Edited version of your private ruling

Authorisation Number: 1012540163157

Subject: capital raising

Question 1

Will the securities be characterised as equity interests in the Company for the purposes of Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will dividends paid by the Company on the securities be frankable distributions within the meaning of section 202-30 of the ITAA 1997 and section 202-40 of the ITAA 1997?

Answer

Yes.

Question 3

Will section 204-15 of the ITAA 1997 apply to the scheme?

Answer

No.

Question 4

Will section 204-30 of the ITAA 1997 apply to the scheme?

Answer

No.

Question 5

Will section 177EA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme?

Answer

No.

Question 6

Will the Commissioner make a determination under subsection 45C(3) of the ITAA 1936 in relation to the scheme?

Answer

No.

This ruling applies for the following periods:

The ruling begins to apply in 2013 for a period of 10 years.

The scheme commences in:

2013

Relevant facts and circumstances

The Company is proposing to offer securities in order to raise capital and has requested the Commissioner provide the Ruling based on the following matters:

· The offer will be made to the public at large and will not be restricted to a particular category of investors.

· The Company will apply for the securities to be listed on the ASX following completion of the offer.

· Each security will be issued for a set Australian dollar amount.

· During the term of the transaction, the Company will be a resident of Australia under the income tax law of Australia and of no other jurisdiction.

· The Company expects to have sufficient available profits from which to pay dividends, and to have net assets in excess of ordinary share capital, immediately before the payment of any dividends payable in respect of the securities.

· Dividends payable in respect of the securities will not be sourced, directly or indirectly, from the Company's share capital account or its non-share capital account.

· The share capital account of the Company will not become tainted within the meaning of Subdivision 197-A of the ITAA 1997 by the issue of the securities.

· The Company will not differentially frank distributions on the securities, or any other interest in the Company that is capable of giving rise to a frankable distribution, according to the tax status of the holders of those instruments or on any other basis.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 subsection 45C(3)

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1997 section 202-15

Income Tax Assessment Act 1997 section 202-30

Income Tax Assessment Act 1997 section 202-40

Income Tax Assessment Act 1997 section 202-45

Income Tax Assessment Act 1997 section 204-15

Income Tax Assessment Act 1997 section 204-30

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 Division 974

Income Tax Assessment Act 1997 section 960-120

Income Tax Assessment Act 1997 Subdivision 995-1

Reasons for decision

Question 1

Summary

The securities will be characterised as 'equity interests' in the Company for the purposes of Division 974 of the ITAA 1997.

Detailed reasoning

Subsection 995-1(1) of the ITAA 1997 provides that an equity interest in an entity has the meaning given by, in the case of a company, Subdivision 974-C of the ITAA 1997.

In Subdivision 974-C, subsection 974-70(1) provides that:

A *scheme gives rise to an equity interest in a company if, when the scheme comes into existence:

(a) the scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the existence of an interest; and

(b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a *debt interest in the company, or a *connected entity of the company, under Subdivision 974-B.

These requirements in relation to the securities are considered below.

Paragraph 974-70(1)(a) of the ITAA 1997: The securities must satisfy the equity test in subsection 974-75(1) of the ITAA 1997 in relation to the Company

Subsection 974-75(1) of the ITAA 1997 provides that a scheme satisfies the equity test, in relation to a company, if it gives rise to one of the interests listed in the table in that subsection:

Item	Interest
1	An interest in the company as a member or stockholder of the company.
2	An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is in substance or effect *contingent on the economic performance (whether past, current or future) of: the company; or a part of the company's activities; or a *connected entity of the company or a part of the activities of a connected entity of the company. The return may be a return of an amount invested in the interest.
3	An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of: the company; or a *connected entity of the company. The return may be a return of an amount invested in the interest.
4	An interest issued by the company that: gives its holder (or a *connected entity of the holder) a right to be issued with an *equity interest in the company or a *connected entity of the company; or (b) is an *interest that will, or may, convert into an equity interest in the company or a connected entity of the company.

The first requirement to be an equity interest, in subsection 974-70(1) of the ITAA 1997, is that there must be a scheme. A 'scheme' is defined in subsection 995-1(1) of the ITAA 1997 to include any arrangement or any scheme, plan, proposal, action, course of action or conduct. The proposed issue of the securities will be a scheme within this definition.

The next requirement to be an equity interest is satisfying the equity test in subsection 974-75(1) of the ITAA 1997, which is that the scheme (the proposed issue of the securities) must give rise to an interest set out in the table above. The issue of the securities will give rise to an interest in the Company as a 'member or stockholder' of the company, satisfying item 1 of the table in subsection 974-75(1) of the ITAA 1997. It is therefore unnecessary to consider other items in the table.

Subsection 974-75(2) of the ITAA 1997 provides that:

A *scheme that would otherwise give rise to an equity interest in a company because of an item in the table in subsection (1) (other than item 1) does not give rise to an equity interest in the company unless the scheme is a *financing arrangement for the company

As the securities satisfies item 1 of the table in subsection 974-75(1) of the ITAA 1997, it is not necessary to satisfy the requirements of section 974-75(2) of the ITAA 1997.

Accordingly, paragraph 974-70(1)(a) of the ITAA 1997 is satisfied.

Paragraph 974-70(1)(b) of the ITAA 1997: securities must not be characterised as a debt interest in the Company (or a connected entity) under Subdivision 974-B of the ITAA 1997

Subsection 974-15(1) of the ITAA 1997 provides that:

A *scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) in relation to the entity.

Subsection 974-20(1) of the ITAA 1997 prescribes the debt test as follows:

A *scheme satisfies the debt test in this subsection in relation to an entity if:

(a) the scheme is a *financing arrangement for the entity; and

(b) (the entity, or a *connected entity of the entity, receives, or will receive, a *financial benefit or benefits under the scheme; and

(c) the entity has, or the entity and a connected entity of the entity each has, an *effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when:

(i) the financial benefit referred to in paragraph (b) is received if there is only one; or

(ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and

(d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and

(e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil.

The scheme does not need to satisfy paragraph (a) if the entity is a company and the interest arising from the scheme is an interest covered by item 1 of the table in subsection 974-75(1) (interest as a member or stockholder of the company).

The application of the debt test to the securities are considered below.

Paragraph 974-20(1)(a) of the ITAA 1997

The interest arising from the scheme is an interest covered by item 1 of the table in subsection 974-75(1) of the ITAA 1997, the condition in paragraph 974-20(1)(a) of the ITAA 1997 does not need to be satisfied.

Paragraph 974-20(1)(b) of the ITAA 1997

Paragraph 974-20(1)(b) of the ITAA 1997 requires that the Company receives, or will receive a financial benefit or benefits under the scheme. Paragraph 974-160(1)(a) of the ITAA 1997 states that a financial benefit includes anything of economic value.

Each security will be issued for a set Australian dollar amount. Therefore, the Company will receive a 'financial benefit' for each security under the scheme. Consequently, the condition in paragraph 974-20(1)(b) of the ITAA 1997 is satisfied.

Paragraph 974-20(1)(c) of the ITAA 1997

Paragraph 974-20(1)(c) of the ITAA 1997 requires the entity to have, or the entity and a connected entity of the entity to each have, an effectively non-contingent obligation (ENCO) under the scheme to provide a financial benefit or benefits to one or more entities after the time when the financial benefit(s) referred to in paragraph 974-20(1)(b) of the ITAA 1997 is received.

An ENCO is defined in subsection 995-1(1) of the ITAA 1997 to have the meaning given by section 974-135 of the ITAA 1997.

Subsection 974-135(1) of the ITAA 1997 states that there is an ENCO to take an action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation to take that action.

Subsection 974-135(2) of the ITAA 1997 states that subsection 974-135(1) of the ITAA 1997 applies to providing a financial benefit under the scheme or terminating the scheme.

Further, subsection 974-135(3) of the ITAA 1997 states that an obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation.

Based on the information provided by the Company, the Company does not have an ENCO to provide any financial benefits with respect to the securities. Accordingly, the condition in paragraph 974-20(1)(c) of the ITAA 1997 is not satisfied.

This means that the securities fail the debt test in subsection 974-20(1) of the ITAA 1997. The scheme constituted by the issue of the securities does not give rise to a debt interest in the Company under subsection 974-15(1) of the ITAA 1997.

Conclusion

The scheme constituted by the issue of the securities satisfies the equity test in subsection 974-75(1) of the ITAA 1997, and the securities is not characterised as a debt interest under Subdivision 974-B of the ITAA 1997. Therefore, the securities are an equity interest in the Company under subsection 974-70(1) of the ITAA 1997.

Question 2

Summary

The dividends paid by the Company on the securities will constitute frankable distributions under section 202-30 and section 202-40 of the ITAA 1997.

Detailed reasoning

For a corporate tax entity that is a company, item 1 of the table in subsection 960-120(1) of the ITAA 1997 defines a 'distribution' as 'a dividend, or something that is taken to be a dividend, under this Act'.

Section 202-30 of the ITAA 1997 provides that distributions 'are frankable unless it is specified that they are unfrankable' and subsection 202-40(1) of the ITAA 1997provides that a 'distribution is a frankable distribution, to the extent that it is not unfrankable under section 202-45.'

The dividends paid by the Company on the securities will be a 'dividend' as defined in subsection 6(1) of the ITAA 1936. Therefore, the dividends paid by the Company on the securities will be frankable distributions unless they are unfrankable under section 202-45 of the ITAA 1997.

Section 202-45 of the ITAA 1997 provides the following list of unfrankable distributions:

(a) (Repealed by No 101 of 2003)

(b) a distribution to which paragraph 24J(2)(a) of the Income Tax Assessment Act 1936 applies that is taken under section 24J of the Income Tax Assessment Act 1936 to be *derived from sources in a prescribed Territory, as defined in subsection 24B(1) of the Income Tax Assessment Act 1936 (distributions by certain *corporate tax entities from sources in Norfolk Island);

(c) where the purchase price on the buy-back of a *share by a *company from one of its *members is taken to be a dividend under section 159GZZZP of that Act - so much of that purchase price as exceeds what would be the market value (as normally understood) of the share at the time of the buy-back if the buy-back did not take place and were never proposed to take place;

(d) a distribution in respect of a *non-equity share;

(e) a distribution that is sourced, directly or indirectly, from a company's *share capital account;

(f) an amount that is taken to be an unfrankable distribution under section 215-10 or 215-15;

(g) an amount that is taken to be a dividend for any purpose under any of the following provisions:

(i) unless subsection 109RB(6) or 109RC(2) applies in relation to the amount - Division 7A of Part III of that Act (distributions to entities connected with a *private company);

(ii) (Repealed by No 79 of 2007)

(iii) section 109 of that Act (excessive payments to shareholders, directors and associates);

(iv) section 47A of that Act (distribution benefits - CFCs);

(h) an amount that is taken to be an unfranked dividend for any purpose:

(i) under section 45 of that Act (streaming bonus shares and unfranked dividends);

(ii) because of a determination of the Commissioner under section 45C of that Act (streaming dividends and capital benefits);

(i) a *demerger dividend;

(j) distribution that section 152-125 or 220-105 says is unfrankable.

Paragraphs 202-45(b) to (d), (f), (g), (i) and (j) do not apply with respect to the payment of the Dividends.

Paragraph 202-45(e)

Having regard to the facts and assumptions of this Ruling, paragraph 202-45(e) of the ITAA 1997 will not apply as Dividends are not sourced, directly or indirectly, from the Company's share capital account.

Paragraph 202-45(h)

Paragraph 202-45(h) of the ITAA 1997 refers to an amount taken to be an unfranked dividend under section 45 of the ITAA 1936 or because of a determination of the Commissioner under section 45C of the ITAA 1936.

No amount of the Dividends will be taken to be an unfranked dividend under section 45 of the ITAA 1936 or because of a determination of the Commissioner under section 45C of the ITAA 1936, and consequently paragraph 202-45(h) of the ITAA 1997 will not apply.

Accordingly, Dividends paid by the Company in respect of the securities will be 'frankable distributions' under sections 202-30 and 202-40 of the ITAA 1997 as none of the criteria for unfrankable distributions under section 202-45 of the ITAA 1997 are met.

Question 3

Summary

Section 204-15 of the ITAA 1997 will not apply to the Scheme.

Detailed reasoning

Subsection 204-15(1) of the ITAA 1997 gives rise to a franking debit in the franking account of a corporate tax entity if:

(a) the exercise of a choice or selection by a member of an entity; or

(b) the member's failure to exercise a choice or selection;

has the effect of determining (to any extent) that another entity makes to one of its members a distribution (the linked distribution) that is:

(c) in substitution (in whole or in part) for a distribution by the first entity to that member or any other member of the first entity; and

(d) unfranked, or *franked at a *franking percentage that differs from the first entity's benchmark franking percentage for the *franking period in which the linked distribution is made.

The holders of the securities (Holders) will be members of the Company (item 1 of the table in subsection 960-130(1) of the ITAA 1997).

The term 'distribution' is defined in subsection 995-1(1) of the ITAA 1997 to have the meaning given by section 960-120 of the ITAA 1997. For a corporate tax entity that is a company, a 'distribution' is defined as 'a dividend, or something that is taken to be a dividend, under this Act'. The dividends paid by the Company on the securities will be a 'dividend' as defined in subsection 6(1) of the ITAA 1936.

With respect to the payment of dividends, any Holder with an entitlement to exercise (or not exercise) a choice or selection which would have the effect of determining that another entity makes to one of its members a linked distribution in substitution for a distribution by the Company to a holder of the securities or any other member of the Company.

Accordingly, subsection 204-15(1) will have no application to the payment of dividends by the Company in respect of the securities.

Question 4

Summary

Section 204-30 of the ITAA 1997 will not apply to the Scheme.

Detailed reasoning

Section 204-30 of the ITAA 1997 is an anti-streaming measure that applies if an entity streams distributions (or distributions and other benefits) in such a way that:

(a) an imputation benefit is, or apart from that section would be, received by a member of the entity as a result of the distribution(s); and

(b) the member would derive a greater benefit from franking credits than another member of the entity; and

(c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.

Where section 204-30 of the ITAA applies, the Commissioner has a discretion to make one or more of the determinations listed in subsection 204-30(3) of the ITAA 1997:

(a) that a specified franking debit arises in the franking account of the entity, for a specified distribution or other benefit to a disadvantaged member;

(b) that a specified exempting debit arises in the exempting account of the entity, for a specified distribution or other benefit to a disadvantaged member;

(c) that no imputation benefit is to arise in respect of the relevant distribution that is made to a favoured member and specified in the determination.

For section 204-30 of the ITAA 1997 to apply, members to whom distributions are streamed must derive a greater benefit from franking credits than another member of the entity. The words 'derive a greater benefit from franking credits' are defined in subsection 204-30(8) by reference to the ability of the members to fully utilise imputation benefits. The imputation benefit for resident shareholders is in the form of a tax offset under Division 207 of the ITAA 1997 (paragraph 204-30(6)(a)), and for non-resident shareholders is in the form of not being liable to pay dividend withholding tax (paragraph 204-30(6)(e)). The resident shareholders derive a greater benefit from franking credits than the non-resident shareholders.

It is reasonable to expect that Holders will receive an imputation benefit because the distributions payable in respect of the securities are frankable distributions, which are expected to be franked.

The remaining issue is whether there will be a streaming of distributions in the way described in section 204-30 of the ITAA 1997. The expression 'streams' is not defined in the ITAA 1997. However, the Explanatory Memorandum to the New Business Tax System (Imputation) Bill 2002, which introduced section 204-30 of the ITAA 1997, states:

3.28 Streaming is selectively directing the flow of franked distributions to those members who can most benefit from imputation credits.

3.29 The law uses an essentially objective test for streaming, although purpose may be relevant where future conduct is a relevant consideration. It will normally be apparent on the face of an arrangement that a strategy for streaming is being implemented. The distinguishing of members on the basis of their ability to use franking benefits is a key element of streaming.

On the basis of the information provided by the Company, it is concluded that the requisite element of streaming does not exist in relation to the securities. Accordingly, section 204-30 of the ITAA 1997 will not apply to the Scheme.

Question 5

Summary

Section 177EA of the ITAA 1936 will not apply to the Scheme.

Detailed reasoning

Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes designed to obtain imputation benefits. In essence, it applies to schemes for the disposition of shares or an interest in shares, where a franked distribution is paid or payable in respect of the shares or an interest in shares.

Where section 177EA of the ITAA 1936 applies, the Commissioner has a discretion pursuant to subsection 177EA(5) of the ITAA 1936 to make a determination to either debit the company's franking account or deny the imputation benefit on the distribution that flowed directly or indirectly to each shareholder.

Section 177EA of the ITAA 1936 applies if the five conditions in subsection 177EA(3) of the ITAA 1936 are satisfied:

(a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; 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; 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; and

(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

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

The relevant taxpayer is a Holder of the securities.

In relation to this scheme, the first four conditions, found in paragraphs 177EA(3)(a) to (d) of the ITAA 1936, are satisfied for the following reasons:

(a) Pursuant to paragraph 177EA(14)(a) of the ITAA 1936, a scheme for a disposition of membership interests or an interest in membership interests includes a scheme that involves issuing the membership interests.

The issue of the securities constitutes a scheme for a disposition of membership interests because the securities are not debt interests and as a result of issuing the securities, the holders of the securities are members of the Company: sections 960-130 and 960-135 of the ITAA 1997.

Accordingly, the Scheme satisfies paragraph 177EA(3)(a) of the ITAA 1936.

(b) Frankable distributions are expected to be payable to the holders of the securities in respect of each security they hold and the Commissioner accepts that the dividends in relation to the securities will be frankable distributions to the extent that the dividends do not fall within the list of unfrankable distributions in section 202-45 of the ITAA 1997.

Accordingly, the Scheme satisfies paragraph 177EA(3)(b) of the ITAA 1936.

(c) Franked distributions are expected to be paid to Holders. The Company has advised that it will frank (to the extent that franking credits are available in its franking account) all distributions.

Accordingly, the Scheme satisfies paragraph 177EA(3)(c) of the ITAA 1936.

(d) It is reasonable to expect that an imputation benefit will be received by the relevant taxpayers (the Holders) as a result of distributions in respect of the securities.

Accordingly, the Scheme satisfies paragraph 177EA(3)(d) of the ITAA 1936.

The remaining condition is whether, 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 (i.e. the Holder) to obtain an imputation benefit: paragraph 177EA (3)(e) of the ITAA 1936. This purpose is hereinafter referred to as 'the requisite purpose'.

This is a test of objective purpose. Circumstances which are relevant in determining whether any person has the requisite purpose include, but are not limited to, the factors listed in subsection 177EA(17) of the ITAA 1936. The relevant circumstances listed encompass a range of circumstances which taken individually or collectively could indicate the requisite purpose. Due to the wide range of these circumstances, some may or may not be present at any one time in any one scheme.

The Commissioner has had regard to the relevant circumstances in subsection 177EA(17) of the ITAA 1936 and based on the information provided by the Company and the qualifications set out in the Ruling, and taking account of the High Court decision in Mills v Federal Commissioner of Taxation [2012] HCA 51; 2012 ATC 20-360; (2012) 87 ALJR 53, the Commissioner considers that the relevant circumstances of the scheme do not, on balance, lead to the conclusion that the purpose of enabling Holders of the securities to obtain imputation benefits is more than incidental.

Accordingly, section 177EA of the ITAA 1936 will not apply to the Scheme.

Question 6

Summary

The Commissioner will not make a determination under subsection 45C(3) of the ITAA 1936 in relation to the Scheme.

Detailed reasoning

Paragraph 45B(3)(b) of the ITAA 1936 authorises the Commissioner to make a written determination that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of a capital benefit provided by a company to a person.

If the Commissioner makes a determination under subsection 45B(3) of the ITAA 1936, the Commissioner may make a further determination under subsection 45C(3) of the ITAA 1936 that the capital benefit, or part of the capital benefit, was paid under a scheme for which a non-incidental purpose was to avoid franking debits arising in relation to the distribution from the company. A determination under subsection 45C(3) results in a franking debit arising for the company.

The Commissioner may make a determination under subsection 45B(3) of the ITAA 1936 where all of the following conditions in subsection 45B(2) of the ITAA1936 are satisfied:

(a) there is a scheme under which a person is provided with a capital benefit by a company.

(b) under the scheme a taxpayer, who may or may not be the person provided with the capital benefit, obtains a tax benefit.

(c) 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, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit.

Paragraph 45B(3)(a) of the ITAA 1936 will be satisfied because a 'capital benefit' will be provided by the Company to Holders under the scheme.

Paragraph 45B(3)(b) of the ITAA 1936 will be satisfied because the Holders will generally obtain a tax benefit from the scheme.

The relevant circumstances of the scheme that must be considered when analysing a person's purpose under paragraph 45B(3)(c) of the ITAA 1936 are listed in subsection 45B(8) of the ITAA 1936.

Having regard to these relevant circumstances of the scheme, as required by subsection 45B(8) of the ITAA 1936, it would not be concluded that any of the parties to the scheme entered into or carried out the scheme for a more than incidental purpose of enabling the Holders to obtain a tax benefit. Therefore, section 45B of the ITAA 1936 will not apply.

Accordingly, the Commissioner will not make a determination under subsection 45C(3) of the ITAA 1936 in relation to the Scheme.

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