1052130493157 | Legal database

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Edited version of private advice

Authorisation Number: 1052130493157

Date of advice: 26 June 2023

Ruling

Subject: Part IVA - 100A - reimbursement agreement

Question 1

Will a dividend taken to be paid to the Trust by the Company (if any) under section 109D or 109E of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of Proposed Arrangement be reduced to nil?

Answer

As the Company's distributable surplus will not exceed zero, it is unnecessary to consider the application of section 109D or 109E of the ITAA 1936 other than that any dividend, if it did arise, would be reduced to nil under section 109Y of the ITAA 1936.

Question 2

Will the Commissioner apply section 177F of the ITAA 1936 to the Proposed Arrangement to determine that an amount equal to all or part of the Dividend is included in the assessable income of the Trust in any of the scheme years?

Answer

No.

Question 3

Will section 100A of the ITAA 1936 apply to any aspect of the Proposed Arrangement, with the effect that the trustee of the Trust will be assessed on all or part of the Dividend under

section 99A of the ITAA 1936?

Summary

No.

This private ruling applies for the following periods:

Income year ending 30 June 20XX

The scheme commenced on:

XX XX XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

All references are to the Income Tax Assessment Act 1936 unless otherwise specified.

1. Person A is the founder and managing director of assorted business and property-holding entities, known collectively as the Group.

2. As the number of entities and properties comprising the Group have expanded, surplus funds from one investment would be used to supplement the external finance for other projects requiring funding. Initially, this was through the utilisation of profits made by the Building Trust flowing to other Group entities to subsidise new developments. This was done by replenishing capital lost by these entities in the early stages of their development.

3. Although the number of entities had expanded significantly as more properties were acquired, all the entities in the Group have been operated and funded as one whole. This has allowed for significant flexibility in intra-group financing, as all of the wealth in the Group is ultimately for the benefit of Person A and their family.

4. It has long been the practice of the Group for there to be a large number of intra-group loans, trust distributions to other Group entities, and unpaid present entitlements, to secure the liquidity and working capital needs of the Group as a whole and to replenish the capital of entities in the Group that were deriving losses.

5. Generally, one trust operates as the main banker for the Group. That is, even though there are many intra-group loans and unpaid present entitlements, this trust is the entity that obtains external borrowings and has a facility with the Bank and on-lends bank-borrowings to the Group as required. The fact that there is a single entity that has the bank facility has necessitated that the other Group entities provide cross-guarantees to secure the bank loan.

6. Recently, Person A has conducted a review of the estate plan, the Group structure, as well as their role on the Group's board, with succession planning a key motivating factor. The number of entities in the Group and the number of related-party loans has grown vastly over the years. This has made administration of the Group complex and costly.

7. The present structure requires significant care and attention to fully comply with Division 7A and the Group prefers to eliminate all Division 7A issues by fully repaying all loans owed to private companies within the Group.

8. It is with the background facts set out in mind that Person A seeks to simplify and rationalise the Group structure to remove as many of the intra-group liabilities as possible by consolidating loans.

9. The Main Trust as at XX XX XX has an estimated carried forward loss of approximately $X, with tax losses first arising in the XX income year.

10. The Main Trust and the Trust have previously made family trust elections specifying Person B as the specified individual.

11. The Main Trust has had a family trust election in force from XX XX XX.

12. The Company is a private company that only has ordinary shares on issue and is wholly owned by the Trust.

13. The Main Trust is an associate (as defined in section 318) of the Trust.

14. As at 30 June 20XX, the Company had the following approximate balances outstanding on loans it had made to other entities in the Group:

• $X owed by the Main Trust (Existing Loans)

• $X owed by the Trust

• $X owed by Other Trusts in the Group

• $X owed by Other Companies within the Group.

15. The Company, Main Trust, Trust, Other Trusts and Other Companies are collectively referred to as the Group Entities.

16. The Group Entities will be residents of Australia for the purpose of subsection 6(1) or subsection 95(2) of the ITAA 1936 throughout the entirety of the period of the ruling.

17. Due to the potential operation of section 109T and the administrative burden required to ascertain the full extent of its application, the Group is unable to definitively say which loans were placed on section 109N terms because otherwise Division 7A would have applied to treat a dividend(s) as having been paid. However, the group has been managing its affairs on the assumption that all of the Former Loans and Existing Loans were on Division 7A terms.

Proposed arrangement (Proposed Arrangement)

18. The steps in the Proposed Arrangement are as follows:

• Step 1: The Company will declare an unfranked dividend (the Dividend) to the Trust.

• Step 2: The Trust will distribute 100% of its income to the Main Trust.

• Step 3: The Main Trust will borrow from the Bank.

• Step 4: With the exception of any Permitted Use Loans, the Main Trust will then lend the necessary funds on commercial terms (Commercial Loans) to all entities within the Group (the Group Entities) to allow them to fully repay all outstanding loans (the Former Loans) owed to the Company and between other Group Entities.

In respect of the Former Loans owed by the Main Trust specifically, it will also use the funds borrowed from the Bank to repay all of its Former Loans payable to the Group Entities, including the outstanding Division 7A loan payable by the Main Trust to the Company (hereafter referred to as the Existing Loan), excluding the outstanding Division 7A loan payable to the Trust.

The repayments of the Former Loans and the Existing Loans are collectively referred to as the Repayments.

• Step 5: The Company will then use the funds it receives from the preceding steps (plus an estimated $X of cash reserves) to partially pay the Dividend owing to the Trust. For other Group Entities (where applicable), they will then lend any surplus funds it receives from the preceding steps (plus an estimated $X of cash reserves) to the Main Trust, on interest-free terms.

• Step 6: The loan owing from the Trust to the Company will be offset in full against the dividend owing to the Trust.

• Step 7: The Trust will make an interim distribution of the Dividend to the Main Trust.

• Step 8: The Trust offsets its loan receivable from the Main Trust against the interim distribution payable to the Main Trust and the Trust also uses the funds it received from the Company as well as from repayments of its other loans receivable from various entities in the Group to fully repay its UPE to the Main Trust.

The loans owing to the Trust will be funded via the use of funds borrowed from the Bank (via the Main Trust) and any cash reserves the borrower may have.

• Step 9: The Main Trust will use the interim distribution to repay the Bank in full.

19. The Trust will distribute 100% of its income for the 20XX income year to the Main Trust.

20. With the exception of the Permitted Use Loan, all loans on Division 7A terms will be repaid.

21. The commercial loans are on terms comparable to key terms of the Bank Finance Agreement that the Group currently holds.

22. The Company will not be undertaking any activities other than those set out in the Proposed Arrangement, with the exception of potentially being wound up.

23. With the exception of Property Company, it is envisaged that the Other Companies will either become dormant or be wound up.

24. No trust distributions will be made to a company in the Group in the 20XX or 20XX income year.

25. The Proposed Arrangement is not part of a broader scheme or arrangement.

26. The Company's distributable surplus, as defined in section 109Y, will not exceed nil for the relevant income years.

27. The Company will not forgive the debts owing on either the Former Loans or the Existing Loans in any way contemplated by section 109F.

28. The Main Trust will not at any point:

• forgive the Commercial Loans, or

• assign the right to receive payment on those loans to an associate, or

• not insist on the entity complying with their obligations under the loan, i.e. repaying the loans, or not insist on the entity making any of the required interest payments or principal repayments in respect of the Commercial Loans.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 99

Income Tax Assessment Act 1997 Section 100A

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 Section 109D

Income Tax Assessment Act 1936 Subsection 109D(1AA)

Income Tax Assessment Act 1936 Section 109E

Income Tax Assessment Act 1936 Subsection 109E(1)

Income Tax Assessment Act 1936 Subsection 109E(2)

Income Tax Assessment Act 1936 Section 109Y

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Subsection 177A(1)

Income Tax Assessment Act 1936 Subsection 177C(1)

Income Tax Assessment Act 1936 Paragraph 177D(b)

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1936 Section 267-20 of Schedule 2F

Income Tax Assessment Act 1936 Subsection 267-20(1) of Schedule 2F

Income Tax Assessment Act 1936 Division 270 of Schedule 2F

Income Tax Assessment Act 1936 Section 270-10 of Schedule 2F

Income Tax Assessment Act 1936 Paragraph 270-10(1)(e) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 270-25(1) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 270-75(1) of Schedule 2F

Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F

Income Tax Assessment Act 1936 Subdivision 267-B of Schedule 2F

Income Tax Assessment Act 1936 Section 272-70 of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-80(6B) of schedule 2F

Income Tax Assessment Act 1936 Subsection 272-90(3A) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-90(5) of Schedule 2F

Income Tax Assessment Act 1936 Subsection 272-100(a) of Schedule 2F

Reasons for decision

Question 1

Will a dividend taken to be paid to the Trust by the Company (if any) under section 109D or 109E of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of the Proposed Arrangement be reduced to nil?

Summary

As the Company's distributable surplus will not exceed zero, it is unnecessary to consider the application of section 109D or 109E other than that any dividend, if it did arise, would be reduced to nil under section 109Y.

Detailed reasoning

29. Broadly, a company will be taken to pay a dividend

• under section 109D to a shareholder or an associate of a shareholder where it makes a loan to those entities that is not put on terms that comply with section 109N and is not repaid in full by the Company's lodgment day of the year it made the loan, or

• under subsection 109E(1) where there is a shortfall of the minimum yearly repayment (MYR) on a loan the company made to a shareholder or associate of a shareholder in a prior year that complied with the requirements of section 109N.

30. The total amount taken to have been paid as dividends under section 109D and 109E by a private company is limited to that company's distributable surplus (subsection 109D(1AA) and subsection 109E(2) in conjunction with section 109Y).

31. Consequently, if the Company's distributable surplus does not exceed zero, any dividends that arise under section 109E or 109D will be reduced to nil under section 109Y.

32. As the Company's distributable surplus will not exceed zero, it is unnecessary to consider the application of section 109D or 109E, other than that any dividend, if it did arise, would be reduced to nil under section 109Y.

Question 2

Summary

No.

Detailed reasoning

33. Part IVA is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

34. Part IVA applies to an arrangement where the following elements exist:

• there is a scheme as defined in subsection 177A(1);

• there is a tax benefit as defined in subsection 177C(1) obtained by a taxpayer in connection with a scheme;

• it would be concluded having regard to the eight matters listed in paragraph 177D(b) that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme; and

• the Commissioner makes a determination under section 177F to cancel the relevant tax benefit.

Application of the law

35. Having regards to all the facts and the commercial objectives sought to be achieved by the Group, the Commissioner accepts that having regard to the factors in subsection 177D(2) the proposed arrangement is not a scheme entered into for the dominant purpose of obtaining a tax benefit.

Question 3

Will section 100A of the ITAA 1936 apply to any aspect of the Proposed Arrangement, with the effect that the trustee of the Trust will be assessed on all or part of the Dividend under section 99A of the ITAA 1936?

Summary

No.

Detailed reasoning

36. Section 100A applies where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate and that present entitlement to that share or to a part of that share arose out of a reimbursement agreement.

37. TR 2022/4 Income tax: section 100A reimbursement agreements (TR 2022/4) provides the Commissioner's view on the application of section 100A.

38. Paragraph 5 of TR 2022/4 outlines the basic requirements for section 100A to apply:

• The following 3 requirements are satisfied:

'Connection requirement' - broadly stated, the present entitlement (or amount paid or applied for the benefit of the beneficiary) must have arisen out of, as a result of or in connection with a reimbursement agreement/

'Benefit to another requirement' - the agreement must provide for the payment of money or transfer of property to, or provision of services or other benefits for, a person other than that beneficiary.

'Tax reduction purpose requirement' - a purpose of one or more of the parties to the agreement must be that a person would be liable to pay less income tax for a year of income.

• The 'ordinary dealing exception' is not satisfied - the agreement must not be one that has been 'entered into in the course of ordinary family or commercial dealing'.

Application of the Law

39. The proposed arrangement is an agreement that would be entered into in the course of ordinary commercial dealings. Therefore, it is not capable of being a 'reimbursement agreement' to which section 100A could apply.

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