Edited version of private advice

Authorisation Number: 1052114481513

Date of advice: 3 May 2023

Ruling

Subject: Income tax - capital management

Question

Whether section 177D of the Income Tax Assessment Act 1936 (ITAA 1936) will apply to the proposed restructure?

Answer

No.

This ruling applies for the following periods:

Period ending XX XX 20XX

Period ending XX XX 20XX

Relevant facts and circumstances

Company A

Background

Company A as head company, and its XX wholly owned subsidiaries comprise an income tax consolidated group (Group A).

Company A and its subsidiaries are Australian incorporated and tax resident companies that are not exempt entities for Australian income tax purposes.

Group A operates a number of key businesses in its sector.

Company A also holds XX% of the shares in Company B. The remaining XX% of ordinary shares in Company B are owned by Trust A.

Directors/controlling minds

Taxpayer A and Taxpayer B are the directors of Company A. Taxpayer A is the director of Company A's wholly owned subsidiaries.

The key decision-maker of Group A is Taxpayer A.

Shareholdings

Table 1: Shareholdings

All shares in Company A were acquired on or after 20 September 1985 and are post-CGT assets. (All shares held in Company A are held on capital account, and not as revenue assets, trading stock or Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) financial arrangements).

Rights attached to the shares

There are XX classes of shares in Company A. These categories carry different rights.

Trust B

Trustee

The trustee for Trust B is Company E, being an Australian incorporated and tax resident company that is not an exempt entity for Australian income tax purposes.

Taxpayer A is the director of Company E.

Shareholdings

Table 2: Shareholdings

Company E was only established to be the trustee of Trust B.

Beneficiaries

The interest holders are:

Table 3: Interest holders

All units held in Trust B are held on capital account, and not as revenue assets, trading stock or Division 230 of the ITAA 1997 financial arrangements.

The only assets held and owned by Trust B are its shares in Company A. For completeness, there is a facility agreement in place between Company E as trustee for Trust B and Company A. This will be extinguished prior to any proposed restructure steps being completed.

Trust C

Taxpayer A is the appointor for the Trust C.

Taxpayer A is the director of Company C (the corporate trustee of Trust C).

Trust D

Taxpayer C is the appointor of the Trust D.

Taxpayer C is the director of Company D (the corporate trustee of the Trust D).

All entities (trustees and beneficiaries) are Australian tax residents and not exempt entities for Australian income tax purposes.

Trust E and Trust F

Taxpayer D and Taxpayer E are key management personnel of one of Group A's business offerings and have played (and continue to play) a significant role in its growth and success.

In order to reward Taxpayer D and Taxpayer E for their efforts and to continue to incentivise the growth and expansion of this business offering, they have been issued with shares in Company A.

Company F

Background

Company F, as head company, and its wholly owned subsidiaries comprise an income tax consolidated group (Group B).

Company F and its subsidiaries are Australian incorporated and tax resident companies that are not exempt entities for Australian income tax purposes.

Control

Taxpayer C is chairman of the Board of Company F, with several other key executives in charge of operations and management of Company F activities.

Shareholdings

Company G as trustee for the Trust G Trust owns XX of the ordinary shares on issue in Company F. Trust G is a discretionary trust for the benefit of Taxpayer C's relatives. Taxpayer C is the appointor for the trust and the director of Company G which is the corporate trustee of the trust.

All entities (trustees and beneficiaries) are Australian tax residents and not exempt entities for Australian income tax purposes.

Company H owns the balance of Company F ordinary shares. Company H has its headquarters in a foreign country.

The shares were acquired on or after 20 September 1985 and are post-CGT assets.

Proposed restructure

Company A is considering restructuring Company A's capital structure in order to facilitate a possible takeover by Company F. Following this restructure, it is expected that Company F will seek to acquire 100% of the shares in Company A.

This takeover is expected to facilitate the diversification of the earnings base and provide increased market partnership opportunities.

The process of due diligence and negotiations are still in progress between the parties. No takeover agreement is in place yet and the timeline of the restructure and the subsequent takeover are still evolving.

The following steps form part of Group A's capital reorganisation.

Preliminary-step 1 An option will be granted to Company A over shares in Company B.

Company A and Trust A will enter into an option agreement on an arm's length basis whereby Company A will obtain the option, but not an obligation, to acquire shares in Company B from Trust A for an arm's length price negotiated between the parties prior to entering into the agreement and specified in the option agreement.

Trust A will have no ability to obligate Company A to acquire its shares in Company B.

As part of the option agreement, Trust A will agree not to sell its shares in Company B to any other party for the duration of the agreement in return for consideration determined at arm's length and to be specified in the option agreement.

Preliminary-step 2 Removal of bare trust arrangement between Company C and Trust D.

On XX XX 20XX, Company C (Trustee) and Company D as trustee for Trust D (Beneficial Owner) entered into a deed of acknowledgement of bare trust, which established a bare trust arrangement between the Trustee and the Beneficial Owner.

Pursuant to the deed of acknowledgement of bare trust, the Beneficial Owner may at any time request that the Trustee transfer the legal title to the above interests to the Beneficial Owner and the Trustee must, on receiving the request, transfer the legal title to the interests to the Beneficial Owner.

As a result of the bare trust arrangement, Company C relevantly holds interests as bare trustee for Company D as trustee for Trust D in Company E, Trust B and Company A.

The bare trust arrangement in respect of the above interests will be removed as a result of Company D as trustee for Trust D (the Beneficial Owner) requesting that Company C (the Trustee) transfer the legal title to the interests to Company D as trustee for Trust D (the Beneficial Owner).

Preliminary-step 3 - Dealing with other interests on issue in Company A with nominal value.

The following interests in Company A (which have nominal market value) will be cancelled for market value consideration of $XX:

•                     Shares held by Trust C;

•                     Shares held by Trust D;

•                     Shares held by Trust E; and

•                     Shares held by Trust A.

The cancellation of these interests which have nominal market value will help simplify Group A's corporate structure by ensuring that the only interests on issue are those with value.

The following table summarises Company A's interest holding after the completion of the proposed preliminary capital reorganisation steps:

Table 4: Company A interest holders

Step 1 - Removal of Trust B

In order to further simplify the capital structure of Group A, Company A and its shareholders intend to remove the current trust structure whereby shares in Company A are owned indirectly via Trust B.

The removal of the trust structure will better allow Taxpayer A and Taxpayer C's respective investments in Group A to be dealt with independently of one another by enabling their respective trusts to own ordinary shares directly (and separately) in Company E, the new parent entity of Group A.

To facilitate this, Trust B will transfer all of its assets (being the ordinary shares held in Company A) to Company E. Trust C and Trust D will each receive shares in Company E commensurate with the value of their respective interests in Trust B immediately prior to the transfer.

Trust B will vest and cease to exist within 6 months of this occurring.

Each party involved will choose to obtain a Subdivision 124-N of the ITAA 1997 CGT roll-over.

The transfer of all assets in Trust B to Company E meet the requirements for CGT roll-over relief under Subdivision 124-N of the ITAA 1997.

Step 2 - Dealing with the class XX and class YY shares

Following completion of step 1, all investors in Group A will hold their investments/interests through Company E, but for the following interests held by certain interest holders in Company A:

• Class XX shares held by Trust E; and
• Class YY shares held by Trust F.

To further simplify Group A corporate structure, it is necessary for all investors in Group A to hold their interests at the same corporate level (i.e. in Company E). This will streamline repatriation outcomes and also increase future investment and takeover prospects for Group A.

It is also imperative that Trust E and Trust F continue to own an interest in Group A via the new parent company, Company E, to ensure that they can benefit from the future growth and success of the business and any future takeover prospects as a way of rewarding and continuing to incentivise Taxpayer D and Taxpayer E for their efforts with Company A's business offerings.

To facilitate this, the following steps will be undertaken:

Step 2(a)

The following interests on issue in Company A will be varied to allow for conversion to ordinary shares in Company A (equivalent to the market value of the interests):

•                     Class XX shares held by Trust E; and

•                     Class YY shares held by Trust F.

This will be facilitated by a special resolution that will be approved by all of the shareholders of Company A as well as the shareholders holding the shares of the class that will be varied (i.e. Trust E and Trust F).

No amount will be paid or payable by the parties to effect this change of rights.

Step 2(b)

Trust E and Trust F will each convert their respective interests referred to at step 2(a) into ordinary shares in Company A equal to the market value of their respective interests.

Step 2(c)

Company E will acquire the ordinary shares in Company A from Trust E and Trust F under a share purchase agreement.

As consideration, Trust E and Trust F will receive ordinary shares in Company E equal to the respective market value of their ordinary shares in Company A.

Trust E and Trust F will participate in the transaction on the same terms as each other.

Capital gains tax (CGT) event A1 will happen when Trust E and Trust F dispose of their shares in Company A under the proposed share exchange. Trust E and Trust F will make a capital gain under subsection 104-10(4) of the ITAA 1997 apart from the roll-over on the basis that the market value of ordinary shares they will respectively receive in Company E exceeds the cost base of their respective ordinary shares in Company A.

The acquisition of ordinary shares in Company A by Company E from Trust E and Trust F meet the requirements for CGT roll-over relief under Subdivision 124-M of the ITAA 1997.

Trust E and Trust F along with Company E will choose to obtain the CGT roll-over under Subdivision 124-M of the ITAA 1997.

Trust E and Trust F will notify Company E in writing of their respective cost base of the newly created Company A ordinary shares worked out just before the contract for sale to facilitate Company E's acquisition of these newly created Company A ordinary shares.

The Company E ordinary shares will carry the same kind of rights and obligations as those attached to the Company A ordinary shares.

Group A will deconsolidate as a result of this step.

Step 2(d)

Company E will immediately make an election to form a new income tax consolidated group together with Company A and each of its wholly-owned Australian tax resident subsidiaries (Group C).

The above steps have been discussed with and agreed to by Trust E and Trust F.

The following table summarises Company E's shareholding prior to Company F's takeover:

Table 5: Company E interest holders

Company F takeover

Following Company A's capital reorganisation, it is expected that Company F will seek to acquire 100% of the ordinary shares in Company E (the proposed new parent entity of Group A).

CGT event A1 will happen when Company E Shareholders dispose of their shares in Company E under the proposed share exchange. Company E Shareholders will make a capital gain under subsection 104-10(4) of the ITAA 1997 apart from the roll-over, meaning this condition is satisfied. The capital gain would equal the difference between the cost base of their respective Company E ordinary shares and the sum of the cash and the market value of the ordinary shares in Company F received in exchange.

It is not yet possible to determine the number and percentage of shareholdings in Company F following the contemplated Company F takeover on the basis that the transaction is still subject to due diligence and contractual negotiations which includes confirmation of purchase price.

It is also not yet known what each vendor shareholder will choose to receive as consideration (i.e. Company F ordinary shares and/or cash).

The takeover is expected to be implemented under a share purchase agreement and involve:

• Company F (or another member of Group B of which Company F is the head company) acquiring 100% of the shares in Company E; and
• As consideration, Company E Shareholders may choose a combination of ordinary shares in Company F and/or cash consideration equal to the respective market value of their ordinary shares in Company E. Each vendor shareholder will receive the same offer and may choose to participate in the takeover on the same terms as each other.

The following table summarises Company F's shareholding following the completion of the preliminary capital reorganisation steps, restructure steps and Company F's takeover:

Table 6: Company F interest holders

The acquisition of ordinary shares in Company E by Company F from Company E Shareholders meet the requirements for CGT roll-over relief under Subdivision 124-M of the ITAA 1997.

Company E Shareholders along with Company F will choose to obtain the CGT roll-over under Subdivision 124-M of the ITAA 1997.

Company E Shareholders will notify Company F in writing of their respective cost base of Company E ordinary shares worked out just before the contract for sale to facilitate Company F's acquisition of their Company E ordinary shares.

There is no step up to cost bases under this step.

The Company F ordinary shares will carry the same kind of rights and obligations as those attached to the Company E ordinary shares.

Company F and other members of its wholly owned group will not issue any debt or other equity instruments under the arrangement to an entity that is not a member of the group in relation to the issuing of Company F ordinary shares to Company E Shareholders.

It is intended that Company E will pay a franked dividend prior to the takeover completing.

Other relevant matters

Apart from Taxpayer C, Trust G Trust and Trust D, there are no associations between any of the other entities for the purposes of section 318 of the ITAA 1936.

There is no other identified or known association between any of the Company E shareholders that will participate in the contemplated Company F takeover or the Company F shareholders.

There is no cross-over/commonality between the named/known beneficiaries or trustees of the trusts that will own shares in Company E and then Company F.

All transactions will be on an arm's length basis - for market value.

Based on current valuations, the market value of ordinary shares issued by Company E to Trust E and Trust F in exchange for their disposal of Company A ordinary shares will not represent more than 80% of the market value of all ordinary shares issued by Company E.

All interest holders in Company A are Australian tax residents.

All beneficiaries of the Australian trusts depicted as interest holders in Company A, are Australian tax residents.

All trustees of the Australian trusts depicted in the ownership structure of Company A are Australian tax resident companies.

Taxpayers' contentions

The Taxpayers have provided the following reasons for the proposed restructure:

Capital reorganisation

The current Group A's corporate structure is unnecessarily complex. This is because of:

• The historic need to ensure Taxpayer C's investment in the business remained silent to the market (to prevent perceptions of bias) which was achieved via the current unit trust structure and bare trust arrangement; and

• Various classes of shares being issued to various investors and key senior employees to incentivise them toward, and protect their interests, in the success of Group A. A number of the shares issued currently have no value.

The sensitivities around Taxpayer C's investment no longer need to be managed.

The commercial, administrative and legal benefits of simplifying the corporate structure by way of increased investment and takeover opportunities, simplified repatriation outcomes and reduced complexity in administering and maintaining the capital structure outweigh any benefits in keeping Taxpayer C's investment silent to the market.

Should Company A simplify its corporate structure, it should realise various commercial benefits.

Each of the following preliminary steps serve a commercial non-tax objective.

Step 1 - Removal of the Trust B

The trust structure is no longer required given Taxpayer C's investment no longer needs to remain silent to the market and is consistent with the objective of simplifying the corporate structure.

The removal of the trust structure will better allow Taxpayer A and Taxpayer C's respective investments in Group A to be dealt with independently of one another and provide them with the flexibility and freedom over their personal stakes and ability to make decisions independently in relation to those stakes.

As discussed below, the flexibility to act independently is crucial in the context of the contemplated Company F takeover and is applicable in the context of takeover prospects in general.

Step 2 - Dealing with class XX and class YY shares

Step 2 is required to ensure all investors in Group A hold the same type of interests at the same corporate level (i.e. ordinary shares in Company E). This will streamline repatriation outcomes and also increase future investment and takeover prospects for Group A.

It is also imperative that Trust E and Trust F continue to own an interest in Group A via the new parent company, Company E, to ensure that they participate in the future growth and success of Taxpayer D and Taxpayer E (key senior management that are beneficiaries of the above trusts) for their efforts with Company A's business offering.

Even if the Company F takeover does not proceed, the parties will still proceed with the capital reorganisation which serves its own separate commercial objectives.

Any takeover, whether by Company F or anyone else, would not be possible or would be extremely complex given that absent the capital reorganisation, the ownership interests in Group A are held across various share classes and held at different corporate levels. This would make any takeover prospect less desirable and far more complex.

Step 1 achieves a key objective of the capital reorganisation being to allow Taxpayer A and Taxpayer C to deal with their investments in Group A independently of each other and without being connected/restricted by the Trust B. They will be able to independently decide whether to accept any takeover offer and will be able to independently negotiate whether to accept payment in the form of shares, cash or a combination of the two.

If the Trust B were to continue to hold shares in Company A, it would be very difficult to negotiate an appropriate mix of cash/scrip consideration split that would accommodate Taxpayer A and Taxpayer C's respective preferences.

Company F takeover

The commercial rationale of Company F's contemplated takeover of Group A is to facilitate the diversification of the earnings base through increased supply to the sector driven by Company F, along with Company A's business offerings which will enhance Company F's offerings and provide increased market partnership opportunities.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 Subdivision 124-N

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177A(5)

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 subsection 177F(2)

Income Tax Assessment Act 1936 paragraph 177F(1)(a)

Reasons for decision

Summary

In these circumstances, it is reasonable to accept that any potential tax benefits (incidental or otherwise) would not lead to the conclusion that the arrangement was entered into for the sole or dominant purpose of obtaining a tax benefit.

Detailed reasoning

GENERAL ANTI-AVOIDANCE

Part IVA is a general anti-avoidance provision. Broadly, it allows the Commissioner the discretion to cancel a tax benefit obtained by a taxpayer in relation to a scheme where the sole or dominant purpose of the scheme was to obtain a tax benefit.

Scheme

Part IVA requires the consideration of a 'scheme', which is defined in subsection 177A(1) of the ITAA 1936 as:

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

b)    any scheme, plan, proposal, action, course of action or course of conduct.

Guidance of the meaning of the term 'scheme' can be found in case law. In Federal Commissioner of Taxation v. Hart (2004) 55 ATR 712 (Hart), per Gummow and Hayne JJ:

[43] [The] definition is very broad. It encompasses not only a series of steps which together can be said to constitute a "scheme" or a "plan" but also (by its reference to "action" in the singular) the taking of but one step.

Tax Benefit

There must be a tax benefit obtained by the taxpayer in order for Part IVA to potentially apply. Section 177C of the ITAA 1936 broadly provides that a tax benefit in relation to a scheme relates to:

a)    amounts not being included in assessable income that would otherwise have been included in assessable income;

b)    amounts included as an allowable deduction that would otherwise not have been included as an allowable deduction;

c)    capital losses incurred that would otherwise not have been incurred;

d)    foreign income tax offsets being allowable that would otherwise not have been allowable; and

e)    no liability to withholding tax on an amount that would otherwise have had a liability.

Dominant purpose

Part IVA also requires consideration of the purpose for which the scheme was entered into. Specifically, section 177D of the ITAA 1936 refers to the purpose of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. The person need not be the taxpayer.

The meaning of the purpose is clarified by subsection 177A(5) of the ITAA 1936, which explains that, where there are two or more purposes, the purpose includes the dominant purpose:

(5)  A reference in this Part [Part IVA] to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

When determining whether the purpose of the scheme was to enable a tax benefit, the Commissioner must also have regard to the following eight factors specified in subsection 177D(2) of the ITAA 1936:

(a)  the manner in which the scheme was entered into or carried out;

(b)  the form and substance of the scheme;

(c)   the time the scheme was entered into and the length of time during which the scheme was carried out;

(d)  the result that, but for the operation of Part IVA, would be achieved by the scheme;

(e)  any change (being a change that has resulted from, will result of or may reasonably be expected to result from, the scheme). in the financial position of the relevant taxpayer that has resulted, or will result from, the scheme;

(f)    any change (being a change that has resulted from, will result of or may reasonably be expected to result from, the scheme)in the financial position of any person who has, or has had, any connection with the relevant taxpayer;

(g)  any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f) of the scheme having been entered into or carried out; and

(h)  the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

Focusing on the various elements of Part IVA should not obscure the way in which the Part as a whole is intended to operate. What constitutes a scheme is ultimately meaningful only in relation to the tax benefit that has been obtained since the tax benefit must be obtained in connection with the scheme. Likewise, the dominant purpose of a person in entering into or carrying out the scheme, and the existence of the tax benefit, must be considered against a comparison with reasonable alternative schemes capable of carrying out the commercial objectives of the arrangement.

In summary, section 177D of the ITAA 1936 provides that Part IVA applies to a scheme in connection with which a taxpayer has obtained a tax benefit if, after having regard to the eight specified factors, it would be concluded that any person who entered into or carried out the scheme, or any part of it, did so for the dominant purpose of enabling the relevant taxpayer to obtain the tax benefit.

The identification of a tax benefit requires consideration of the tax consequences of a 'counterfactual', or alternative hypothesis, that would have resulted had the scheme not been entered into. As stated by Gummow and Hayne JJ in Hart:

[66] When [section 177C(1)] is read in conjunction with [former] s177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in [former] s177D(b) will require consideration of what other possibilities existed.

Guidance for identifying the counterfactuals of the scheme can be found in Practice Statement PS LA 2005/24: Application of the General Anti-Avoidance Rules (PS LA 2005/24). In particular, paragraph 109 lists the following considerations for determining the counterfactuals:

• the most straightforward way of achieving the commercial and practical outcomes;
• commercial norms, such as standard industry behaviour;
• social norms, such as family obligations;
• behaviour of the parties around the time of the scheme compared with the period of the scheme's operation; and
• actual cash flow.

PS LA 2005/24 further explains that if:

• the scheme had no effect other than obtaining the tax benefit, it is reasonable to assume that nothing would have happened if it was not carried out (paragraphs 75 and 110), and
• a tax benefit is obtained in connection with the scheme which also achieves a wider commercial objective, then it would be reasonable to expect that in absence of the scheme the wider commercial objectives would have been pursued by an alternative arrangement (paragraph 76 and 111).

In Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 the Court explained that although the Commissioner has to consider each of the factors provided by former subsection 177D(b) of the ITAA 1936, this doesn't mean that each of the factors must point to the dominant purpose, stating that:

Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against that [former] s177D requires in order to reach the conclusion to which 177D refers.

The Commissioner's support of this view is provided in PS LA 2005/24 which states at paragraph 126 that all factors of subsection 177D(2) of the ITAA 1936 need to be taken into account with regard to the relevant evidence, and weighed together, to identify the dominant purpose of the scheme.

Cancellation of tax benefit

Where the Commissioner has made a determination under paragraph 177F(1)(a) of the ITAA 1936 that an amount is to be included in a taxpayer's assessable income, subsection 177F(2) provides that this amount shall be deemed to be included in the taxpayer's assessable income.

Application to your circumstances

The proposed arrangement would satisfy the requirements for a scheme pursuant to subsection 177A(1) of the ITAA 1936.

Tax benefit

It would appear that steps 1 and 2, while being entered into for genuine commercial reasons, are a preface to a likely takeover by Company F. To establish whether there is a tax benefit associated with the proposed arrangement, it is necessary to consider what would reasonably have been expected to occur, including the tax outcomes, if the scheme had not entered into.

If a tax benefit is obtained in connection with a scheme that also achieves a wider commercial objective (disregarding the tax benefit), then it is reasonable to expect that in the absence of the scheme the wider commercial objective would still have been pursued by the means of a transaction or dealing with a different form or shape. In this instance it is reasonable to conclude that in the absence of steps 1 and 2 a takeover of Company A by Company F would nevertheless occur. This is the relevant counterfactual.

Under this counterfactual it is likely that the Trust B, by exchanging shares in Company A for shares in Company F, would derive a capital gain. However, provided Company F became the owner of at least 80% of shares in Company A (and the other requirements of subdivision 124-M of the ITAA 1997 were met) a roll-over would nevertheless be available.

However, in the absence of steps 1 and 2, Company A would not become a subsidiary of Company E and therefore a deconsolidation and reconsolidation of the corporate group would not be triggered.

It is possible that a tax benefit could be obtained via the deconsolidation and reconsolidation through a step-up in the cost base of the assets for Group C.

However, this potential tax benefit must be weighed against the other commercial (non-tax driven) objectives of the proposed arrangement to determine the dominant purpose of the scheme and thereby whether Part IVA is applicable to the scheme.

Dominant purpose

Whether your purpose in entering into the arrangement is to obtain a tax benefit, is determined with reference to the eight factors specified in subsection 177D(2) of the ITAA 1936:

(a)  The manner in which the scheme is entered into or carried out;

(b)  The form and substance of the scheme;

(c)   The time at which the scheme was entered into and the length of the period during which the scheme will be carried out;

(d)  The result in relation to the operation of this Act, but for this part, would be achieved by the scheme;

(e)  Any change in the financial position of the relevant taxpayer that has resulted, will result, or may be reasonably expected to result, from the scheme;

(f)    Any change in the financial position of any person who has, or has had, any connection with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g)  Any other consequences for the relevant taxpayer or person connected; and

(h)  The nature of any connection between the relevant taxpayer and any person referred to in subparagraph (f).

Conclusion

Based on the available information and having regard to the eight factors in section 177D of the ITAA 1936, a reasonable person would more likely than not conclude that there are potential 'benefits' arising from the scheme - being a step-up in the cost base of the assets for Group C as a result of the capital reorganisation under the consolidations regime.

Taking into account the various considerations, it is reasonable to accept that any tax benefits (incidental or otherwise) are outweighed by the commercial (not-tax) benefits that have been put forward in justification of the scheme. These motivations include that:

• There are legitimate commercial reasons for dispensing with the existing unit trust arrangement. Broadly, Subdivision 124-N of the ITAA 1997 requires all assets of the unit trust to be transferred to a company in return for the unitholders receiving shares in that company (and for the unit trust to cease to be within 6 months).

The entities are merely doing what is recognised and allowed for under Subdivision 124-N of the ITAA 1997. The purpose of these transactions is to achieve the broader aim of allowing each shareholder in Company E to independently choose whether to dispose of their shares and independently negotiate the form any consideration for that disposal.

• The proposed arrangement will simplify the corporate structure and make the group more attractive to would be suitors whether or not the Company F takeover proceeds.
• All transactions are on commercial terms, including the cancellation of shares and reclassification of shares.

Consequently, any potential tax benefit from the deconsolidation and reconsolidation of Group A is not considered to be the dominant purpose behind the scheme and Part IVA will not apply to the scheme.

[1] For convenience, the trust rather than the trustee is listed as the shareholder.

[2] For convenience, the trust rather than the trustee is listed as the shareholder.

[3] For convenience, the trust rather than the trustee is listed as the shareholder.

[4] For convenience, the trust rather than the trustee is listed as the interest holder.

[5] Collectively, described as Company E Shareholders.

For convenience, the trust rather than the trustee is listed as the interest holder.

[6] For convenience, the trust rather than the trustee is listed as the interest holder.

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