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Edited version of your written advice
Authorisation Number: 1051224652865
Date of advice: 15 May 2017
Ruling
Subject: Part IVA of the ITAA 1936
Question
Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to any residual taxable income retained in the company and taxed at company tax rates?
Answer
No
This ruling applies for the following periods
1 July 2015 to 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
The Company was established to provide a consultancy service, with Person A as the sole director.
Person A commenced consulting via The Company in order to further utilise their skills and to undertake a variety of work with various clients.
The Company has self-assessed as a Personal Services Business (PSB) as it meets the requirements of section 87-20 of the Income Tax Assessment Act 1997 (ITAA 1997) (the unrelated clients test).
All shares in The Company are owned by Person A and their spouse (Person B) as trustees of the Trust.
Person A and Person B and the children are Primary Beneficiaries of the Trust. Other family members and eligible entities are general beneficiaries of the Trust.
The Company after-tax profits will be paid to the shareholder of The Company as dividends, where profits are not retained in the company to meet working capital requirements and acquire plant and equipment, as required.
The retention of taxable income in The Company being taxed at company tax rates. The taxable income of The Company will be determined after payment of all deductible expenses that relate to the business of The Company, including commercial wages to Person A and Person B and superannuation contributions
Estimated residual taxable income for the year ended 30 June 2016 is $60,000.
There is no estimate of the residual taxable income for future years.
The Company was established for the following reasons:
● Person A was eager to pursue commercial gains
● Allow enhanced asset protection, including the ownership of shares via a discretionary trust
● Minimise on-costs to clients, including workers compensation, payroll tax and superannuation
● Tender for contracts, the entity form being was a necessity given the requirements of the industry in respect of contractors
● To be able to work with a variety of clients on a variety of projects
● To have flexible working arrangements and an improved quality of life
● To allow the option of employing staff at a later date to enhance the services that could be offered by The Company.
Person A ceased an employment position after X years of service, creating a new business. Person A's remuneration from The Company would be the lesser of:
● A commercial salary or
● The net taxable income derived by the company after the payment of all deductible expenses, but before a commercial salary.
The retention of taxable income in The Company after the payment of commercial remuneration was not considered a factor in the establishment of The Company.
At the time The Company was established there were no contrived arrangements to minimise tax or split income. The establishment of The Company to conduct the consulting business was based on commercial factors only.
The financial position of Person A will be mainly effected by the ability of The Company to derive consultancy income in excess of a commercial wage.
The financial position of family members would only change if The Company derived a taxable income over and above commercial remuneration levels to Person A and Person B. This would occur through the payment of after tax profits by The Company as dividends to the Trust.
Relevant legislative provisions
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 section 177F
Income Tax Assessment Act 1997 section 86-15
Reasons for decision
Part IVA of the Income Tax Assessment Act 1936 (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.
It is determined that Part IVA would not apply to the arrangement.
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