Private company held as an investment by a superannuation fund: discretion to treat as public company

Will the Commissioner exercise his discretion under subsection 103A(5) of the Income Tax Assessment Act 1936 (ITAA 1936) to treat a private company, which is held as an investment by a superannuation fund, as a public company?

No. The Commissioner will not exercise his discretion under subsection 103A(5) of ITAA 1936 to treat the private company, which is held as an investment by a superannuation fund, as a public company.

The taxpayer is a private company for income tax purposes.

The taxpayer is not listed on the Australian Stock Exchange as it does not satisfy the tests prescribed by the Australian Stock Exchange for listing.

The corporate trustee of a complying superannuation fund held all of the interest in the taxpayer.

The superannuation fund has 350,000 members. Each member has a contingent interest in the fund.

Subsection 103A(5) of the ITAA 1936 provides the Commissioner with a discretion to treat a private company as a public company for income tax purposes even though the company does not satisfy one or more of the prescribed tests contained in section 103A of the ITAA 1936.

The principle 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 (the '20 75% test').

Furthermore, the subsidiary of a public company is treated as a public company.

In April 1965, Public Information Bulletin No 3 (PIB No 3) was issued to give some guidance as to how the Commissioner's discretionary powers under section 103A of the ITAA 1936 would be exercised. In relation to an unlisted company, PIB No 3 stated: ... the discretionary power to treat such a company as a public company will be exercised where the company satisfies the tests for listing prescribed by the stock exchanges now operating in Australian capital cities but, for reasons unconnected with income tax, does not wish to have its shares listed. A provision in the articles of association of a company that the directors may refuse to register a transfer of shares will not generally be an obstacle to the exercise of the discretionary power.

Subsection 103A(5) of the ITAA 1936 lists certain specific factors that need to be taken into account when determining whether or not the discretion should be exercised. Regard must be had to the following factors: • the number of persons capable or controlling the company and whether any of them was a public company • the market value of the shares listed by the company • the number of persons who beneficially owned shares in the company at the end of the year of income; and • any other matters the Commissioner considers relevant.

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. Rather, regard must be made to the overall position of the company.

The main question to be considered when exercising the discretion is whether the company reasonably falls within the general concept of a public company.

In this instance, the company is not considered to fall within the general concept of a public company. Furthermore, the Commissioner will not exercise his discretion to treat the private company as a public company because: • the company is unlisted and fails the '20 persons/75% test' • the reason the company is unlisted is because it does not satisfy the tests for listing prescribed by Australian Stock Exchanges • the corporate trustee is the only entity capable of controlling the company. It is recognised that the corporate trustee may under the deed that created the superannuation fund invite or require members to direct it as to its strategy to be adopted for the investment of assets. However such an invitation does not extend to the members having any influence over or control of the corporate trustee and consequently over the company. • no one person owns shares in the company as the members of the superannuation fund only have a contingent beneficial interest ( Re Coram: Ex parte Official Trustee in Bankruptcy v. Inglis and Ors (1992) 36 FCR 251; 109 ALR 355). The corporate trustee does not have 'exclusive' beneficial holding of the shares as its holding is as the trustee of a superannuation fund. On the authority of Re Wala Wynard Indian Gold Mining Co (1882) 21 Ch D 849 shares cannot be beneficially held unless the person's name is entered into the register of members and the person holds the shares for his own 'exclusive' benefit.

Therefore the Commissioner will not exercise his discretion under subsection 103A(5) of the ITAA 1936 to treat the private company as a public company.