Edited version of private advice

Authorisation Number: 1051714149928

Date of advice: 22 July 2020

Ruling

Subject: Family trust elections - family group

Question

Are both entities, Company A and Company B, considered to be members of Taxpayer A's family group for the purpose of section 272-90(5) of Schedule 2F of Income Tax Assessment Act 1936 ('ITAA 1936') without having to make an interposed entity election?

Answer

No

This ruling applies for the following periods:

X XX 20XX to Y YY 20YY

The scheme commences on:

X XX 20XX

Relevant facts and circumstances

Incorporation of Company A

1.      Company A is an Australian proprietary company, incorporated in ABC on X XX 20ZZ.

2.      Company A's current directors are Taxpayer B and Taxpayer C.

Incorporation of Company B

3.      Company B is an Australian proprietary company, incorporated in ABC on X XX 20ZZ.

4.      Company B's current directors are Taxpayer B and Taxpayer C.

Related Parties of Company A and Company B

5.      The related parties of both Company A and Company B are:

i.       Taxpayer B

ii.      Taxpayer C

iii.     Taxpayer A (child of Taxpayer B and Taxpayer C)

iv.     Taxpayer D (child of Taxpayer B and Taxpayer C)

v.      Taxpayer B and Taxpayer C as Trustee for Taxpayer A

vi.     Taxpayer B and Taxpayer C as Trustee for Taxpayer D

vii.    Company C as Trustee for Trust E

6.      Trust E has a family trust election in place, with Taxpayer A as the specified individual.

Shareholdings of Company A

7.      Company A has on issue:

i.       xxx Class A shares;

ii.      xxx Class B shares;

iii.     xxx Class C shares; and

iv.     xxx Class D shares.

8.      The shareholders of Company A are:

i.       Taxpayer B, who holds xxx Class A shares;

ii.      Taxpayer C, who holds xxx Class B shares;

iii.     Taxpayer B and Taxpayer C as Trustee for Taxpayer D, who hold xxx Class C shares; and

iv.     Taxpayer B and Taxpayer C as Trustee for Taxpayer A, who hold xxx Class D shares.

9.      Rights attaching to the class shares, as per Company A's Constitution, are as follows:

i.       The directors have the discretion to declare dividends on one or more classes of shares to the exclusion of other classes, or at different rates (as per Clause X.Y of Constitution)

ii.      The Governing Director (currently Taxpayer B) has:

a.      xx% of the votes at any director meeting; and

b.    yy% of the votes at any shareholder meeting (as per Clause ZZ of the Constitution).

iii.     Each of the share classes have equal capital rights.

Shareholdings of Company B

10.   Company B has xx ordinary shares (which carry fixed rights to income and capital) on issue.

11.   The shareholders of Company B are:

i.       Company A, which beneficially holds x ordinary shares - y of these shares are held by Company A, and the x^th share is registered in the name of Taxpayer B, as nominee of Company A;

ii.      Trust E which holds z ordinary shares.

Information provided

12.   You have provided a number of documents containing detailed information in relation to Company A and Company B, including:

a.      Private Binding Ruling ('PBR') Application, dated X XX 20ZZ;

b.      A copy of the Constitution of Company A and a summary of amendments since 19XX;

c.      Further information provided during phone call on Y YY 20ZZ.

13.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 271-15

Income Tax Assessment Act 1936 Section 272-10

Income Tax Assessment Act 1936 Section 272-20

Income Tax Assessment Act 1936 Section 272-90

Income Tax Assessment Act 1936 Section 272-95

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1936 ('ITAA 1936') unless otherwise stated.

Question

Are both entities, Company A and Company B, considered to be members of Taxpayer A's family group for the purpose of section 272-90(5) of Schedule 2F of Income Tax Assessment Act 1936 ('ITAA 1936') without having to make an interposed entity election?

Summary

Company A and Company B are not considered to be members of Taxpayer A's family group for the purpose of section 272-90(5) of Schedule 2F of ITAA 1936 without having to make an interposed entity election.

Detailed reasoning

14.   Schedule 2F of ITAA 1936 covers trust losses and other deductions and is the relevant legislative division for this ruling.

15.   Section 271-15 of Schedule 2F of ITAA 1936, titled Tax liability where family trust makes distribution etc. outside family group, imposes a liability for Family Trust Distribution Tax if:

(a)    a trustee makes a family trust election in relation to a trust; and

(b)    at any time while the election is in force (including a time before it was made), the trust confers a present entitlement to, or distributes, income or capital of the trust:

(i)     upon or to a person who is neither the individual specified in the family trust election nor a member of the individual's family group in relation to the conferral or distribution; or

(ii)    upon or to the individual specified in the election or a member of the individual's family group, where the individual or member is the trustee of a trust, or the member is a trust, that is not included in the individual's family group in relation to the conferral or distribution

16.   The provision above (section 271-15) only applies to distributions outside of the family group.

17.   Relevant provisions within section 272-90 of Schedule 2F of ITAA 1936, titled Family Group, outline the following:

(1)    This section states whether a person is a member of the family group of the individual (the primary individual) specified in the family trust election in relation to a conferral of a present entitlement to, or a distribution of, income or capital of a company, partnership or trust, upon or to the person.

(2)    A member of the primary individual's family (see section 272-95) is a member of the primary individual's family group in relation to the conferral or distribution.

...

(4)    A company, partnership or trust is a member of the primary individual's family group in relation to the conferral or distribution if:

(a)    The company, partners or trustee has made an interposed entity election to that effect; and

(b)    The election is in force when the conferral takes place, or the distribution is made.

(5)    A company, partnership or trust is a member of the primary individual's family group in relation to the conferral or distribution if, when the conferral takes place, or the distribution is made:

(a) the primary individual; or

(b) one or more members of the primary individual's family; or

(c) the trustees of one or more family trusts, provided the primary individual is specified in the family trust election of each of those family trusts;

or any combination of the above, have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust.

18.   Section 272-95 of Schedule 2F of ITAA 1936, titled Family, outlines that the family of an individual (the test individual) consists of all of the following (if applicable):

(a)    any parent, grandparent, brother, sister, nephew, niece, child, or child of a child, of:

(i)    the test individual; or

(ii) the test individual's spouse;

(b)    the spouse of the test individual or of anyone who is a member of the test individual's family because of paragraph (a).

19.   Section 272-10 of Schedule 2F of ITAA 1936, titled Fixed entitlement to share of income or capital of a company, states that:

(1)    If a shareholder in a company holds shares carrying the right to receive some or all of the dividends that may be paid by the company, the shareholder has a fixed entitlement to a share of the income of the company equal to the percentage of the total dividends represented by the dividends that the shareholder has a right to receive.

(2)    If a shareholder in a company holds shares carrying the right to receive the whole or part of any distribution of the paid-up share capital of the company in the event of any return of capital to shareholders, the shareholder has a fixed entitlement to a share of the capital of the company equal to the percentage of the total distribution represented by the amount that the shareholder has a right to receive.

20.   Section 272-20 of Schedule 2F of ITAA 1936, titled Fixed entitlement to share of income or capital held indirectly, states that:

A person holds a fixed entitlement to a share of the income or capital of a company, partnership or trust indirectly if the person holds the entitlement indirectly through fixed entitlements to shares of the income or capital, respectively, of interposed companies, partnerships or trusts.

21.   The concept of fixed entitlement as defined in section 272-10 requires a shareholder to hold shares that carry 'the right to receive some or all' in the case of dividends or 'the right to receive the whole or part' in the case of a distribution of capital, that can equate to a percentage of the total. The concept of a right to receive dividends has been considered by the Taxation Board of Review in relation to the former company loss rules and similarly worded provisions. The Taxation Board has held that the 'right to receive dividends' in those provisions referred to absolute and not discretionary rights.

22.   In instances where the entitlement was not certain but depended on the exercise of a discretion it has been held that no right to dividends existed and the relevant provisions were not satisfied: Case C 63 (1971) ATC 275; Case K1 (1978) ATC 1; Case L11 (1979) ATC 61 and Case L67 (1979) ATC 519.

Application to your circumstances

23.   In your circumstances, subsection 272-90(1) of Schedule 2F of ITAA 1936 (Family Group) is satisfied as Trust E has a family trust election in place with Taxpayer A as the specified individual.

24.   Subsection 272-90(2) of Schedule 2F of ITAA 1936 (Family Group) is also satisfied as Taxpayer B, Taxpayer C and Taxpayer D are members of the primary individual's (Taxpayer A's) family.

25.   Where the trust which owns the shares in the company makes a family trust election with the same specified individual as the family trust making the distribution, then the company would form part of the family group and an interposed entity election would not be required.

26.   For the company to be included in the family group under subsection 272-90(5) of Schedule 2F of the ITAA 1936 it needs to be determined, whether Taxpayer B, Taxpayer C, Taxpayer A and Taxpayer D, or any combination of them, have fixed entitlements to all of the income and capital of Company A, and if so, then indirectly for Company B.

29. Of the xx ordinary shares, in Company B, Company A beneficially holds x shares (y in their own name and z held by Taxpayer B as nominee), and Trust E holds z shares. Company A has on issue x classes of shares (A, B, C and D) and each class has xxx shares as follows:

·  A shares are held by Taxpayer B

·  B shares are held by Taxpayer C

·  C shares held by Taxpayer B and Taxpayer C as trustee for Taxpayer D (so beneficially for Taxpayer D)

·  D shares held by Taxpayer B and Taxpayer C as trustee for Taxpayer A (so beneficially for Taxpayer A)

30.   Under the constitution of Company A:

·  the directors have the discretion to declare dividends on one or more classes of shares to the exclusion of other classes of shares or at different rates (as stated in Clause X.Y of the Constitution);

·  the share classes have equal capital rights;

·  Taxpayer B controls the voting power at director and shareholder meetings.

31.   Fixed entitlement to a share of income or capital of a company is outlined in subsections 272-10(1) and 272-10(2) of Schedule 2F of the ITAA 1936. Individually, Taxpayer A, Taxpayer B, Taxpayer C and Taxpayer D do not hold shares that have a right to receive some or all of the dividends of Company A because the dividends may, with the exercise of the discretion, be paid to one or more of the other classes of shares to the exclusion of their shares, as outlined in Clause X.Y of the company Constitution.

32.   Collectively, all of the dividends must be paid to members of Taxpayer A's family, however, for the purposes of subsections 272-10(1) and 272-10(2) each of the shareholders' entitlements must be fixed (giving them a right to a share of dividends equal to a percentage of the total dividends) and then taken together all of the shareholders who satisfy (a) to (c) in subsection 272-90(5) should add up to all of the income and capital of the company (100%).

33.   An entitlement that relies upon the exercise, or non-exercise, of a discretion to distribute dividends or capital would have a fixed entitlement of 0%. In respect of Company A, the directors have the discretion to declare dividends on one or more classes of shares to the exclusion of other classes of shares or at different rates (Clause X.Y).

34.   Based upon this, there would be no fixed entitlements to income in this company, although there are fixed entitlements totalling 100% in respect of capital. This would then mean that, for the purposes of subsection 272-90(5), no entity (let alone a family member) has fixed entitlements to the income of this company and it will not form part of the family group

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