ATO Interpretative Decision
ATO ID 2012/50
Income Tax
Part IVA: multiple entry consolidated group - cancel tax benefitFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to cancel the tax benefit obtained by an Australian resident company in respect of the financing cost of an off-shore investment made by an Australian MEC group?
Decision
Yes. Part IVA of the ITAA 1936 applies to cancel the tax benefit, being interest incurred and claimed as a deduction under section 25-90 of the Income Tax Assessment Act 1997 (ITAA 1997), obtained by the Australian resident entity.
Facts
Prior to the relevant transactions, an international group of companies was controlled by a US resident company, US Head Co which owned US Sub Co amongst other entities. Aust Co was the head entity of a tax consolidated group consisting of four Australian resident entities that operated the US Head Co business in Australia, and wholly owned by US Sub Co through a US resident intermediate holding company.
Then, the following transactions and events took place:
- 1.
- US Head Co acquired an unrelated US business company by acquiring US New Co via its wholly owned subsidiary US Sub Co.
- 2.
- The purchase of this acquisition was funded by US Head Co.
- 3.
- US Sub Co formed a Limited Liability Company, US LLC, and transferred its shares in US New Co to US LLC.
- 4.
- The consideration given by US LLC to US Sub Co for US New Co shares included the issue of Redeemable Preference Shares (RPS) denominated in Australian dollars, Common Shares ($US) and other consideration.
- 5.
- Subsequent to the purchase, US Sub Co incorporated an Eligible Tier 1 company, New Aust Co, in Australia adding it to an existing Single Entity Consolidated Group to form an Australian Multiple Entry Consolidated (MEC) Group with Aust Co as its Provisional Head Entity.
- 6.
- US Sub Co sold its Australian denominated RPS held in US LLC to New Aust Co in exchange for an interest bearing Promissory Note.
- 7.
- US LLC paid dividends on the RPS to New Aust Co.
- 8.
- New Aust Co used the dividend revenue on the RPS to pay interest on the promissory note to US Sub Co. The fixed yield on the RPS was one percentage point higher than the interest payable on the Promissory Note.
No income was recognised as having been derived overseas in relation to amounts represented by interest deductions claimed in Australia.
The RPS carried a sufficient voting interest of greater than 10% such that the dividends were non-portfolio dividends as defined in section 317 of the ITAA 1936 and therefore non-assessable non-exempt income of the Australian MEC group pursuant to section 23AJ of the ITAA 1936.
Aust Co as provisional head entity of the MEC group claimed interest expenses on the Promissory Note pursuant to sections 25-85 and 25-90 of the ITAA 1997.
US Head Co at the time it borrowed to purchase US New Co was in a Net Operating Loss (NOL) position for US income tax purposes.
The additional annual interest US Head Co incurred in the course of financing its acquisition of US New Co would add to its NOL position.
The Australian group was in a tax positive position prior to and throughout the period of investment.
The stated purpose for the transfer of US LLC to New Aust Co was to provide commercial benefits arising from the Australian group having greater access to US clients in respect of the business of US New Co. The ownership changes effected by the transaction were said to facilitate this access.
Reasons for Decision
For the purposes of considering Part IVA of the ITAA 1936, the following conclusions were made:
- •
- The scheme under subsection 177A(1) of the ITAA 1936 consists of the steps set out at points 1 to 8 above.
- •
- The tax benefit under subparagraph 177C(1)(b) of the ITAA 1936 was the amount of the interest incurred on the Promissory Note claimed and claimed as allowable deductions pursuant to sections 25-85 and 25-90 of the ITAA 1997.
Had the Scheme not been carried out, ownership of US LLC would not have been transferred to New Aust Co by transferring RPS in US LLC in return for a Promissory Note issued by New Aust Co. The stated commercial purpose of the transfer could have been achieved by simpler means not involving ownership transfers.
The dominant purpose of the scheme under section 177D of the ITAA 1936 was concluded to be the obtaining of the tax benefits.
Entry into the scheme had no financial impact on US Head Co and its worldwide group of companies aside from the tax savings derived by the Australian part of the group.
Since New Aus Co. was a wholly owned subsidiary of US Sub Co, any commercial benefits were economically owned by US Sub Co. and not Aust Co which was merely a sister company.
The main purpose of the scheme was to take advantage of the tax capacity of the Australian group to decrease the total amount of the income tax incurred by the international group. This was accomplished by a contrived scheme that generated allowable deductions in Australia without off-setting assessable income being derived in Australia or anywhere else.
There was a lack of evidence and credibility concerning the commercial benefits said to arise from the scheme as compared to the tax benefits.
Accordingly, Part IVA of the ITAA 1936 applies to cancel the tax benefit obtained by an Australian resident company in respect of the financing cost of an off-shore investment.
Date of decision: 1 June 2012Year of income: Year ended 31 December 2005 Year ended 31 December 2006 Year ended 31 December 2007 Year ended 31 December 2008 Year ended 31 December 2009
Legislative References:
Income Tax Assessment Act 1936
subsection 177A(1)
subparagraph 177C(1)(b)
section 177D
section 317
section 25-85
section 25-90
Keywords
Interest expense
Part IVA
Tax benefits under tax avoidance schemes
Redeemable preference shares
Consolidation - multiple entry consolidated group
ISSN: 1445-2782