• Appendix

    Examples considered by NTLG working group. Diagrams for examples 1 to 9 can also be viewed in PDF format.

    Examples – assumed facts Potential scheme
    Example 1: RPS issued to suit issuer’s Australian tax position

    Variation 1 – Co A can issue debt

    1. Co A requires additional funding to expand its business.
    2. The Company has the flexibility to issue additional subordinated debt, ordinary equity or redeemable preference shares.
    3. The Brokers have approached the market with an indicative term sheet involving (a) preference shares redeemable in 12 years with voting and preferential dividend entitlements; or (b) 12 year subordinated debt.
    4. Subsequently the Tax Manager suggests that the terms of the Redeemable Preference Shares be reduced to less than 10 years as this would produce a better tax profile for the group.
    5. The terms of the shares are changed to ensure a non-contingent obligation to repay the face value of the shares within 10 years from the date of issue.
     
    1. The issue of the RPS.
    2. Changing the terms of the RPS.
     

    Variation 2 – Co B cannot issue debt

    1. Co B requires additional funding to expand its business.
    2. Given the company's current indebtedness, it has determined to raise additional equity as the current lenders have indicated that the company cannot raise additional debt.
    3. Brokers have approached the market with an indicative term sheet involving preference shares redeemable (RPS) in 12 years with voting and preferential dividend entitlements.
    4. Subsequently the Tax Manager suggests that the terms of the Redeemable Preference Shares be reduced to 10 years as this would produce a better tax profile for the group.
    5. The terms of the shares are changed to ensure a non-contingent obligation to repay the face value of the shares within 10 years from the date of issue.
     
    1. The issue of the RPS.
    2. Changing the terms of the RPS to ensure debt deductions.
     

    Variation 3 – RPS issued to suit foreign investor’s Australian tax position

    1. Co C requires additional funding to expand its business.
    2. Given the company's current indebtedness it has determined to raise additional equity.
    3. Brokers have approached the market with an indicative term sheet involving preference shares redeemable (RPS) in 12 years with voting and preferential dividend entitlements.
    4. A suitable foreign resident investor's investment is contingent on the investment being structured as a debt-interest to access the interest withholding tax rate of 10% rather than a potential dividend withholding tax rate of 30% if there are insufficient franking credits.
    5. The terms of the shares are changed to ensure a non-contingent obligation to repay the face value of the shares within 10 years from the date of issue which is acceptable to the foreign investor.
     
    1. The issue of the RPS.
    2. Changing the term of the RPS.
     

    Variation 4 - RPS issued to suit Investors foreign tax position - exempt income

    1. Co D requires additional funding to expand its business.
    2. The Company seeks additional subordinated debt funding.
    3. A foreign resident investor indicates that it is willing to invest in the company if the investment is structured as equity and not debt.
    4. The foreign resident proposes that the investment be structured as Redeemable Preference Shares as that will meet the investor’s tax profile in the foreign jurisdiction (on the basis that the dividends will be subject to a participation exemption).
    5. The Company agrees and issues redeemable preference shares that are redeemable within 10 years.
     
    1. The issue of the RPS.
    2. Changing the terms of the RPS.
     
    Example 2 -Investment structured as debt to preserve tax losses
    1. Shares in Company E are owned by Apollo and Artemis.
    2. Company E has significant accounting and tax losses and has not been performing well in recent years. They decide to expand into a new service line and approach Dionysus for assistance.
    3. Dionysus will only agree if he is entitled to 60% of future profits and takes full control of the Company as CEO. Dionysus offers to subscribe for shares based on current market value to reach 60% of equity. Apollo and Artemis are willing to accept the offer.
    4. Company E’s tax advisor is concerned to preserve tax losses and suggests that this should be structured as a 10 year promissory note with interest based on 40% of pre-tax profits and redeemable at a premium if certain value hurdles are met or there is an early departure due to differences of opinion on the management of the company. A bonus is added to equate the two proposals.
    5. Dionysus agrees to the revised offer.
     
    1. Invitation to join, initial offer, revised offer.
    2. Changing the terms of the offer.
     
    Example 3 - Person accepts lower consideration to take advantage of rollover
    1. Hermes owns a chain of travel consultancies. Hermes is over 55 years and is ready to retire and wishes to sell his business.
    2. Under a competitive process Hermes receives two significant offers. Prometheus makes an offer for $6.1 million and Leto offers $5.8m.
    3. Hermes speaks to his tax advisor who informs him that if the net asset value of the business is less than $6 million at the time of sale and he rolls over the proceeds into a superannuation fund, his tax liability will be significantly reduced.
    4. Hermes makes an offer to sell the business to Prometheus for $5.95m, which is accepted.
     
    1. Disposing of the business to Prometheus for $5.95m.
    2. Agreeing to accept a reduced consideration of $150,000.
     
    Example 4 - Contract change to ensure income not personal services income

    Variation 1 – Change in clients and contract change

    1. Cassandra has an incorporated consultancy business – Troy Advisory Pty Ltd - with three unrelated clients. One of the clients, Priam, is significantly larger than the other two – Paris and Hercules.
    2. Priam offers Cassandra a deal in which Cassandra will be paid on a time basis estimated to be approximately $300,000 a year on a new security project on the proviso that she gives up the other two clients.
    3. Cassandra’s tax advisor indicates that Troy Advisory's income will be treated as personal services income, but if she changed the arrangement for the security project to a results based contract in 6 phases, then the income would be taxed in the company at the company rate. This is put to Priam.
    4. Priam indicates that if Cassandra wants to pursue a results based contract, then he would want a discount of $15,000.
    5. Cassandra accepts the discounted price on the basis that it results in improved cash flow as a result of the lower tax liability.
     
    1. Changing the terms of the contract to a results based agreement.
     

    Variation 2 – Existing client and contract change

    1. Tiresius has an incorporated consultancy business – Theban Advisory Pty Ltd - with one client, Cadmus.
    2. Theban Advisory currently provides services on a time–cost basis and treats its income as personal services income.
    3. Tiresius’s tax advisor suggests that Tiresius change the terms of the arrangement with Cadmus to be a results based contract. On this basis, it is considered that Theban Advisory’s income is not personal services income.
    4. Cadmus agrees and the contract is modified to divide a specific security project into 6 phases.
     
    1. Changing the terms of the contract to a results based agreement.
     
    Example 5 - Arrangements pursued to obtain the benefit of the R&D tax credit
    1. Minotaur Veterinary Practice Pty Ltd has been using a manual record keeping system for years.
    2. A new employee, Daedalus, is studying to become a software developer and offers to develop a software system for an additional 30% pay.
    3. Minos, the CEO rejects this offer on the basis that preliminary research suggests that the costs of the project will outweigh the benefits and will divert resources from the core business.
    4. However, Minotaur’s tax advisors informs Minos that if they pursue the idea, they may be entitled to an R&D credit which will reduce the cost of development. To do so they must be willing to provide the product to external users.
    5. Minotaur proceeds with the development on the basis of the R&D credit, makes the produce generic, and provides the product to other vets who provide a threshold number of referrals to Minotaur as an incentive.
     
    1. Developing the software.
    2. Making the software generic to gain the R&D credit.
     
    Example 6 -Pre-disposal dividend from profits

    Variation 1 – dividend from realised profits – internal reorganisation

    1. Corinthian Childcare UK is a multinational group with an Australian subsidiary, Laius Australia Ltd, which in turn owns a US company Oedipus US Ltd.
    2. It is determined to rationalise the international group structure and transfer Oedipus US to Jocasta UK Ltd.
    3. Oedipus has a significant holding of passive assets and would not satisfy a 90% active assets test.
    4. It is determined to pay a dividend from realised profits prior to sale which has the effect of eliminating any Australian capital gain.
    5. The shares held in Oedipus US Ltd are subsequently transferred.
     
    1. The dividend and the sale of shares to a group company.
    2. The payment of the dividend.
     

    Variation 2 – dividend from unrealised profits – internal reorganisation

    1. Corinthian Childcare UK is a multinational group with an Australian subsidiary, Laius Australia Ltd, which in turn owns a US company Oedipus US Ltd.
    2. It is determined to rationalise the international group structure and transfer Oedipus US to Jocasta UK Ltd.
    3. Oedipus has a significant holding of passive assets and would not satisfy a 90% active assets test.
    4. It is determined to pay a dividend from unrealised profits (though a revaluation of assets) prior to sale which has the effect of eliminating any Australian capital gain.
    5. The shares held in Oedipus US Ltd are subsequently transferred.
     
    1. The dividend and the sale of shares to a group company.
    2. The payment of the dividend.
     

    Variation 3 - dividend from realised profits – internal reorganisation and indirect external sale

    1. Corinthian Childcare UK is a multinational group with an Australian subsidiary, Laius Australia Ltd, which in turn owns a US company Oedipus US Ltd.
    2. It is determined to rationalise the international group structure and transfer Oedipus US to Jocasta UK Ltd. This is to take place prior to a disposal of Jocasta UK Ltd to Delphi UK Ltd, a third party purchaser.
    3. Oedipus has a significant holding of passive assets and would not satisfy a 90% active assets test.
    4. It is determined to pay a dividend from realised profits prior to sale which has the effect of eliminating any Australian capital gain.
    5. The shares held in Oedipus US Ltd are subsequently transferred.
    6. The shares in Jocasta UK Ltd are transferred to a Delphi UK Ltd.
     
    1. The dividend and the sale of shares to a group company.
    2. The payment of the dividend.
     

    Variation 4 – dividend from unrealised profits - internal reorganisation and indirect external sale

    1. Corinthian Childcare UK is a multinational group with an Australian subsidiary, Laius Australia Ltd, which in turn owns a US company Oedipus US Ltd.
    2. It is determined to rationalise the international group structure and transfer Oedipus US to Jocasta UK Ltd. This is to take place prior to a disposal of Jocasta UK Ltd to Delphi UK Ltd, a third party purchaser.
    3. Oedipus has a significant holding of passive assets and would not satisfy a 90% active assets test.
    4. It is determined to pay a dividend from unrealised profits (though an asset revaluation) prior to sale which has the effect of eliminating any Australian capital gain.
    5. The shares held in Oedipus US Ltd are subsequently transferred.
    6. The shares in Jocasta UK Ltd are transferred to a Delphi UK Ltd
     
    1. The dividend and the sale of shares to a group company.
    2. The payment of the dividend.
     

    Variation 5 – dividend from realised profits – indirect external sale

    1. Corinthian Childcare UK is a multinational group with an Australian subsidiary, Laius Australia Ltd, which in turn owns a US company Oedipus US Ltd.
    2. It is determined to sell Oedipus US Ltd to Delphi UK Ltd, a third party purchaser.
    3. Oedipus has a significant holding of passive assets and would not satisfy a 90% active assets test.
    4. It is determined to pay a dividend from realised profits prior to sale which has the effect of eliminating any Australian capital gain.
    5. The shares held in Oedipus US Ltd are subsequently transferred to Delphi UK Ltd.
     
    1. The dividend and the sale of shares to a group company.
    2. The payment of the dividend.
     

    Variation 6 – dividend from unrealised profits – indirect external sale

    1. Corinthian Childcare UK is a multinational group with an Australian subsidiary, Laius Australia Ltd, which in turn owns a US company Oedipus US Ltd.
    2. It is determined to sell Oedipus US Ltd to Delphi UK Ltd, a third party purchaser.
    3. Oedipus has a significant holding of passive assets and would not satisfy a 90% active assets test.
    4. It is determined to pay a dividend from unrealised profits (through revaluation of assets) prior to sale which has the effect of eliminating any Australian capital gain.
    5. The shares held in Oedipus US Ltd are subsequently transferred to Delphi UK Ltd.
     
    1. The dividend and the sale of shares to a group company.
    2. The payment of the dividend.
     
    Example 7 - Acquisition via a consolidated group to ensure no L5 gain

    Variation 1 - aware

    1. Agamemnon UK Ltd wishes to purchase the Hector Holdings Ltd group in Australia.
    2. It establishes Odysseus Aust Ltd as the acquisition vehicle.
    3. In negotiations with Hector Holdings owners, it learns that the group has a latent L5 capital gain which will be realised if Odysseus makes a direct purchase of Hector Holdings.
    4. Odysseus seeks tax advice and is advised to establish Nestor Pty Ltd and to form a consolidated group thus not crystallising the capital gain.
    5. Thus Odysseus forms a consolidated group with Nestor and Odysseus acquires the shares in Hector Holdings without crystallising the capital gain.
     
    1. The whole acquisition process.
    2. Establishment of Nestor and consolidation.
     

    Variation 2 - unaware

    1. Agamemnon UK Ltd wishes to purchase the Hector Holdings Ltd group in Australia.
    2. It establishes Odysseus Aust Ltd as the acquisition vehicle.
    3. Minimal due diligence is undertaken on Hector Holdings as the owners offer the sale on a “take it or leave it” basis.
    4. Odysseus seeks tax advice and is advised to establish Nestor Pty Ltd and to form a consolidated group in case there is a latent L5 capital gain
    5. Thus Odysseus forms a consolidated group with Nestor and Odysseus acquires the shares in Hector Holdings.
    6. After acquisition it is revealed that there was a significant L5 capital gain.
     
    1. The whole acquisition process.
    2. Establishment of Nestor and consolidation.
     
    Example 8 – Double transfer through partnership to ensure no gain on sale of stock
    1. Europa Pty Ltd has an interest in livestock with tax cost significantly below market value.
    2. Zeus Pty Ltd would like to acquire the livestock.
    3. Europa’s tax advisor suggests that Europa and Zeus form a partnership with the transfer of the livestock from Europa to the Partnership and from the Partnership to Zeus.
    4. The above transaction takes place and as a result of Section 70-100(4) no taxable gain is crystallised.
     
    1. The whole arrangement.
    2. The formation of the partnership and double sale.
     
    Example 9 - Ensuring a grant to purchase equipment is not assessable upfront
    1. A State Government offers a grant of $100m to Gaia Pty Ltd construct an environmental project.
    2. If the grant is assessable upfront the project will not go ahead.
    3. A structure is put to the ATO in which it is believed the $100m is not assessable upfront. The ATO disagrees.
    4. The State Government is approached to change the form of the grant which it does.
    5. The only reason for the change of form was to avoid the adverse tax outcome
     
    1. The modifications to the grant.
     
    Example 10 - Negative gearing

    Don has just got a job working long shifts on a mining project and he expects to earn $250,000 p.a.  He owns a home Perth, which is now worth $1,000,000 with a $500,000 mortgage at 5.58%.  He knows that he will only be able to work at this rate for a few years, so wants to make sure he minimizes his tax, and sets himself up for retirement.  He buys an investment property for $2,500,000 which he funds entirely by an interest only loan at 6%.  Both loans are completely separate, and are on normal commercial terms as offered by the bank.   He makes a $70,000 tax loss in respect of the investment property which is claimed as a tax deduction.   Over the next few years he deposits at least $10,000 per month into an offset account set up against the home loan, but makes interest only repayments on his investment property loan.   After a few years, the offset account completely offsets the home loan payable.

    He sells his home (tax free capital gain), and moves into the much nicer investment property. The proceeds on sale of the home significantly reduce the loan on the investment property, and Don is able to retire.

    Putting funds into a private offset account rather than paying down balance of the investment loan.

    Variation 1

    One year Don is especially busy, and earns $350,000.  Just before year end, he arranges to prepay the interest on the investment loan for the following year (when he expects he will be earning significantly less).  The bank charges him the same rate for the prepaid interest.  His tax loss for the year is $220,000. 

    Prepaying the interest to get a deduction in the year in which income will be higher.

    Variation 2

    Don took out a new line of credit loan (at 6%) secured against the equity in his home.  This loan is on normal commercial terms, is not “linked” or part of the same facility.  The Bank is happy for the fund to be used for any purpose.  Don decides to draw down $150,000 on the line of credit in order to fund in order to prepay the interest on the investment loan.  He subsequently claims a deduction for the interest on the line of credit.

    Drawing down on the line of credit, rather than using the money in the offset account.

      Last modified: 06 Mar 2015QC 38265