Edited version of private ruling

Authorisation Number: 1011839824795

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Ruling

Subject: Will the Commissioner cancel under PART IVA of the Income Tax Assessment Act 1936 (ITAA 1936), including section 177EA, any tax or franking benefits that flow from the receipt of franked dividends?

Issue 1

Question 1

Will the Commissioner conclude that section 177EA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to the scheme? If so, what determination will the Commissioner make?

Answer

No

Question 2

Will the Commissioner conclude that he is empowered by section 177D of the ITAA 1936 to make a determination under section 177F? If so, what tax benefit(s) will the Commissioner cancel?

Answer

No

Issue 2

Question 1

Will the Commissioner make a determination in any year under subsection 177EA(5) of the ITAA 1936?

Answer

No

Question 2

Will the Commissioner make a determination in any year under subsection 177EA(5) of the ITAA 1936? If so, what parts of the distributions will the Commissioner specify?

Answer

No

Question 3

Will the Commissioner make a determination in any year under section 177F of the ITAA 1936? If so, what is the tax benefit under section 177C that the Commissioner will cancel?

Answer

No

Question 4

Will the Commissioner make any compensating adjustments in any year under subsection 177F(3) of the ITAA 1936? If so, what adjustments will the Commissioner make?

Answer

No

This ruling applies for the following periods:

The year ending 2012

The year ending 2013

The year ending 2014

The year ending 2015

The scheme will commence on:

1 July 2011

Relevant facts and circumstances

1. The proposed redemption by a beneficiary of its interests in a Trust and the purchase of Australian equities in an arms length transaction.

Assumptions

1. The entity will receive franked and unfranked dividends on the equities purchased and

2. The entity will not enter into any special arrangement with any company, other investor or any other person in respect of the distribution of franked dividends, but merely to receive dividends in the ordinary course as an ordinary investor.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 204-30(7).

Income Tax Assessment Act 1997 Subsection 204-30(8).

Income Tax Assessment Act 1997 Paragraph 204-30(8)(f).

Income Tax Assessment Act 1997 Subsection 204-30(9).

Income Tax Assessment Act 1997 Subsection 204-30(10).

Income Tax Assessment Act 1997 Division 207.

Income Tax Assessment Act 1997 Section 995.

Income Tax Assessment Act 1936 Subsection 177A.

Income Tax Assessment Act 1936 Subsection 177A(1).

Income Tax Assessment Act 1936 Section 177C.

Income Tax Assessment Act 1936 Section 177C(1).

Income Tax Assessment Act 1936 Section 177D.

Income Tax Assessment Act 1936 Subsection 177D(a).

Income Tax Assessment Act 1936 Subsection 177D(b).

Income Tax Assessment Act 1936 Subparagraph 177D(b)(i).

Income Tax Assessment Act 1936 Subparagraph 177D(b)(ii).

Income Tax Assessment Act 1936 Subparagraph 177D(b)(iii).

Income Tax Assessment Act 1936 Subparagraph 177D(b)(iv).

Income Tax Assessment Act 1936 Subparagraph 177D(b)(v).

Income Tax Assessment Act 1936 Subparagraph 177D(b)(vi).

Income Tax Assessment Act 1936 Subparagraph 177D(b)(vii).

Income Tax Assessment Act 1936 Subparagraph 177D(b)(viii).

Income Tax Assessment Act 1936 Section 177EA.

Income Tax Assessment Act 1936 Section 177EA(3).

Income Tax Assessment Act 1936 Paragraph 177EA(3)(a).

Income Tax Assessment Act 1936 Paragraph 177EA(3)(b).

Income Tax Assessment Act 1936 Subparagraph 177EA(3)(b)(i).

Income Tax Assessment Act 1936 Subparagraph 177EA(3)(b)(ii).

Income Tax Assessment Act 1936 Paragraph 177EA(3)(c).

Income Tax Assessment Act 1936 Paragraph 177EA(3)(d).

Income Tax Assessment Act 1936 Paragraph 177EA(3)(e).

Income Tax Assessment Act 1936 Subsection 177EA(4).

Income Tax Assessment Act 1936 Subsection 177EA(5).

Income Tax Assessment Act 1936 Paragraph 177EA(5)(a).

Income Tax Assessment Act 1936 Paragraph 177EA(5)(b).

Income Tax Assessment Act 1936 Subsection 177EA(14).

Income Tax Assessment Act 1936 Paragraph 177EA(14)(b).

Income Tax Assessment Act 1936 Subsection 177EA(16).

Income Tax Assessment Act 1936 Subsection 177EA(17).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(a).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(b).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(c).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(d).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(e).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(f).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(g).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(ga).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(h).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(i).

Income Tax Assessment Act 1936 Paragraph 177EA(17)(j).

Income Tax Assessment Act 1936 Subsection 177EA(19).

Income Tax Assessment Act 1936 Section 177F.

Income Tax Assessment Act 1936 Subsection 177F(1).

Income Tax Assessment Act 1936 Subsection 177F(2A).

Income Tax Assessment Act 1936 Subsection 177F(3).

Reasons for decision

1.  Section 177EA of the ITAA 1936 is primarily directed at schemes involving franking credit trading. Its introduction was designed to secure the integrity of one of the underlying principles of the dividend imputation system, namely, to ensure that the benefits of imputation are restricted to the true economic owners of the shares and only to the extent that those shareholders are able to use those franking credits themselves. Subsection 177EA(3) provides that section 177EA applies if: 

a.       there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity (paragraph 177EA(3)(a) of the ITAA 1936); and 

b.      either:

i.         a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests (subparagraph 177EA(3)(b)(i) of the ITAA 1936); or

ii.       a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be subparagraph 177EA(3)(b)(ii) of the ITAA 1936); and 

c.       the distribution was, or is expected to be, a franked distribution (paragraph 177EA(3)(c) of the ITAA 1936); and 

d.      except for section 177EA, a person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution (paragraph 177EA(3)(d) of the ITAA 1936); and 

e.       having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit (paragraph 177EA(3)(e) of the ITAA 1936). 

Scheme for disposition of shares or an interest in such shares

2. Under subsection 177EA(14) of the ITAA 1936 a scheme for a disposition of membership interests is defined widely and includes entering into any contract arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the membership interests or interest in membership interests.

3. A scheme for these purposes is defined in sub-section 177A (1) of the ITAA 1936 and includes any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct.

4. In the present case the scheme that the entity has identified is described in the facts as the redemption by a beneficiary of its interests in a Trust and the purchase of Australian equities in an arms length transaction.

5. The conditions of paragraphs 177EA(3)(a) and 177EA(14)(b) of the ITAA 1936 will be satisfied.

Frankable distribution has been paid or is expected to be payable

6. The second requirement for subsection 177EA to apply is that a frankable distribution must have been paid or be expected to be payable to a person in respect of the membership interests.

7. Frankable distributions will be paid on some of the Australian equities that the entity will purchase. Accordingly, paragraph 177EA(3)(b) of the ITAA 1936 will be satisfied.

Dividend or distribution was, or is expected to be franked

8. The third requirement is that the dividend or distribution was, or is expected to be, a franked distribution.

9. Frankable distributions will be paid on some of the Australian equities that the entity will purchase. Accordingly, paragraph 177EA(3)(c) is satisfied.

Imputation benefits

10. The fourth requirement is that a person (the relevant taxpayer) would have received imputation benefits as a result of the distributions, or could reasonably be expected to receive such benefits. Imputation benefits for this purpose are as defined in Section 995 of the ITAA 1997 with further clarification for indirect distributions in subsection 177EA(16).

11. The relevant taxpayer who expected to receive a franked distribution in respect of the scheme is the entity. The entity would receive imputation benefits (i.e. a tax offset under Division 207 of the Income Tax Assessment Act 1997 (ITAA 1997)) as a result of any franked distribution is receives in respect of the Australian equities. Accordingly, paragraph 177EA(3)(d) is satisfied.

Conclusion

12. In the present case the conditions of paragraphs 177EA(3)(a) to (d) of the ITAA 1936 are satisfied i.e. there is a scheme for the disposition of membership interests under which a franked distribution is expected to be paid with the result that the entity would receive an imputation benefit. Accordingly, paragraph 177EA(3)(e) requires consideration of whether, having regard to the relevant circumstances of the scheme, it would be concluded that there is a purpose, which is more than merely an incidental purpose, of conferring an imputation benefit under the scheme. Under this arrangement the relevant taxpayer and the scheme comprises the circumstances surrounding the purchase of franked Australian equities.

13. In arriving at a conclusion the Commissioner must have regard to subsection 177EA(4) and the relevant circumstances of the scheme which include, but are not limited to, the circumstances set out in subsection 177EA(17) of the ITAA 1936.

Relevant Purpose.

14. Subsection 177EA(4) provides the mere acquisition of membership interests by a person would not of itself support a conclusion that would fall within paragraph 177EA(3)(e) about that person's purpose.

15. Paragraph 8.64 of the EM states as follows:

The mere acquisition of shares or units in a unit trust where the shares or units are to be held at risk in the ordinary way, will not, in the absence of further features, attract the rule, even though the shares or units are expected to pay franked dividends or distributions.

16. Notwithstanding that the entity has taken into account (subjectively) the fact that some of the dividends it expects to receive on its Australian Equities, will be franked, those distributions merely flow (objectively) as a natural incident of acquiring Australian equities,..

17. That presently is the case in relation to the entities indirect investment in equities through the Trust, and will be the case in relation to its change of investment.

Paragraph 177EA(17)(a) of the ITAA 1936

18. Paragraph 177EA(17)(a) provides that the relevant circumstances of a scheme include:

the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding membership interests, or having interests in membership interests, in the corporate tax entity that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any membership interests, or interests in membership interests, in the corporate tax entity);

19. For all the Australian equities that the entity acquired it will bear the full risks and loss and all the opportunities for profit or gain for the entire duration of its ownership. There will be no contacts, options or other arrangements in relation to the Australian equities that will pass the risks and benefits of ownership to a party other than the entity as part of the arrangement.

20. The Australian equities will be 'held at risk in ordinary way' by the entity.

21. The imputation credits will flow to the entity in direct proportion to its underlying ownership interest in the equities..

22. Accordingly this factor supports the conclusion that the relevant purpose does not exist.

Paragraph 177EA(17)(b) of the ITAA 1936

23. Paragraph 177EA(17)(b) of the ITAA 1936 is concerned with whether a taxpayer in a year of income derives a greater benefit from franking credits than other taxpayers who hold membership interest.

24. The note to subsection 177EA(19) of the ITAA 1936 explains that where a distribution is made directly to a taxpayer subsections 204-30(7), (8), (9) and (10) of the Income Tax Assessment Act 1997 (ITAA 1997) set out 'a list of circumstances in which the taxpayer will be treated as having derived a greater benefit from franking credits than another entity'. Paragraph 204-30(8)(f) of the ITAA 1997 states that a taxpayer derives a greater benefit from franking credits than another member of the entity if 'the other member is an exempting entity'.

25. This provision does not apply to the benefit of franking credits that are paid as a result of a change to direct ownership of shares. This is confirmed by subsection 177EA (4).

26. It applies to situations in which the entitlement to franking credits is contrived or artificial. The reasonable comparison of other entities holding membership interests is between other owners of shares.

27. In this case the entities entitlement to the franking credits occurs as a result of the direct ownership of the shares and is no different to the other owners of the shares. The entity is merely an ordinary investor in Australian equities. Other investors might not benefit to the same extent from franking credits as the entities but the franking credits are not directed toward a particular class of shareholder. It will make no arrangement with any company or such investors to exploit any differential.

28. This supports a conclusion that the entity will not enter into or carry out the scheme, for the more than incidental purpose of conferring an imputation benefit.

Paragraph 177EA(17)(c) of the ITAA 1936

29. Paragraph 177EA(17)(c) of the ITAA 1936 is concerned with whether apart from the scheme a company would have retained the franking credits or used franking credits to pay a franked distribution to another entity other than the entity who would not benefit to the same extent as the entity from imputation credits.

30. The companies in which the entity will invest will pay dividends in accordance with their own independently determined dividend policies, without reference to the entities proposed investment

31. Accordingly this factor supports the conclusion that the relevant purpose does not exist.

Paragraph 177EA(17)(d) of the ITAA 1936

32. Paragraph 177EA(17)(d) of the ITAA 1936 requires a consideration of whether, apart from the scheme, a franked distribution would have flowed indirectly to an entity that receives less benefits from franking credits than the entity. That consideration is relevant to the streaming or deflection of franking credits away from shareholders to whom they are of little value.

33. In the present arrangement distributions flow through the Trust indirectly to both beneficiaries.

34. Tweddle v. Federal Commissioner of Taxation180 CLR 1 provides supports that the function of Income Tax Acts or of those who administer them is not to dictate to taxpayers in what business they shall engage or how to run their business profitably or economically.

35. This consequence arises, however, from the bare purchase by the entity of the Australian equities whether on market or through its redemption of its interest in a Trust it is a natural incident of the mere change of ownership and consequential complete transfer of risks associated with ownership.

36. Accordingly, section 177EA requires the mere differential in status between the seller and the acquirer of the Australian equities that flows from the bare acquisition of shares not to be taken into account in inferring any purpose.

37. Accordingly this factor supports the conclusion that the relevant purpose does not exist.

Paragraph 177EA(17)(e) of the ITAA 1936

38. Paragraph 177EA(17)(e) of the ITAA 1936 requires a consideration of the issue of non-share equity interests.

39. As there will be no issue of non-share equity interests this factor is not relevant.

Paragraph 177EA(17)(f) of the ITAA 1936

40. Paragraph 177EA(17)(f) of the ITAA 1936 requires a consideration of the calculation of consideration by reference to the imputation benefits to be received.

41. The entity will pay market value consideration based on listed share prices for all shares purchased.

42. As there will be no calculation of consideration by reference to the imputation benefits to be received this factor supports the conclusion that the relevant purpose does not exist.

Paragraph 177EA(17)(g) of the ITAA 1936

43. Paragraph 177EA(17)(g) of the ITAA 1936 requires a consideration of the associated deductions or capital losses.

44. The entity as the recipient of a distribution will not receive any deduction or capital loss as a result of the payment of a distribution.

45. As there will be no deduction or capital loss as a result of the payment of a distribution this factor supports the conclusion that the relevant purpose does not exist.

Paragraph 177EA(17)(ga) of the ITAA 1936

46. Paragraph 177EA(17)(ga) of the ITAA 1936 requires a consideration of the source of distributions.

47. No distribution under the proposed scheme will be sourced, directly or indirectly, from unrealised or untaxed profits. The entity like any other investor in Australian equities will receive distributions in accordance with independent distribution policies.

48. As there no distribution under the scheme will be sourced, directly or indirectly, from unrealised or untaxed profits this factor supports the conclusion that the relevant purpose does not exist.

Paragraph 177EA(17)(h) of the ITAA 1936

49. Paragraph 177EA(17)(h) of the ITAA 1936 requires a consideration of the equivalence to interest.

50. No dividend or distribution under the scheme will represent an equivalent amount of interest or an amount similar to interest.

51. As there no dividend or distribution under the scheme to represent an equivalent amount of interest or an amount similar to interest this factor supports the conclusion that the relevant purpose does not exist.

Paragraph 177EA(17)(i) of the ITAA 1936

52. Paragraph 177EA(17)(i) of the ITAA 1936 requires a consideration of the period for which shares are held.

53. The entity intends to invest directly in Australian equities as a medium to long term investor and will hold those shares for the purpose of meeting its defined liabilities (i.e. long term investment purposes). There is no short-term arrangement to purchases shares cum dividend and sell ex dividend.

54. As there no short-term arrangement to purchase and sell this factor is favourable to the conclusion that the relevant purpose does not exist.

Paragraph 177EA(17)(j) of the ITAA 1936

55. Paragraph 177EA(17)(j) of the ITAA 1936 requires a consideration of any of the matters referred to in subparagraphs 177D(b)(i) to (viii) to determine whether a person or persons had the relevant purpose in paragraph 177EA (3)(e) .

56. They are also to be considered with subsection 177EA(4) in mind. That is, the acquisition of the equities of itself is not to be taken into account in reaching a conclusion as to purpose.

57. Factor (i) The arrangement has not been executed in a contrived manner.

58. Factor (ii) In form and substance the scheme is no more than a bare acquisition of equities on market terms funded by the redemption of the beneficiaries interest in a Trust permitted under the Deed to withdraw all or part of its Member's Account. The redemption will trigger a capital gain. The transactions will have real economic and commercial consequences for the parties involved, commensurate with the interests that are acquired and divested. That is, the investment gains and losses each party will bear will change in line with the revised investment strategies.

59. Factor (iii) there is no significance in the timing or duration of the scheme.

60. Factor (iv) requires a comparison between the scheme and an alternative that produces less favourable tax consequences. That is: what would have happened, or might reasonably be expected to have happened, if the particular scheme had not been entered into or carried out (Federal Commissioner of Taxation v. Hart [2004] HCA 26; 217 CLR 216).

61. The alternatives would be either for the entity to continue to invest indirectly in the Trust or that its direct investment choices would have been in more diverse assets and not as heavily weighted towards shares. The alternatives may result in less franking credits because there would be less share ownership but also less assessable income. On balance there is no reasonable alternative which would allow the entity to directly invest in Australian equities that produces any different tax result.

62. It cannot be objectively concluded, having regard to these factors and ignoring the bare acquisitions of the equities, that any party to the scheme held a purpose of obtaining for the entity a franking credit benefit.

63. All these factors support the conclusion that the relevant purpose does not exist in respect of the proposed transaction.

Section 177EA Conclusion

64. Notwithstanding the very broad wording in section 177EA, the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 3) 1998 (EM 1998) stated that the object of these provisions is predominantly to prevent franking credit trading and franked dividend streaming. Paragraph 8.124 of EM 1998 states:

One of the underlying principles of the dividend imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves. Franking credit trading, which broadly is the process of transferring franking credits on a dividend from investors who cannot fully use them (such as non-residents and tax-exempts) to others who can fully use them undermines this principle. Similarly, dividend streaming (i.e. the streaming of franking credits to select shareholders) undermines the principle that, broadly speaking, tax paid at the company level is imputed to shareholders proportionately to their shareholdings.

65. Paragraph 8.82 of 1998 states:

The incidence of risk is a strong pointer to where real ownership of the shares lies. The risks and opportunities of share ownership may be removed or altered, among other ways, by entering into a derivative (for example, a futures contract or an option). For example, where the value of a derivative contract of a shareholder varies inversely with the value of the shareholder's shares, to the extent of the inverse variation, the effect is to pass the risks and opportunities of holding the share to the counterparty under the contract. By using derivatives the risks and opportunities of share ownership can be reduced to nothing, or to any fraction of the ordinary exposure (or even increased). Generally, the greater the risk borne by the taxpayer receiving the franking credit benefit, the less likely it is that the requisite purpose is present.

66. The entity proposes to purchase in line with a commercially investment strategy Australian equities in an arms length transaction

67. The entity bears all the risks and benefits of ownership (i.e. on shares for which it is the true economic owner). There are no arrangements where the entities risks of ownership of the shares are passed to other parties.

68. It is important to recognise that, by virtue of subsection 177EA(4), the mere acquisition of membership interests by a person would not of itself support a conclusion that would fall within paragraph 177EA(3)(e) about that person's purpose. The relevant scheme by the entity is the mere acquisition of Australian equities.

69. The scheme is not blatant, artificial or contrived it is a redemption of a beneficiary interest in a trust permitted under the trust deed the purchase of Australian equities in an arms length transaction at market value .

70. Having examined all of the material described above it is considered that having regard to the 'relevant circumstances' listed in subsection 177EA(17) of the ITAA 1936, it would not be concluded that the scheme was carried out for a purpose of enabling the taxpayer to obtain an imputation benefit .

Question 2

Detailed reasoning

71. Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) (Part IVA) is a general anti-avoidance provision that can apply in certain circumstances if you obtain a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained.

72. Section 177F of the ITAA 1936 gives the Commissioner discretion to cancel a tax benefit that has been obtained, or would, but for section 177F of the ITAA 1936 be obtained by a taxpayer in connection with a scheme to which Part IVA applies.

73. Practice Statement PS LA 2005/24 provides a description of the three elements that must be satisfied in order for Part IVA to apply:

· there is a 'scheme' as defined in subsection 177A(1);

· a 'tax benefit' as defined in subsection 177C(1) was or would have been obtained in connection with the scheme; and

· after consideration of the factors specified in section 177D, it is concluded that the scheme was entered or is entered into for the sole or dominant purpose of obtaining the tax benefit.

The scheme

74. Subsection 177A(1) of the ITAA 1936 defines a scheme widely as:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct;

75. Gummow and Hayne JJ of the High Court had this to say about that definition in Federal Commissioner of Taxation v Hart [2004] HCA 26; 55 ATR 712 at [43] per:

This definition is very broad. It encompasses not only a series of steps which together can be said to constitute a 'scheme' or a 'plan' but also (by its reference to 'action' in the singular) the taking of but one step.

76. The scheme that the entity has identified is described in the facts as follows:

The redemption by the beneficiary of its interests in a Trust and the purchase of Australian equities) in an arms length transaction.

Tax benefit

77. For Part IVA to apply, a taxpayer must have obtained, or would, but for section 177Fof the ITAA 1936 obtain, a tax benefit in connection with a scheme.

78. Subsection 177C(1) provides that the following tax benefit may be obtained by a taxpayer in connection with a scheme:

(a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or

(ba) a capital loss being incurred by the taxpayer during a year of income where the whole or a part of that capital loss would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out; or

(bb) a foreign income tax offset being allowable to the taxpayer where the whole or a part of that foreign income tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into or carried out;…

79. The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an alternative hypotheses or an alternative postulate. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative hypothesis or postulate also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D of the ITAA 1936.

80. In Peabody v. FC of T 92 ATC 4585 the High Court said, at [4671]:

A reasonable expectation requires more than a possibility. It involves a predication as to events which would have taken place if the relevant scheme had not been entered into or carried out and the predication must be sufficiently reliable for it to be regarded as reasonable.

81. In the arrangement, the reasonable expectation is that if the scheme is not entered into the entity would continue to hold an interest in a Trust through indirect and minority investments through a Trustee.

82. After the scheme is entered into, the entity will hold and manage the assets directly. The Trustee expects that the scheme will increase assessable income derived and foreign tax offsets and will decrease the level of tax free and tax deferred distributions.

Dominant purpose of the scheme

83. For Part IVA to apply to the scheme, it must have been entered into for the dominant purpose of obtaining the tax benefit. To determine whether a taxpayer entered into the scheme with the sole or dominant purpose of obtaining a tax benefit, it is necessary to consider the eight factors in section 177D of the ITAA 1936. The test is whether, having regard to:


(i)  the manner in which the scheme was entered into or carried out;


(ii)  the form and substance of the scheme;

(iii)  the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv)  the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v)  any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi)  any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii)  any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii)  the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.

Conclusion

84. Having regard to the relevant factors specified in section 177D of the ITAA 1936 and all the relevant facts and evidence pointing to the commercial basis and the commercial risk of the proposed scheme, it is concluded that the scheme will not be entered into for the sole or dominant purpose of obtaining a tax benefit in connection with the scheme.

85. This leads to the conclusion that any tax benefit arising from the scheme will not be one to which Part IVA applies.

Issue 2

Question 1

Detailed reasoning

86. 84.Section 177EA of the ITAA 1936 is directed to franking credit trading which is the process of transferring franking credits on a dividend from investors who cannot fully use them, to investors who can fully use them.

87. 85.In order for section 177EA of the ITAA 1936 to apply to a disposition of shares, the Commissioner must be able to conclude, amongst other things, that the purpose of at least one of the participants to the disposition of shares was to obtain a franking credit benefit. It is not necessary that this purpose is the dominant purpose but it must be more than merely incidental.

88. Where section177EA applies the Commissioner has a discretion pursuant to subsection 177EA(5) to make a determination to debit the company's franking account pursuant to paragraph 177EA(5)(a), or deny the imputation benefit to each shareholder pursuant to paragraph 177EA(5)(b). The Commissioner will exercise his discretion in such a way that he does not make a determination that the imputation benefit obtained by the participating shareholders be denied under paragraph 177EA(5)(b).

89. On the basis of the information provided, and having regard to the relevant circumstances of the scheme, it would not be reasonable to conclude that in entering into the scheme, the entity demonstrated the objective purpose of securing imputation benefits. To the extent that any imputation benefits are secured, those benefits are considered to be incidental to the commercial basis of the proposed scheme.

90. Accordingly the Commissioner will not make a determination under subsection 177EA(5) of the ITAA 1936.

Question 2

Detailed reasoning

91. Section 177EA of the ITAA 1936 is directed to franking credit trading which is the process of transferring franking credits on a dividend from investors who cannot fully use them, to investors who can fully use them.

92. In order for section 177EA of the ITAA 1936 to apply to a disposition of shares, the Commissioner must be able to conclude, amongst other things, that the purpose of at least one of the participants to the disposition of shares was to obtain a franking credit benefit. It is not necessary that this purpose is the dominant purpose but it must be more than merely incidental.

93. Where section 177EA applies the Commissioner has a discretion pursuant to subsection 177EA(5) to make a determination to debit the company's franking account pursuant to paragraph 177EA(5)(a), or deny the imputation benefit to each shareholder pursuant to paragraph 177EA(5)(b). The Commissioner will exercise his discretion in such a way that he does not make a determination that the imputation benefit obtained by the participating shareholders be denied under paragraph 177EA(5)(b).

94. On the basis of the information provided, and having regard to the relevant circumstances of the scheme, it would not be reasonable to conclude that in entering into the scheme, the entity demonstrated the objective purpose of securing imputation benefits. To the extent that any imputation benefits are secured, those benefits are considered to be incidental to the commercial basis of the proposed scheme.

95. Accordingly the Commissioner will not make a determination under subsection 177EA(5) of the ITAA 1936.

Question 3

Detailed reasoning

96. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1).

97. Before the Commissioner can exercise the discretion in subsection 177F(1), the requirements of Part IVA must be satisfied. These requirements are that:

(i) a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

(ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

(iii) having regard to section 177D, the scheme is one to which Part IVA applies.

98. Regard must be had to the individual circumstances of each case in making a determination under section 177F to cancel a tax benefit.

99. The scheme that the entity has identified is described in the facts as follows:

the redemption by a beneficiary of its interests in a trust and the purchase of Australian equities in an arms length transaction.

100. No Tax benefit can be identified under section 177C of the ITAA 1936 and therefore the scheme is not one which section 177D would apply.

101. Accordingly the Commissioner will not make a determination under section 177F of the ITAA 1936 to cancel a tax benefit therefore there is no tax benefit under section 177C that the Commissioner will cancel.

Question 4

Detailed reasoning

102. Where the Commissioner has made a determination under subsection 177F(1) or (2A), he may, if in his opinion it is fair and reasonable, make another determination under subsection 177F(3) adjusting the taxation situation of any taxpayer. A subsection 177F(3) determination is known as a 'compensating adjustment'.

103. Accordingly as the Commissioner has not made a determination under subsection 177F(1) or (2A),the Commissioner will not make any compensating adjustments in any year under subsection 177F(3) of the ITAA 1936.

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