Private ruling: Commissioner’s discretion under subsection 103A(5) of the Income Tax Assessment Act 1936 (ITAA 1936).
Date of advice: 12 June 2017
Published: October 2017

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 103A(5) of the ITAA 1936 to treat Company A and its wholly owned subsidiaries as public companies for income tax purposes under subsection 103A(1) of the ITAA 1936 for the year ending 30 June 2017? | A1: Yes.

Relevant facts and circumstances: Company A is a private company for corporation’s law purposes, and is an Australian tax resident company. Company A has an accounting and income tax year ending 30 June. Company A became a wholly owned subsidiary of Company B, a public company for income tax purposes, during the income year ended 30 June 2017. 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 has been, and will continue to be, carried on for the purposes of profit or gain to its individual members. A family group does 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 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)

Reasons for decision: Summary: All references refer to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated. In accordance with subsection 103A(1), 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. Company A does not satisfy any of the conditions in paragraphs (a) to (c) in relation to 2017 income year because: ● Company A does not satisfy paragraph (a) as shares in Company A will not be listed on an official stock exchange in Australia or elsewhere, as at the last day of the relevant years of income ● Company A does not satisfy paragraph (b) because it was not at all times during the relevant years of income a co-operative company as defined by section 117, and ● Company A does not satisfy paragraph (c) because it has been, and it will continue to be, carried on for the purpose of profit or gain to its individual members. Company A will not satisfy any of the conditions in paragraphs (d)(i) to (d)(iv) in relation to the relevant income years as Company A is 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 relations to companies; or ● a company in which such a body a Government had a controlling interest on the last day of the year of income. Company A does not satisfy subparagraph 103A(2)(d)(v) because Company A was not wholly owned by a public company at all times during the year of income as required by subsection 103A(4). | Detailed Reasoning - Is subsection 103A(3) satisfied?: Subsection 103A(3) 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: 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 company is denied public company status, 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 '20 person 75%’ test contained within subsection 103A(3) is subject to the Commissioner's discretion under subsection 103A(5), to treat a company as a "public company" if he considers it reasonable to do so. 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. 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. Subsection 103A(4) provides: Subject to subsection (4D), a company is, for the purposes of this section, a subsidiary of a public company in relation to the year of income if: (a) at all times during the year of income all the shares in the first-mentioned company were beneficially owned by a company which, or companies each of which, is a public company for the purposes of subsection (1) in relation to the year of income of that company (in this subsection referred to as the corresponding year of income ) that corresponds with the first-mentioned year of income but which is not, or none of which is: (i) a company to which paragraph (2)(c) applies in relation to the corresponding year of income; or (ii) a subsidiary of a public company for the purposes of this section in relation to the corresponding year of income by reason of subsection (4B); (b) the corresponding year of income, or each of the corresponding years of income, referred to in paragraph (a) ended on the same day as the year of income first-mentioned in that paragraph; (c) at no time during the year of income was a person or were 2 or more persons in a position to affect rights of the relevant holding company or holding companies in connexion with the first-mentioned company so as to prevent the relevant holding company or holding companies from exercising for its or their own benefit the whole of the voting power in the first-mentioned company or from receiving for its or their own benefit the whole of any dividends that might be paid by the first-mentioned company or of any distribution that might be made of capital of the first-mentioned company; and (d) no agreement was entered into before or during the year of income by virtue of which a person or 2 or more persons would be in a position after the year of income so to affect rights of the relevant holding company or holding companies in connexion with the first-mentioned company. | Detailed Reasoning - Application of the Commissioner’s 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 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) and ● 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) An overarching principle to be considered when exercising the Commissioner’s discretion is whether the company reasonably falls within the concept of a public company. In ATO ID 2004/760 it is stated 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 notes that the principal features of a public company are: 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 exercise of the Commissioner’s discretion requires balancing of all the relevant factors referred in subsection 103A(5) to determine whether the company reasonably falls within the concept of a public company. | Detailed Reasoning - The number of person 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. According to Company A’s Constitution, questions arising at a general meeting must be decided by a majority of votes cast by the members present at the meeting, except where a greater majority is required by the Constitution or by law. At a general meeting on a show of hands, every member present has one vote and on a poll, every member present has one vote for each share held. Ordinary shares in Company A are the only shares in Company A that carry with them voting rights in 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. During 2017 income year, a small number of persons were capable of controlling Company A. However, a public company owned a significant percentage of shares in Company A. 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 Company A’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 shares issued by Company A before the end of the income year is substantial and therefore, it is considered that these figures are more indicative of a public company than a private company. This factor supports the exercise of the Commissioner’s discretion to treat Company A 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: 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. Since the merger with Company A is wholly owned by Company B. Company B itself is listed and has a large number of shareholders. The number of persons currently holding shares in Company B is a substantial number of shareholders. The number of shareholders in Company B is expected to increase as the entity continues to expand. | Detailed Reasoning - Any other matter 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. The guidance provides a number of factors that are to be considered. These factors are relevant to determining whether Company A falls within the general concept of a public company. Paragraph 44 of CITCM No. 847 details further maters which must be considered by the Commissioner when exercising the discretion in subsection 103A(5): ● 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 ● 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 ● 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 ● the voting and dividend rights attached to the shares are in all material respects, comparable with rights normally attached to shares of a listed public company, and ● the appointment and rotation of directors is undertaken in the same manner as is done in the case of listed public companies. Company A has a large paid-up capital. Although, Company A has a small number of shareholders, a significant percentage of shares are owned by a public company. 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. Historically, Company A has paid substantial dividends, similar to that expected of a public company. Company A is not controlled by a family group of shareholders as it is held by a number of arm’s length investors with substantial shareholder being a public company and since the merger, Company A is wholly owned by Company B (a public company). Prior to the merger, the voting and dividend rights attached to ordinary shares are comparable with the rights normally attached to shares of a listed company. For example, the Company Constitution provides that at general meeting, every shareholder has one vote for each share held and all dividends must be paid equally on all shares. There are no other classes of shares on issue. The appointment and retirement of Directors is set out in the Constitution. The Constitution provides that: ● the Board is comprised of a minimum of one Director and maximum of 10 Directors, unless the shareholders pass a resolution varying that number at a general meeting ● Directors are elected or re-elected by ordinary resolution at general meeting of the Company, and ● the Board may also appoint a Director, either as an addition to the existing Directors or to fill a casual vacation. In this case, the total number of Directors may not exceed the maximum number fixed under the Constitution. The appointment and rotation of Directors in Company A is undertaken in a manner consistent with other listed public companies. Apart from a small number of shareholders, Company A satisfies all the points referred to in CITCM No. 847 that are favourable in exercise of the discretion and this supports the exercise of the Commissioner’s discretion in subsection 103A(5). Paragraph 44 of CITCM No. 847 provides some guidance on the matters which the Commissioner may consider for unlisted companies. It states that an unlisted company must satisfy the ’20 persons 75%’ test as outlined in subsection 103A(3). Page 4 of the Public Information Bulletin No.3 (PIB No.3) states that shares beneficially owned by public companies will be excluded when applying the ’20 persons 75%’ test. As such, Company A’s pre-merger shareholder profile in line with guidelines in PIB No. 3 will exclude the public company’s shareholding in Company A, leaving a total shareholding of XX% in Company A for the purpose of calculating the ’20 persons 75%’ test. As such, the remaining shareholders could not own 75% or more of Company A. Further, paragraph 43 of the CITCM No. 847 states :“… The second category will include a company which has been assessed as a private company in the past and which is converted into a public company. If the exercise of the discretionary power is requested in these cases, it may be exercised where the company satisfies the ’20 persons 75%’ test throughout the period from the time the issue of shares to the general public is completed up to the end of the year of income and it is evident that the tests will be satisfied throughout succeeding years of income…” Post-merger, the ’20 persons 75%’ test will be satisfied because Company A’s post-merger shareholder profile will result in excluding the public company’s shareholding in Company A. The remaining shareholding of XX% in Company A ensures that the ’20 persons 75%’ test is passed. PIB No. 3 on page 6 states: Expressed in very broad terms, the question [to be considered by the Commissioner when exercising his discretion] 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 the particular class of shares, are within the bounds of what could reasonably be expected in the case of a public company are within the bounds of what could reasonably be expected in the case of a public company. As noted above Company A’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 the 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) to reach a conclusion as to whether the company reasonably falls within the concept of a public company. Whilst a relative small number of persons are capable of controlling the company, the major shareholder is a public company for income tax purpose. Company A’s pre-merger and post-merger shareholder profile satisfies the '20 persons 75%’ test in paragraph 103A(3)(a) in the income year ending 30 June 2017. Other relevant factors and matters examined are consistent with those that would be expected of a public company. These supporting considerations include that: ● the appointment and rotation of directors of Company A is consistent with what would be expected of a listed public company ● the voting rights and dividend rights attaching to the shares in Company A are within the bounds of what would reasonably be expected in the case of a public company ● although there is a small number of owners, the issued capital of the company is substantial and until acquisition by a Company B, Company A has had no one controlling shareholder ● the market value of the issued capital of the company is substantial and consistent with that of a public company ● Company A has always had a substantial, although non-controlling, public company as a shareholder, and ● Since the merger, Company A is wholly owned by a public listed entity.