Eligibility to Elect

16.84. A number of issues relating to eligibility to elect call for examination. These concern the possibility of confining the election to companies whose profits are below a specified limit and whose income is not investment income; the possibility of confining the election to companies whose income is derived from Australian sources; the restrictions that should be imposed in terms of numbers of shareholders, the kinds of shareholders, and the capital structure of the company.

16.85. Amount and nature of company profits. In the United States the election is available whatever the amount of company profits, and in this respect there is no

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attempt to confine the election to smaller companies. In Canada the Carter Commission would have confined the election to companies with incomes below $200,000. In the Committee's view the election to be taxed in the manner of a partnership is not primarily directed to assisting small companies, but is a means of ensuring that company profits are taxed fairly. It follows that there should be no restriction on the election by reference to the amount of company profits.

16.86. The United States law denies the election to a company deriving 20 per cent or more of its income from investments, though it has been proposed that this restriction be eliminated. The Committee does not think it appropriate to impose such a restriction. The availability of the election to an investment company is consistent with the treatment proposed in paragraphs 16.116–16.117 of investment income of companies that have not elected.

16.87. The United States does not allow an election when more than 80 per cent of a company's income is derived from foreign sources. The only reason for such a restriction would seem to be the administrative complications involved in allowing tax credits to shareholders; but in the Committee's view these are not sufficient to justify discriminating between companies with domestic-source and companies with foreign-source income.

16.88. Number and nature of shareholders. The compliance and administrative costs of an election system will be minimised if the election is confined to companies with small numbers of shareholders all of whom are individuals and beneficially entitled. In the United States the number of shareholders may not exceed ten, though it has been proposed that this be raised to fifteen to allow greater flexibility, making it possible, for example, to issue shares to key employees. The Committee favours the maximum number of shareholders being set at ten, at least until the administrative problems involved in an election system have been carefully assessed.

16.89. All shareholders should be individuals who are beneficially entitled. An exception might be made of the administrator of a deceased estate; but the system could not be conveniently applied where a shareholder is another company. All shareholders and the company itself should be resident in Australia.

16.90. Capital structure of the company. If the allocation of profits to shareholders is to be made as easy as possible, all shares in the company should carry the same rights to income and capital. In the United States all shares must be of the same class, though consideration is currently being given to allowing also a class of shareholders without voting rights who have rights to fixed annual distributions and to a fixed amount upon redemption. The Committee would take the view that, at the outset at least, only one class of shares should be allowed.