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This edited version has been archived due to the length of time since original publication.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

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Edited version of your written advice

Authorisation Number: 1051428368704

Date of advice: 19 September 2018

Ruling

Subject: Dividend stripping

Question 1

Will the proposed transaction be considered:

Answer

(a) No

(b) No

Question 2

Will Part IVA of the ITAA 1936 apply to the proposed transaction?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

New Co may use those funds to make investments, provide loans, or pay dividends to Individual X.

Individual X will not be paid a dividend under the proposed transaction. Dividends may be paid from New Co to Individual X in future income years.

Company X is considered to be an ‘at-risk’ entity for any potential claims made against it. The accumulated profits have built up over many years and form the basis of Company’s cash reserves. Those assets would be at risk in the event of action taken against the company. By paying a dividend to New Co the cash reserves will now be sitting in New Co which would provide a level of protection against claims made on Company X.

New Co will not be undertaking trading activities.

Other matters

All Division 7A of the ITAA 1936 consequences have been considered and will be maintained and satisfied as a result of the proposed transaction

The shares issued in New Co will be ordinary class shares.

Further dividends will be paid in future years from Company X to New Co.

Company X will be funded going forward through development contracts or loans.

All entities are Australian tax residents for tax purposes

No entity covered by the ruling has any tax losses.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 207-155

Income Tax Assessment Act 1997, section 207-145

Income Tax Assessment Act 1936, section 177A

Income Tax Assessment Act 1936, section 177C

Income Tax Assessment Act 1936, section 177E

Income Tax Assessment Act 1936, section 177F

Income Tax Assessment Act 1936, Part IVA

Reasons for decision

Question 1

Will the proposed transaction be considered:

Summary

Detailed reasoning

Section 207-155 of the ITAA 1997 states that:

The threshold condition for the application of section 177E of the ITAA 1936, found in paragraph 177E(1)(a) of the ITAA 1936, is in substantially the same terms to section 207-155 of the ITAA 1997.

The consequences of a scheme being considered a dividend stripping scheme are found in:

Dividend stripping is not a defined term, and it does not have a precise legal meaning. The meaning of dividend stripping is considered in paragraphs 8 to10 of Taxation Ruling IT 2627 Income Tax: Application of Part IVA to Dividend Stripping Arrangements, which state:

Dividend stripping is further considered in Taxation Determination TD 2014/1 Income tax: is the ‘dividend access share’ arrangement of the type described in this Taxation Determination a scheme ‘by way of or in the nature of dividend stripping’ within the meaning of section 177E of Part IVA of the Income Tax Assessment Act 1936? The characteristics of a dividend stripping scheme are listed in paragraph 17 of TD 2014/1, of relevance:

Conclusion on application of section 177E

The proposed transaction does not satisfy all the conditions in paragraphs 177E(1)(a)-(d) of the ITAA 1936. Section 177E therefore does not apply to the proposed transaction.

Conclusion on application of section 207-155

It is considered that a ‘scheme…by way of, or in the nature of dividend stripping’ for the purposes of section 207-155 of the ITAA 1997 bears the same meaning as section 177E. For the same reasons set out above, the proposed transaction is not considered part of a dividend stripping operation under section 207-155.

Question 2

Is the proposed transaction a scheme to which Part IVA of the ITAA 1936 will apply?

Summary

Part IVA of the ITAA 1936 will not apply to the proposed transaction.

Detailed reasoning

A scheme will be one to which Part IVA applies if a taxpayer has obtained a tax benefit in connection with the scheme and it would be concluded that the (objective) dominant purpose of a person who entered into or carried out the scheme (or a part of the scheme) was to obtain a tax benefit (subsection 177D(1)).

As discussed above, a dominant purpose of tax avoidance is not present. Consequently, the proposed arrangement is not a scheme to which Part IVA applies.

As section 177D does not apply, the Commissioner would not be empowered to make a determination would not be made under subsection 177F(1) to cancel any tax benefit that may be obtained under the proposed arrangement.


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