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Questions we've been asked: General issues

QB 10/06: Elections for qualifying company status

All legislative references are to the Income Tax Act 2007.

Question

If a nominee or bare trustee holds shares in a company for another person, should the nominee or bare trustee shareholder, or the beneficial owner of the shares sign the notice of shareholder election for qualifying company status?

Answer

A notice of shareholder election for qualifying company ("QC") status for that shareholding will be effective if signed by any one of:

  • the beneficial owner of the shares,
  • a person holding shares as a nominee for the beneficial owner of the shares, or
  • a person holding shares as a bare trustee for the beneficial owner of the shares.

The legislation requires that the beneficial owner make the shareholder election. The beneficial owner can satisfy this requirement by personally making the election. However, the legislative requirements will also be satisfied if the election is made by a nominee or bare trustee acting on instructions and on behalf of the beneficial owner.

The act of a nominee is "looked through". The nominee's act is treated as done by the person on whose behalf the nominee is acting (see s YB 21(1)). Therefore, where a nominee shareholder signs a notice of shareholder election for QC status, the election will be treated as having been made by the beneficial owner of the shares.

A bare trustee is treated as a nominee (see s YB 21(2)). Therefore, when a bare trustee signs a notice of shareholder election for QC status, the election will similarly be treated as having been made by the beneficial owner of the shares.

This item clarifies the Commissioner's statement on who is required to sign a notice of shareholder election for QC status, where nominees or bare trustees are involved (Tax Information Bulletin (TIB) Vol 3 No 7 (April 1992)). That statement is withdrawn with immediate effect to the extent of the following bolded text in relation to "Shareholder elections - Section 393D":

In determining who has to make the election it is important to note that the look through rules only apply for the count test and not for the election requirements. Where a chain of qualifying companies exists, only the shareholder qualifying company must complete a shareholder election and assume liability. Similarly, in the case of a nominee interest it is the nominee who elects.

The Commissioner considers that the same conclusions apply in relation to the newly enacted look-through company regime.

Explanation

Purpose of this item

This item explains who should sign a notice of shareholder election for QC status where a nominee shareholder or bare trustee shareholder is involved. In these situations, the possible signatories are the person holding shares as the nominee or bare trustee for the beneficial owner or the beneficial owner of the shares. The item concludes that an effective shareholder election will be made when a notice of shareholder election is signed by any one of these signatories.

This item does not impact on the rules of general agency where a person could validly instruct an agent to sign an election on their behalf.

Who is required to make a shareholder election?

Section HA 1(5) states in relation to entering the QC regime:

For a company to be a qualifying company or a loss-attributing qualifying company, all the directors of the company, and every shareholder in the company with legal capacity, must sign an election referred to in section HA 5. An exception applies for a minority shareholder in the situation described in section HA 29.
[emphasis added]

For a company to become a QC, every shareholder in the company with legal capacity must sign an election. Section HA 1(6) then states:

A shareholder who makes an election referred to in subsection (5) must agree to take personal liability to the extent described in section HA 8.

By electing QC status, the shareholders:

  • elect to enter the QC regime, and
  • elect to be liable for a share of the company's income tax liability, proportional to the shareholder's effective interest in the company.

Elections to become a qualifying company

Section HA 5(1) states that:

A company that meets the requirements of sections HA 6 to HA 9 may be a qualifying company or an LAQC only if all the directors of the company and every shareholder in the company with legal capacity, choose that the company is to become a qualifying company. Every director and every shareholder with legal capacity must sign a notice of election and give it to the Commissioner.

To make the election to be a QC, every shareholder with legal capacity must:

  • choose that the company is to become a QC,
  • sign a notice of election, and
  • give that notice to the Commissioner.

When these legislative requirements are considered in detail along with the discernible policy intent of the QC and LAQC regimes, the "shareholder" referred to in these sections is the beneficial owner of the shares. It is the beneficial owner who must make a shareholder election. Given that the beneficial owner must make the shareholder election, the issue is whether the beneficial owner must do this personally or whether a nominee or bare trustee could do so on behalf of the beneficial owner.

Can nominees or bare trustees elect on behalf of beneficial owners?

Definition of nominees

"Nominee" is defined in s YB 21:

Treatment of nominee
(1) In this Act, unless the context otherwise requires, if a person holds something or does something as a nominee for another person, the other person holds or does that thing and the nominee is ignored.
Who is a nominee?
(2) A person holds or does something as a nominee for another person if the person acts on the other person's behalf. However, a trustee is a nominee only if the trustee is a bare trustee.

For the purposes of the Act, a nominee is a person who holds something or does something for another person on that other person's behalf. Usually a nominee will be directly instructed to take a particular action. A nominee acts within the limits allowed by the person on whose behalf and as whose representative the nominee is acting. The nominee can only act as directed by the beneficial owner. Therefore, the nominee's action is implicitly or explicitly approved by the person for whom they are acting.

Unless the context requires otherwise, if a nominee holds or does something for another person, the nominee is ignored. The person, on whose behalf the nominee was acting, is treated as having taken the action. The nominee is looked through.

A nominee shareholder

Where a person uses a nominee to hold shares in a company, the nominee is the shareholder on the company's share register. However, the nominee holds the shares for the other person (the beneficial owner of the shares).

If the nominee shareholder does something on behalf of the beneficial owner of the shares and as instructed by the beneficial owner, that action is treated as the action of the beneficial owner of the shares.

Example 1: Adam holds shares in a company, as Bella's nominee. Adam is the shareholder on the company's share register. Adam, as Bella's nominee shareholder, signs an election for QC status in relation to that shareholding as directed by Bella. Adam has acted on behalf of Bella and as Bella's representative. For the purposes of the QC regime, Adam is ignored. Bella, the beneficial owner of the shares, is treated as having made the shareholder election.

In summary, where a nominee shareholder acts on behalf of the beneficial owner of the shares in relation to those shares and as instructed by the beneficial owner, the nominee is ignored and the action is treated as that of the beneficial owner of the shares.

A bare trustee shareholder

Section YB 21(2) states that "a trustee is a nominee only if the trustee is a bare trustee." As such, a bare trustee is a "nominee" under the Act.

Therefore, if a bare trustee holds shares in a company, the bare trustee holds those shares for and on behalf of the beneficial owner of the shares. Where the bare trustee shareholder acts on behalf of and as instructed by the beneficial owner of the shares, the bare trustee (then acting as a nominee) is ignored. The action is treated as that of the beneficial owner of the shares.

Example 2: Alice is the shareholder of a company. She holds the shares in the company as a bare trustee for Ben. Ben is the beneficial owner of the shares. Ben instructs Alice to sign the form to elect QC status in relation to those shares. Alice, as shareholder, signs a shareholder election form for QC status. Alice has acted on behalf of Ben and as instructed by Ben. For the purposes of the QC regime and by the application of section YB 21, Alice is ignored. Ben, the beneficial owner of the shares, is treated as having made the shareholder election.

Look-through Companies

The Commissioner considers that the same result is reached in relation to the newly enacted look-through company ("LTC") regime. Section HB 13 states in relation to electing to become an LTC:

HB 13 LTC elections
(1) For the purposes of section HB 1, an LTC election (the election) is a notice that-
  (a) is signed and dated by a director of the company that becomes a look-through company (the LTC) or other agent with appropriate authority; and
  (b) is in the form prescribed by the Commissioner; and
  (c) specifies an income year beginning on or after 1 April 2011 for which it may first operate; and
  (d) has attached to it notices
  (i) signed and dated by all persons who, on the date of signing the election, own look-through interests in the LTC; and
  (ii) evidence unanimous agreement of the owners in choosing to apply section HB 1.

The QC and LAQC regime requires notices of shareholder elections. Under the LTC regime, s HB 13(1)(d)(i) requires all persons who own "look-through interests" in a LTC to make an election. A "look-through interest" is defined as meaning a person's shares in an entity or look-through company (subject to the requirements of that definition). For the same reasons as for the QC and LAQC regimes, the election required under s HB 13(1)(d)(i) must be made by the beneficial owner of the shares. The beneficial owner can satisfy this requirement by personally making the election. However, the legislative requirements will also be satisfied if the election is made by a nominee or bare trustee acting on instructions and on behalf of the beneficial owner under s YB 21.

Therefore, a notice of election for LTC status made by the owner of a look-through interest will be effective if signed by any one of:

  • the beneficial owner of the shares,
  • a person holding shares as a nominee for the beneficial owner of the shares, or
  • a person holding shares as a bare trustee for the beneficial owner of the shares.
Example 3: Arthur is the shareholder of a company. He holds the shares in the company as a nominee for Brenda. Brenda is the beneficial owner of the shares. Brenda instructs Arthur to sign the form to elect LTC status in relation to those shares. Arthur, as Brenda's nominee shareholder, signs a shareholder election form for LTC status. Arthur has acted on behalf of Brenda and as instructed by Brenda. For the purposes of the LTC regime and by the application of s YB 21, Arthur is ignored. Brenda, the beneficial owner of the shares, is treated as having made the election for LTC status.

 

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Date published: 22 Dec 2010

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