In the realm of tax law, the differences between the definitions of private and public company for tax purposes carry profound implications, particularly within the framework of Division 7A. Advisors must understand these nuances to guarantee compliance and adeptly manage their financial matters.

Importantly, and often misunderstood, a ‘public company’ under the Corporations Act 2001, may be a ‘private company’ under taxation law.

Here, we outline the fundamental differences in the categorisation of private and public companies under tax and corporate law, highlighting the significance of determining a company’s status under tax law.

Corporate Law Setting: Pty Ltd Companies vs. Ltd Companies

In the context of corporate law, under the Corporations Act 2001, companies are commonly categorised as proprietary limited (Pty Ltd) or public limited (Ltd) companies. Pty Ltd companies, often referred to as private companies, have a cap of 50 on the number of shareholders and certain other restrictions under the Corporations Act.

On the other hand, Ltd companies, also known as public companies, are a company other than a proprietary company which can, but does not have to, offer shares to the public. Public companies have a more extensive framework for corporate governance than private companies.

Tax Law Setting: Private Companies vs. Public Companies

Under tax law, the categorisation of a company as private or public plays an important role, especially for purposes of Division 7A. Section 103A of the Income Tax Assessment Act 1936 is the section that determines whether a company is a public company or private company under taxation laws.

Section 103A starts by saying that a company is a private company if it is not a public company – no real issues there. However, the definition of public company is different than under the Corporations Act. Under section 103A, a company is a public company where, subject to exceptions (below), it is:

a listed company on the last day of the income year;
a co-operative company at all times during the income year;
at all times the company has not been carried on for a purpose of profit; or
the company is:

a. a mutual life assurance company;

b. a friendly society dispensary;

c. a statutory public authority, not being a company under company law;

d. a company in which a government or a body referred to in (c) above had a controlling interest on the last day of the year of income; or

e. in relation to the year of income, a subsidiary of a public company.

For listed and co-operative companies, a company is not a public company (as defined) where in broad terms 75% of the entitlement to vote or to dividends is held by 20 or fewer persons. Section 103A also includes detailed, complex, rules on what is a subsidiary of a public company.

Finally, under section 103A the Commissioner has the power in certain circumstances to deem a company as either public or private.

What does this mean?

Under section 103A a company is a private company unless it is a public company. However, ‘public company’ is different from under the Corporations Act. That is, unless a company is a public company as defined in section 103A, it is a private company for taxation purposes (even though it may be a public company under the Corporations Act).

While many companies will be public companies under both definitions, if a Corporations Act public company is part of a private group, other than interests in widely held listed companies, care should be taken to ensure the classification of the company for tax purposes.

A clear understanding of the nuanced definitions of private and public companies in both corporate and tax law is paramount for businesses and accounting firms, particularly concerning Division 7A compliance. Navigating these distinctions ensures accurate classification and adherence to relevant regulations, safeguarding the financial integrity of companies operating in the dynamic legal landscape.

Our Federal Tax Team can help you establish whether your company falls under the definition of a private or public company for tax purposes and whether Division 7A is applicable in your case.

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au

Kseniia Gasiuk
Associate
T +61 3 9611 0160
E kgasiuk@sladen.com.au