Edited version of your written advice

Authorisation Number: 1051516699394

Date of advice: 17 May 2019

Ruling

Subject: Dividend access shares

Question 1: Is the Dividend Access Share Scheme (DAS Scheme) a ‘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 a dividend stripping’ for the purpose of paragraph 177E(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No

Question 2: Does section 177D of the ITAA 1936 operate to deem the DAS Scheme a scheme to which Part IVA of the ITAA 1936 applies?

Answer:

No

Question 3: Is the DAS Scheme a ‘dividend stripping operation’ for the purpose of section 207-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

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

Company A is an Australian resident company.

During the 2019 income year Company A issued one Z class shares each to the New Directors at $1.

The purpose of issuing the Z class shares is to pay dividends to the New Directors from time to time to remunerate them for their efforts and contributions to the business of Company A.

The Constitution of Company A allows the issue of Z class shares.

The Z class shares were issued to the New Directors personally. They can only hold the share in their personal capacity and not through an interposed entity, nor can they hold the Z class shares beneficially for another entity.

The New Directors are Australian residents for tax purposes.

The Z class shares carry the following rights and entitlements:

● no voting right,

● right to return of paid-up capital but no right to participate in surplus assets or profits upon capital reduction or winding up of the company,

● dividends determined at the discretion of the directors in such proportion and condition as they think fit,

● no right to dividend until payment. Any assignment or grant of rights in respect of the dividends or proceeds of the dividends before payment shall be of no effect and shall relieve the company from the obligation to pay the dividend and may result in the shares being automatically redeemed,

● not transferrable or assignable,

● redeemable at the direction of the directors.

The issue of the Z class shares to the New Directors and the payments of dividends to them from time to time are referred to as the DAS Scheme for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 207-145

Income Tax Assessment Act 1997 Section 207-155

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177E

Reasons for decision

Question 1

Summary:

The DAS Scheme is not a 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 a dividend stripping.

Detailed reasoning

Section 177E(1) of the ITAA 1936 states that a dividend stripping scheme happens where:

● property of a company is disposed of as a result of:

● a 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 a dividend stripping; and

● in the Commissioner’s opinion, the disposal of property represents, in whole or in part, a distribution of profits of the company; and

● if, immediately before the scheme was entered into, the company had paid a dividend equal to the amount of the disposal of property, an amount (referred to as the notional amount) would have been included in the assessable income of a taxpayer of a year of income; and

● the scheme is entered into after DDMMYY.

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.

The scheme

‘Scheme’ is defined broadly in subsection 177A(1) of the ITAA 1936 as:

● any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

● any scheme, plan, proposal, action, course of action or course of conduct.

The DAS Scheme comprises the following steps:

● the issue of 10 Z class shares to each of the New Directors, and

● the payments of dividends to the New Directors from time to time as remuneration for their work.

The DAS Scheme commenced after DDMMYY.

Has property of a company been disposed of as a result of the scheme?

For the purposes of section 177E of the ITAA 1936, disposal of property of a company includes the payment of a dividend by the company (paragraph 177E(2)(a) of the ITAA 1936).

The dividend payments on the Z class shares will constitute disposals of property as a result of the scheme.

Does that disposed property represent a distribution of profits of the company?

The dividend payments on the Z class shares will be sourced from profits of Company A.

Would an amount have been included in the assessable income of a taxpayer if the company had paid a dividend equal to the disposal of property immediately before the scheme was entered into?

An amount would be included in the assessable income of the ordinary shareholders if Company A paid the amount of the dividends to its ordinary shareholders immediately before the scheme was entered into.

Is the scheme by way of or in the nature of dividend stripping?

‘Dividend stripping’ is not defined in the ITAA 1936.

Dividend stripping has been recognised by the courts in Patcorp Investments Ltd v. FCT [1976] HCA 67; (1976) 140 CLR 247; FCT v. Consolidated Press Holdings Ltd [2001] HCA 32; (2001) 207 CLR 235 as involving the following six characteristics:

● a target company, which has substantial undistributed profits, creating a potential tax liability either for the company or its shareholders;

● the sale or allotment of shares in the target company to another party;

● the payment of a dividend to the purchaser or allottee of the shares out of the target company’s profits;

● the purchaser escaping Australian income tax on the dividend so declared;

● the vendor shareholders receiving a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers; and

● the scheme being carefully planned, with all the parties acting in concert, for the predominant if not sole purpose of the vendor shareholders avoiding tax on a distribution of dividends by the target company.

Under the DAS Scheme the New Directors were allotted Z class shares and dividends will be paid to them out of Company A’s profits. However, the Z class shares are held in the New Directors’ personal capacity and they cannot transfer, assign or grant any rights in respect of the shares and the dividends. Therefore, the New Directors do not escape income tax on the dividends.

The purpose of the DAS Scheme is to remunerate the New Directors for their efforts and contributions to Company A’s business. There is no avoidance of tax on the payments of dividends on the Z class shares as they can only be declared and paid to the New Directors personally.

The DAS Scheme does not have the effects of placing company profits in the hands of shareholders in a tax-free or substantially tax-free form in substitution for taxable dividends. As the predominant purpose of tax avoidance is not present, the DAS Scheme is also not a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping for the purpose of subparagraph 177E(1)(a)(ii) of the ITAA 193.

Question 2

Summary:

The DAS Scheme is not a scheme to which Part IVA of the ITAA 1936 applies.

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) of the ITAA 1936).

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

Question 3

Summary: The DAS Scheme is not a ‘dividend stripping operation’ for the purpose of section 207-145 of the ITAA 1997.

Detailed reasoning

Subdivision 207-F of the ITAA 1997 has the effect of cancelling the effect of the gross-up and tax offset rules where the imputation system has been manipulated. Under paragraph 207-145(1)(d) of the ITAA 1997 and relevant for the purpose of this ruling, recipients of a franked distribution can be denied the benefits of the franking credits in various situations including where the distribution is made as part of a dividend stripping operation.

‘Dividend stripping operation’ in this context is defined in section 207-155 which provides:

A distribution made to a member of a corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a scheme that:

(a) was by way of, or in the nature of, dividend stripping; or

(b) had substantially the effect of a scheme by way of, or in the nature of, dividend stripping.

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.

As the DAS Scheme is not a scheme by way of, or in the nature of, dividend stripping, or a scheme that has substantially the effect of a scheme by way of, or in the nature of, dividend stripping for the purpose of paragraph 177E(1)(a) of the ITAA 1936, it is not a dividend stripping operation for the purpose of paragraph 207-145(1)(d) of the ITAA 1997.

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