Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1012651725298

Ruling

Subject: Dividend access share arrangement

Question 1

Is the nature of the dividend access shares equity?

Answer

Yes.

Question 2

Will anti-dividend streaming provisions apply?

Answer

No.

Question 3

Will franking credit scheme anti-avoidance rules apply?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the private ruling involves dividend access shares.

The arrangement is set out in the following documents:

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 974-20(1)

Income Tax Assessment Act 1997 Section 974-135

Income Tax Assessment Act 1997 Section 204-30

Income Tax Assessment Act 1936 Section 177EA

Reasons for decision

Debt/Equity

Division 974 of the ITAA 1997 contains provisions which determine whether a scheme gives rise to a debt interest or an equity interest for taxation purposes.

A scheme will give rise to an equity interest in a company if the scheme satisfies the equity test in subsection 974-20(1) of the ITAA 1997 and the interest is not characterised as a debt interest.

Equity test

An interest in a company as a member or stockholder meets the equity test (item 1 of the table in subsection 974-20(1) of the ITAA 1997).

The DASs proposed to be issued are shareholder interests and therefore meet the equity test.

Debt test

A scheme will give rise to a debt interest in an entity if the debt test in subsection 974-20(1) of the ITAA 1997 is satisfied. A scheme satisfies the debt test if all of the following conditions are met:

Section 974-135 of the ITAA 1997 specifies that there is an ENCO to take 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 action. The section also states that an obligation is non-contingent if it is non-contingent on any event, condition or situation, other than the ability or willingness of that entity or connected entity to meet the obligation.

It is considered that the DASs issued by the Companies fail the debt test as there is no ENCO to provide a financial benefit as required by section 974-20 of the ITAA 1997. Although it is intended that the Companies pay a dividend on the DASs, there is no obligation for the Companies to do so. The payment of a dividend on the DASs is still contingent on a decision by the boards of the Companies.

Conclusion

The DASs proposed to be issued by the Companies are equity interests as they are shareholder interests (and therefore meets the equity test) and are not characterised as debt interests.

Dividend streaming

Subdivision 204-D of the ITAA 1997 contains provisions which aim to prevent the streaming of franking credits to one member of a corporate tax entity in preference to another.

Section 204-30 of the ITAA 1997 applies where an entity streams one or more distributions in such a way that the franking credits attaching to the distribution are received by those members of the entity who derive a greater benefit from them; and other members receive lesser imputation or no imputation benefits.

For this section to apply, members to whom distributions are streamed must be in a position to derive a greater benefit from the franking credits than other members.

Subsection 204-30(8) of the ITAA 1997 details examples of when a member of an entity will be taken to have derived a greater benefit from franking credits than another member. These are where the other member:

Streaming is not a defined term but the Explanatory Memorandum, to the New Business Tax (Imputation) 2002 at Chapter 3, Paragraph 28 described streaming as 'selectively directing the flow of franked distributions to those members who can most benefit from imputation credits.'

In this case the 'other member' is the Original Shareholder who is a resident individual. It is not considered that they would receive less of a benefit from franking credits than the holder of the DASs.

Therefore, it is not considered that the arrangement in question is dividend streaming to which Division 204-D of the ITAA 1997 applies.

Franking credit scheme anti-avoidance rules

Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies where one of the purposes (other than an incidental purpose) of a scheme is to obtain an imputation benefit. In these circumstances, subsection 177EA(5) enables the Commissioner to make a determination with the effect of either:

Pursuant to subsection 177EA(3) of the ITAA 1936, the provision applies if the following conditions are satisfied:

The 'imputation benefit' is defined to be simply the availability of a tax offset pursuant to Division 207 of the ITAA 1997. (Subsection 177EA(16) of the ITAA 1936).

The 'relevant circumstances' of the scheme are set out in subsection 177EA(17) of the ITAA 1936 in an inclusive manner.

In the event that a distribution was made on the DASs and franking credits were available, that distribution would be franked and the DAS holder would get the benefit of the franking credits.

Having regard to those relevant circumstances in the context of the specific facts of the particular scheme in question, it has been accepted that the 'imputation benefit' would be no more than an incidental benefit of the scheme and it would not be concluded that any person who proposes to enter into the scheme or carry it out, are doing so for more than an incidental purpose of entitling the DAS holder to a tax offset.


Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).