Edited version of your private ruling

Authorisation Number: 1012609255069

Ruling

Subject: Retirement planning proposal

Question 1

Will the liquidation of A Pty Ltd (the Company) trigger capital gains tax (CGT) event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes (although CGT event G3 could potentially be relevant instead of CGT event C2).

Question 2

Is the franked distribution from the Company to the B Superannuation Fund (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 ended 30 June 2014

Year of income ended 30 June 2015

The scheme commences on

1 July 2013

Relevant facts and circumstances

1. Taxpayer 1 and Taxpayer 2 are spouses (together, the Taxpayers). The Taxpayers were both born in 1958 and are currently planning for their retirement.

2. The Taxpayers are directors of C Pty Ltd (Trustee). The Trustee is the trustee of a self-managed superannuation fund, B Superannuation Fund (the Fund). Taxpayer 1 and Taxpayer 2 are the only members of the Fund.

3. The Taxpayers are each currently receiving a "transition to retirement income stream" from the Fund.

4. Taxpayer 1 is the sole director of A Ltd (the Company). Taxpayer 1 holds the majority of the shares in the Company; Taxpayer 2 holds one share in it.

5. As at 30 June 2012, the Company's assets included assets attributable to retained earnings. Those assets were comprised of cash and other investments that it is proposed would be liquidated prior to the proposal set out below being implemented. That amount could be fully franked if paid as a dividend.

6. As at 30 June 2012 the Company had an amount of franking credits.

7. It is intended that the following steps will be implemented:

(a) a professional valuation of the shares in the Company will be obtained. It is said that this market value of the shares will be the value of the retained earnings plus provision for franking credits and any other elements that a qualified independent valuer identifies;

(b) Taxpayer 1 will transfer to Taxpayer 2 a specified number of shares in the Company;

(c) on or before 30 June 2014, the Taxpayers will then each make an in-specie contribution to the Fund of a portion of their shares in the Company;

(d) on or after 1 July 2014, the Taxpayers will each make an in-specie contribution to the Fund of the remainder of their shares in the Company;

(e) upon the transfers of shares to Taxpayer 2 and the Fund, Taxpayer 1 will crystallise a capital gain. Taxpayer 1 does not have any income tax carried forward losses, but does have capital losses available to offset some or all of that capital gain;

(f) after the shares are contributed to the Fund, the Fund will terminate any existing pensions and will commence new pensions to the Taxpayers. Once those pensions are commenced, the Fund will only have members whose total account balances are supporting their pensions and no new members will be admitted to the Fund;

(g) after the expiry of 45 days, the Company will pay a fully franked distribution to the Fund equal to its retained earnings (the franked distribution). It is expected that the payment will be made by the Company in one payment within one financial year of the Fund receiving the contributions of shares in the Company;

(h) based on a fully franked distribution of $X the franking credit on that distribution would be $Y;

(i) the franked distribution (i.e. including the franking credit) paid to the Fund is said to be exempt income for the Fund. A proportion (as worked out under subsection 295-390(3) of the ITAA 1997) of the franked distribution which would otherwise be assessable income of the Fund is treated as exempt from income tax under subsection 295-390(1) of the ITAA 1997. The relevant proportion is expected to be 100%. The Fund is said to be entitled to a refund of the unused franking credit tax offset;

(j) the Fund will subsequently make pension payments to each of the Taxpayers over a number of years. It is not expected that the Fund will pay either of the Taxpayers a superannuation lump sum;

(k) following payment of the dividend, the Company will be liquidated/deregistered;

(l) upon the liquidation of the Company, the Fund will realise a capital loss equal to the market value of the shares in the Company at time the Taxpayers contributed the shares to the Fund. It is expected that the Fund will not use those capital losses.

8. The Taxpayers' purpose in taking these steps is said to be for retirement planning.

9. If the above steps are not implemented, it is intended that the Company will pay fully franked dividends to the Taxpayers over a number of years. The Taxpayers will contribute these amounts to the Fund as non-concessional contributions.

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 1936 Section 177F

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-145

Income Tax Assessment Act 1997 Section 207-20

Income Tax Assessment Act 1997 Section 207-145

Reasons for decision

Question 1

Summary

10. A CGT event happens for the purposes of Parts 3-1 and 3-3 of the ITAA 1997 when a company is deregistered in accordance with the Corporations Law. It is usually CGT event C2 in section 104-25 of the ITAA 1997 that is relevant, although CGT event G3 in section 104-145 of the ITAA 1997 may happen at an earlier time in respect of worthless shares in a company in liquidation or administration.

Detailed reasoning

11. CGT event C2 happens when shares that you own are cancelled, surrendered or redeemed (section 104-25 of the ITAA 1997).

12. A company ceases to exist on deregistration, and therefore any issued shares in that company will be cancelled at the time that the company is deregistered.

13. In accordance with Taxation Determination TD 2000/7 Income tax: capital gains: when does a CGT event happen to shares in a company, for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997, if the company is deregistered under the Corporations Law, (TD 2000/7) the time that the CGT event C2 happens is when the company is deregistered in accordance with subsection 601AA(4) of the Corporations Law. On the basis that there are no capital proceeds the Fund will make a capital loss equal to the asset's reduced cost base.

14. However, TD 2000/7 also explains that CGT event G3 in section 104-145 of the ITAA 1997 provides a mechanism for a shareholder to make a capital loss on worthless shares in a company before the time of the deregistration of the company. This would be applicable if a liquidator or administrator of the company declared, in writing, that they had reasonable grounds to believe that there was no likelihood that the shareholders in the company would receive any further distributions in the course of winding up the company.

15. In this case the Fund as the relevant shareholder in the Company may be able to choose to make a capital loss from the event (G3) happening in respect of its shares, equal to the reduced cost base of the shares, at the time of the declaration rather than at the time of deregistration.

Question 2

Summary

16. 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

Subsection 207-145(1) of the ITAA 1997

17. 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 207-145(1)(d)) "the distribution is made as part of a dividend stripping operation", then, relevantly:

(a) (in paragraph 207-145(1)(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 207-145(1)(f)) the entity is not entitled to a tax offset under Subdivision 207-F of the ITAA 1997 because of the distribution.

18. 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) 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.

19. If the dividend from the Company to the Fund is 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 of the ITAA 1997.

Dividend stripping operations:

20. 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].

21. 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].

22. 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) this involves a scheme having "substantially the effect" of a scheme "by way of or in the nature of dividend stripping": 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?

23. 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 20 above are satisfied.

24. First element: The Company has substantial undistributed profits. The Company's sole asset is cash or cash assets represented by retained earnings. Accordingly, the element of a "dividend stripping operation" identified in paragraph 20(a) above is satisfied.

25. Second element: Either Taxpayer 1 or the Taxpayers will transfer all of the shares in the Company to the Fund. The transfer of the shares in the Company to the Fund will result in an accretion to the value of the relevant member's interest in the Fund. It is not significant that this takes place by way of contribution rather than sale, because this is merely a variation from the paradigm case and does not remove the scheme from having the central characteristics of a "dividend stripping operation": FCT v. CPH (FFC) at [156], Lawrence v. FCT at [45] (see paragraph 21 above). Alternatively, the scheme will have "substantially the effect" of a scheme "by way of or in the nature of dividend stripping". Accordingly, the element of a "dividend stripping operation" in paragraph 20(b) above is satisfied.

26. Third element: The Company will pay dividends to the Fund which are equal to the value of its retained earnings. Accordingly, the element of a "dividend stripping operation" in paragraph 20(c) above is satisfied.

27. 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 295-390(2)(a) of the ITAA 1997, a proportion (as worked out under subsection 295-390(3) of the ITAA 1997) of that income and which would otherwise be assessable income of the Fund will be exempt from income tax under subsection 295-390(1) of the ITAA 1997. The relevant proportion of the Fund income that is to be exempt is expected to be 100%. 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 20(d) above is satisfied.

28. Fifth element: Taxpayer 1 or the Taxpayers will benefit from an accretion to the value of their respective interests in the Fund of an amount equal to the stated market value of the shares as a result of their in-specie contributions of the shares to the Fund. Although the Taxpayers 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] (see paragraph 21 above). Alternatively, the scheme will have "substantially the effect" of a scheme "by way of or in the nature of dividend stripping". Accordingly, the element of a "dividend stripping operation" in paragraph 20(e) above is satisfied.

29. Sixth element: The arrangement proposed and described at paragraph 7 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 295-390(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 potentially tax free distribution as superannuation benefits to the members of the Fund;

(b) (to a lesser extent) the generation of a capital loss in the Fund on the liquidation/deregistration of the Company; and

(c) the substitution of a capital amount for the disposal of the shares instead of dividend income with a resultant lower incidence of tax (under the applicable capital gains tax provisions) for Taxpayer 1 (and Taxpayer 2 in respect of her original one share): see Lawrence v. FCT at [44].

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

30. 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 the Taxpayers 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 unused franking credit tax (see paragraph 7(h) above).

31. Furthermore, the fact that Taxpayer 1 may have an assessable net capital gain in relation to the transfer of the shares to Taxpayer 2 and 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

32. 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 of the ITAA 1936

33. 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.

34. 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].

35. 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?

36. For the following reasons, each of the conditions in paragraphs 177E(1)(a) to (d) of the ITAA 1936 referred to in paragraph 34 above are satisfied.

37. First condition: The breadth of the definition of "scheme" in section 177A of the ITAA 1936 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 7 above clearly constitute a scheme within the meaning of subsection 177A(1) of the ITAA 1936.

38. Moreover, the "scheme" described in paragraph 7 above is plainly a "scheme that is in relation to a company"; namely, A Pty Ltd.

39. For this reason, the first condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 34(a) above is satisfied.

40. Second condition: For the reasons given above in paragraphs 23 to 31, 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 34(b) above is satisfied.

41. 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.

42. 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 7(g) above).

43. Accordingly, the third condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 34(c) above is satisfied.

44. Fourth condition: As noted above in paragraph 7(g), the franked distribution represents 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 34(d) above is satisfied.

45. Fifth condition: If, before the scheme described in paragraph 7 is entered into, the Company paid a dividend to its then shareholders, being the Taxpayers, it is reasonable to expect that an amount would have been included in the assessable income of Taxpayer 1 (and Taxpayer 2 in respect of Taxpayer 2's one original share). For this reason, the fifth condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 34(e) above is satisfied.

46. 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 34(f) above is satisfied.

47. For those reasons, if the scheme in paragraph 7 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)) and Taxpayer 1 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 his assessable income (paragraphs 177E(1)(f) and (g)).

Question 4

Summary

48. 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.

Section 177EA of the ITAA 1936

49. Subsection 177EA(5) of the ITAA 1936 gives the Commissioner the power (relevantly, in paragraph 177EA(5)(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.

50. 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 177A(3) of the ITAA 1936 "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)".

51. 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)). 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)(i), subparagraph (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)).

52. The "relevant circumstances" are defined in subsection 177EA(17) 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.

53. 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

54. It is clear that the "jurisdictional facts" in paragraphs 177EA(3)(a) to (d) of the ITAA 1936 and described in paragraphs 51(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 Taxpayer 1 to (first, in part) Taxpayer 2 and then from the Taxpayers to the Fund (see paragraph 7 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.

55. 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?

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

57. Certain of the "relevant circumstances" in subsection 177EA(17) 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 paragraph 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].

58. 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 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 as to purpose.

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

(a) the value reflected as an accretion to the value of the members' interests in the Fund is calculated by reference to imputation benefits (see paragraph 7(a) above) (cf., paragraph 177EA(17)(f));

(b) the period of time the Fund will hold the shares prior to the payment of the franked distribution is short and the Company will be thereafter liquidated/deregistered. The Company 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 will be minimal (cf., paragraphs 177EA(17)(a) and (i));

(c) the subsequent liquidation of the Company will give rise to a capital loss for the Fund (cf., paragraph 177EA(17)(g)).

60. Turning to the matters in paragraphs 177D(2)(a) to (h) of the ITAA 1936 which are picked up by paragraph 177EA(17)(j), 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 connected with the Taxpayers, being the Taxpayers themselves, the Company and the Trustee which one or both control and are interested in (cf., paragraph 177D(2)(h));

(b) the scheme's form involves a transfer of the shares 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 attached franking credits of the Company to its ultimate economic owner (the Taxpayers) 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:

(i) the Fund will receive the franked distribution together with a refund of the unused franking credit tax offset on the basis that the franked distribution is exempt income pursuant to section 295-390 of the ITAA 1997 and will make a capital loss on the Company's deregistration/liquidation (cf., paragraph 177D(2)(d));

(ii) Taxpayer 1 will have an amount, referable to a net capital gain made upon disposal of the shares, included in Taxpayer 1's assessable income and, because of the method of calculating net capital gains, a lesser amount will be included in Taxpayer 1's assessable income than would be included if the franked distribution had been paid directly to Taxpayer 1: see FCT v. Lawrence at [44] (cf., paragraph 177D(2)(e)); and

(iii) the Taxpayers will receive the benefit of pensions 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 dividend and a franking credit. Instead Taxpayer 1 would have the benefit of a lesser amount. That is, the dividend amount reduced by tax payable (top up tax) to the extent that Taxpayer 1's marginal tax rates exceeds the company tax rate (cf., paragraph 177D(2)(f)).

61. 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 the greatest extent possible without exceeding the superannuation non-concessional contribution cap) to their ultimate economic owner (the Taxpayers) through the Fund and thus with the benefit of the exemption in section 295-390 of the ITAA 1997.

62. It is no answer to say that the main purpose of the scheme is the maximising of the Wilson'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 (see paragraph 30 above).

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