Private ruling: Commissioner's discretion under subsection 103A(5) of the Income Tax Assessment Act 1936 (ITAA 1936)
Date of advice: 3 March 2017
Published: August 2017

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

Relevant facts and circumstances: The Commissioner exercised his discretion under subsection 103A(5) of the ITAA 1936 to deem the Company to be a public company for the previous two income years. The Company is listed on the Australian Securities Exchange (ASX). These listed shares are not shares entitled to a fixed rate of dividend. The purpose of the initial public offer (IPO) was to raise capital to repay the Company's existing corporate debt, strengthen the Company's balance sheet and provide access to equity markets. The offer also provided institutional and retail investors the opportunity to invest in the Company (creating a liquid market for the Company's shares). The IPO comprised an offer to issue a substantial amount of fully paid ordinary shares in the Company and the sale of a few million fully paid ordinary shares. The market capitalisation of the Company increased significantly since listing. The number of beneficial owners in the issued capital of the Company is substantial. This number has increased since listing. 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 held more than 75% of the interests in the Company in the previous income year. The Company has sufficiently large paid-up capital. 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 dividend policy of the Company is consistent with what would reasonably be expected in the case of a listed public company. The Company is not controlled by a family group of shareholders. The number of persons capable of controlling the Company was less than seven in the income year. Management and operation of the Company, the conduct of general meetings, appointment and remuneration of directors, distribution of profits and winding up provisions are 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 has been carried on for the purposes of profit or gain to its individual members. The Company is not a mutual life insurance company. The Company is not a friendly society dispensary. 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. Assumptions To make this private ruling, the Commissioner has made the following assumptions: ● At a time in the income year, the Company will not satisfy the 20 person 75% test in paragraph 103A(3)(a) of ITAA 1936; and ● The Company remains listed on the ASX until the end of the income year.

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) and | 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, 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 it is assumed for the purposes of the ruling that 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, will be listed for quotation in the official list of the ASX as at the last day of the year of income. The Company did not satisfy any of the conditions in paragraphs (b) to (d). Specifically; ● The Company did not satisfy paragraph (b) because it was not at all times during the year of income a co-operative company as defined by section 117. ● The Company did not satisfy paragraph (c) because it has been carried on for the purpose of profit or gain to its individual members. ● The Company did not satisfy paragraph (d) because it was not any of the following: ● a mutual life assurance company ● a friendly dispensary society ● 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 relation to companies, or a company in which such a body; or a Government had a controlling interest on the last day of the year of income, or ● a subsidiary of a public company in relation to 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 - Is subsection 103A(3) of the ITAA 1936 satisfied?: Subsection 103A(3) of the ITAA 1936 prescribes tests that must be satisfied before a company, which would otherwise be a public company under subsection 103A(2), may be considered as a public company. Subsection 103A(3) 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). Subsection 103(3) is concerned with the definition of an indirect interest held in a company. The section 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. 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. Related to this provision is subsection 103A(7) that discusses the nomineeship of a person by another person or entity. The section determines that a person, their relatives and nominees and their relatives' nominees are deemed to be one person. Due to the operation of subsection 103(3) above, the definition of "held indirectly" not only goes behind the legal ownership of shares held in trust to the beneficiaries, but also goes behind the legal entity of an interposed company to its shareholders, in order to determine the individuals who would be the ultimate recipients in the event of distributions by a company and by any partnerships, trustees or other companies interposed between that company and those individuals. The decision of Case E12 , 73 ATC 81 discussed the operation of subsection 103A(7) in determining whether a certain company, which was listed on the ASX, satisfied the 20 person 75% test of subsection 103A(3). The Board of Review unanimously 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. The effect of this decision, for present purposes, is that a nominee's holdings should only be grouped together with each of its investors separately. A nominee should not be grouped together with all of its investors and treated as one entity for the purposes of subsection 103A(3). In this case, a number of the top twenty shareholders of the Company are nominee companies that held shares in the Company for two or more underlying beneficial owners. Therefore, in accordance with subsection 103(3), the Commissioner is directed to look at the underlying ownership of the company. The applicant has traced through a number of these nominee shareholders to their underlying beneficial owners. Based on this information, the top 20 shareholders held more than 75% of the interests in the Company in the previous income year. Therefore, the Company has breached the 20 person 75% test in the previous income year. The 20 person 75% test contained within subsection 103A(3) is subject to the Commissioner's discretion under subsection 103A(5) of the Act, to treat a company as a "public company" if he considers it reasonable to do so. In regards to the shareholding figures which concerned the previous year of income, the Commissioner has already exercised his discretion for that year to treat the Company as a public company. We do not have any further information about the change in shareholding figures for the relevant income year. As such the decision on whether to exercise the discretion for the relevant income year has been based on the information we have for the previous year and that the Company will breach the 20 person 75% test at some point in that year. Therefore, for the purposes of this private ruling, an assumption has been made which states 'at a time in the income year the Company will not satisfy the 20 person 75% test in paragraph 103A(3)(a)'. This has been done so that the possible application of the Commissioners discretion can be considered for the income year. | Detailed Reasoning - Application of the Commissioners discretion: The Commissioner has a discretionary power under subsection 103A(5) 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 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. 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). 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 general concept of a public company. ATO ID 2004/760 provides 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 the features because it 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 . As mentioned previously, the Company breaches the 20 person 75% test under subsection 103A(3). As a result, it is necessary to undertake a detailed examination of each relevant factor referred to in subsection 103A(5) to demonstrate that the Company reasonably falls within the concept of a public company. | Detailed Reasoning - A. 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. The number of persons capable of controlling the Company was less than seven in the income year. In accordance with the reasoning above, this attribute is more indicative of a private company rather than a public company. Therefore, the Commissioner considers that the Company's circumstances in relation to this factor do not support the exercise of the discretion in subsection 103A(5). | Detailed Reasoning - B. 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 - C. The number of persons who beneficially held shares in the company at the end of the year of income: ATO ID 2004/760 indicates that a larger number of shareholders is more indicative of a public company and 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 no specific quantum of shareholders or paid up capital that is required to have the discretion exercised. In the Company's case, the large number of shareholders, the existence of nominee companies holding shares for multiple underlying beneficial owners and the increase in the number of shareholders since listing date indicates that there would be a substantial number of persons who beneficially held shares in the Company at the end of the income year. This factor supports the exercise of the discretion in subsection 103A(5). | Detailed Reasoning - D. 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 for the purposes of the ruling that it will remain listed on the ASX throughout the income year. The dividend policy of the Company is consistent with what would reasonably be expected in the case of a listed public company. 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). | Detailed Reasoning - Conclusion: In determining whether to exercise the discretion to treat a company which does not satisfy one or more 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.