle to be considered when exercising the Commissioner’s discretion is whether the company reasonably falls within the concept of a public company. The Company is currently 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 satisfy the 20 person 75% test under subsection 103A(3). As a result, it is necessary to undertake a detailed examination of each relevant factors referred to in subsection 103A(5) to demonstrate that the Company reasonably falls within the concept of a public company. | Detailed Reasoning - The number of persons capable of controlling the company and whether any of those persons was a public company: In exercising his discretion, the Commissioner should have regard to the number of persons capable of controlling the Company and whether any of those persons were 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. In considering the question of “capable of controlling”, it is also useful to examine the policy objectives in relevant explanatory memorandums to amendments made to Division 103. In the Explanatory Memorandum to Income Tax Assessment Bill 1948, commentary was written about the concepts of what is a private company and a public company for the purposes of the application of the revenue law. In the previous section 103(1), “Private company” was defined to mean a company which is under the control of not more than seven persons, and which is not a company in which the public are substantially interested or a subsidiary of a public company. Further, the previous section 103(2)(c) provides that a company shall be deemed to be under the control of any persons where the major portion of the voting power or the majority of the shares is held by those persons or nominees of those persons or where the control is, by any other means whatever, in the hands of those persons. These definitions were successfully challenged before the Full High Court in Adelaide Motors Ltd. v Federal Commissioner of Taxation (1942) 66 C.L.R. 436, and in Federal Commissioner of Taxation v West Australian Tanners and Fellmongers Ltd. (1945) 70 C.L.R. 623. These decisions established that, where the shareholders of a company are more than seven in number, that company is not a private company unless control of the company is actually exercised by seven or less persons. If this actual control is not demonstrable, the company is not a private company as presently defined. In the Company’s case more than seven persons were found capable of controlling the Company. In accordance with the reasoning above, this attribute is more indicative of a public company rather than a private company. Therefore, the Commissioner considers that the Company’s circumstances in relation to this factor support the exercise of the discretion in subsection 103A(5). | Detailed Reasoning - The market value of the shares issued by the company before the end of the year of income: The market value of the shares issued by the Company before the end of the income year is substantial and is what would be expected of a public company rather than a private company. This factor supports the exercise of the Commissioner’s discretion to treat the Company as a public company. | Detailed Reasoning - The number of persons who beneficially held shares in the company at the end of the year of income: In the Company’s case, this factor supports the exercise of the discretion in subsection 103A(5). | Detailed Reasoning - 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) is to be exercised. In each instance, the guidance provides a number of factors that are to be considered. Whilst this guidance has been provided in respect of unlisted companies, these factors 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) may usually be exercised where; (a) the Company has sufficiently large paid-up capital and wide spread of shareholdings to enable it to obtain 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 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. 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. It is in fact listed on the ASX and it is assumed it will remain listed on the ASX throughout the income year. The Company maintains capital management policies, including a dividend policy of paying out fully-franked dividends from its post-tax operating cash flow generated from its business. Overall, it is considered that this policy is consistent with what might reasonably be expected of a listed public company in similar circumstances. The Company is not controlled by a family group of shareholders. The voting rights and dividend rights attaching to the ordinary shares in the Company are within the bounds of what could reasonably be expected in the case of a public company. The appointment and rotation of directors in the Company is considered to be undertaken in reasonably the same manner as is done in the case of listed public companies. The Company satisfies all the points referred to in CITCM no. 847 that are favourable to the exercise of the discretion and this supports the exercise of the Commissioner’ discretion in subsection 103A(5). PIB no. 3 states in relation to unlisted companies that: Expressed in very broad terms, the question will be “Does the company reasonably fall within the general concept of a public company?”. The prospects of the discretion being exercised to grant public company status will thus be enhanced if; (a) the dividend policy of the company; and (b) the dividend and voting rights attached to particular classes of shares, are within the bounds of what could reasonably be expected in the case of a public company. As noted above the Company’s dividend policy and the voting and dividend rights attaching to its shares are consistent with what would be expected of a listed public company in similar circumstances. They are within the bounds of what could reasonably be expected in the case of a public company and this further supports the exercise of the Commissioner’s discretion under subsection 103A(5). Furthermore, in relation to subsection 103A(6), the applicant has submitted that nothing in the Company’s constituent document or any other relevant contract, agreement or instrument has the effect of varying shareholder voting rights or rights to dividends such that the 20 persons 75% test would be breached. The Commissioner accepts this in support of the exercise of the discretion at subsection 103A(5). | Detailed Reasoning - 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, the Commissioner must have regard to the factors in subsection 103A(5). 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. On the balance of considerations, the Commissioner considers that the Company reasonably falls within the concept of a public company and would exercise his discretion under subsection 103A(5) to treat the Company as a public company for the income year.