Issue
Is a director and employee of a subsidiary of a public company entitled to an arm's length salary (ALS)?
Decision
No, a director and employee of a subsidiary of a public company is not entitled to an ALS.
Facts
The employee applied for the determination of an ALS.
The employee was the managing director of the employer, a subsidiary of a public company during the years in question.
The employee held no shares in either the employer or the parent company.
Reasons for Decision
Subregulations 47(3) and (4) of the Income Tax Regulations 1936 (ITR 1936) provide for the determination of an appropriate arm's length salary for a person who is an 'associate' of the person's employer. The Commissioner may determine an ALS after considering matters in accordance with subregulation 47(4) of the ITR 1936.
Section 140C of the Income Tax Assessment Act 1936 (ITAA 1936) refers to the definition of 'associate' in section 26AAB of the ITAA 1936.
A public company or its directors are not accustomed, or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of an individual director on the Board of Directors of that public company.
A managing director of a public company may have significant day to day management responsibility and influence at Board meetings. Despite this, the managing director is still required to act in the best interests of the company and its shareholders.
The applicant has no shares in the employer as it is 100% owned by a public company. As the applicant was not a shareholder of the parent company no control could be exercised over the subsidiary by the use of voting power.
In view of the above, the applicant is not an 'associate', as defined in subsection 26AAB(14) of the ITAA 1936, of the employer.
As the applicant is not an 'associate' of the employer it follows that the applicant is ineligible for the determination of an ALS.