Edited version of your written advice

Authorisation Number: 1051204641848

Date of advice: 20 March 2017

Ruling

Subject: Strata Title Subdivision

Question 1

Will the distribution of the strata titles to Company Y be considered a return of capital and, if so, will there be any assessable dividend component of the distribution pursuant to paragraph (d) of the definition of dividend in section 6(1) of the ITAA 1936?

Answer

No

Question 2

Will the cancellation of the shares, at the point of deregistration, be a CGT event for Company Y and, if so, will the rollover provisions contained in section 124-190 of the ITAA 1997 apply?

Answer

Yes

Question 3

Will any value of the strata titles being transferred to Company Y be considered a deemed dividend under section 47(1) of the ITAA 1936 and, if so, will it be a frankable dividend?

Answer

No

Question 4

Will the cancellation of shares in consideration of the transfer of the Lots be considered a share buyback for the purposes of Division 16K of the ITAA 1936 and, if so, will it be a frankable dividend?

Answer

No

Question 5

Will subdivision 204-D of the ITAA 1997 apply to Company Y?

Answer

No

Question 6

Will section 45 of the ITAA 1936 apply to Company Y?

Answer

No

Question 7

Will section 45A of the ITAA 1936 apply to Company Y?

Answer

No

Question 8

Will section 45B of the ITAA 1936 apply to Company Y?

Answer

No

Question 9

Will the transfer of strata titles to Company Y result in a deemed dividend under section 109C of the ITAA 1936?

Answer

No

Question 10

Will section 177EA of the ITAA 1936 apply to Company Y?

Answer

No

Question 11

Will Part IVA of the ITAA 1936 apply to Company Y?

Answer

No

This ruling applies for the following periods:

1 July 2017 - 30 June 2018

The scheme commenced on:

1 July 2016

Relevant facts and circumstances

Company X acquired a property pre CGT. This is its only asset.

Company X's constitution had the effect of identifying and dividing the capital into groups.

Shares were issued for flats and car spaces.

Shareholders are not deemed to be tenants of the company but have all of the rights and privileges of an owner.

Company Y purchased shares for flats and the corresponding car spaces, including a purchase which occurred prior to 20 September 1985.

Transaction

Company X intends to subdivide the property by converting to strata title.

It was voted unanimously on a change of corporate structure to an Owners Corporation.

The transaction will result in Company X transferring the freehold title of the flats and car parks to Company Y in direct proportion to their shareholding.

On registration, an Owners Corporation will be created of which Company Y will be a member. The Owners Corporation will become registered owner of the common property.

Company X will account for the distribution as a debit to equity.

Company X will apply to ASIC to be voluntarily deregistered under section 601AA(1) and (2) of the Corporations Act 2001 (CA) using Form 6010. The provisions provided in sections 257A to 257H of the CA in regards to share buy-backs do not apply.

Company Y's shares in Company X will be cancelled upon its deregistration.

No other distributions to shareholders will occur and there are no residual assets or liabilities.

Company Y will exercise rollover relief in accordance with section 124-190 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6(1)

Income Tax Assessment Act 1936 Section 6(4)

Income Tax Assessment Act 1936 Section 45

Income Tax Assessment Act 1936 Section 45A

Income Tax Assessment Act 1936 Section 45B

Income Tax Assessment Act 1936 Section 47(1)

Income Tax Assessment Act 1936 Division 16K

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Section 159GZZZK

Income Tax Assessment Act 1936 Section 177EA

Income Tax Assessment Act 1936 Subsection 47(1A)

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 1997 Section 124-10

Income Tax Assessment Act 1997 Section 124-190

Income Tax Assessment Act 1997 Subsection 124-190(1)

Income Tax Assessment Act 1997 Subsection 124-190(3)

Income Tax Assessment Act 1997 Paragraph 108-5(1)(b)

Income Tax Assessment Act 1997 Subsection 104-25(1)

Income Tax Assessment Act 1997 Subsection 104-25(4)

Income Tax Assessment Act 1997 Subdivision 204-D

Income Tax Assessment Act 1997 Section 204-30

Income Tax Assessment Act 1997 Subsection 204-30(1)

Income Tax Assessment Act 1997 Paragraph 204-30(1)(a)

Income Tax Assessment Act 1997 Paragraph 204-30(1)(b)

Income Tax Assessment Act 1997 Paragraph 204-30(1)(c)

Reasons for decision

Question 1

Summary:

The distribution of strata titles to Company Y will not be considered a return of capital and there will be no assessable dividend component of the distribution pursuant to paragraph (d) of the definition of dividend in section 6(1) of the ITAA 1936.

Detailed reasoning

Section 6(1) of the ITAA 1936 defines dividend as:

(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;

(c) … 

but does not include:

(d) 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; or

…

Note:

Subsection (4) sets out when paragraph (d) of this definition does not apply.

The definition of a dividend in paragraph (d) excludes property distributed by a company to a shareholder where the value of the property is debited against an amount standing to the credit of the share capital account of the company. However, in cases where the value exceeds the amount debited to the share capital account, this distribution of capital is a dividend.

Subsection 6(4) of the ITAA 1936 goes on to explain, that a company cannot distribute a tax free payment by raising share capital from some shareholders and making a tax-preferred capital distribution to other shareholders.

In this case Company X will only provide the flat strata title to the shareholder who holds the corresponding shares to the flat (and car parking space).

Company Y owns the rights to occupy flats. Accordingly they will be provided with the strata titles to these flats and corresponding car parking spaces.

The recorded entry in Company X's accounting records will include a debit in an equity account.

All shares, including Company Y's shares will be cancelled once deregistration of Company X occurs.

No other payments or distributions to shareholders will occur in relation to this scheme.

Therefore, Company Y's acquisition of strata unit titles in exchange for the cancellation of its shares is not considered a dividend under section 6(1)(d) of the ITAA 1997.

Question 2

Summary

The cancellation of Company Y's shares, through the deregistration of Company X, will be a CGT event for Company Y and the rollover provisions contained in section 124-190 of the ITAA 1997 will apply.

Detailed Reasoning

A legal and equitable right is considered a CGT asset in accordance with paragraph 108-5(1)(b) of the ITAA 1997. A share is considered a legal equitable right and is therefore a CGT asset.

Subsection 104-25(1) of the ITAA 1997 discusses when ownership of an intangible CGT asset ends by the asset expiring, being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. This is CGT event C2.

Subsection 104-25(4) of the ITAA 1997 provides an exception to disregard a capital gain or loss to a CGT asset when it was acquired before 20 September 1985.

Strata title conversion is provided for in section 124-190 of the ITAA 1997. Rollover relief is available under subsection 124-190(1) where it states:

You can choose to obtain a roll-over if:

(a) you own property that gives you a right to occupy a unit in a building; and

(b) the building's owner subdivides it into stratum units; and

(c) the owner transfers to you the stratum unit that corresponds to the unit you had the right to occupy just before the subdivision.

Note 1:

The roll-over consequences are set out in section 124-10. The original asset is the property that gave you the right to occupy a unit in the building. The new asset is the stratum unit.

Note 2:

Section 103-25 tells you when you have to make the choice.

A stratum unit is defined in subsection 124-190(3) of the ITAA 1997 as a lot or unit …and any accompanying common property.

Through its ownership of shares, Company Y owns the rights to occupy flats at the property. These shares are CGT asset's as they are a legal and equitable right.

This arrangement consists of Company X subdividing the property into strata units which represent each of the flats with associated car parking space and common property to be held by an Owner Corporation. This will be achieved by registering a strata plan. On registering the strata plan, a separate title is created for each lot or each lot and common property.

To be eligible to claim roll-over relief the taxpayer must receive the stratum unit that corresponds to the unit that the taxpayer had the right to occupy immediately before the conversion.

Company Y owns the shares which carry the rights to occupy flats immediately before the conversion.

ASIC will voluntarily deregister Company X once the titles to the new lots are transferred to the shareholders of the company. Company Y will receive title to the flats.

All shares in Company X including Company Y's will be cancelled upon deregistration. This will trigger CGT event C2 for those shares acquired post 20 September 1985.

Regarding the shares acquired by Company Y prior to 20 September 1985, the relevant stratum unit, is treated as having been acquired by Company Y before 20 September 1985 (per subsection 124-10(4) of the ITAA 1997).

Company Y fulfils these rollover conditions and are eligible to obtain rollover relief in accordance with scheme.

Question 3

Summary

The value of the strata titles being transferred to Company Y will not be considered a deemed dividend under section 47(1) of the ITAA 1936

Detailed Reasoning

Subsection 47(1) of the ITAA 1936 provides for certain distributions made by a liquidator to be deemed to be dividends:

Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it.

Subsection 47(1A) of the ITAA 1936 relevantly provides that a reference in subsection 47(1) to 'income derived by the company' includes a reference to:

(a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or

(b) a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 required a net capital gain to be worked out as follows:

Method statement

Step 1.  Work out each capital gain (except a capital gain that is disregarded) that the company made during that year of income. Do so without indexing any amount used to work out the cost base of a CGT asset.

Step 2.  Total the capital gain or gains worked out under Step 1. The result is the net capital gain for that year of income.

Note 1 to section 124-190 of the ITAA 1997 advises:

The roll-over consequences are set out in section 124-10. The original asset is the property that gave you the right to occupy a unit in the building. The new asset is the stratum unit.

Section 124-10 of the ITAA 1997 details the consequences of a rollover and subsection 124-10(3) provides clarification on the cost base of the new asset. In this case the new assets are the strata titles:

There are these consequences (in most cases) if you can obtain a roll-over when your ownership of a CGT asset (the original asset) ends and you acquire one or more CGT assets (the new assets) in a situation covered by this Division….

124-10(2)

A capital gain or a capital loss you make from the original asset is disregarded.

124-10(3)

If you acquired the original asset on or after 20 September 1985, the first element of each new asset's cost base is:

The first element of each new asset's reduced cost base is worked out similarly.

…

124-10(4)

If you acquired the original asset before 20 September 1985, you are taken to have acquired each new asset before that day.

Company X will not provide any other distributions upon wind up, other than the transfer of strata title, immediately after subdivision.

Once completed, Company X will be voluntarily deregistered.

In any case, the net capital gain would be disregarded either on the basis of being pre-CGT or rolled over for those assets acquired after 20 September 1985.

A deemed dividend for the purposes of section 47(1) of the ITAA 1936 does not occur.

Question 4

Summary

The cancellation of Company Y Shares in consideration of the transfer of the strata titles will not be considered a share buyback for the purposes of Division 16K of the ITAA 1936.

Detailed Reasoning

Division 16K of the ITAA 1936 provides for the taxation treatment of share buy-backs.

Section 159GZZZK of the ITAA 1936 describes the type of transaction that is covered by Division 16K. Where a company buys a share in itself from one of its shareholders then, for the purposes of Division 16K:

Company X has advised that the share buy-back provisions provided in sections 257A to 257H of the Corporations Act 2011 do not apply to them and none of the shareholders will derive a dividend upon cancellation of the shares.

In this case the arrangement will result in the cancellation of shares pursuant to the voluntary deregistration of a company. Company X will have no assets and no outstanding liabilities and will apply to ASIC to be voluntarily deregistered under section 601AA(1) and (2) of the Corporations Act 2001 using Form 6010.

For these reasons Division 16K of the ITAA 1936 will not apply to treat the receipt of the strata titles to Company Y as a share buy back.

Question 5

Summary

Subdivision 204-D of the ITAA 1997 will not apply to Company Y.

Detailed Reasoning

Section 204-30 of the ITAA 1997

Subdivision 204-D of the ITAA 1997 was introduced as a specific anti-avoidance provision. It is intended to apply where a company streams dividends so as to provide franking credit benefits to shareholders who benefit most from these credits, in preference to shareholders who would gain either no benefit, or a lesser benefit, from a franked dividend payment.

Section 204-30 of the ITAA 1997 is the key provision. Subsection 204-30(1) of the ITAA 1997 states that:

This section empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that:

(a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions; and

(b) the member would derive a greater benefit from franking credits than another member of the entity; and

(c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.

Section 204-30 of the ITAA 1997 is concerned with whether the other shareholders would have received a lesser benefit, or no benefit, from the franked dividend which was distributed.

Paragraph 204-30(1)(a) of the ITAA 1997

Company Y will not receive an imputation benefit from the transaction.

Paragraph 204-30(1)(b) of the ITAA 1997

The strata titles will be distributed in proportion to their corresponding shareholding. This condition is not met.

Paragraph 204-30(1)(c) of the ITAA 1997

The strata titles will be distributed according to their corresponding shareholding. This condition is not met.

Section 204-30 of the ITAA 1997 will only apply where each of paragraphs (a), (b) and (c) of subsection 204-30(1) of the ITAA 1997 apply. As paragraphs 204-30(b) and (c) do not apply, the requirements of section 204-30(1) have not been met.

Therefore, the Commissioner will not make a determination under section 204-30 of the ITAA 1997 in relation to the intended payment of a franked dividend to Company Y.

Question 6

Summary

Section 45 of the ITAA 1936 will not apply to Company Y.

Detailed Reasoning

Section 45 of the ITAA 1936 is a general anti-avoidance rule which is focused on capital streaming arrangements.

Application of section

45(1)

This section applies in respect of a company that, whether in the same year of income or in different years of income, streams the provision of shares (other than shares to which subsection 6BA(5) applies) and the payment of minimally franked dividends to its shareholders in such a way that:

(a) the shares are received by some shareholders but not all shareholders; and
	(b) some or all of the shareholders who do not receive the shares receive or will receive minimally franked dividends.
	45(2)

…

In this case Company X is providing all shareholders with the strata title right to the flat they had the right to occupy immediately prior to the transaction. The transfers are being distributed in proportion to the rights held. Therefore section 45 of the ITAA 1936 does not apply to Company Y.

Question 7

Summary

Section 45A of the ITAA 1936 will not apply to Company Y.

Detailed Reasoning

Section 45A of the ITAA 1936 applies in circumstances where capital benefits are streamed to certain shareholders (who are advantaged shareholders) who derive a greater benefit from the receipt of capital and it is reasonable to assume that the other shareholders (who are the disadvantaged shareholders) have received or will receive dividends.

Application of section

45A(1)

This section applies in respect of a company that, whether in the same year of income or in different years of income, streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that:

(a) the capital benefits are, or apart from this section would be, received by shareholders (the advantaged shareholders) who would, in the year of income in which the capital benefits are provided, derive a greater benefit from the capital benefits than other shareholders; and

(b) it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received, or will receive, dividends.

However, it does not apply if section 45 applies in relation to the streaming or in the circumstances set out in subsection (5).

…

In accordance with the facts of this case, Company X has advised the transfer of strata titles will be made to shareholders in direct proportion to their rights. As such this transaction does not meet the requirements of section 45A of the ITAA 1936.

Question 8

Summary

Section 45B of the ITAA 1936 will not apply to Company Y.

Detailed Reasoning

Section 45B of the ITAA 1936 applies to arrangements in which capital benefits are provided in substitution for dividends in circumstances where a person enters into the arrangement with a purpose of ensuring that a taxpayer's tax liability is less than it would have been if the capital benefit had been a dividend. Where this section applies, a franking debit may arise if the capital benefit was paid under a scheme to avoid franking debits arising.

Purpose of section

45B(1)

The purpose of this section is to ensure that relevant amounts are treated as dividends for taxation purposes if:

(a) components of a demerger allocation as between capital and profit do not reflect the circumstances of a demerger; or

(b) certain payments, allocations and distributions are made in substitution for dividends.

Application of section

45B(2)

This section applies if:

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

(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; and

(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.

As stated, the application of this subsection applies to capital streaming arrangements in which bonus shares are provided to some shareholders and unfranked or minimally franked dividends are paid to other shareholders.

In this case Company X has confirmed they will transfer the strata titles to the shareholders in accordance with their entitlements. No other distributions will be made to Company Y or any other shareholder. From the information provided Company Y is not receiving capital streaming distributions and 45B of the ITAA 1936 does not apply.

Question 9

Summary

The transfer of strata titles by Company X to Company Y will not result in a deemed dividend to Company Y under section 109C of the ITAA 1936.

Detailed Reasoning

Section 109C of the ITAA 1936 defines a payment for the purposes of Division 7A. A private company that makes a payment to an entity is taken to pay a dividend to that entity if they are a shareholder in the private company (or an associate of the shareholder when the payment is made).

Section 109C(3) includes a payment to an entity where a transfer of property to that entity occurs. Subsection 109C(3)(c) is specific to include the definition of payment as the transfer of prope rty.

In this case, Company X has applied for strata titles for each of the units. Company X will transfer X of these titles to Company Y in accordance with their shareholding.

Whilst this transfer of property could be caught under subsection 109C(3)(c) of the ITAA 1936, the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 3) 1998 (EM) makes it clear that the intent of Division 7A is to capture tax-free distributions of profits.

9.2 The purpose of the amendments is to ensure that private companies will no longer be able to make tax-free distributions of profits to shareholders (and their associates) in the form of payments or loans.

It is considered that this transfer of property is caught by the CGT provisions rather than as a tax free distribution profits from the company. For this reason, it is considered that section 109C of the ITAA 1936 does not apply to Company Y for this transaction.

Question 10

Summary

Section 177EA of the ITAA 1936 does not apply to Company Y.

Detailed Reasoning

Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to a wide range of schemes to obtain a tax advantage in relation to imputation benefits. In essence, it applies to schemes for the disposition of shares or an interest in shares, where a franked distribution is paid or payable in respect of the shares or an interest in shares.

Specifically, subsection 177EA(3) of the ITAA 1936 states that section 177EA applies if:

(a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

(b) either:

(i) a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or

(ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and

(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

(d) except for this section, the person (the 'relevant taxpayer') would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

(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.

On the basis of all the material supplied in this Ruling, it would not be reasonable to conclude that in entering into the scheme Company X demonstrated the necessary objective purpose of securing imputation benefits for shareholders.

Question 11

Summary

Part IVA of the ITAA 1936 will not apply to Company Y.

Detailed Reasoning

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

In broad terms, Part IVA will apply where the following requirements are satisfied:

● there is a scheme (see section 177A)

● a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C)

● the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)).

The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case.

Application to your circumstances

What is being proposed is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with other factors in paragraph 177C(2) of the ITAA 1936, these factors eliminate the scheme from being further considered against the application of Part IVA. Therefore, Part IVA will not apply to this arrangement.

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