Edited version of your written advice

Authorisation Number: 1012867009874

Date of advice: 27 August 2015

Ruling

Subject: Transfer of assets due to marriage breakdown

Question 1

Does Division 126 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to allow the Trustee of the White Unit Trust (the Unit Trust) to disregard any capital gain realised from the transfer of Blue Pty Ltd (Blue) shares to Mr Yellow?

Answer

Yes

Question 2

Will the transfer of the Blue shares to Mr Yellow from the Trustee of the Unit Trust result in a deemed dividend being included in Mr Yellow's assessable income pursuant to Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 3

Will the transfer of Blue shares to Mr Yellow from the Trustee of the Unit Trust result in an amount being included in the assessable income pursuant to section 99B of the ITAA 1936?

Answer

No

Question 4

Will capital gains tax (CGT) event E4 happen when the Trustee of the Unit Trust transfers the Blue shares to Mr Yellow for nil consideration?

Answer

No

Question 5

Will Red Pty Ltd (Red) be eligible to disregard any capital gain realised from the transfer of the Blue shares to Mr Yellow pursuant to Division 126 of the ITAA 1997?

Answer

Yes

Question 6

Will the market value of the Blue shares transferred from Red to Mr Yellow be included in Mr Yellow's assessable income as a dividend pursuant to section 44 of the ITAA 1936?

Answer

Yes

Question 7

If an amount is included in Mr Yellow's assessable income pursuant to section 44 of the ITAA 1936, will the dividend be frankable?

Answer

Yes

Question 8

If the amount is not assessable to Mr Yellow pursuant to section 44 of the ITAA 1936, will the market value of the Blue shares be included in Mr Blue's assessable income pursuant to section 109C?

Answer

No

Question 9

If the amount is included in Mr Yellow's assessable income pursuant to section 109C of the ITAA 1936, is the dividend frankable pursuant to section 109RC?

Answer

No, however the amount will be frankable pursuant to section 202-40 of the ITAA 1997

Question 10

Will Mr Yellow be eligible to disregard any capital gain realised from the transfer of his Red shares to Mrs Yellow pursuant to Division 126 of ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Years ended 30 June 2015 to 30 June 2017

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Background

Mr Yellow and Mrs Yellow are married. Joe Yellow and Jane Yellow are the children of Mr and Mrs Yellow.

1. Mr and Mrs Yellow own and control a number of companies and trusts in their family group as follows:

Red Pty Ltd
Shareholder	No of shares	Class of shares
Mr Yellow	X	Y
	X	Y
Mrs Yellow	X	Y
	X	Y
Joe Yellow	X	Y
Jane Yellow	X	Y

White Unit Trust (the Unit Trust)
Shareholder	No of units	Class of units
Red	X	ordinary
Mr Yellow	X	ordinary
Mrs Yellow	X	ordinary

Blue Pty Ltd
Shareholder	No of shares	Class of shares
Trustee for UnitTrust	Z	Y
	Z	Y
	Z	Y
Mr Yellow	Z	Y
Mrs Yellow	Z	Y

2. The Unit Trust is an Australian resident trust.

3. The taxpayers state that Red acquired its Blue shares in a number of tranches, the last being in the early 2000's.

4. The taxpayers further state that the Unit Trust acquired the Blue shares for nominal consideration in the late 1980's. They also state that the Blue shares held by the Unit Trust are not trading stock in the hands of the Unit Trust.

5. In the 1980's, Red acquired X units in the Unit Trust from an unrelated third party. The remaining X units were acquired by Red from an unrelated third party in the early 2000's. Consequently, Red did not make any payments to the Unit Trust in to become a unitholder nor has there been any loan or payment from Red to the Unit Trust.

6. You state that the Unit Trust does not have any unpaid present entitlements (UPEs) owing to private companies.

Proposed changes in ownership of Blue and Red

7. Mr and Mrs Yellow are currently negotiating the terms of settlement for the dissolution of their marriage. It has been determined that to give effect to the separation of matrimonial assets, the ownership of the entities in their family group should be divided between Mr and Mrs Yellow under the terms of family consent orders.

a. A family consent order is a written agreement that is approved by a court and has the same effect as a court order made by a judicial officer after a court hearing.

8. It is proposed that family consent orders will require the Trustee of the Unit Trust and Red to transfer all their shares in Blue to Mr Yellow for nil consideration resulting in Mr Yellow becoming the sole shareholder of Blue.

9. Similarly, it is proposed that family consent orders will require Mr Yellow to transfer all his shares in Red to Mrs Yellow for nil consideration.

10. The taxpayers claim that:

a. Mr and Mrs Yellow have agreed to the above proposed transfer of ownership having regard to the economic values of the entities and the emotional ties to each of the underlying assets, and

b. no regard to Mr and Mrs Yellow's interests in the Unit Trust was made in determining the manner in which the matrimonial assets would be divided.

11. The taxpayers explain that after the proposed transfer of Blue shares from Red to Mr Yellow, Red's assets will be greater than the sum of its liabilities and paid up capital. For this reason, the taxpayers consider that the transfer of the Blue shares to Mr Yellow will be made out of Red's profits.

Relevant legislative provisions

Section 104-5 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-70 of the Income Tax Assessment Act 1997

Division 126 of the Income Tax Assessment Act 1997

Subsection 126-15(1) of the Income Tax Assessment Act 1997

Section 202-40 of the Income Tax Assessment Act 1997

Section 202-45 of the Income Tax Assessment Act 1997

Subsection 6(1) of the Income Tax Assessment Act 1936

Section 44 of the Income Tax Assessment Act 1936

Section 97 of the Income Tax Assessment Act 1936

Section 99A of the Income Tax Assessment Act 1936

Section 99B of the Income Tax Assessment Act 1936

Section 99C of the Income Tax Assessment Act 1936

Division 7A of the Income Tax Assessment Act 1936

Subdivision EA of Division 7A of the Income Tax Assessment Act 1936

Reasons for decision

Question 1:

Does Division 126 of the ITAA 1997 apply to allow the Trustee of the Unit Trust to disregard any capital gain realised from the transfer of shares to Mr Yellow?

SAME ASSET ROLL-OVERS FOR MARRIAGE OR RELATIONSHIP BREAKDOWNS

12. Part 3-1 and Part 3-3 of the ITAA 1997 provides for the taxation consequences of CGT events to CGT assets acquired after 20 September 1985.

13. Section 104-5 of the ITAA 1997 sets out a list of CGT events. CGT event A1 is the disposal of a CGT asset pursuant to subsection 104-10(1). Subsection 104-10(2) states that a taxpayer will dispose of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

14. Subsection 126-15(1) of the ITAA 1997 outlines the circumstances in which there will be a roll-over for a CGT event involving a company or trustee (the transferor) and the spouse of an individual (the transferee) broadly as a result of marriage or relationship breakdowns. These circumstances include, but are not limited to, if the transfer is due to:

a. a court order under the Family Law Act 1975 (Family Law Act) or under a State, Territory or foreign law relating to relationship breakdowns of spouses

b. a maintenance agreement approved by a court under section 87 of the Family Law Act or a corresponding agreement approved by a court under a corresponding foreign law

c. something done under:

i. a financial agreement made under Part VIIIA of the Family Law Act that is binding because of section 90G of that Act or a corresponding written agreement that is binding because of a corresponding foreign law

ii. a financial agreement made under Part VIIIAB of the Family Law Act that is binding because of section 90UJ of that Act or a corresponding written agreement that is binding because of a corresponding foreign law

iii. an award made in arbitration in accordance with section 13H of the Family Law Act or a corresponding written agreement that is binding because of a corresponding foreign law, and

iv. a written agreement that is binding as a result of State or Territory law or foreign law relation to relationship breakdown and, because of that law, the court is prevented from making an order about matters to which the agreement applies or that is inconsistent with the terms of the agreement.

15. However, the roll-over is only available to those CGT events listed in subsection 126-5(2) of the ITAA 1997, which includes event A1. Further, roll-over is not available where the CGT asset is trading stock of the transferor, as provided by paragraph 126-5(3)(a).

16. Subsection 125-5(4) of the ITAA 1997 provides that the capital gain or loss made by the transferor is disregarded.

Application to your circumstances

17. You state that the family consent order will require the Trustee of the Unit Trust to transfer all its Blue shares to Mr Yellow resulting in the company having the following shareholding:

Blue
Shareholder	No of shares	Class of shares
Mr Yellow	5	A
	4	B
	20	C
Red	4	C

18. As the Unit Trust acquired the Blue shares for nominal consideration in 1988, the shares were acquired after 20 September 1985 and are CGT assets to which Part 3-1 or Part 3-3 of the ITAA 1997 may apply. Specifically, CGT event A1 will be triggered when the Trustee of the Unit Trust disposes of its shares in Blue and subsection 126-5(2) will be satisfied.

19. You state that the family consent orders will satisfy one of the requirements of paragraphs 126-15(1)(a) to (f) of the ITAA 1997. The Blue shares are also not trading stock, thereby satisfying subsection 126-5(3). As the transfer of the shares meets all the necessary requirements, the Trustee of the Unit Trust will have roll-over relief available to it pursuant to subsection 126-5(4) and the capital gain or loss from the disposal of the Blue shares can be disregarded by the Trustee.

Question 2:

Will the transfer of the Blue shares to Mr Yellow from the Trustee of the Unit Trust result in a deemed dividend being included in his assessable income pursuant to Division 7A of the ITAA 1936?

DISTRIBUTIONS TO ENTITIES CONNECTED WITH A PRIVATE COMPANY - DEEMED DIVIDENDS

20. Division 7A of Part III of the ITAA 1936 (Division 7A), comprising of sections 109B to 109ZE, is an integrity measure aimed at ensuring that profits of a private company are not effectively received by its shareholders in non-dividend form. Division 7A provides for certain amounts paid on or after 4 December 1997 to entities connected with a private company to be taken to be dividends and assessed under section 44 of the ITAA 1936.

21. The general provisions of Division 7A at Subdivision B, comprising of sections 109B to 109F, apply to treat as dividends amounts paid or lent, or debts forgiven by a private company to a shareholder in a private company or an associate of such a shareholder, unless they come within specified exclusions.

Definition of a 'private company'

22. Section 6(1) of the ITAA 1936 states that the meaning of the term 'private company' is that given in subsection 103A(1). Subsection 103A(1) defines private company to be a 'company [that] is not a public company in relation to the year of income.' According to subsection 103A(2), a public company includes:

a. a company whose shares were listed for quotation on a stock exchange at the last day of the income year

b. a co-operative company, mutual life assurance company or friendly society dispensary

c. a company that has not been carried on for the purpose of profit or gain to its members and was prohibited by its constitution from making a distribution to its members

d. a government body or a company controlled by a government body, and

e. a subsidiary of a public company.

Application to your circumstances

23. The Unit Trust is not a company and therefore does not does not satisfy the requirements of subsection 103A(1) of the ITAA 1936.

INTERPOSED ENTITY PROVISIONS OF DIVISION 7A

24. The interposed entity provisions of Division 7A at Subdivision E comprise of sections 109T to 109X of the ITAA 1936. These sections provide that a private company may be taken to have paid a dividend to a shareholder in the private company or an associate of such a shareholder (the target entity) if an entity interposed between the private company and the target entity makes a payment or loan to the target entity under an arrangement involving the private company. Such an amount is taken to be a dividend that is assessable income of the shareholder or shareholder's associate under section 44.

Payments and loans through interposed entities

25. Subsection 109T(1) of the ITAA 1936 provides that a private company is taken to have made a payment or loan to a target entity for the purposes of Division 7A if:

a. the private company makes a payment or loan to an entity (the first interposed entity)

b. a reasonable person would conclude that the private company made the payment or loan solely or mainly as part of an arrangement involving a payment or loan to a target entity, and

c. either:

i. the interposed entity then makes a payment or loan to the target entity, or

ii. another entity interposed between the private company and the target entity makes a payment or loan to the target entity.

26. In relation to what will constitute a payment, subsection 109C(3) of the ITAA 1936 provides that a payment to an entity is:

(a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and

(b) a credit of an amount to the extent that it is:

(i) to the entity; or

(ii) on behalf of the entity; or

(iii) for the benefit of the entity; and

(c) a transfer of property to the entity.

Application to your circumstances

27. In order for the interposed entity provisions of Division 7A of the ITAA 1936 to apply in your circumstances, it is necessary for all the elements in subsection 109T(1) to be satisfied. Specifically, this means that the following would need to occur:

a. Blue and/or Red make a payment or loan to the Unit Trust (the interposed entity)

b. a reasonable person would conclude that Blue and/or Red made the payment or loan to the Unit Trust solely or mainly as part of an arrangement involving a payment or loan to Mr Yellow, and

c. the Unit Trust makes a payment or loan to Mr Yellow.

28. Although the proposed transfer of Blue shares to Mr Yellow by the Unit Trust is a transfer of property and is considered a payment pursuant to paragraph 109C(3)(c) of the ITAA 1936, the remaining elements of subsection 109T(1) will not be satisfied. In particular, you state that Blue and/or Red will not make a loan or payment to the Unit Trust. Nor has any such loan or payment been made in the past. Based on this, paragraph 109T(1)(a) will not be satisfied.

29. Further, you state that:

a. the transfer of the Blue shares to Mr Yellow will be brought about for the purposes of separation matrimonial assets after a marriage breakdown

b. had the marriage of Mr and Mrs Yellow not broken down, the transfer of Blue shares would not have been contemplated, and

c. the transfer of the Blue shares was not contemplated at the time Red acquired units in the Unit Trust or when the Unit Trust acquired the shares in Blue.

30. Due to the above factors, it is not considered that a reasonable person would conclude that the arrangement is one that has been entered into solely or mainly for the purpose of making a loan or payment to Mr Yellow. As such, all the requirements for subsection 109T(1) of the ITAA 1936 to be satisfied are not present in your circumstances.

Unpaid present entitlements

31. Broadly, Subdivision EA of Division 7A of the ITAA 1936 provides that a shareholder (or associate of a shareholder) of a private company may be deemed to have received a dividend if:

a. a private company has a UPE to trust income

b. a trustee makes a payment to a shareholder (or an associate of a shareholder) of a private company, and

c. the payment discharges or reduces the amount of the UPE of the private company.

Application to your circumstances

32. You state that the Unit Trust does not have any UPEs outstanding to any private companies. As the transfer of the Blue shares to Mr Yellow by the Unit Trust does not discharge or reduce a UPE, section 109XA of the ITAA 1997 is not satisfied.

Question 3:

Will the transfer of Blue shares to Mr Yellow from the Trustee of the Unit Trust result in an amount being included in his assessable income pursuant to section 99B of the ITAA 1936?

RECEIPT OF TRUST INCOME NOT PREVIOUSLY SUBJECT TO TAX

33. Section 99B of the ITAA 1936 applies to include the income of a trust in the assessable income of a trust beneficiary in certain circumstances. Subsection 99B(1) provides a general rule that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust estate or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

34. However subsection 99B(2) of the ITAA 1936 provides for the amount of assessable income to be reduced by:

a. an amount that represents the corpus of the trust estate

b. any amount that, had it been derived by a resident taxpayer, would not have been the taxpayer's assessable income in that year

c. an amount that is non-assessable non-exempt income of the beneficiary because of section 802-17 of the ITAA 1997

d. an amount that has been included in the assessable income of the beneficiary pursuant to section 97 of the ITAA 1936

e. an amount in respect of which the trustee of the trust estate is or has been assessed and liable to pay tax in pursuance of sections 98, 99, or 99A of the ITAA 1936

f. an amount that is or has been included in the assessable income of any taxpayer other than a company under section 102AAZD of the ITAA 1936

g. where the beneficiary is a company, an amount that is or has been included in the assessable income of the beneficiary under section 10AAZD of the ITAA 1936.

35. Further guidance on the operation of sections 99B of the ITAA 1936 is provided in the Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No. 5) 1978 which introduced sections 99B and 99C. This states that:

…section 99B will require the inclusion in a beneficiary's assessable income of amounts paid to or applied during a year of income for the benefit of a resident beneficiary where that amount represents trust income of a class which is taxable in Australia but which has not previously been subject to Australian tax in the hands of either the beneficiary or the trustee. It will normally apply where accumulated foreign-source income of a non-resident trust estate…is distributed to a resident beneficiary.

36. Section 99B of the ITAA 1936 is intended to ensure that income accumulated by a foreign trust is brought to tax when distributed to a resident beneficiary. For example, a non-resident trust with resident beneficiaries derives interest income which is accumulated and becomes part of the trust capital. As no beneficiary is entitled to the trust income, section 97 cannot apply. Further section 99A cannot apply because the trustee is a non-resident and the income is foreign sourced. Accordingly section 99B will apply when the amount is distributed.

37. While subsection 99B(2) provides an exclusion for payments from trust corpus, that exclusion does not apply to the extent the payment is attributable to an amount that, had it been derived by a resident taxpayer, would have been included in his or her assessable income. The exception raises questions regarding the characteristics of the hypothetical resident taxpayer.

Application to your circumstances

38. Mr Yellow and the Unit Trust are Australian residents to which subsection 99B(1) of the ITAA 1936 may apply in relation to the transfer of the Blue shares if the conditions in subsection 99B(2) are not satisfied. Specifically, of relevance to your circumstances are paragraphs 99B(2)(a) and (b) which provide that the assessable income pursuant to subsection 99B(1) will be reduced by amounts representing corpus of the trust and by amounts, that had it been derived by a resident taxpayer, would not have been included in that taxpayer's assessable income.

39. As the Blue shares are property of the Unit Trust that is set aside to produce income, the shares represent corpus of the Trust. Paragraph 99B(2)(a) is thereby satisfied such that any potential application of section 99B is reduced by the amount of corpus represented by the shares. Furthermore, as explained at paragraphs 18 and 19 above, the Trustee of the Unit Trust will have roll-over relief available to it pursuant to subsection 126-5(4) of the ITAA 1997 such that the capital gain or loss from the disposal of the Blue shares can be disregarded. As a result, the Trustee of the Unit Trust is not required to include an amount in its assessable income as a result of the disposal of the shares and therefore paragraph 99B(2)(b) is also satisfied and section 99B does not apply to the Unit Trust or Mr Yellow in relation to the transfer of the Blue shares.

40. Furthermore, it is arguable whether section 99B of the ITAA 1936 applies to a resident Trustee. The EM which introduced the provision, together with other sections adjacent to section 99B, makes it clear that the provision is intended to primarily apply where accumulated foreign-source income of a non-resident trust estate is distributed to a resident beneficiary. As the Unit Trust is a resident taxpayer, it is arguable whether section 99B could apply to it. In any event, and for the reasons explained in paragraphs 40 and 41, section 99B does not apply to the Unit Trust or Mr Yellow in relation to the transfer of the Blue shares.

Question 4

Will CGT event E4 happen when the Trustee of the Unit Trust transfers the Blue shares to Mr Yellow for nil consideration?

CAPITAL PAYMENT FOR TRUST INTEREST: CGT EVENT E4

41. Section 104-70 of the ITAA 1997 provides that CGT event E4 will happen if a trustee makes a payment to a unit holder in relation to their interest in the trust and the amount of the payment is not included in the beneficiary's assessable income.

Application to your circumstances

42. It is proposed that family consent orders will require the Trustee of the Unit Trust to transfer all its shares in Blue to Mr Yellow for nil consideration. That is, although Mr Yellow will receive a payment by way of the shares, the transfer is not in respect of his unit holding but as a result of the breakdown of his marriage. Consequently, the requirements in section 104-70 of the ITAA 1997 will not be satisfied and CGT event E4 will not occur.

Question 5

Will Red be eligible to disregard any capital gain realised from the transfer of the Blue shares to Mr Yellow pursuant to Division 126 of the ITAA 1997?

SAME ASSET ROLL-OVERS FOR MARRIAGE OR RELATIONSHIP BREAKDOWNS

43. As explained in paragraphs 17 to 19, section 126-15 of the ITAA 1997 provides CGT roll-over relief for a company or trustee (the transferor) and the spouse of an individual (the transferee) broadly as a result of marriage or relationship breakdowns.

Application to your circumstances

44. It is proposed that family consent orders will require Red to transfer all its shares in Blue to Mr Yellow for nil consideration resulting in Mr Yellow becoming the sole shareholder of Blue. You state that the family consent order will satisfy one of the requirements of paragraphs 126-15(1)(a) to (f) of the ITAA 1997.

45. As Red acquired the Blue shares in a number of tranches, the last of which being in early 2000, the shares were acquired after 20 September 1985 and are CGT assets to which Part 3-1 or Part 3-3 of the ITAA 1997 may apply. Specifically, CGT event A1 will be triggered when Red disposes of its shares in Blue.

46. You state that the family consent orders will satisfy one of the requirements of paragraphs 126-15(1)(a) to (f) of the ITAA 1997. The Blue shares are also not trading stock, thereby satisfying subsection 126-5(3). Consequently, Red will have roll-over relief available to it pursuant to subsection 126-5(4) and the capital gain or loss from the disposal of the Blue shares can be disregarded by the company.

Question 6

Will the market value of the Blue shares transferred from Red to Mr Yellow be included in Mr Yellow's assessable income as a dividend pursuant to section 44 of the ITAA 1936?

DIVIDENDS

47. Section 44 of the ITAA 1936 specifically includes dividends in a taxpayer's assessable income. Paragraph 44(1)(a) provides that the assessable income of a resident shareholder in a company includes:

(i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

(ii) all non-share dividends paid to the shareholder by the company…

48. Dividends are defined in subsection 6(1) of the ITAA 1936 as including:

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

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

49. Paragraph 4 of Taxation Ruling TR 2014/5 Income Tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate) (TR 2014/5) explains that a transfer of property by a private company to a shareholder that is made in compliance with a section 79 of the Family Law Act will be an ordinary dividend to the extent that it is paid out of the private company profits. The transfer will be assessable income of the shareholder pursuant to section 44 of the ITAA 1936.

50. TR 2014/5 further explains at paragraph 69 that the characterisation of the transfer of property as a dividend is not altered by the fact that it is made to give effect to an order by the Family Court. That is, the cause for the directors resolving the make the transfer to the shareholder does not alter its character.

51. The meaning of the term 'out of profits' is not defined in the legislation however there has been judicial consideration of the issue which suggests that:

a. 'profits' implies comparison of the business' performance at two specific points in time, generally separated by an interval of a year, and

b. dividends do not need to be paid out of a profit or dividend fund to be considered to be paid out of profits for the purposes of subsection 44(1) of the ITAA 1936.

52. Further guidance on the meaning of paid out of profits is provided in Taxation Ruling TR 2003/8 Income tax: distributions of property by companies to shareholders - amount to be included as an assessable dividend (TR 2003/8). Specifically, paragraph 8 and 13 state that if the company's assets are greater than its liabilities and share capital immediately after the payment of the dividend, then it will be considered to have been made out of profits.

Application to your circumstances

53. It is proposed that family consent orders will require Red to transfer its shares in Blue to Mr Yellow for nil consideration resulting in Mr Yellow becoming the sole shareholder of Blue. At the time of the transfer, Mr Yellow will be a shareholder of Red, which is expected to maintain substantial accumulated profits.

54. As explained above, a family consent order is a written agreement that is approved by a court and has the same effect as a court order made by a judicial officer after a court hearing. Therefore, the Commissioner's view contained in TR 2014/5 will equally apply to the family consent orders as it would section 79 of the Family Law Act orders.

55. The transfer of Blue shares by Red satisfies the definition of dividend pursuant to subsection 6(1) of the ITAA 1936 in that it is a distribution by Red to its shareholder, Mr Yellow, made by way of a transfer of property. As explained by paragraph 69 of TR 2014/5, the characterisation of this transfer of shares will not be altered by the fact that is made to give effect to a family consent order.

56. You state that Red will have significant profits at the time of the transfer of the Blue shares to Mr Yellow. After the transfer, Red's assets will continue to be greater than the sum of the company's liabilities and paid up capital. Given this, and consistent with judicial view and TR 2003/8, the transfer of these shares will be considered to have been made out of Red's profits.

57. Consistent with paragraph 4 of TR 2014/5, the transfer of Blue shares will be a dividend such that it is included in Mr Yellow's assessable income pursuant to section 44 of the ITAA 1936.

Question 7

If an amount is included in Mr Yellow's assessable income pursuant to section 44 of the ITAA 1936, will the dividend be frankable?

IMPUTATION SYSTEM

58. Division 200 of the ITAA 1997 provides for an imputation system to avoid double taxation at the shareholder level. Broadly, this is achieved by allowing members who receive assessable income from a corporate tax entity to claim a tax offset for tax already paid by the corporate entity. The tax credit paid by the corporate tax entity is known as a franking credit.

59. Section 202-40 of the ITAA 1997 provides that a distribution is a frankable distribution to the extent that it is not unfrankable pursuant to section 202-45.

60. Section 202-45 of the ITAA 1997 explains that the following are unfrankable:

a. distributions by certain corporate tax entities from sources in Norfolk Island

b. where the purchase price on a share buy-back is taken to be a dividend under section 159GZZZP - so much of the purchase price that exceeds what would be the market value of the if the buy-back did not take place

c. a distribution in relation to non-share equity

d. a distribution that is directly or indirectly sourced from a company's share capital account

e. an amount that is unfrankable as a result of sections 215-10 or 215-15

f. an amount that is a dividend as a result of any of the following provisions:

i. Division 7A, unless subsections 109RD(6) or 109RC(2) apply in relation to the amount

ii. section 109, and

iii. section 47A

g. an amount that is unfrankable under section 45 or because of a determination of the commissioner under section 45C

h. a demerger dividend, and

i. a distribution that is unfrankable pursuant to sections 152-125 or 220-105.

Application to your circumstances

61. In order to determine whether the dividend paid by Red to Mr Yellow by way of transfer of Blue shares is frankable pursuant to section 202-40 of the ITAA 1997, it is necessary to consider whether the dividend is unfrankable pursuant to section 202-45. Of relevance to your circumstances is paragraph 202-45(e), being a distribution that is directly or indirectly sourced from Red's share capital. As the transfer of the Blue shares does not represent a transfer of share capital to Mr Yellow, paragraph 202-45(e) is not satisfied. Nor are any of the other paragraphs of section 202-45. Consequently, section 202-40 is satisfied in that the dividend is one which is frankable.

62. This conclusion is supported by paragraph 72 of TR 2014/5 which states that where the shareholder is paid a dividend in compliance with a Family Court order, the dividend will be frankable.

Question 8

If the amount is not assessable to Mr Yellow pursuant to section 44 of the ITAA 1936, will the market value of the Blue shares be included in Mr Yellow's assessable income pursuant to section 109C?

PAYMENTS TREATED AS DIVIDENDS

63. Broadly, section 109C of the ITAA 1936 provides that a private company will be taken to have paid a dividend to an entity if;

a. a payment is made when the entity is a shareholder of the private company (or an associate of such a shareholder), or

b. a reasonable person would conclude that the payment is made because the entity has been such a shareholder or associate at some time.

64. However, section 109L of the ITAA 1997 provides that section 109C will not apply to the extent that the payment made to the entity will be included in their assessable income apart from this Division (as it operates in conjunction with section 44).

Application to your circumstances

65. As explained in paragraphs 53 to 57, the transfer of Blue shares to Mr Yellow is considered a payment of dividends by Red and thereby satisfies section 44 of the ITAA 1997. Given that section 44 does apply to your circumstances, it is not necessary to consider the potential operation of section 109C of the ITAA 1936.

Question 9

If the amount is included in Mr Yellow's assessable income pursuant to section 109C of the ITAA 1936, is the dividend frankable pursuant to section 109RC?

DIVIDEND MAY BE FRANKED IF TAKEN TO BE PAID BECAUSE OF FAMILY LAW OBLIGATION

66. Section 109RC of the ITAA 1997 provides the circumstances in which a payment that is treated as a dividend under section 109C will be frankable, including that the payment is made to give effect of a Family Law obligation.

Application to your circumstances

67. As explained above, the amount included in Mr Yellow's assessable income will be in accordance with section 44 of the ITAA 1997 and will be frankable. Section 109C of the ITAA 1936 will not apply and therefore neither will section 109RC.

Question 10

Will Mr Yellow be eligible to disregard any capital gain realised from the transfer of his Red shares to Mrs Yellow pursuant to Division 126 of ITAA 1997?

SAME ASSET ROLL-OVERS FOR MARRIAGE OR RELATIONSHIP BREAKDOWNS

68. Paragraphs 14 to 18 above explain the circumstances in which there will be roll-over for a CGT event involving a transfer as a result of marriage or relationship breakdown. If the relevant conditions are met, subsection 125-5(4) of the ITAA 1997 provides that the capital gain or loss made by the transferor is disregarded.

Application to your circumstances

69. You state that the family consent order will require Mr Yellow to transfer his Red shares to Mrs Yellow for no consideration.

70. You state that the Red shares are not trading stock in the hands of Mr Yellow and, as a result of subsection 126-5(2) of the ITAA 1997, CGT event A1 will occur at the time of the transfer and subsection 126-5(2) is satisfied.

71. You state that the family consent orders will satisfy one of the requirements of paragraphs 126-5(1)(a) to (f) of the ITAA 1997. The Red shares are also not trading stock, thereby satisfying subsection 126-5(3). As the transfer of the shares meets all the necessary requirements, Mr Yellow will have roll-over relief available to him pursuant to subsection 126-5(4) and the capital gain or loss from the disposal of the Red shares can be disregarded by him.

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