Edited version of private advice

Authorisation Number: 1012679128557

Ruling

Subject: Demerger

Questions and Answers

1. Are the shareholders in Company H entitled to choose to access the demerger rollover under section 125‐55 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the transfer of shares in Company I?

Yes

2. Is any capital gain or capital loss that arises to Company H under CGT event A1 from the disposal of its shares in Company I disregarded?

Yes

3. Is any capital gain or capital loss to the shareholders in Company H that arises to them under the demerger disregarded?

Yes

4. Will any in specie distribution of shares in Company I from Company H to the Company H shareholders constitute a demerger dividend which is non‐assessable non‐exempt income under subsections 44(3) - (5) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes

5. Are the shares in Company I acquired by the shareholders in Company H under the demerger will be taken to have been acquired prior to 20 September 1985 under section 125‐80 of the ITAA 1997?

Yes

6. Do the pre‐CGT assets held by Company I maintain their pre‐CGT status following the demerger?

Yes

7. Will section 45B of the ITAA 1936 apply to treat any part of the demerger dividend as assessable?

No

8. Will section 109RA of the ITAA 1936 apply to prevent any demerger dividend from being a dividend to which Division 7A could apply?

Yes

9. Will section 177E of the ITAA 1936 apply to the transaction to treat the transaction as a scheme by way of, or in the nature of, dividend stripping?

No

10. Will Part IVA of the ITAA 1936 apply to any aspect of the transactions?

No

This ruling applies for the following period(s)

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

The taxpayers seriously intend to undertake a series of transactions that will involve the restructure of a private group.

The restructure will involve a transfer of shares in Company I from Company H to the current shareholders of Company H.

The current shareholders of Company H:

• are all Australian tax residents;

• all acquired their shares prior to 20 September 1985; and

• will each choose to access the CGT demerger rollover pursuant to section 125‐55 of the Income Tax Assessment Act 1997 (ITAA 1997)

Company H was incorporated and used to acquire, prior to 20 September 1985, a number of significant parcels of land.

Once acquired, the land held by Company H was used primarily for farming purposes, with the intention of growing the primary production business.

Over years, one of the parcels of land Property G became increasingly difficult to farm given urbanization and the lands close proximity to a town.

Some years ago, the actively farmed primary production land and other leased commercial property acquired by Company H were transferred to a newly incorporated, wholly owned subsidiary, Company I. The transfer utilized the same asset CGT rollover in subdivision 126‐B of the ITAA 1997. The motive of the transfer was to quarantine the Property G property for the following reasons:

a) The land no longer had primary production capability, and

b) The land had future potential subdivision opportunity. The transfer enabled a broad acre residential development in a commercial protected structure, whilst protecting the vast property retained within Company I.

The farmland retained in Company I has been held and used to grow the primary production business. To further complement the primary production business additional farmland was recently acquired through a new entity, Company J to facilitate the growth of the business.

Company H requested approval to develop the Property G site.

Company H received agreement to subdivide and develop the Property G site.

Company H entered into a contract of sale to sell the Property G land to a developer.

Settlement of the contract of sale was received by way of a mortgage over the subdivided landholding.

The Company H Group is now seriously contemplating a restructure in order to achieve the following objectives:

Enhanced business efficiency

Urbanization has resulted in an unprecedented level of developer interest in land previously only used for farming.

Settlement on the parcel of land held by Company H was received by way of a mortgage over the subdivided landholding. This has resulted in a significant receivable in Company H which is anticipated to be returned via significant repayments in the medium term.

Given the extended history of Company H and the market value of shares in Company I, it would not be commercial to hold the valuable assets in Company H for the longer term. While Company H was not a party to the development of the Property G land, the shareholders do not want to expose remaining investments in Company I in the case of developer litigation or claims.

The restructuring of the Company H Group will enable the shareholders to achieve their goal of separating the assets (retained in Company I) from the old investment and business activities within Company H.

Compliance savings

Once this mortgage has been repaid, it is proposed Company H be liquidated, as, given its long corporate history of almost 60 years, it would not be prudent for any future business or investment activities to be conducted through the company due to the possibility of any future claims against the company by past creditors or other parties.

The proposal to demerge Company I would facilitate the orderly liquidation of Company H, given the only material assets in Company H consist of a combination of cash, receivables and the shares in Company I.

Proposed restructure

It is proposed that the restructure of the Company H Group be undertaken by implementing the following steps:

Prior to the restructure Company I will issue preference shares.

Step 1 - Company H declares a dividend and return of capital to its shareholders equal to the market value of the shares in Company I.

The dividend from Company H would be debited to the company's asset revaluation reserve while the return of capital would be debited to share capital. The amounts debited to these accounts would be determined by reference to the market value of the shares in Company I as compared to the market value of Company H.

A valuation will be undertaken for both Company H and Company I for the purposes of determining the amount of both the dividend and the return of capital.

Step 2 - In‐specie distribution of all shares in Company I to the shareholders of Company H in full satisfaction of the amounts payable under Step 1.

The amount payable by Company H to its shareholders created at Step 1 will be satisfied by the transfer of Company H's entire shareholding in Company I to the Company H shareholders:

Following the restructure:

• Company I would be directly owned by the shareholders in Company H in exactly the same proportion as their initial shareholdings in Company H.

• At least 50% of the assets owned by Company I are used in the course of carrying on Company I's business.

No taxpayers associated with the scheme have a capital loss.

The only dealing between associates is a documented loan.

There is no other entity capable of being a head entity of a demerger group of which Company H could be a demerger subsidiary.

Company H does not have a history of paying regular dividends to its shareholders, with none having been paid for at least the last 15 years. The reason for this are:

• Company H has historically run a relatively difficult farming enterprise and held capital appreciating, low yielding commercial properties, which has led to a lack of free cash flow to be able to pay regular dividends. The small amount of profits generated during this period from the farming enterprise and commercial rental properties have been reinvested back into the company.

• The first major change in the operations of Company H occurred when the majority of the actively farmed land, as well as the commercial rental properties originally held by Company H, were transferred to Company I. Following the transfer, the same issues as outlined above prevented Company H from paying a dividend continued to affect Company I's ability to pay a dividend to Company H.

• The only asset retained by Company H was Property G, upon which farming had become increasingly difficult. The farming enterprise on it ceased altogether when it was sold. Settlement occurred by way of a mortgage over the land by Company H.

Following the demerger, the shareholders of Company H will be looking to assign this mortgage and once this is done, Company H will be liquidated immediately thereafter.

Accounting Entries

As the taxpayers cannot directly trace the amount of share capital invested in Company I by the shareholders of Company H, The taxpayers propose to raise journal entries that are consistent with the Commissioner's approach to determining the extent to which share capital invested in the demerged entity as outlined at paragraph 57 of PS LA 2005/21.

In order to facilitate this, the taxpayers intend to engage a registered valuer to provide the relevant market valuations.

The proposed accounting entries would be as follows (amounts used for illustrative purposes only)

Company H

Upon liquidating, the distribution will comprise both a return of capital and a frankable distribution. Based on the 30 June 2013 accounts, the equity account of Company H is comprised of the following amounts:

Contributed capital $D

Retained earnings $E

Reserves - pre-CGT $F (Property G disposal)

It is expected the liquidator's distribution under section 47 of the ITAA 1936 will comprise the following amounts:

Paid-up capital $D

Assessable dividend $E

Reserves - pre-CGT $F

Company H has an equity investment of $ in Company I and a debt interest receivable from Company I. There have been no identifiable capital contributions made by the shareholders in Company H to enable Company H to make a further investment into Company I.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Subsections 44(3)

Income Tax Assessment Act 1936 Subsection 44(4)

Income Tax Assessment Act 1936 Subsection 44(5)

Income Tax Assessment Act 1936 Section 45B

Income Tax Assessment Act 1936 Paragraph 45B(1)(a)

Income Tax Assessment Act 1936 Subsection 45B(2)

Income Tax Assessment Act 1936 Subsection 45B(4)

Income Tax Assessment Act 1936 Subsection 45B(8)

Income Tax Assessment Act 1936 Subsection 45B(9)

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Subsection 109C(4)

Income Tax Assessment Act 1936 Section 109RA

Income Tax Assessment Act 1936 Section 160ZZS

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Subsection 177D(b)

Income Tax Assessment Act 1936 Section 177E

Income Tax Assessment Act 1936 Paragraphs 177E(1)(a) through to (d)

Income Tax Assessment Act 1936 Paragraph 177E(1)(f)

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1997 Subsection 104‐135(5)

Income Tax Assessment Act 1997 Section 125‐155

Income Tax Assessment Act 1997 Subsection 125-55(1)

Income Tax Assessment Act 1997 Subsection 125-65(1)

Income Tax Assessment Act 1997 Subsection 125-65(3)

Income Tax Assessment Act 1997 Subsection 125-65(4)

Income Tax Assessment Act 1997 Subsection 125-65(6)

Income Tax Assessment Act 1997 Subsection 125-70(1)

Income Tax Assessment Act 1997 Paragraph 125-70(1)(a)

Income Tax Assessment Act 1997 Subparagraph 125-70(1)(b)(i)

Income Tax Assessment Act 1997 Paragraph 125-70(1)(d)

Income Tax Assessment Act 1997 Subparagraph 125-70(1)(e)(i)

Income Tax Assessment Act 1997 Paragraph 125-70(1)(g)

Income Tax Assessment Act 1997 Paragraph 125-70(2)(a)

Income Tax Assessment Act 1997 Paragraph 125-70(2)(b)

Income Tax Assessment Act 1997 Subsection 125-70(4)

Income Tax Assessment Act 1997 Subsection 125-70(5)

Income Tax Assessment Act 1997 Subsection 125‐80(3)

Income Tax Assessment Act 1997 Division 149

Reasons for decision

Summary

The shareholders of Company H are entitled to choose to access the demerger rollover under section 125‐55 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the transfer of shares in Company H Investments (Company I).

Any capital gain or capital loss that arises to Company H under CGT event A1 from the disposal of its shares in Company I is disregarded.

Any capital gain or capital loss to the shareholders in Company H that arises to them under the demerger will be disregarded.

Any in specie distribution of shares in Company I from Company H to the Company H shareholders will constitute a demerger dividend.

The shares in Company I acquired by the shareholders in Company H under the demerger will be taken to have been acquired prior to 20 September 1985.

The pre‐CGT assets held by Company I will maintain their pre‐CGT status following the demerger.

Section 45B of the ITAA 1936 does apply to treat any part of the demerger dividend as assessable.

Section 109RA of the ITAA 1936 does not apply to prevent any demerger dividend from being a dividend to which Division 7A could apply.

Section 177E of the ITAA 1936 does not apply to the transaction to treat the transaction as a scheme by way of, or in the nature of, dividend stripping.

Part IVA of the ITAA 1936 applies to the proposal.

Detailed reasoning

1. Demerger roll-over for Company H shareholders

Subsection 125-55(1) of the ITAA 1997 relevantly provides that demerger rollover may be chosen if:

• a shareholder owns a share in a company;

• the company is the head entity of a demerger group;

• a demerger happens to the demerger group; and

• under the demerger a CGT event happens to the original interest and a new or replacement interest is acquired in the demerged entity.

The shareholders are shareholders in Company H.

A demerger group comprises one head entity and at least one demerger subsidiary (subsection 125-65(1) of the ITAA 1997).

Company H will be the head entity because:

• no other member of the Company H group holds ownership interests in Company H (subsection 125-65(3) of the ITAA 1997); and

• there will be no other company or trust capable of being a head entity of a demerger group of which Company H could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997).

Company I will be a demerger subsidiary of Company H because Company H has ownership interests (ordinary shares) in Company I that carry more than 20% of the rights to any distribution of income and capital, and the right to exercise more than 20% of the voting power of Company I (subsection 125-65(6) of the ITAA 1997).

The relevant demerger group will comprise Company H and Company I.

Subsection 125-70(1) of the ITAA 1997 describes when a demerger happens. A demerger will happen to the Company H demerger group because:

• there will be a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), and Company H will dispose of at least 80% of its Company I shares to the owners of Company H (subparagraph 125-70(1)(b)(i) of the ITAA 1997);

• CGT event G1 will happen to the shareholders of Company H upon the return of capital. Company I shares will be acquired by Company H shareholders on the basis of their ownership of shares in Company H (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i) of the ITAA 1997);

• neither Company H nor Company I are superannuation funds (paragraph 125-70(1)(g) of the ITAA 1997);

• Company H shareholders will acquire Company I shares in the same proportion as they own Company H shares just before the demerger (paragraph 125-70(2)(a) of the ITAA 1997);

• each of the Company H shareholders will own shares in Company H and Company I that (just after the demerger) represent the same proportionate total market value as their Company H shares represented (just before the demerger) (paragraph 125-70(2)(b) of the ITAA 1997);

• under the scheme, there will be no buy-back of shares for the purposes of Division 16K of Part III of the ITAA 1936 (subsection 125-70(4) of the ITAA 1997); and

• there will be no rollover available under another provision for any CGT events that happen to the Company H shares under the restructure (subsection 125-70(5) of the ITAA 1997).

When the demerger happens, Company I will be a demerged entity as defined in subsection 125-70(6) of the ITAA 1997, and Company H will be a demerger entity as defined in subsection 125-70(7) of the ITAA 1997.

Therefore the shareholders of Company H, will be eligible to choose demerger rollover under subsection 125-55(1) of the ITAA 1997.

2. Capital gain for Company H upon demerger of Company I

Under the proposed demerger, Company H would dispose of its shares in Company I to the shareholders in Company H, triggering CGT event A1.

Under section 125‐155 of the ITAA 1997, any capital gain or loss made by a demerging entity from CGT event A1 happening to its interest in a demerged entity under a demerger is disregarded.

Therefore any capital gain or capital loss made by Company H as a result of the demerger will be disregarded under section 125-155 of the ITAA 1997.

3. Disregard capital gain to Company H shareholders upon demerger of Company I

Under the proposed demerger, Company H will return capital to shareholders, triggering CGT event G1. However, as all the shares in Company H are pre‐CGT shares, any capital gain that the shareholders in Company H make as a result of the return of capital would be disregarded under subsection 104‐135(5) of the ITAA 1997.

4. Non-Assessable demerger dividend

Subsection 6(1) of the ITAA 1936 relevantly defines a dividend as including:

a) any distribution made by a company to any of its shareholders, whether in money or other property; and

b) any amount credited by a company to any of its shareholders as shareholders;

but does not include:

c) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company…..

Accordingly, the distribution of the shares in Company I by Company H would be a dividend to the shareholders of Company H to the extent that the amount is not debited to the share capital account.

Pursuant to subsection 44(1) of the ITAA 1936, the shareholders of Company H are required to include the dividend in their assessable income to the extent that it is paid out of profits. However, if the condition in subsection 44(5) of the ITAA 1936 is satisfied, subsections 44(3) and 44(4) of the ITAA 1936 state that section 44 of the ITAA 1936 applies to the demerger dividend as if it is not paid out of profits and is not assessable income or exempt income.

The condition in subsection 44(5) of the ITAA 1936 is satisfied because just after the demerger, at least 50% of the market value of CGT assets owned by Company I are used in the course of carrying on Company I's business (subsection 44(5) of the ITAA 1936).

A demerger dividend is that part of a demerger allocation that is assessable as a dividend under subsection 44(1) of the ITAA 1936 or that would be so assessable apart from subsections 44(3) and (4) of the ITAA 1936 (section 6(1) ITAA 1936).

A demerger allocation is relevantly the total market value of the allocation represented by the ownership interests disposed of by a member of a demerger group (i.e. Company H) under a demerger to the owners of ownership interests in the head entity (i.e. Company H).

Therefore, the demerger dividend, being the part of the amount of the distribution of the shares in Company I that is not debited to the share capital account of Company H, is treated as if it is not paid out of profits and is not assessable income or exempt income.

5. Pre‐CGT status of shares in Company I transferred under the demerger

The shares in Company H were all acquired by the shareholders of Company H prior to 20 September 1985 and are therefore pre‐CGT. However, Company I was incorporated on dd/mm/yyyy and therefore Company H's interests in Company I are considered post‐CGT.

Subsection 125‐80(3) of the ITAA 1997 provides that where the demerger rollover is chosen if the original interests were acquired before 20 September 1985, the Company H shareholders are taken to have acquired all of their new interests before that day.

Accordingly, as the shareholders in Company H acquired their interests in Company H prior to 20 September 1985, the shares transferred to them in Company I are taken to have been acquired prior to 20 September 1985 and will therefore be considered pre‐CGT.

6. Pre‐CGT status of assets held by Company I

Division 149 (or its predecessor section 160ZZS of the ITAA 1936) applies where an entity has acquired assets prior to 20 September 1985 and on or after that date there is a change of 50% or more in the beneficial interests (either directly or indirectly through one or more interposed companies, trusts or partnerships) of the assets. Where such a change occurs, the provision deems the assets to have been acquired for their market value at the time of the change.

The term beneficial interest is not defined. Under its ordinary meaning, a shareholder would have no legal or equitable interest in the assets of the company (Charles v Federal Commissioner of Taxation (1954) 90 CLR 598).

However, as stated at the NTLG CGT Sub-committee meeting on 1 December 1993, it is the Tax Office view that section 160ZZS, by its terms, necessarily supplants ordinary legal concepts of beneficial interests in an asset. For the purposes of section 160ZZS of the ITAA 1936, and Division 149 of the ITAA 1997, a shareholder may be treated as having a beneficial interest in the company's assets.

A shareholder has a beneficial interest in an asset of the company if:

• they are entitled to receive a capital distribution from the company; and

• they are entitled to receive ordinary income that may be derived from the asset.

Before the demerger, the ultimate owners of the assets of Company I were the shareholders of Company H. Following the demerger, the ultimate owners of Company I's assets (i.e. the shareholders of Company H) obtain a direct ownership interest in the Company I shares and their ultimate ownership percentage does not change. Therefore, subdivision 149‐B of the ITAA 1997 does not apply and the pre‐CGT assets in Company I will retain their pre‐CGT status following the demerger of Company I by Company H.

7. Section 45B

Section 45B of the ITAA 1936 is an integrity measure that was introduced to ensure that certain payments that are paid in substitution for dividends are treated as dividends for taxation purposes (paragraph 45B(1)(a) of the ITAA 1936). Broadly, it can apply where the following requirements are met (subsection 45B(2) of the ITAA 1936):

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

A demerger benefit is defined in subsection 45B(4) of the ITAA 1936 to include "a company provides the person with ownership interests in that or another company".

Since Company H is providing its shareholders with ownership interests in Company I, a demerger benefit is being provided to the shareholders of Company H.

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

A "tax benefit" is defined with reference to whether an amount of tax payable is less than, or payable later than, what would have been payable if the demerger benefit had instead been a dividend (subsection 45B(9)).

The Company H shareholders will not have any tax liability under the proposed demerger. Therefore, their tax payable under the proposed demerger is less than what it would have been had they received a dividend.

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 (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit.

The Commissioner is required to consider the relevant circumstances (as outlined in subsection 45B(8) of the ITAA 1936) of the scheme to determine whether it could be concluded that entities that 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 the relevant taxpayer to obtain a tax benefit (as defined in subsection 45B(9) of the ITAA 1936). On the basis of the information surrounding the demerger, the Commissioner has formed the view that any benefits provided to the relevant taxpayer will not be made for a more than an incidental purpose of enabling a taxpayer to obtain a tax benefit.

Therefore, section 45B of the ITAA 1936 will not apply to the scheme.

8. Division 7A

Section 109RA of the ITAA 1936 states that Division 7A does not apply to a demerger dividend to which section 45B of the ITAA 1936 does not apply. As determined previously section 45B of the ITAA 1936 does not apply to the demerger dividend, therefore section 109RA does not apply.

9. Dividend stripping

Under paragraph 177E(1)(f) of the ITAA 1936, a taxpayer is taken to have obtained a tax benefit if the scheme is a dividend stripping scheme in terms of section 177E of the ITAA 1936.

The conditions that will attract the operation of section 177E of the ITAA 1936 are outlined in paragraphs 177E(1)(a) through to (d) of the ITAA 1936. These are:

• there must be a scheme by way of or in the nature of dividend stripping or having substantially the same effect as a dividend stripping scheme by way of disposal of property of a company,

• in the opinion of the Commissioner the disposal of the property represents a distribution of profits of the company,

• whether the payment of a dividend out of profits immediately before the scheme was entered into would, or might reasonably be expected to, have included an amount in the assessable income of any taxpayer, and

• the scheme was entered into after 27 May 1981.

There is no precise legal meaning of the term 'dividend stripping'. Income tax ruling IT 2627 discusses the application of Part IVA to dividend stripping arrangements, and says at paragraph 9:

However, it can be said that in its traditional sense a dividend stripping scheme would include one where a vehicle entity (the stripper) purchases shares in a target company that has accumulated or current years' profits that are represented by cash or other readily-realisable assets. The stripper pays the vendor shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company.

The common characteristics of a scheme by way of dividend stripping include (Lawrence v FCT 2008 ATC 20-052):

1. a target company with substantial undistributed profits creating a potential tax liability either for the company or its shareholders.

2. the sale or allotment of shares in the target company to another party

3. the payment of a dividend to the purchaser or allottee of the shares out of the target company's profits

4. the purchaser escaping Australian income tax on the dividend

5. the vendor shareholders receiving a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers.

If the scheme is not a scheme by way of dividend stripping, it may be a scheme having substantially the effect of a scheme by way of dividend stripping.

Before a taxpayer can determine whether a scheme has substantially the effect of a scheme by way of dividend stripping, the taxpayer needs to determine the effect of a scheme by way of dividend stripping. This requires the taxpayer to formulate a notional scheme having the effect of a scheme by way of dividend stripping.

It is not considered that the scheme proposed is one by way of or in the nature of dividend stripping or having substantially the same effect as a dividend stripping scheme. Consequently, it is not considered that section 177E of the ITAA 1936 has any application in relation to the current arrangement.

10. Part IVA

Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances if a taxpayer obtains a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. Part IVA is a provision of last resort.

In order for Part IVA to apply, the following requirements must be satisfied:

• There must be a scheme as defined by section 177A of the ITAA 1936.

• There must be a tax benefit as defined by section 177C of the ITAA 1936, obtained in connection with the scheme

• The scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit.

Scheme

The definition of scheme in section 177A is very broad and includes any agreement, arrangement, plan or proposal.

The proposed arrangement outlined in the facts, including the subsequent liquidation of Company H, will be a scheme within the meaning of a scheme in section 177A of the ITAA 1936.

Tax benefit

The anti-avoidance provisions only apply where there is a tax benefit from the scheme. Under section 177C of the ITAA 1936 a tax benefit received in relation to a scheme is any of the following four amounts:

• An amount that was not included in the assessable income of the taxpayer, where that amount would have been included, or might reasonably be expected to be included, in the assessable income of the taxpayer if the scheme had not been entered into.

• An amount for a deduction being allowable to the taxpayer, where that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into.

• An amount of a capital loss being incurred by the taxpayer, where that amount would not have been, or might reasonably be expected not to have been, incurred by the taxpayer if the scheme had not been entered into.

• An amount of a foreign income tax offset being allowable to the taxpayer, where that foreign income tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into.

The Commissioner is required to consider the relevant circumstances of the scheme to determine whether it could be concluded that entities that 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 the relevant taxpayer to obtain a tax benefit. On the basis of the information surrounding the demerger, the Commissioner has formed the view that any benefits provided to the relevant taxpayer will not be made for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit.

Because the proposal will not result in a tax benefit within the meaning of section 177C of the ITAA 1936, Part IVA of the ITAA 1936 will not apply.

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