Edited version of your private ruling

Authorisation Number: 1012443439947

Ruling

Subject: Part IVA

Question and Answer

Will provision Part IVA of the Income Taxation Assessment Act 1936 be applied to the payment?

No.

This ruling applies for the following periods

1 July 2011 to 30 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Individual 1, Individual 2 and the Company are all residents of Australia for taxation purposes.

Individual 1 and Individual 2 are married, but separated.

Individual 2 is the current sole director and shareholder of the Company.

Individual 1 is not a shareholder of the Company.

Individual 1 is an associate of the Company because of Individual 2 who is the director and shareholder of the Company.

No services have been rendered by Individual 1 to the Company.

There has been no office or employment held by Individual 1 in the Company.

The Orders are proposed as part of the property settlement between Individual 1 and Individual 2 arising out of their separation.

The Orders are, in essence, settled between the parties pending the outcome of this ruling request.

The Orders will be binding on all parties.

Pursuant to paragraph 21 of the Orders, the Company will pay to Individual 1 the payment. This will occur within a period of the publication of the Orders.

The purpose of the Payment is to ensure that Individual 1 and Individual 2 each receive a part of the total available assets.

Individual 1 and Individual 2 have at all times dealt with each other at arm's length in relation to the property settlement.

Individual 1 and Individual 2 have always been represented by a separate set of lawyers and advisers.

Part IVA

In considering the 8 points of Part IVA your representative advised the following;

First Point: The manner in which the scheme will be entered into or carried out

In this context, "manner" includes a consideration of the way in which and the method or procedure by which the particular scheme was established (FCT v Spotless Ltd & Anor 96 ATC 5201).

The Payment is required to be made by the Company pursuant to the Orders. The need for the Orders in the first place arises from the separation of Individual 1 and Individual 2, and the need to divide the property of their relationship between them (including property accumulated during their relationship, but owned by companies and trusts which one or both of them control).

Individual 1 and Individual 2 have at all times dealt with each other at arm's length in relation to the property settlement, which arm's length dealing is evidenced by the fact that each of them is, and always has been, represented by a separate set of lawyers and advisers. Further, the amount of the proposed payments to be made to each of them pursuant to the Orders, represent arm's length amounts presumably considered consistent with their entitlements to share in the division of the property of their relationship.

The Orders are consistent with normal commercial or family dealings in the context of a property settlement following the breakdown of a marriage or relationship. The Orders do not contemplate section 109J applying. Section 109J happens to be a provision which applies to the circumstances which have arisen as a result of the financial settlement between Individual 1 and Individual 2 which is expressed in the Orders.

This, points to the conclusion that the requisite purpose in section 177D of the ITAA 1936 does not exist.

Second Point: The form and substance of the scheme

The second point to be considered under section 177D(b) of the ITAA 1936 is the form and substance of the scheme.

The Rulees will be ordered by the Family Court under the Faintly Law Act 1975 (Cth) to make the payments in the manner contemplated by the Orders.

There is no artificial or contrived actions in the proposed transactions the subject of the Orders for which the only explanation is the pursuit of the relevant tax benefits.

Relevantly, the Orders, as a matter of substance, have the effect of imposing legally binding obligations on the parties to the Orders. The Orders are intended to be final orders in the proceedings to end the financial relationship between Individual 1 and Individual 2.

The ruling, prevailing or most influential purpose of taxpayers in complying with Family Court orders is typically, as is the ease here, to permanently sever the financial connections or relationship between the individuals. The form and substance of such transactions in these circumstances will typically, as is the ease here, reflect that prevailing purpose.

This, points to the conclusion that the requisite purpose in section 177D of the ITAA 1936 does not exist.

Third Point: The time at which the scheme will be entered into and the period of time during which the scheme will be carried out

The third point to be considered under section 177D(b) of the ITAA 1936 is the time at which the scheme was entered into and the length of the period during which the scheme was carried out.

In Hart & Anor 2002 ATC 4608, Hill J said that an example of a case where timing would be most relevant to Part IVA of the ITAA 1936 would be a scheme involving a flurry of activity around the end of the tax year directed at obtaining a deduction in that year.

In the present case, the timing of the entering into the Orders and the carrying out of the proposed transactions the subject of the Orders is not in any way tax driven so as to enable any or all of the Rulees or any other taxpayer to obtain a tax benefit. Rather, the proceedings, and the proposed Orders, are intended to finalise the property settlement between them as soon as possible and in the most commercially satisfactory way, by avoiding the need for lengthy and protracted litigation.

This, points to the conclusion that the requisite purpose in section 177D of the ITAA 1936 does not exist.

Fourth Point: The result in relation to the operation of the ITAA36 and the ITAA97 that, but for Part IVA, would be achieved by the scheme

The fourth point to be considered for the purposes of section 177D(b) of the ITAA 1936 is the result in relation to the operation of the ITAA 1936 and the ITAA 1997 that, but for Part IVA of the ITAA 1936, would be achieved by the scheme.

In the present case, the results in relation to the operation of the ITAA 1936 and the ITAA 1997 that, but for Part IVA of the ITAA 1936, would be achieved by the scheme are set out in the annexure attached to the ruling request.

Whilst the transactions the subject of the Orders do result in one of the Rulee taxpayers obtaining, aside from the application of Part IVA, a tax free amount, these results must be weighed against other aspects of the arrangement in order to determine the dominant purpose of the relevant Rulee. In FCT v Mochkin 2003 ATC 4272 at 4289 the Full Federal Court stated:

"91. The result in relation to the operation of the ITAA that, apart from Part IVA, would be achieved by the scheme, included the distribution of income generated by Daccar and Ledger to the beneficiaries of the No 1 and No 2 Trusts. As I have already noted, it is difficult to see how the result of the scheme, in the sense in which that term was used in s 177D(b)(iv), could be said to be tax neutral Viewed objectively, the result sought by the scheme, so far as the ITAA was concerned, was the opportunity to distribute net commission income derived by Daccar and Ledger in a tax effective manner. This result nonetheless must be weighed against other aspects of the scheme in order to determine the Taxpayer 's dominant purpose."

In the present case, when the relevant tax benefits are considered in conjunction with the first and second point, this fourth point is essentially neutral.

Fifth, Sixth and Seventh Points - the effect of the scheme

The fifth, sixth and seventh points focus on the non-tax effects of the scheme, not only for the relevant taxpayer, but also for all connected parties. These points look to the practical financial, legal, economic and any other outcomes achieved by the scheme for the taxpayer and connected patties.

In summary, the Payment the subject of the Orders to which the ruling request is concerned, essentially results in a transfer of money from the Company to Individual 1, resulting in an increase in money and property held by Individual 1 and a decrease in money and/or property held by the Company. However, these consequences are commercial in character when considered in context, relevantly being that they reflect the Orders to be made by the Family Court in order to permanently sever the financial relationship between Individual 1 and Individual 2.

It is generally accepted by the ATO that the fifth, sixth and seventh points of subsection 177D(b) will often require consideration in conjunction with the second point (paragraph 106 of PS LA 2005/24), i.e. the form and substance of the scheme. In the present case, when the relevant tax benefits are considered in conjunction with the second point, the fifth, sixth and seventh points are essentially neutral.

Eighth point - the nature and connection between the relevant taxpayer and any person connected with the taxpayer

Paragraph 110 of PS LA 2005/24 provides that:

"The existence of any connection between the taxpayer and those other persons is relevant to the identification of the other factors, such as the manner of the scheme, the form and substance of the scheme, and the tax, financial and other consequences of the scheme ".

In the present case Individual 1 and Individual 2 were in a relationship for many years and that relationship has ceased. Individual 2 as the sole director and shareholder of the Company was and is, the controller of the Company. However, the connection between the parties in the present case is essentially neutral as regards determining the requisite purpose in section 177D(b) of the ITAA 1936 when considered in conjunction with the first three matters.

Conclusion

Whilst the tax consequences set out in the annexure to the ruling request will follow from the transactions the subject of the Orders, this should come as no surprise "having regard to the reality that the tax laws affect the shape of nearly every transaction." (FCT v Mochkin 2003 ATC 4272 at 4282).

In the present case, it is entirely appropriate in reaching a view as to the requisite purpose in section 177D of the ITAA 1997, to weigh up the commercial and practical side of the arrangements against any perceived tax benefits (FCT v Mochkin 2003 ATC 4272 at 4288), and to form a "global assessment of purpose (FCT v Consolidated Press Holdings Ltd & Anor 2001 ATC 4343 at 4360).

It is submitted that an objective assessment of all of the facts leads to the conclusion that the transactions the subject of the Orders are not intended to be undertaken for the sole or dominant purpose of obtaining a tax benefit (section 177D of the ITAA 1997).

Relevantly, in the present case the "ruling, prevailing or most influential purpose" (FCT v Spotless Services Ltd & Anor 96 ATC 5201 at 5206) of the Rulees in complying with the Orders is to comply with legally binding obligations so as to permanently sever the financial connections or relationship between Individual 1 and Individual 2 to allow them to get on with their lives.

The Orders of the Family Court are consistent with normal commercial or family dealings in the context of a property settlement following the breakdown of a marriage or relationship. The Orders do not contemplate section 109J applying. Section 109J happens to be a provision which applies to the circumstances which have arisen as a result of the financial settlement between Individual 1 and Individual 2 which is expressed in the Orders.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177A(3)

Income Tax Assessment Act 1936 subsection 177A(5)

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Reasons for decision

Application of Part IVA

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of 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.

In broad terms, Part IVA will apply where the following requirements are satisfied:

· there is a scheme (see section 177A)

· a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C)

· the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)).

The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case.

Application to your circumstances

What you are proposing is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with the factors in paragraph 177D(b) of the ITAA 1936, all these factors either point against the application of Part IVA or are neutral. Therefore, Part IVA will not apply to this arrangement.

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