Edited version of private advice

Authorisation Number: 1052103989151

Date of advice: 4 April 2023

Ruling

Subject: Tax integrity measures

Question 1

Will the Proposed Restructure, or elements of the Proposed Restructure, described in this ruling constitute a scheme to which section 177D of the Income Tax Assessment Act 1936 (ITAA 1936) applies?

Answer

No.

Question 2

For the purposes of subparagraph 177E(1)(a)(i) of the ITAA 1936, will the Proposed Restructure, or elements of the Proposed Restructure, described in this ruling constitute 'a scheme by way of or in the nature of dividend stripping'?

Answer

No.

Question 3

For the purposes of subparagraph 177E(1)(a)(ii) of the ITAA 1936, will the Proposed Restructure, or elements of the Proposed Restructure, described in this ruling constitute 'a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping'?

Answer

No.

Question 4

Will the distributions made by Company A under Step 2 of the Proposed Restructure described in this ruling be taken to be made as part of a 'dividend stripping operation' for the purposes of section 207-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 5

Will the Proposed Restructure, or elements of the Proposed Restructure, described in this ruling constitute a scheme to which section 177EA of the ITAA 1936 applies?

Answer

No.

This ruling applies for the following periods:

Income tax year ending 30 June 20XX

Income tax year ending 30 June 20XX

Relevant facts and circumstances

1.    Company A is an Australian proprietary company with 10,000 shares on issue.

2.    The shareholders in Company A were:

a.    Mr X, holding 9,999 ordinary shares, and

b.    Ms Y, holding 1 ordinary share.

3.    Mr X passed away in 20XX. Pursuant to Mr X's will, his two daughters Ms Y and Ms Z are beneficiaries, each entitled to receive 50% of the shares he held in Company A.

4.    Ms Y and Ms Z are Australian residents for tax purposes.

5.    Probate was granted to the executors of Mr X's estate in 20XX. The estate is yet to be fully administered.

6.    During 20XX and as part of the administration of Mr X's estate:

a.    the 10,000 ordinary shares in Company A were split into 20,000 ordinary shares

b.    9,999 ordinary shares in Company A were transferred by the estate to Ms Y, and

c.     9,999 ordinary shares in Company A were transferred by the estate to Ms Z.

7.    As a consequence of these share transfers, Ms Y holds 10,001 ordinary shares in Company A and Ms Z holds 9,999 ordinary shares in Company A.

8.    Company A holds a portfolio of listed shares, securities and cash. Its sole business activity is to invest in listed shares and other securities.

9.    Company A has a history of either paying fully franked dividends or not paying dividends at all. Company A paid a fully franked dividend of $YY in the year ended 30 June 20XX.

10.  As at 30 June 20XX, Company A had undistributed profits of $XX.

11.  Ms Y and Ms Z wish to separate their financial interests in Company A from each other and are proposing to do so via the implementation of the following restructure (the Proposed Restructure).

Step 1

12.  A new company, Company B has been incorporated, in which Ms Y is the sole director and shareholder. Ms Y will transfer her 10,001 ordinary shares in Company A to Company B in exchange for the issue of ordinary shares in Company B. The shares in Company B issued to Ms Y will have substantially the same market value as the Company A shares transferred by Ms Y.

13.  Similarly, a new company, Company C has been incorporated, in which Ms Z is the sole director and shareholder. Ms Z will transfer her 9,999 ordinary shares in Company A to Company C in exchange for the issue of ordinary shares in Company C. The shares in Company C issued to Ms Z will have substantially the same market value as the Company A shares transferred by Ms Z.

14.  As at the date of this ruling, Ms Y has no intention of selling her shares in Company B and Ms Z has no intention of selling her shares in Company C.

Step 2

15.  The assets of Company A will be distributed to Company B and Company C by way of dividend. This dividend may be paid by way of in-specie transfer of specific assets and/or as cash following the liquidation of assets. It is expected that all dividends paid by Company A to Company B and Company C will be fully franked.

16.  Subject to paragraph 17, any assets distributed by Company A to Company B and Company C in specie will continue to be held by the companies, and any cash dividend paid by Company A to Company B and Company C will be reinvested in listed shares and securities.

17.  Ms Y and Ms Z will continue to invest in listed shares and securities through Company B and Company C respectively and, as needed, will divest assets and have dividends paid by those companies to them to fund their own family's personal needs.

Step 3

18.  Company A will be wound up.

Purpose of Proposed Restructure

19.  Ms Y and Ms Z have advised that the purpose of the Proposed Restructure is to:

a.    facilitate their estate planning independently, i.e. establish an estate plan which will not involve their co-ownership of the same company and allows them to maintain a portion of their wealth in their own wholly owned company which will form part of their own, separate estate. The Proposed Restructure will also simplify their estate planning by enabling them to bequeath shares in their own company as desired, as opposed to having to deal with the underlying listed shares and securities.

b.    allow them to separate their personal wealth (as was the case prior to Mr X's death) and pursue their own financial and investment activities, through corporate structures, to meet their differing needs; avoiding the need to jointly agree on investment activities, investment risk profile, dividend policy and other management decisions, and/or impose their own independent family needs on the other. For example, Ms Z's husband has medical issues which will require Ms Z to divest assets and/or pay dividends in the near future to pay for treatment and support for her husband.

c.     allow them to continue their father's legacy by maintaining the share portfolio currently held by Company A (to the extent assets are distributed in-specie), and its returns, in a company structure (albeit in separate companies).

Assumptions

1.    Ms Y and Ms Z will be eligible to choose to obtain a roll-over under Subdivision 122-A of the ITAA 1997 in relation to the transfer of their shares in Company A to Company B and Company C respectively, and will make that choice.

2.    There are no further steps in the Proposed Restructure and there will be no further roll-overs or transactions that would change the actual or beneficial ownership of the membership interests in Company B and Company C.

3.    Dividends paid by Company B and Company C will be paid to Ms Y and Ms Z as the sole shareholders of Company B and Company C respectively.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

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 paragraph 177E(1)(a)

Income Tax Assessment Act 1936 subparagraph 177E(1)(a)(i)

Income Tax Assessment Act 1936 subparagraph 177E(1)(a)(ii)

Income Tax Assessment Act 1936 section 177EA

Income Tax Assessment Act 1936 subsection 177EA(3)

Income Tax Assessment Act 1936 paragraph 177EA(3)(a)

Income Tax Assessment Act 1936 paragraph 177EA(3)(b)

Income Tax Assessment Act 1936 paragraph 177EA(3)(c)

Income Tax Assessment Act 1936 paragraph 177EA(3)(d)

Income Tax Assessment Act 1936 paragraph 177EA(3)(e)

Income Tax Assessment Act 1936 subsection 177EA(17)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 Subdivision 207-F

Income Tax Assessment Act 1997 section 207-145

Income Tax Assessment Act 1997 paragraph 207-145(1)(d)

Income Tax Assessment Act 1997 section 207-155

Reasons for decision

Question 1

Summary

The Proposed Restructure, or elements of it, will not constitute a scheme to which section 177D of the ITAA 19361 applies.

Detailed reasoning

Section 177D provides that Part IVA applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F to cancel the tax benefit obtained under the scheme.

A conclusion about a relevant person's purpose is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the matters outlined in subsection 177D(2).

While there is a degree of tax deferral, which can constitute a tax benefit for the purposes of section 177D, on the facts and having consideration of the matters outlined in subsection 177D(2), there is insufficient tax purpose to engage the application of the general anti-avoidance provisions in Part IVA.

Questions 2 and 3

Summary

The Proposed Restructure, or elements of it, will not constitute either a dividend stripping scheme or a scheme having substantially the same effect for the purposes of section 177E.

Detailed reasoning

Section 177E is an anti-avoidance provision designed to prevent tax benefits being obtained as part of a dividend stripping scheme or a scheme with substantially the same effect as a dividend stripping scheme.

Section 177E embraces a scheme which can be said objectively to have the dominant (although not necessarily exclusive) purpose of avoiding tax. Assessing the purpose of the scheme is an objective test having regard to the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated.

While there is a degree of tax deferral, which can constitute a tax benefit for the purposes of section 177E, on the facts there is insufficient tax purpose to engage the application of the dividend stripping provisions in section177E.

Question 4

Summary

For the purposes of paragraph 207-145(1)(d) of the ITAA 1997, distributions made by Company a under Step 2 of the Proposed Restructure are not considered to be made as part of a dividend stripping operation under section 207-155 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 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 of the ITAA 1997 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, found in paragraph 177E(1)(a), is in substantially the same terms to section 207-155 of the ITAA 1997.

As the proposed arrangement 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 section 177E, it is not a dividend stripping operation for the purpose of paragraph 207-145(1)(d) of the ITAA 1997.

Question 5

Summary

The Proposed Restructure, or elements of it, will not constitute a scheme to which section 177EA applies.

Detailed reasoning

Section 177EA is a general anti-avoidance rule that supports the operation of the imputation system with the purpose of ensuring that the benefits of the imputation system flow to the economic owner of the share which is the source of the franked distribution.The section is directed at schemes involving the transfer of franking credits on a dividend from entities that cannot fully use them to entities that can.If the section applies, the Commissioner may debit the company's franking account or deny the franking credit benefit to the recipient of the dividend.

Specifically, subsection 177EA(3) provides that for section 177EA to apply, the following must be present:

          (a)        there is a scheme for the disposition of shares, or interest in shares, in a company (paragraph 177EA(3)(a))

          (b)        a franked dividend has been paid, or is expected to be paid, directly or indirectly (paragraphs 177EA(3)(b) and (c))

          (c)        the relevant taxpayer would, or could reasonably be expected to, receive imputation benefits from the distribution (paragraph 177EA(3)(d)), and

          (d)        having regard to relevant circumstances of the scheme (as provided for in subsection 177EA(17)), it would be concluded that the scheme was entered into for the not-incidental purpose of enabling the relevant taxpayer to obtain an imputation benefit (paragraph 177EA(3)(e)).

For the Proposed Restructure, the interposition of the respective wholly owned entities would not be considered to be a scheme the purpose of which was to enable Ms Y, Ms Z, Company B or Company C to obtain imputation benefits.

1 All legislative references are to the ITAA 1936, unless otherwise stated.

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