Edited version of your private ruling

Authorisation Number: 1012603273505

Ruling

Subject: Retirement planning proposal

Question 1

Is the franked distribution from A Pty Ltd (the Company) to the X Superannuation Fund (the Fund) non-arm's length income of the Fund under section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the franked distribution from the Company to the Fund made as part of a dividend stripping operation within the meaning of paragraph 207-145(1)(d) of the ITAA 1997?

Answer

Yes

Question 3

Is there a scheme to which Part IVA, and therefore section 177F, of the Income Tax Assessment Act 1936 (ITAA 1936) applies?

Answer

Yes

Question 4

Is there a scheme to which section 177EA of the ITAA 1936 applies?

Answer

Yes

This ruling applies for the following periods:

Year of income ending 30 June 2014

Year of income ending 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

Factual arrangement

1. C is the sole member of the Fund and sole director of the Fund's trustee.

2. C has reached retirement age. On 1 July 20XX C commenced to draw a "transition to retirement" pension from the Fund. In June 20YY, C made a non-concessional contribution to the Fund.

3. C wishes to maximise their wealth in retirement.

4. C is the trustee of the D Family Trust (D Trust). As trustee of the D Trust, C owns 100% of the issued share capital in A Pty Ltd (the Company).

5. C is the sole director of the Company.

6. C formerly participated in a professional business, a one-third interest in which business formed part of the D Trust. That one-third interest was recently sold.

7. The Company was a beneficiary of the D Trust and received trust distributions (initially reflected as unpaid present entitlements) from the D Trust.

8. The cash asset is the only asset of the Company and the Company has no liabilities. The cash asset represents the Company's retained.

9. The Company can pay a fully franked dividend.

10. It is intended the following steps will be implemented:

(a) the Company will divide its share capital into a number of shares.

(b) prior to 30 June 20ZZ C, as trustee for the D Trust, will transfer to themself, as full beneficial owner, a specified number of shares in the Company.

(c) on or before 30 June 20ZZ, C will make a non-concessional in-specie contribution to the Fund of those shares in the Company.

(d) also on or before 30 June 20ZZ, the Fund will purchase the remaining shares in the Company from C as trustee of the D Trust. This will be achieved by using the contribution made by C in June 20YY.

(e) the D Trust will make a net capital gain as a result of the disposal of the shares to C and to the Fund, which is to be reflected as a net capital gain for the relevant beneficiary.

(f) the shares in the Company acquired by the Fund will be recognised in its accounts at market value.

(g) the shares will be used to support the payment of a pension to C.

(h) after the expiry of 45 days, the Company will pay a franked distribution of equal to its retained earnings to the Fund (The Franked distribution).

(i) the Franked distribution (i.e. including the franking credit) paid to the Fund is said to be exempt income for the Fund under section 295-385 of the ITAA 1997. The Fund is said to be entitled to a refund of the unused franking credit tax offset arising from a franking credit.

(j) the Franked distribution will be used to fund pension payments to C for her retirement over a number of years. There is no intention to pay a superannuation lump sum to C.

(k) following payment of the franked distribution, the Company will be wound up and deregistered.

(l) a capital loss will arise upon deregistration of the Company. However, as the Fund will use segregation of current pension assets (under section 295-385 of the ITAA 1997) to work out its exempt current pension income, the capital loss that will arise on deregistration of the company will be disregarded (under section 118-320 of the ITAA 1997).

11. As a result of the steps at paragraph 10, the Fund will increase in value, being the franked distribution plus a refund of the unused franking credit tax offset less the purchase price of the shares purchased.

12. If C does not undertake the steps at paragraph 10, the D Trust will remain the shareholder and franked distributions from the Company may be distributed to C in a way that she can maximise their non-concessional contributions to the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA,

Income Tax Assessment Act 1936 Section 177E,

Income Tax Assessment Act 1936 Section 177EA,

Income Tax Assessment Act 1997 207-20,

Income Tax Assessment Act 1997 207-145,

Income Tax Assessment Act 1997 207-150,

Income Tax Assessment Act 1997 295-545 and

Income Tax Assessment Act 1997 295-550.

Reasons for decision

Question 1

Summary

13. Leaving aside considerations of section 207-145 of the ITAA 1997 and Part IVA of the ITAA 1936 as dealt with in the subsequent questions, the Franked distribution from the Company to the Fund would be non-arm's length income of the Fund under subsection 295-550(2) of the ITAA 1997. The franked distribution would therefore not be exempt as current pension income under either paragraph 295-385(1)(a) or subsection 295-390(1) of the ITAA 1997.

Detailed reasoning

14. In accordance with section 295-545 of the ITAA 1997 the income of a complying superannuation fund is split into a 'non-arm's length component' and a 'low tax component'.

15. The note to subsection 295-545(1) of the ITAA 1997 explains that a concessional rate (15%) of tax applies to the low tax component, while the non-arm's length component is taxed at the highest marginal tax rate (45%). These rates are set out in the Income Tax Rates Act 1986.

16. Subsection 295-545(2) of the ITAA 1997 provides that the non-arm's length component for an income year is the entity's non-arm's length income for that year less any deductions to the extent that they are attributable to that income. The phrase 'non-arm's length income' has the meaning given by section 295-550 of the ITAA 1997.

17. Dividends paid to an entity by a private company, along with ordinary or statutory income reasonably attributable to such a dividend (such as the franking credits), are non-arm's length income of the entity unless the amount is consistent with an arm's length dealing (subsection 295-550(2) of the ITAA 1997).

18. Subsection 295-550(3) of the ITAA 1997 requires consideration of the following matters when deciding whether an amount is consistent with an arm's length dealing:

(a) the value of shares in the company that are assets of the entity; and

(b) the cost to the entity of the shares on which the dividend was paid; and

(c) the rate of that dividend; and

(d) whether the company has paid a dividend on other shares in the company and, if so, the rate of that dividend; and

(e) whether the company has issued any shares to the entity in satisfaction of a dividend paid by the company (or part of it) and, if so, the circumstances of the issue; and

(f) any other relevant matters.

19. The Commissioner has issued Taxation Ruling TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income. This Ruling refers to former section 273 of the ITAA 1936 which concerned 'special income' (now termed non-arm's length income) and continues to provide the ATO view so far as the new provision (section 295-550 of the ITAA 1997) expresses the same ideas as section 273.

20. In the facts of this case it is stated that the shares are to be purchased at market value, and are to be contributed at market value, such that the shares are reflected at market value in the member's account. This is a relevant consideration under paragraph 295-550(3)(a) of the ITAA 1997 and the acquisition of shares at market value is consistent with an arm's length dealing.

21. The rate of the dividend (paragraph 295-550(3)(c) of the ITAA 1997 is also relevant and refers to the amount of the dividend (or dividends) paid per share over a period of time (e.g. annually) by a company. In this case the dividend rate reflects the distribution of all of the assets of the company over a short period of time (i.e. potentially soon after the 45 day holding period rule is satisfied).

22. As the Fund is the only shareholder there is no comparison to be made as between the rate of dividends paid to the Fund and the rate of dividends paid to any other shareholder (paragraph 295-550(3)(d) of the ITAA 1997).

23. Other relevant factors (paragraph 295-550(3)(f) of the ITAA 1997) to consider include the market value of the shares as compared with the dividend rate and the rate of return on investment and also the level of investment risk undertaken by the Fund in relation to the dividend rate and the rate of return.

24. It is considered that taking into account the acquisition of the shares at the stated market value, the dividend rate, the rate of return, the lack of risk, the timeframe and the certainty that all of the assets of the Company will be paid to the Fund as a fully franked dividend given all parties are related, the dividend income of the Fund is non-arm's length income.

• The Fund has minimal or nil investment risk as the only asset of the Company is cash, the Company has no liabilities and there are no trading or investment activities being conducted by the Company.

• There is no risk that the dividend won't be paid given the non-arm's length relationship that exists between all parties involved.

• During the relatively short period of time the shares are held by the Fund it will for minimal or nil investment risk realise all of the assets of the Company giving it a return of 100% based on the stated market value of the shares and an after tax return in excess of 100% (i.e. with the refund of the franking credit tax offset).

• The stated market value of the shares takes no account of the statutory right to the franking credit tax offset and the subsequent refund that is conferred on a Fund as a result of the transaction.

25. Therefore, subsection 295-550(2) of the ITAA 1997 would apply to the Fund with respect to its receipt of the Franked distribution from the Company. The franked distribution would not be exempt current pension income of the Fund (under paragraph 295-385(1)(a) or subsection 295-390(1) of the ITAA 1997).

Question 2

Summary

26. The Franked distribution from the Company to the Fund is made as part of a dividend stripping operation within the meaning of paragraph 207-145(1)(d) of the ITAA 1997. As a consequence the amount of the franking credit on the distribution is not included in the assessable income of the Fund under section 207-20 of the ITAA 1997 and the Fund is not entitled to a tax offset under Subdivision 207-F because of the distribution (paragraphs 207-145(e) and (f) of the ITAA 1997).

Detailed reasoning

Section 207-145(1) of the ITAA 1997

27. Subsection 207-145(1) of the ITAA 1997 provides, relevantly, that where a franked distribution is made to an entity in circumstances where (in paragraph (d)) "the distribution is made as part of a dividend stripping operation", then, relevantly:

(a) (in paragraph (e)) the amount of the franking credit on the distribution is not included in the assessable income of the entity under section 207-20 or 207-35 of the ITAA 1997; and

(b) (in paragraph (f)), the entity is not entitled to a tax offset under Subdivision 207-F because of the distribution.

28. Section 207-155 of the ITAA 1997 defines when a distribution is made as part of a "dividend stripping operation" within the meaning of paragraph 207-145(1)(d) of the ITAA 1997 as follows:

A distribution made to a member of a corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a scheme that:

(a) was by way of, or in the nature of, dividend stripping; or

(b) had substantially the effect of a scheme by way of, or in the nature of, dividend stripping.

29. If the Franked distribution from the Company to the Fund would be a distribution made "as part of a dividend stripping operation" within the meaning of paragraph 207-145(1)(d) of the ITAA 1997, the relevant effect will be that the amount of any franking credit on the distribution will not be included in the assessable income of the Fund and the Fund will not be entitled to a tax offset under Subdivision 207-F.

Dividend stripping operations

30. A "dividend stripping operation" has been recognised as involving the following characteristics:

(a) a company with substantial undistributed profits (target co);

(b) a sale or allotment of shares in target co to another party;

(c) the payment of a dividend to the purchaser or allottee of shares by target co;

(d) the acquirer escaping Australian income tax on the dividend so declared;

(e) the vendor shareholder receiving a capital sum for their shares in an amount the same as or very close to the dividend paid out; and

(f) the transactions being carefully planned, with the parties acting in concert for the predominant purpose of avoiding tax on the distribution of dividends by target co.

Commissioner of Taxation v. Consolidated Press Holdings Ltd [1999] FCA 1199; (1999) 91 FCR 524 (FCT v. CPH (FFC)) at [136] - [137] and [157], Commissioner of Taxation v. Consolidated Press Holdings Ltd [2001] HCA 32; (2001) 207 CLR 235 (FCT v. CPH (HC)) at [126] and [129]; Lawrence v. Federal Commissioner of Taxation [2009] FCAFC 29; (2009) 175 FCR 277 (Lawrence v. FCT) at [42] - [43].

31. A scheme may still be a "dividend stripping operation" because the making of a distribution was "by way of or in the nature of dividend stripping" even if it contains features which vary from the paradigm case of dividend stripping, so long as it retains the central characteristics of a dividend stripping scheme: FCT v. CPH (FFC) at [156], Lawrence v. FCT at [45].

32. A difference between a scheme "by way of or in the nature of dividend stripping" and a scheme which has "substantially the effect" of a scheme "by way of or in the nature of dividend stripping" lies in the means adopted to distribute the profits of the target company. Where the means adopted do not involve a distribution, but some other step (such as the purchase by the target company of near worthless assets or assets later rendered near worthless by the target company): Lawrence v. FCT at [47] - [52].

Will the franked distribution from the Company to the Fund be a distribution made as part of a dividend stripping operation?

33. The payment of the Franked distribution from the Company to the Fund will be made as part of a "dividend stripping operation" within the meaning of paragraph 207-145(1)(d) of the ITAA 1997 because each of the elements of a scheme "by way of or in the nature of dividend stripping" will be present. For the reasons below, each of the central characteristics of a scheme by way of or in the nature of dividend stripping identified in paragraph 30 above are satisfied.

34. First element: The Company has substantial undistributed profits. The Company's sole asset is cash or cash assets attributable to retained earnings. Accordingly, the element of a "dividend stripping operation" identified in paragraph 30(a) above is satisfied.

35. Second element: C, as trustee of the D Trust, will transfer to themself, as full beneficial owner, a specified number of shares in The Company. C will then transfer those shares (by way of a contribution) to the Fund. The remaining shares held by her as trustee will be transferred (by way of a sale) to the Fund. As to those remaining shares, there will be a sale of shares in the Company. As to the share held by C, while there will be no sale, there will be a transfer of shares in the Company to (ultimately) the Fund which will result in an accretion to the value of C's interest in the Fund. This is a mere "variation on the paradigm" which will not remove the scheme from satisfying the central characteristics of a "dividend stripping operation": FCT v. CPH (FFC) at [156], Lawrence v. FCT at [45]. Alternatively, the scheme will have "substantially the effect" of a scheme "by way of or in the nature of dividend stripping".

36. Accordingly, whether by way of contribution in return for an accretion of capital for C or by way of a sale, the element of a "dividend stripping operation" in paragraph 30(b) above is satisfied.

37. Third element: The Company will pay the Franked distribution to the Fund which is equal or substantially equal to the value of its retained earnings. Accordingly, the element of a "dividend stripping operation" in paragraph 30(c) above is satisfied.

38. Fourth element: On the assumption that the Franked distribution is "consistent with an arm's length dealing" within the meaning of subsection 295-550(2) of the ITAA 1997, and therefore is not "non-arm's length income" of the Fund within the meaning of paragraph 295-385(2)(a) of the ITAA 1997, the Franked distribution is said to be exempt from income tax under subsection 295-385(1) of the ITAA 1997. In the result, absent the application of subsection 207-145(1) of the ITAA 1997, the Fund will obtain a refund of the unused franking credit tax offset in relation to the Franked distribution. Accordingly, the element of a "dividend stripping operation" in paragraph 30(d) above is satisfied.

39. Fifth element: C will benefit from an accretion to the value of her interest in the Fund as a result of the transfer of the specified number of shares in the Company to C and the subsequent contribution of those shares by her in her individual capacity to the Fund. Although C will not receive a direct payment for the shares in the company, this is (again) only a "variation on the paradigm" which will not remove the scheme from one which has the central characteristics of a "dividend stripping operation": FCT v. CPH (FFC) at [156], Lawrence v. FCT at [45]. Alternatively, the scheme will have "substantially the effect" of a scheme "by way of or in the nature of dividend stripping".

40. C, in their capacity as trustee of the D Trust, will receive a capital sum for the remaining shares in the Company. Those two amounts equal the sum of the Franked distribution. Accordingly, the element of a "dividend stripping operation" in paragraph 30(e) above is satisfied.

41. Sixth element: The arrangement proposed and described at paragraph 10 above is carefully planned. It involves all the parties acting in concert for a predominant purpose. The objective purpose of the parties is to obtain:

(a) the exemption in subsection 295-385(1) of the ITAA 1997 as it applies to the Franked distribution and the refund of the unused franking credit tax offset thus increasing the amount available for subsequent tax free distribution as a superannuation benefit to C;

(b) the substitution of a capital amount for the disposal of the shares instead of a franked distribution with a resultant lower incidence of tax (under the applicable capital gains tax provisions) for the relevant beneficiary of the D Trust: see Lawrence v. FCT at [44].

There are no other rational explanations for the implementation of the arrangement.

42. It is no answer to say that the arrangement is undertaken for the purposes of retirement planning rather than for the purposes of avoiding tax. This is because that poses a false dichotomy of the kind referred to in Commissioner of Taxation v. Spotless Services Limited (1996) 186 CLR 404 (FCT v. Spotless) at 415 - 416. This is because, on an objective assessment, the substantial aspect of the arrangement that makes it desirable retirement planning for C and gives rise to the enhanced value is the tax benefits obtained through the channelling of the Franked distribution through the Fund, namely, refund of the franking credit tax offset (see paragraphs 10(h) and (i) above).

43. Furthermore, the fact that the beneficiaries of the D Trust may have been assessed on a share of the net capital gain made by C as trustee in respect of the disposal of the shares in the Company to the Fund does not mean that a "dividend stripping operation" cannot arise. In Lawrence v. FCT, the Full Court of the Federal Court observed at [44] that "notwithstanding the advent of comprehensive taxation of capital gains, this characteristic remains relevant because the methods of calculating capital gains invariably lead to a lower amount of tax".

Question 3

Summary

44. There is a scheme to which Part IVA and therefore section 177F of the ITAA 1936 applies. The Commissioner may make a determination under section 177F of the ITAA 1936 that has the effect of cancelling the tax benefit.

Detailed reasoning

Section 177E of Part IVA

45. Where the conditions of subsection 177E(1) of Part IVA of the ITAA 1936 are satisfied, paragraph 177E(1)(e) provides that the relevant scheme "shall be taken to be a scheme to which this Part applies". This has the result that the Commissioner is empowered to issue a determination cancelling a tax benefit under section 177F of the ITAA 1936.

46. The conditions in subsection 177E(1) of the ITAA 1936 are to the following effect:

(a) there is a "scheme" of the kind defined in subsection 177A(1) of the ITAA 1936 that is in relation to the company (target co);

(b) the scheme is one:

(i) by way of or in the nature of dividend stripping; or

(ii) having substantially the same effect as dividend stripping;

(c) a result of the scheme is that property of the target co is disposed of;

(d) the Commissioner forms the opinion that the disposal of property by the target co represents in whole or in part a distribution whether to a shareholder (called the vendor shareholder) or another person of profits of target co;

(e) had the target co, immediately before the scheme was entered into, paid a dividend out of profits equal to the amount of profits represented by the target co's disposal of property (the "notional amount"), the notional amount would or might reasonably be expected to have been included by reason of the payment of the dividend in the assessable income of a taxpayer in a year of income; and

(f) the scheme was entered into after 27 May 1981.

See FCT v. CPH (FFC) at [118] - [123].

47. As noted above, if those conditions are satisfied, the scheme is taken to be one to which Part IVA of the ITAA 1936 applies (paragraph 177E(1)(e)), and the taxpayer shall be taken to have obtained a tax benefit referable to the notional amount not being included in the assessable income of the taxpayer in the year of income: FCT v. CPH (FFC) at [124] - [127].

Are the conditions of subsection 177E(1) of the ITAA 1936 satisfied in relation to the franked distribution from the Company to the Fund?

48. For the following reasons, each of the conditions in paragraphs 177E(1)(a) to (d) of the ITAA 1936 referred to in paragraph 46 above are satisfied.

49. First condition: The breadth of the definition of "scheme" in section 177A has been judicially noted: British American Tobacco Australia Services Ltd v. Federal Commissioner of Taxation [2010] FCAFC 130; (2010) 189 FCR 151 at [30]. It includes any "scheme, plan, proposal, action, course of conduct, or course of action". The matters in paragraph 10 above clearly constitute a scheme within the meaning of subsection 177A(1) of the ITAA 1936.

50. Moreover, the "scheme" described in paragraph 10 above is plainly a "scheme that is in relation to a company"; namely, A Pty Ltd.

51. For this reason, the first condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 46(a) above is satisfied.

52. Second condition: For the reasons given above in paragraphs 33 to 43, the "scheme" is one by way of or in the nature of dividend stripping. For this reason, the second condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 46(b) above is satisfied.

53. Third condition: Subsection 177E(2) of the ITAA 1936 provides as follows:

Without limiting the generality of subsection (1), a reference in that subsection to the disposal of property of a company shall be read as including a reference to:

(a) the payment of a dividend by the company;

(b) the making of a loan by the company (whether or not it is intended or likely that the loan will be repaid);

(c) a bailment of property by the company; and

(d) any transaction having the effect, directly or indirectly, of diminishing the value of any property of the company.

54. The scheme involves the payment by the Company of the Franked distribution to the Fund and thus is a scheme the result of which is the disposal of property of the Company within the meaning of paragraph 177E(2)(a) of the ITAA 1936 (see paragraph 10(h) above).

55. Accordingly, the third condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 46(c) above is satisfied.

56. Fourth condition: As noted above in paragraph 10(h), the Franked distribution to be paid represents all or substantially all of the Company's retained earnings. Therefore, the Commissioner has formed the view that the Franked distribution will represent, in whole or in part, a distribution of the profits of the Company. For this reason, the fourth condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 46(d) above is satisfied.

57. Fifth condition: If, before the scheme described in paragraph 10 was entered into, A paid a franked distribution to its then shareholder, being C as trustee of the D Trust, it is reasonable to expect that an amount would have been included in the assessable income of the beneficiaries of the D Trust. For this reason, the fifth condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 46(e) above is satisfied.

58. Sixth condition: The scheme is to be entered into after 27 May 1981. Therefore, the sixth condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 46(f) above is satisfied.

59. For those reasons, if the scheme in paragraph 10 above is entered into, it will be taken to be a scheme to which Part IVA of the ITAA 1936 applies (paragraph 177E(1)(e) of the ITAA 1936) and the beneficiaries of the D Trust, will be taken to have obtained a tax benefit in connection with the scheme, being the amount which, had the Company paid a franked distribution prior to entering into the scheme, would have formed part of their assessable income (paragraphs 177E(1)(f) and (g)).

Question 4

Summary

60. There is a scheme to which section 177EA of the ITAA 1936 applies. The Commissioner may therefore determine (under paragraph 177EA(5)(b)) that no imputation benefit arises for the Fund in respect of that distribution.

Detailed reasoning

Section 177EA of the ITAA 1936

61. Subsection 177EA(5) of the ITAA 1936 gives the Commissioner the power (relevantly, in paragraph (b)) to determine that no imputation benefit is to arise in respect of a distribution or specified part of a distribution that is made or flows indirectly to a relevant taxpayer.

62. In Mills v. Federal Commissioner of Taxation [2012] HCA 51; (2012) 87 ALJR 53 (Mills v. FCT) at [59], it was pointed out that subsection 177EA(3) "is an exhaustive statement of the jurisdictional facts that are necessary and sufficient for s177EA to apply so as to found an exercise of power by the Commissioner to deny a franking credit under s177EA(5)(b)".

63. The "jurisdictional facts" can be relevantly identified as follows:

(a) there is a scheme for the distribution of membership interests, or interests in membership interests, in a corporate tax entity (paragraph 177EA(3)(a) of the ITAA 1936). This includes entering into a contract, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the membership interests or interests in membership interests (paragraph 177EA(14)(b));

(b) a frankable distribution has been paid, or is payable, or expected to be payable in respect of the membership interest (subparagraph 177EA(3)(b)(ii) being presently irrelevant);

(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit (paragraph 177EA(3)(c));

(d) except for section 177EA, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, an imputation benefit as a result of the distribution (paragraph 177EA(3)(d)). An "imputation benefit" includes receipt by the taxpayer of a tax offset under Division 207 of the ITAA 1997 or, in the case of a corporate taxpayer, a franking credit arising in the franking account of the taxpayer (subsection 177EA(16));

(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)).

64. The "relevant circumstances" are defined in subsection 177EA(17) of the ITAA 1936 to include 11 matters, the last of which (in paragraph 177EA(17)(j)) includes the eight matters in paragraphs 177D(2)(a) to (h) of the ITAA 1936.

65. Section 177EA of the ITAA 1936 was considered by the High Court in Mills v. FCT. The following propositions emerge from the judgment of Gageler J (with whom the other members of the Court agreed):

(a) the relevance of the "relevant circumstances" in subsection 177EA(17) lies in the extent to which they are probative of the ultimate question of purpose (at [61]);

(b) the circumstances referred to in subsection 177EA(17) are not exhaustive of the circumstances that might be probative of that ultimate question. They are nevertheless mandatory relevant considerations. Where they exist, they must be taken into account and their degree of relevance will vary according to the extent to which they are probative of the ultimate question (at [61]);

(c) the reference to purpose in paragraph 177EA(3)(e) may, but need not, be that of the issuer. A purpose is a consequence intended by a person to result from some action and, in this context, refers to a consequence intended by the person in entering into or carrying out a scheme for the disposition of relevant interests. A person will often intend a single action to have multiple consequences (at [63]);

(d) a purpose is an "incidental purpose" within the meaning of paragraph 177EA(3)(e) if it does no more than follow from some other purpose. A purpose can be incidental even when it is central to the design of a scheme if the design is directed to the achievement of another purpose (at [64] and [66]);

(e) the reference to "enabling" in paragraph 177EA(3)(e) refers to "supplying with the requisite means or opportunities" to the end of obtaining an imputation benefit (at [65]);

(f) a relevant purpose within the scope of paragraph 177EA(3)(e) need not be a "dominant purpose"; a "dominant purpose" is sufficient but not necessary to supply the relevant jurisdictional fact. It does not follow that "a purpose which does no more than further or follow from some dominant purpose is incidental" (at [66]);

(g) counterfactual analysis is not antithetical to the assessment of purpose in paragraph 177EA(3)(e). Consideration of alternatives may assist the drawing of conclusions in a particular case that a purpose of enabling a holder to obtain a franking credit does or does not exist and, if it does exist, whether it is incidental to some other purpose (at [66]);

(h) in the case of a capital raising, if the franking of distributions serves no purpose other than to facilitate the capital raising, then the purpose is an incidental purpose within the meaning of paragraph 177EA(3)(e) (at [67]); and

(i) in the assessment of purpose in subsection 177EA(3), each of the factors in subsection 177EA(17) need not be analysed individually, so long as they are all taken into account, where probative, in a global assessment of purpose (at [73]).

Application of paragraphs 177EA(3)(a) - (d) of the ITAA 1936

66. It is clear - and is conceded by the applicant - that the "jurisdictional facts" in paragraphs 177EA(3)(a) to (d) of the ITAA 1936 and described in paragraphs 63(a) to (d) above are satisfied. This is because:

(a) there is a "scheme for the disposition of membership interests" because the relevant scheme involves the transfer of shares in the Company from C as trustee of the D Trust, first to themself in the case of the specified number of shares as full beneficial owner and then, to the Fund (see paragraph 10 above). Accordingly, the jurisdictional fact in paragraph 177EA(3)(a) is satisfied;

(b) it is expected that the Franked distribution to the Fund will be a frankable distribution and it is expected to be a franked distribution. Accordingly, the jurisdictional facts in subparagraph 177EA(3)(b)(i) and paragraph 177EA(3)(c) are satisfied;

(c) except for section 177EA, the Fund could reasonably be expected to receive an imputation benefit as a result of the Franked distribution. Accordingly, the jurisdictional fact in paragraph 177EA(3)(d) is satisfied.

67. Accordingly, the question as to whether the power to make a determination under subsection 177EA(5) of the ITAA 1936 will arise turns on whether the relevant purpose in paragraph 177EA(3)(e) is present.

Is it more than an incidental purpose of the scheme to enable the Fund to obtain an imputation benefit?

68. As was observed in Mills v. FCT, the relevance of each of the factors in subsection 177EA(17) of the ITAA 1936 and the probative weight they bear will differ in each case (at [61]).

69. Some of the "relevant circumstances" in subsection 177EA(17) of the ITAA 1936 can be put aside as irrelevant. Because the Fund will be the sole shareholder in the Company, there is no question of it deriving a "greater benefit" than other persons who hold membership interests. Thus, the circumstances in paragraphs 177EA(17)(b), (c) and (d) can be put to one side. Equally, the scheme does not involve the issue of non-share equity and so the matter in paragraphs 177EA(17)(e) can be put to one side. These matters are generally concerned with "dividend streaming" arrangements: see Mills v. Federal Commissioner of Taxation [2011] FCAFC 158; 198 FCR 89 at [43].

70. Some of the "relevant circumstances" in subsection 177EA(17) of the ITAA 1936 point, at least to some extent, against the existence of the relevant purpose. The value attributed to the transfer of the full beneficial ownership of the shares to C and then reflected as an accretion to the value of C's interest in the Fund, as well as the consideration paid by the Fund for the shares in the Company do not appear to have been calculated by reference to any imputation benefits (cf., paragraph 177EA(17)(f)). The Franked distribution does not appear to be equivalent to receipt of an amount in the nature of interest (cf., paragraph 177EA(17)(h)). The Franked distribution appears to be paid from taxed and not untaxed profits (cf., paragraph 177EA(17)(ga)). These matters, to the extent that they bear probative weight, point against the relevant conclusion.

71. The following matters in subsection 177EA(17) of the ITAA 1936 point towards the existence of the relevant purpose:

(a) the period of time the Fund will hold the shares in the Company prior to the payment of the Franked distribution is short and the Company will be thereafter deregistered. It will conduct no trading activities in that period and its assets are substantially cash assets. The extent and duration of the risk of loss the Fund will bear as a result of its holding of the shares in the Company will be minimal (cf., paragraphs 177EA(17)(a) and (i));

(b) the subsequent deregistration of the Company will give rise to a capital loss for the Fund (cf., paragraph 177EA(17)(g)). However, the weight of this matter is limited by the fact that a capital loss for the Fund will likely be disregarded because of the adoption of the segregated assets method of determining exempt income under section 295-385 of the ITAA 1997 and the subsequent application of section118-320 of the ITAA 1997.

72. Turning to the matters in paragraphs 177D(2)(a) to (h) of the ITAA 1936 which are picked up by paragraph 177EA(17)(j) of the ITAA 1936, the following are relevant:

(a) the scheme involves a carefully orchestrated and interlinked series of transactions (cf., paragraph 177D(2)(a)) between persons who are all connected with C, being either themself or companies or trusts which the control and is interested in (cf., paragraph 177D(2)(h));

(b) the scheme's form involves a transfer of the shares in the Company to the Fund and payment of a franked distribution to it. The substance of the scheme (that is, "what in fact [the relevant person] may achieve by carrying it out": Mills v. FCT at [71]) is the channelling of the distribution of the profits and the franking credits of the Company to its ultimate economic owner (principally C) through the Fund (cf., paragraph 177D(2)(b));

(c) the scheme is to be implemented over a short period of time at or close to the end of the financial year (cf., paragraph 177D(2)(c));

(d) the effects of the scheme (that is, the financial position of the relevant persons with and without the scheme: Mills v. FCT at [70]) will be as follows:

(iii) the Fund will receive the Franked distribution together with a refund of the franking credit tax offset on the basis that the Franked distribution is exempt income pursuant to section 295-385 of the ITAA 1997 (a capital loss on Arcadian's deregistration is disregarded under section 118-320 of the ITAA 1997). Therefore, the net effect will be an increase in the value of the Fund. (cf., paragraph 177D(2)(d));

(iv) C (or other beneficiaries of the D Trust) will have an amount, referrable to the net capital gain made upon disposal of the shares, included in their assessable income and, because of the method of calculating net capital gains, this will be a lesser amount than arises from dividend income: see FCT v. Lawrence at [44] (cf., paragraph 177D(2)(e)); and

(v) C, in their personal capacity, will receive the benefit of a pension from the Fund supported by the Franked distribution and the refund of the unused franking credit tax offset whereas without the scheme they would not have the benefit of the full value of the franked distribution and a franking credit. Instead in their personal capacity C would have the benefit of a lesser amount. That is, the dividend amount reduced by tax payable (top up tax) to the extent that their marginal tax rate exceeds the company tax rate. (cf., paragraph 177D(2)(f)).

73. Overall, the balance of matters points towards a conclusion that a more than incidental purpose of the scheme is to enable the Fund to gain an imputation benefit. The critical factor in an assessment of purpose is the absence of any explanation for the implementation of the scheme other than to ensure that the profits of the Company and the attached franking credits are channelled to their ultimate economic owner (C) through the Fund and thus with the benefit of the exemption in section 295-385 of the ITAA 1997.

74. It is no answer to say that the main purpose of the scheme is the maximising of C's wealth in retirement. That draws the same false dichotomy as was rejected in FCT v. Spotless. This is because it is the tax effect referred to above which achieves the maximisation of wealth in retirement over that which would otherwise be achieved.

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