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This edited version has been archived due to the length of time since original publication.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: 1051478166067

Date of advice: 31 January 2019

Ruling

Subject: Dividend access share arrangement

Question 1: Are A Class shares in Company A treated as equity interest under Subdivision 974-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes

Question 2: Are there any tax consequences triggered as a result of the direct value shifting rules under Division 725 of the ITAA 1997 in respect of the A Class shares?

Answer: No

Question 3: Will payments of future dividends on the A Class shares be frankable distributions as defined in section 202-40 of the ITAA 1997?

Answer: Yes

Question 4: Will the dividend streaming provisions contained in Subdivision 204-D of the ITAA 1997 apply to the payment of future dividends on the A Class shares?

Answer: No

Question 5: Will Person A be entitled to a tax offset equal to the franking credits on the future dividends under subsection 207-20(2) of the ITAA 1997?

Answer: Yes

Question 6: Will the dividend stripping rules contained in Subdivision 207-F of the ITAA 1997 and section 177E of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the payment of future dividends on the A Class shares?

Answer: No

Question 7: Will the franking credit benefit trading rules in section 177EA of the ITAA 1936 applies to the payment of future dividends on the A Class shares?

Answer: No

Question 8: Will the payments of future dividends on the A Class shares constitute a scheme to which section 177D of the ITAA 1936 will apply such that the Commissioner will make a determination under section 177F of the ITAA 1936?

Answer: No

This ruling applies for the following period:

1 July 2018 – 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Relevant legislative provisions

Income Tax Assessment Act 1997 section 202-40

Income Tax Assessment Act 1997 section 202-45

Income Tax Assessment Act 1997 Subdivision 204-D

Income Tax Assessment Act 1997 section 204-30

Income Tax Assessment Act 1997 section 207-20

Income Tax Assessment Act 1997 Subdivision 204-F

Income Tax Assessment Act 1997 section 207-145

Income Tax Assessment Act 1997 Division 725

Income Tax Assessment Act 1997 subsection 725-50

Income Tax Assessment Act 1997 Subdivision 974-C

Income Tax Assessment Act 1997 section 974-20

Income Tax Assessment Act 1997 section 974-70

Income Tax Assessment Act 1997 section 974-75

Income Tax Assessment Act 1997 section 974-135

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177E

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 subsection 177EA(3)

Reasons for decision

Question 1

Summary: The A Class shares are treated as equity interest under Subdivision 974-C of the ITAA 1997

Detailed reasoning:

Division 974 of the ITAA 1997 contains provisions which determine whether a scheme gives rise to a debt interest or an equity interest for taxation purposes.

A scheme will give rise to an equity interest in a company if the scheme satisfies the equity test in subsection 974-75(1) of the ITAA 1997 and the interest is not characterised as a debt interest.

Equity test

An interest in a company as a member or stockholder meets the equity test (item 1 of the table in subsection 974-75(1) of the ITAA 1997).

The A Class shares are shareholder interests and therefore meet the equity test.

Debt test

A scheme will give rise to a debt interest in an entity if the debt test in subsection 974-20(1) of the ITAA 1997 is satisfied. A scheme satisfies the debt test if all of the following conditions are met:

Section 974-135 of the ITAA 1997 specifies that there is an ENCO to take action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation to take action. The section also states that an obligation is non-contingent if it is not contingent on any event, condition or situation, other than the ability or willingness of that entity or connected entity to meet the obligation.

It is considered that there is no ENCO to provide a financial benefit with respect to the future dividends on A Class shares as they are paid at the discretion of the directors.

The A Class shares are, therefore, equity interest as they satisfy the equity test and do not satisfy the debt test.

Question 2

Summary: There are no tax consequences triggered as a result of the direct value shifting rules under Division 725 of the ITAA 1997 in respect of the A Class shares.

Detailed reasoning:

Pursuant to section 725-145 of the ITAA 1997, there is a direct value shift under a scheme involving equity interests in an entity (the target entity) if:

The A Class shares were issued upon Company A’s incorporation and the voting, dividend and capital rights have never been changed. Therefore, a direct value shift under Division 725 does not occur.

Question 3

Summary: Future dividends on A Class shares are frankable distributions as defined in section 202-40 of the ITAA 1997.

Detailed reasoning:

Subsection 202-40(1) of the ITAA 1997 states that a distribution is a frankable distribution, to the extent that it is not unfrankable under section 202-45 of the ITAA 1997.

The future dividends will not fall into any of the categories of unfrankable distributions under section 202-45 of the ITAA 1997. Therefore, they are considered to be dividends capable of being franked under section 202-40 of the ITAA 1997.

Question 4

Summary: The dividend streaming provisions contained in Subdivision 204-D of the ITAA 1997 does not apply to the payment of future dividends on A Class shares.

Detailed reasoning:

Subdivision 204-D of the ITAA 1997 contains provisions which aim to prevent the streaming of franking credits to one member of a corporate tax entity in preference to another.

The Commissioner has the power to make a determination under section 204-30 of the ITAA 1997 where an entity streams one or more distributions in such a way that the franking credits attaching to the distribution are received by those members of the entity who derive a greater benefit from franking credits; and other members receive lesser imputation or no imputation benefits. For the determination to be made, members to whom distributions are streamed must be in a position to derive a greater benefit from franking credits than other members.

Subsection 204-30(8) of the ITAA 1997 details examples of when a member of an entity will be taken to have derived a greater benefit from franking credits than another member. The payments of dividends will not result in Person A’s deriving a greater benefit from franking credits than the holders of ordinary shares and do not meet any of the (non-exhaustive) examples listed in subsection 204-30(8) of situations where a member derive a greater benefit from franking credits than another member.

The payments of future dividends on A Class shares, therefore, will not constitute streaming for the purposes of Subdivision 204-D of the ITAA 1997.

Question 5

Summary: Person A will be entitled to a tax offset equal to the franking credits in respect of the future dividends under subsection 207-20(2) of the ITAA 1997.

Detailed reasoning:

As the future dividends will not fall into any of the categories of unfrankable distributions under section 202-45 of the ITAA 1997, they are considered to be dividends capable of being franked under section 202-40 of the ITAA 1997.

The franking credits attached to the distributions will form part of the assessable income of Person A under subsection 207-20(1) of the ITAA 1997.

Person A will be entitled to a tax offset equal to the franking credits under subsection 207-20(2) of the ITAA 1997.

Question 6

Summary: The dividend stripping rules contained in Subdivision 207-F of the ITAA 1997 and Section 177E of the ITAA 1936 do not apply to the payment of future dividends on A Class shares.

Detailed reasoning:

Subdivision 207-F of the ITAA 1997 creates the appropriate adjustment to cancel the effect of the gross-up and tax offset rules where the entity concerned has manipulated the imputation system in a manner that is not permitted under the income tax law.

Direct or indirect recipients of a franked distribution can be denied the benefits of franking credits in various situations, one of which is when the distribution is made as part of a dividend stripping operation (paragraphs 207-145(1)(d), 207-150(1)(e) of the ITAA 1997).

Dividend stripping operation in this context is defined in section 207-155 of the ITAA 1997 as:

Section 177E of the ITAA 1936 operates to counter particular kinds of scheme which would otherwise effectively place company profits in the hands of shareholders in a tax-free form. Section 177E of the ITAA 1936 applies where:

Where all of the above conditions are met, the scheme is taken to be a scheme to which Part IVA of the ITAA 1936 applies, and the taxpayer is taken to have obtained a tax benefit in connection with the scheme equal to the notional amount (paragraphs 177E(1)(e)-(g) of the ITAA 1936).

‘Dividend stripping’ is not defined in the ITAA 1936 and has been recognised by the courts as involving the following six characteristics:

In the context of dividend access shares the Commissioner has expressed the view in Taxation Determination TD 2014/12 that section 177E of the ITAA 1936 applies to an arrangement with features of the type described in paragraph 4 of the Determination:

The application of section 177E of the ITAA 1936 depends on the facts of the particular case, and in particular whether there is an objective purpose of tax avoidance in respect of the scheme.

The payments of future dividends on A Class shares do not exhibit the above features. Accordingly, there is no scheme by way of or in the nature of dividend stripping, or a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping. Section 177E of the ITAA 1936, therefore, does not apply.

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 of the ITAA 1936. For the same reasons set out above, the payment of future dividends on A Class shares is not considered part of a dividend stripping operation under section 207-155 of the ITAA 1997.

Question 7

Summary: The franking credit benefit trading rules contained in section 177EA of the ITAA 1936 do not apply to the payments of future dividends on A Class shares.

Detailed reasoning:

Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies where one of the purposes (other than an incidental purpose) of a person entering into a scheme is to enable a taxpayer to obtain an imputation benefit.

Specifically, section 177EA of the ITAA 1936 applies if the following conditions, set out in subsection 177EA(3) of the ITAA 1936 are satisfied:

Although frankable distributions are expected to be paid by Company A the arrangement to make payments of future dividends on A Class shares does not involve a disposition of membership interest nor is it implemented for a more than incidental purpose of enabling taxpayers to obtain an imputation benefit. Accordingly, section 177EA of the ITAA 1936 does not apply.

Question 8

Summary: The Commissioner will not make a determination under Section 177F of the ITAA 1936 in respect of the payments of future dividends on A Class shares.

Detailed reasoning:

A scheme will be one to which Part IVA of the ITAA 1936 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) of the ITAA 1936).

As discussed above, a dominant purpose of tax avoidance is not present. As section 177D of the ITAA 1936 does not apply, the Commissioner will not make a determination under subsection 177F(1) of the ITAA 1936 to cancel any tax benefit.


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