Edited version of private ruling

Authorisation Number: 1011507113494

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Ruling

Subject: Share Capital Reduction

Question 1

In respect of the proposed payment of an amount to be debited against the share capital account of Operating Co Pty Ltd as part of the consideration for the cancellation of shares, will the Commissioner make a determination under subsection 45A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45C of the ITAA 1936 applies in relation to the whole, or a part, of the payment?

Answer

No.

Question 2

In respect of the proposed payment of an amount to be debited against the share capital account of Operating Co Pty Ltd as part of the consideration for the cancellation of shares, will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or part, of the payment?

Answer

No.

Question 3

Will the Commissioner make a determination under paragraph 204-30(3)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to deny the whole or a part of the imputation benefit that would arise in respect of the proposed payment of a fully franked dividend as part of the consideration for the cancellation of shares in Operating Co Pty Ltd?

Answer

No.

Question 4

Will the Commissioner make a determination that section 177F of the ITAA 1936 applies to deny the whole or part of any interest deduction claimable by Operating Co Pty Ltd to finance the proposed arrangement to cancel certain shares in Operating Co Pty Ltd and Investor Co Pty Ltd?

Answer

No.

Question 5

Will the Commissioner make a determination under subsection 177EA(5) of the ITAA 1936 that a franking debit arises in the franking account of Operating Co Pty Ltd, or that no imputation benefit arises, in respect of the proposed payment of a fully franked dividend as part of the consideration for the cancellation of shares?

Answer

No.

This ruling applies for the following period:

1 July 2010 - 30 June 2011

Relevant facts and circumstances

Operating Co Pty Ltd is the head company of a consolidated group.

Operating Co Pty Ltd is owned by 40 legal entities. Prior to the proposed share capital reduction (SCR), the break-up of shareholders owning greater than a 1% interest in the company is eight.

The majority shareholder in Operating Co Pty Ltd is Investor Co Pty Ltd. Investor Co Pty Ltd is a passive investment company and does not conduct any active business.

The SCR that Operating Co Pty Ltd is proposing to enter into will involve the cancellation of a portion of its issued share capital. That portion is stated by the applicant to be approximately 7%. In consideration of Investor Co Pty Ltd agreeing to have those shares cancelled, Operating Co Pty Ltd will pay Investor Co Pty Ltd a total amount of $X.00 per share.

The applicant has stated that it will be paying Investor Co Pty Ltd 'market value' for the shares that are to be cancelled. The Commissioner expresses no opinion as to whether (or not), the amount eventually paid will represent 'market value' for the purposes of this ruling application.

Operating Co Pty Ltd has determined the proportion of 'share capital' that is to be attributed to each share on issue using the average capital per share (ACPS) methodology. This has resulted in Operating Co Pty Ltd allocating $0.XX in share capital to each share that is to be cancelled (using the ACPS methodology).

The balance of the payment is stated as representing a fully franked dividend. .

Operating Co Pty Ltd does not have sufficient cash reserves available to fully fund the SCR. Operating Co Pty Ltd intends to approach an external financial institution to obtain the funding.

The proposed SCR will comply with that terms meaning as set out in subsection 256B(2) of the Corporations Act 2001 (the Corporations Act). Investor Co Pty Ltd is the only shareholder of Operating Co Pty Ltd who will have any shares cancelled.

The start date for the SCR will be dependent on certain pre-conditions being satisfied, including obtaining funding on suitable terms and conditions, complying with section 256B of the Corporations Act and having the shareholders pass a resolution approving the SCR. The transaction will commence during the income year ending 30 June 2011.

The applicant has stated that there have not been any transfers to Operating Co Pty Ltd's share capital account which would cause it to be tainted for the purposes of either Division 197 of the ITAA 1997 or Division 197 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997).

Operating Co Pty Ltd has a franking account balance which is in credit as of 30 June 2009. It is expected that the franking account balance will remain in credit at the time of the proposed SCR.

Operating Co Pty Ltd has an informal dividend policy under which it pays out a significant proportion of its net profit after tax, subject to the capital requirements of the Operating Co Pty Ltd consolidated group. In previous years, where a loss was made, Operating Co Pty Ltd paid dividends out of retained earnings.

The dividend paid to Investor Co Pty Ltd will not adversely affect the ability of Operating Co Pty Ltd to pay dividends to its remaining shareholders in the future, and Operating Co Pty Ltd intends to pay an ordinary fully franked dividend in accordance with its informal dividend policy in the relevant year.

Relevant legislative provisions

Corporations Act 2001, section 256B

Corporations Act 2001, subsection 256B(2)

Corporations Act 2001, section 256C

Income Tax Assessment Act 1936, section 45A

Income Tax Assessment Act 1936, subsection 45A(3)

Income Tax Assessment Act 1936, subsection 45A(4)

Income Tax Assessment Act 1936, paragraph 45A(4)(b)

Income Tax Assessment Act 1936, paragraph 45A(4)(e)

Income Tax Assessment Act 1936, paragraph 45A(4)(f)

Income Tax Assessment Act 1936, section 45B

Income Tax Assessment Act 1936, subsection 45B(2)

Income Tax Assessment Act 1936, paragraph 45B(2)(c)

Income Tax Assessment Act 1936, subsection 45B(5)

Income Tax Assessment Act 1936, paragraph 45B(5)(b)

Income Tax Assessment Act 1936, subsection 45B(8)

Income Tax Assessment Act 1936, paragraph 45B(8)(a)

Income Tax Assessment Act 1936, 45B(8)(b)

Income Tax Assessment Act 1936, paragraph 45B(8)(c)

Income Tax Assessment Act 1936, paragraph 45B(8)(d)

Income Tax Assessment Act 1936, paragraph 45B(8)(e)

Income Tax Assessment Act 1936, paragraph 45B(8)(f)

Income Tax Assessment Act 1936, paragraph 45B(8)(h)

Income Tax Assessment Act 1936, paragraph 45B(8)(i)

Income Tax Assessment Act 1936, paragraph 45B(8)(j)

Income Tax Assessment Act 1936, paragraph 45B(8)(k)

Income Tax Assessment Act 1936, section 45C

Income Tax Assessment Act 1936, section 46F

Income Tax Assessment Act 1936, section 160ADA

Income Tax Assessment Act 1936, Part IVA

Income Tax Assessment Act 1936, section 177A

Income Tax Assessment Act 1936, section 177C

Income Tax Assessment Act 1936, section 177D

Income Tax Assessment Act 1936, paragraph 177D(b)

Income Tax Assessment Act 1936, subparagraph 177D(b)(i)

Income Tax Assessment Act 1936, subparagraph 177D(b)(ii)

Income Tax Assessment Act 1936, subparagraph 177D(b)(iii)

Income Tax Assessment Act 1936, subparagraph 177D(b)(iv)

Income Tax Assessment Act 1936, subparagraph 177D(b)(v)

Income Tax Assessment Act 1936, subparagraph 177D(b)(vi)

Income Tax Assessment Act 1936, subparagraph 177D(b)(vii)

Income Tax Assessment Act 1936, subparagraph 177D(b)(viii)

Income Tax Assessment Act 1936, section 177E

Income Tax Assessment Act 1936, paragraph 177E(1)(a)

Income Tax Assessment Act 1936, paragraph 177E(1)(b)

Income Tax Assessment Act 1936, paragraph 177E(1)(c)

Income Tax Assessment Act 1936, section 177EA

Income Tax Assessment Act 1936, subsection 177EA(3)

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

Income Tax Assessment Act 1936, subsection 177EA(5)

Income Tax Assessment Act 1936, section 177F

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

Income Tax Assessment Act 1997, subsection 4-10(3)

Income Tax Assessment Act 1997, section 4-15

Income Tax Assessment Act 1997, section 118-20

Income Tax Assessment Act 1997, subsection 118-20(2)

Income Tax Assessment Act 1997, Division 197

Income Tax Assessment Act 1997, section 204-30

Income Tax Assessment Act 1997, paragraph 204-30(1)(a)

Income Tax Assessment Act 1997, paragraph 204-30(1)(b)

Income Tax Assessment Act 1997, paragraph 204-30(1)(c)

Income Tax Assessment Act 1997, subsection 204-30(3)

Income Tax Assessment Act 1997, subsection 204-30(6)

Income Tax Assessment Act 1997, subsection 204-30(7)

Income Tax Assessment Act 1997, subsection 204-30(8)

Income Tax Assessment Act 1997, paragraph 204-30(8)(a)

Income Tax Assessment Act 1997, paragraph 204-30(8)(b)

Income Tax Assessment Act 1997, paragraph 204-30(8)(c)

Income Tax Assessment Act 1997, paragraph 204-30(8)(d)

Income Tax Assessment Act 1997, paragraph 204-30(8)(e)

Income Tax Assessment Act 1997, paragraph 204-30(8)(f)

Income Tax Assessment Act 1997, subsection 204-30(9)

Reasons for decision

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

Question 1

Section 45A applies where a company streams the provision of a capital benefit to one shareholder(s) (the advantaged shareholder(s)), and the payment of a dividend to another shareholder(s) (the disadvantaged shareholder(s)) in such a way that:

1. the capital benefit is received by the shareholder (the advantaged shareholder) who would in the year of income derive a greater benefit from the capital benefit than any of the disadvantaged shareholders; and

2. it is reasonable to assume that the disadvantaged shareholders have received or will receive dividends.

In this private ruling application, the advantaged shareholder is Investor Co Pty Ltd, and the disadvantaged shareholders are all other shareholders identified on the Operating Co Pty Ltd share register.

The applicant has stated that Investor Co Pty Ltd is having approximately 7% of its shares that it holds in Operating Co Pty Ltd cancelled. Consequently, Investor Co Pty Ltd is an advantaged shareholder in respect of those shares, and a disadvantaged shareholder in respect of the remaining shares. In circumstances where a SCR is taking place in relation to a portion of a single shareholder's interest, then it is conceivable that despite Investor Co Pty Ltd being 'advantaged' in terms of that portion of its Operating Co Pty Ltd shares that are to be cancelled, it may be disadvantaged in relation to the balance of its holding.

Section 45A should be applied on an individual, rather than a class basis. As Investor Co Pty Ltd will be advantaged relevant to the portion of its shareholding which it is selling, and disadvantaged in relation to the remaining portion, the provision must be applied to the entity by analysing each share that it holds.

Consistent with the definition of 'provision of a capital benefit' (as defined in subsection 45A(3)), the applicant has conceded that, at least in relation to its shareholding that will be cancelled, Investor Co Pty Ltd will be an advantaged shareholder. This is due to it receiving a return of share capital under the proposed SCR.

It should be noted that the disadvantaged shareholders will not be receiving any dividend payment that is associated with the SCR. Rather, they will continue to receive dividends paid in accordance with Operating Co Pty Ltd's informal dividend policy.

To determine whether (or not) the Commissioner should apply section 45A, it is necessary to determine whether the capital benefit received by Investor Co Pty Ltd as a result of the SCR constitutes a greater benefit to Investor Co Pty Ltd than it would to other shareholders identified on the Operating Co Pty Ltd share register. Subsection 45A(4) sets out 6 factors to have regard to when determining whether the advantaged shareholder is actually receiving a greater benefit. The discussion below considers those factors as they apply in the present circumstances:

(a) Whether Investor Co Pty Ltd holds pre-CGT shares:

The shares which are to be cancelled as a result of the SCR may be both pre and post-CGT shares. Both the advantaged shareholder and disadvantaged shareholders hold a mix of pre and post-CGT shares. The applicant has advised that whilst Operating Co Pty Ltd has not made any decision as to which class of shares it will cancel, the expectation is that post-CGT shares will be cancelled. If this is the case, then there will be no advantage to Investor Co Pty Ltd in terms of realising shares that have a pre-CGT status.

In the event pre-CGT shares are cancelled, the applicant states that there are other shareholders who are not participating in the SCR who also hold pre-CGT shares. The shareholders who hold pre-CGT shares in Operating Co Pty Ltd, and who are not participating in the SCR are not disadvantaged in respect of those actual shares' pre-CGT status.

The applicant has also stated that if the advantaged shareholder disposes of pre-CGT shares, then it is likely CGT event K6 will occur. In other words, the applicant expects that due to increases in the market value of the property acquired by Operating Co Pty Ltd between 20 September 1985 and the time of the actual SCR, shareholders who hold pre-CGT shares will loose the benefit of the pre-CGT status to the extent that the increase in value of the share is attributable to that increase in market value of the acquired property.

The Commissioner has not been asked to rule on CGT event K6, and expresses no opinion as to whether (or not) the CGT event K6 happens.

However, the Commissioner accepts that should Operating Co Pty Ltd decide to cancel a portion of Investor Co Pty Ltd's shareholding that was acquired prior to 20 September 1985, then subject to ascertaining Operating Co Pty Ltd's market value at the relevant times, CGT event K6 may happen. If this is the case, then the Commissioner accepts the proposition that a return of share capital in respect of Investor Co Pty Ltd's pre-CGT shares would not confer a greater benefit.

(b) Investor Co Pty Ltd is an Australian resident:

The applicant has stated that the advantaged shareholder is an Australian resident. On this basis the Commissioner is satisfied that paragraph 45A(4)(b) is not a factor indicative of the advantaged shareholder gaining a greater benefit.

(c) Investor Co Pty Ltd's cost base of the share is not substantially less than the capital benefit:

The Commissioner accepts that Operating Co Pty Ltd is not in a position to know the exact cost base of either Investor Co Pty Ltd's shareholding, or that of the remaining, potentially disadvantaged shareholders.

The applicant has also submitted that should the dividend component of the payment exceed the capital gain made on cancellation of a share, then while subsection 118-20(2) of the ITAA 1997 reduces the capital gain to nil, it is not possible for the advantaged shareholder to make a capital loss (which would otherwise occur if the cost base of the share was greater than the capital benefit received).

In effect to the extent that the share's cost base exceeds the capital benefit, Investor Co Pty Ltd will actually be suffering a disadvantage.

(d) Investor Co Pty Ltd does not have any capital losses for the income year in which the benefit is provided:

The applicant has stated that Investor Co Pty Ltd does not have any carried forward capital losses, nor is it expecting to have a capital loss in the current year. The Commissioner accepts that based on these circumstances, paragraph 45A(4)(d) is not relevant in determining whether the advantaged shareholder gains a greater benefit.

(e) Investor Co Pty Ltd, is a private company that would have been entitled to the inter-corporate dividend rebate under the former section 46F:

The applicant has stated that Investor Co Pty Ltd, being a private company, would have been entitled to a rebate under the former section 46F. The Commissioner accepts that this factor will not result in Investor Co Pty Ltd deriving a greater benefit under the proposed arrangement. Accordingly, the Commissioner accepts that based on these circumstances, paragraph 45A(4)(e) is not relevant in determining whether the advantaged shareholder gains a greater benefit.

(f) Investor Co Pty Ltd does not have any income tax losses:

The applicant has stated that Investor Co Pty Ltd does not have any carried forward income tax losses, nor does it expect to have any current year income tax losses in the year that it participates in the SCR. The Commissioner accepts that based on these circumstances, paragraph 45A(4)(f) is not relevant in determining whether the advantaged shareholder gains a greater benefit.

The Commissioner has formed the view that the SCR does not represent the streaming of capital benefits to a shareholder who would derive a greater benefit, as compared to other shareholders, and that those other shareholders are not receiving dividends based on their ability to utilise that dividend or otherwise. Rather the purpose of the SCR is to provide Investor Co Pty Ltd with a form of financing to enable it to meet its own corporate objectives. Accordingly, the Commissioner will not make a determination under subsection 45A(2) in respect of the proposed payment.

Question 2

Requirements of section 45B

The operative provision of section 45B is subsection 45B(2). Insofar as is relevant, that provision states:

This section applies if:

(a) there is a scheme under which a person is provided with a capital benefit by a company; and

(b) under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit; and

(c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit.

Where these conditions are met, the Commissioner is authorised to make a determination under subsection 45B(3) that section 45C applies to the whole or part of the capital benefit provided to the shareholder such that it is taken to be an unfranked dividend.

Each of the elements of section 45B is considered in more detail below.

Scheme

The term 'scheme' takes on the same meaning that it has for Part IVA purposes. The Part IVA definition of scheme is very broad and includes any 'agreement, arrangement, understanding, promise or undertaking' or 'any scheme, plan, proposal, action, course of action or course of conduct.'

Accordingly, the SCR is a scheme for the purposes of section 45B.

Provided with a capital benefit

The meaning of 'provided with a capital benefit' is defined in subsection 45B(5) as follows:

A reference to a person being provided with a capital benefit is a reference to any of the following:

(a) the provision of ownership interests in a company to the person;

(b) the distribution to the person of share capital or share premium;

(c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person.

As part of the SCR proceeds is regarded as capital, and to that extent will be fully debited against Operating Co Pty Ltd's share capital account, those proceeds will represent a capital benefit in the hands of Investor Co Pty Ltd, pursuant to paragraph 45B(5)(b).

Obtaining a tax benefit

Under the scheme a person must obtain a tax benefit. The meaning of obtaining a tax benefit is defined broadly in subsection 45B(9) as:

… if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if… the capital benefit had been a dividend.

Accordingly, under a literal reading of the legislation, the SCR may provide Operating Co Pty Ltd's shareholder, Investor Co Pty Ltd, with a tax benefit (since a small capital gain may be made) in contrast to the outcome that would result if the entire payment was characterised as a dividend.

Purpose of obtaining a tax benefit

The final element that has to be satisfied for section 45B to apply is contained in paragraph 45B(2)(c) as quoted above.

Paragraph 1.31 of the Explanatory Memorandum that accompanied the Taxation Laws Amendment (Company Law Review) Bill 1998, which originally enacted section 45B explained what is meant by 'a purpose' of a scheme as follows:

Section 45B requires a 'purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit. The words in parentheses are inserted for more abundant caution; a reference to 'a purpose' of a scheme is usually understood to include any main or substantial purpose of the scheme, and the words in parentheses clarify that this is the intended meaning here. Thus while section 45B does not require the purpose of obtaining a tax benefit to be the ruling, most influential or prevailing purpose, neither does it include any purpose which is not a significant purpose of the scheme.

A purpose is an incidental purpose when it occurs fortuitously or in subordinate conjunction with one of the main or substantial purposes of the scheme, or merely follows that purpose as its natural incident.

The application of section 45B to Operating Co Pty Ltd therefore turns on whether, having regard to the relevant circumstances of the SCR, it may be concluded that it was undertaken for more than an incidental purpose of enabling Operating Co Pty Ltd's shareholders to obtain a tax benefit.

The meaning of the 'relevant circumstances of the scheme' is set out in subsection 45B(8). Listed in paragraphs (a)-(j) are the relevant circumstances that need to be considered. In paragraph (k), the matters referred to in sub-paragraphs 177D(b)(i)-(viii) are also required to be considered.

The relevant circumstances that need to be considered are:

Whether the capital component of the Operating Co Pty Ltd payment will be attributable to the profits of Operating Co Pty Ltd: paragraph 45B(8)(a).

The capital component of the payment that Operating Co Pty Ltd will pay Investor Co Pty Ltd is entirely attributable to Operating Co Pty Ltd's share capital account. The applicant has stated that Operating Co Pty Ltd's share capital account is not tainted (within the meaning described in Division 197 of the ITAA 1997 or Division 197 of the IT(TP)A 1997). The capital component of the payment has been determined using the 'average capital per share' (ACPS) methodology. The Commissioner has issued a Practice Statement PS LA 2008/10 to provide instruction and guidance to tax officers in regard to the application of section 45B in relation to SCRs. PS LA 2008/10 does not discuss a suitable methodology for attributing consideration between a capital payment and a dividend. However, drawing on the Commissioner's discussion in PS LA 2007/9 of the appropriate methodology to determine the split between share capital and dividend payments in a share buy-back, the Commissioner considers that the ACPS methodology is an appropriate one.

Accordingly, the Commissioner is satisfied that the capital component of the payment is not sourced from the profits of the company.

The pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or an associate of the company: paragraph 45B(8)(b).

Operating Co Pty Ltd has a long history of paying dividends to its shareholders. These are generally proportionate to the net profit derived by the company. Further, even in loss years, the company has paid dividends out of retained earnings.

The applicant has confirmed Operating Co Pty Ltd's intention to continue paying regular dividends to shareholders both in the year of income in which the SCR will take place, as well as in future income years. That is, the SCR will not alter the current and ongoing dividend policy of Operating Co Pty Ltd. The provision of the capital benefit is not intended to replace or supplement the regular distributions made by Operating Co Pty Ltd. Operating Co Pty Ltd's pattern of distributions shows that there is no intention or motivation that could be regarded as inclining towards the requisite purpose that is required for the application of section 45C.

Further, Operating Co Pty Ltd has not previously undertaken a SCR. It is only doing so now in order to facilitate the reduction of one shareholder's interest (Investor Co Pty Ltd), who no longer wishes to maintain its level of share ownership in Operating Co Pty Ltd. These circumstances combined tend against the existence of the requisite purpose.

Whether the relevant taxpayer has capital losses that, apart from the scheme would be carried forward to a later year of income: paragraph 45B(8)(c).

Investor Co Pty Ltd does not have any capital losses available which could be used to offset the capital benefit received, therefore this factor tends against the existence of the requisite purpose.

Whether some or all of the ownership interests in the company or in an associate of the company were acquired or taken to have been acquired before 20 September 1985: paragraph 45B(8)(d).

Operating Co Pty Ltd has not decided which shares it will be cancelling. Presumably, Operating Co Pty Ltd will negotiate with Investor Co Pty Ltd in relation to this factor. That said, the applicant has stated that Investor Co Pty Ltd has not decided whether it will be selling post, or pre-CGT shares. It is likely that Investor Co Pty Ltd will seek to have its post-CGT shares cancelled. In the event that Operating Co Pty Ltd cancels Investor Co Pty Ltd's post-CGT shares, then it becomes self evident that the requisite purpose is not present.

In the event that Investor Co Pty Ltd has pre-CGT shares cancelled, then the applicant has stated that it is likely CGT event K6 will occur. The applicant further contends, that this will prevent Investor Co Pty Ltd from disregarding any capital gain. The Commissioner makes no statement as to the likelihood (or not) of CGT event K6 happening.

In the event that Investor Co Pty Ltd has pre-CGT shares cancelled, then this factor will give some weight to the Commissioner making a determination that section 45C will apply.

Whether the relevant taxpayer is a non-resident: paragraph 45B(8)(e).

Investor Co Pty Ltd is an Australian resident for taxation purposes. Therefore this factor is not supportive of the Commissioner making a determination that section 45C will apply.

Whether the cost base of the relevant ownership interest is not substantially less than the value of the applicable capital benefit: paragraph 45B(8)(f).

The applicant has stated that Investor Co Pty Ltd has a range of cost bases for shares that it holds in Operating Co Pty Ltd. As noted, Operating Co Pty Ltd has not determined the exact shares it will be cancelling. The applicant has further stated that they expect Investor Co Pty Ltd will have shares cancelled with cost bases both above and below the value of the capital proceeds.

In circumstances where the cost base of the share exceeds the capital benefit, then as identified in paragraph 10 of PS LA 2008/10, there is no possibility of a capital loss being generated by the application of the anti-overlap rules in section 118-20 of the ITAA 1997 and Investor Co Pty Ltd would be disadvantaged by the receipt of the capital benefit.

The Commissioner accepts the applicant's submission that little weight should be given to this factor.

Whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital: paragraph 45B(8)(h).

Operating Co Pty Ltd is cancelling its shares. Therefore, Investor Co Pty Ltd's membership interest in Operating Co Pty Ltd held after the SCR will be different in proportion and profile to that which would have been the case had the payment consisted entirely of a dividend, and had those shares not been cancelled. Therefore, this factor tends against the existence of the requisite purpose as it suggests a genuine purpose of a return of capital.

Paragraphs 45B(8)(i) and 45B(8)(j) are not relevant to the proposed Operating Co Pty Ltd SCR as the scheme will not involve the provision of ownership interest and is not considered to be a demerger.

Paragraph 45B(8)(k) requires that regard be had to the matters contained in subparagraphs 177D(b)(i) to (viii), namely:

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

The commercial realities of the situation indicated that one particular shareholder in Operating Co Pty Ltd (Investor Co Pty Ltd) had a strong commercial driver to reduce its shareholding in Operating Co Pty Ltd. This meant that a selective SCR of Investor Co Pty Ltd's interest in Operating Co Pty Ltd was the most appropriate method to facilitate the reduction of Investor Co Pty Ltd's interest. The other option considered was a share buy-back, and the capital benefit provided there under would be identical in all respects. This tends to weigh against a finding of the requisite purpose.

Finally, the scheme is intended to be carried out in a simple, transparent and commercial manner. There are no artificial or contrived steps in the scheme.

(ii) the form and substance of the scheme;

The form and the substance of the scheme are congruent in all respects. This tends to weigh against a finding of the requisite purpose.

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

The applicant has stated that the SCR is entirely dependent on certain commercial objectives being met. These include obtaining a private ruling, complying with sections 256B and 256C of the Corporations Act, sourcing third party finance to fund the SCR and reaching a final negotiated outcome with Investor Co Pty Ltd. The SCR will proceed as soon as is practicable after meeting these commercial considerations. Neither the timing of the transaction, or the period which it is anticipated to take suggest that this factor is of any importance. Consequently, this factor weighs against a finding of the requisite purpose.

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

The applicant has stated that there is little practical difference in Investor Co Pty Ltd receiving either a return of capital or a franked dividend.

In the case of a return of capital, Investor Co Pty Ltd may make a small capital gain but it is not possible for it to make a capital loss unless the payment is less than the reduced cost base of the shares as a result of the SCR.

In the case of a fully franked dividend, the applicant suggests that the tax effect is neutral due to the franking credits attached.

The Commissioner accepts the applicant's contentions. Accordingly, little weight is placed upon this factor in evaluating the motives behind the requisite purpose.

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

The applicant has submitted that the net change in the financial position of Investor Co Pty Ltd will be nil. That is, they are replacing one asset (a share) with another asset (cash) of the same value. This tends to weigh against a finding of the requisite purpose.

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

Operating Co Pty Ltd will need to obtain funding from a financial institution in order to fund part of the SCR. Operating Co Pty Ltd will also be required to debit its share capital account and retained earnings to reflect the return of capital and profits to Investor Co Pty Ltd. This tends to weigh against a finding of the requisite purpose.

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

There are no other consequences of the scheme having been entered into, or carried out.

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (vi);

The relevant relationship for the purposes of this factor is that which exists between Operating Co Pty Ltd and Investor Co Pty Ltd (as a shareholder in Operating Co Pty Ltd who is desirous of liquidating a part of its interest in the company). This tends to weigh against a finding of the requisite purpose.

Examining the totality of the relevant circumstances, the Commissioner considers that the conclusion required by paragraph 45B(2)(c) should not be drawn and the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole, or a part of the payment.

Question 3

Whilst only one particular shareholder is participating in Operating Co Pty Ltd's SCR (Investor Co Pty Ltd), the applicant has stated that Operating Co Pty Ltd intends to continue paying fully franked dividends to its remaining shareholders into the future. The applicant has further stated that as at 30 June 2009 Operating Co Pty Ltd's franking account was in credit and the franking debit that would result from the payment of the fully franked dividend under the SCR will likely result in a debit. This leaves a franking credit balance.

Section 204-30 of the ITAA 1997 counters strategies that are designed and implemented to manipulate the imputation system. The section applies where a corporate tax entity streams the payment of dividends, or the payment of dividends and the giving of other benefits, to its members in such a way that:

(a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions (paragraph 204-30(1)(a) of the ITAA 1997);

(b) the member would derive a greater benefit from franking credits than another member of the entity (paragraph 204-30(1)(b) of the ITAA 1997); and

(c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits (paragraph 204-30(1)(c) of the ITAA 1997).

If section 204-30 of the ITAA 1997 applies, the Commissioner is vested with discretion under subsection 204-30(3) of the ITAA 1997 to make a determination in writing either:

(a) that a specified franking debit arises in the franking account of the entity, for a specified distribution or other benefit to a disadvantaged member (paragraph 204-30(3)(a) of the ITAA 1997); or

(b) that no imputation benefit is to arise in respect of any streamed distributions made to a favoured member, and this is to be specified in the determination (paragraph 204-30(3)(c) of the ITAA 1997).

It is clear that Investor Co Pty Ltd is receiving an 'imputation benefit' for the purposes of subsection 204-30(6) of the ITAA 1997.

What must be determined, is whether (or not) Investor Co Pty Ltd derives a greater benefit from the franking credits in accordance with subsections 204-30(7)-(10) of the ITAA 1997, than does the non-participating shareholders in Operating Co Pty Ltd. Subsection 204-30(7) of the ITAA 1997 states that the list of cases in which a member of an entity derives a greater benefit from franking credits than another member, in subsection 204-30(8) of the ITAA 1997, is not an exhaustive list.

In determining whether Investor Co Pty Ltd has derived a 'greater benefit from franking credits', subsection 204-30(8) of the ITAA 1997 directs the Commissioner to have regard to six factors set out in that provision. Namely, whether:

(i) the non-participating shareholders are non-residents for Australian taxation purposes: paragraph 204-30(8)(a) of the ITAA 1997. The applicant has stated that Operating Co Pty Ltd has 2 non-resident shareholders, these shareholders' only hold 0.036% of Operating Co Pty Ltd's issued shares each. The non-residents shareholders of Operating Co Pty Ltd constitute 0.072% of the company's issued share capital. The Commissioner is satisfied that this level of non-resident shareholding is not capable of motivating the transaction.

(ii) the non-participating shareholders are entitled to a tax offset under Division 207: paragraph 204-30(8)(b) of the ITAA 1997. Whilst the non-participating shareholders will not be receiving a franked dividend that is associated with the SCR, the applicant has stated, with the exception of the non-resident shareholders discussed previously and the potential situation of a trust distributing to a non-resident beneficiary, that all other non-participating shareholders will be entitled to a tax offset. The Commissioner accepts these contentions, and is satisfied that little weight should be given to this consideration.

(iii) the participating shareholder's amount of income tax payable as a consequence of the distribution paid under the SCR, is less than the tax payable (after taking into account the available tax offset) by the non-participating shareholders: paragraph 204-30(8)(c) of the ITAA 1997. The applicant contends that the tax offset is unlikely to be wasted in this way by the non-participating shareholders. This is due to the tax offset being refundable to individuals, and convertible into carry forward losses for corporate shareholders. The applicant has acknowledged that where the franking credits flow to a trust, the potential exists for a discrepancy to arise, but has submitted that even in these circumstances there is unlikely to be any franking credit wastage. The Commissioner accepts these contentions, and is satisfied that little weight should be given to this consideration.

(iv) the non-participating shareholders are corporate tax entities who will not receive a franking credit if a distribution is made: paragraph 204-30(8)(d) of the ITAA 1997. The Commissioner accepts the applicant's contention that the rulee is not aware of any circumstances which would preclude the corporate shareholder members of the company from receiving a franking credit in respect of a distribution.

(v) the non-participating shareholders are corporate tax entities who will not be able to pass on the benefit of the franking credits received to its own members: paragraph 204-30(8)(e) of the ITAA 1997. All of the corporate shareholders in Operating Co Pty Ltd are franking entities. The applicant has stated that Operating Co Pty Ltd is not in a position to know whether theses shareholders would be unable to make frankable distributions (for example they may have no profits out of which to declare dividends), however, the applicant has stated that Operating Co Pty Ltd considers it unlikely that its corporate shareholders could not pass on the benefit of the franking credits. The Commissioner accepts the applicant's contention that Operating Co Pty Ltd is not in a position to know the accounting and tax positions of its corporate shareholders.

(vi) the non-participating shareholders are exempting entities: paragraph 204-30(8)(f) of the ITAA 1997. This consideration is not relevant as the applicant has stated that none of the corporate shareholders satisfy this condition.

The applicant has stated that the circumstances detailed in subsections 204-30(9) and (10) of the ITAA 1997 are not relevant. These provisions concern franking credits that flow from an exempting entity (or former exempting entity: subsection (9), and venture capital: subsection (10)). The Commissioner accepts the applicant's contentions that these provisions are not relevant.

In summary, the Commissioner accepts the applicant's contention that the SCR is not structured so as to 'stream' franking credits to those who are best able to use them.

The Commissioner will not make a determination under paragraph 204-30(3)(c) of the ITAA 1997 to deny imputation benefits that arise in respect of the dividend component of the SCR paid to Investor Co Pty Ltd.

Question 4

Part IVA has potential application to transactions if it is reasonable to conclude that a scheme (broadly defined) was entered into or carried out by a person for the dominant purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with the scheme. In this context, a tax benefit may arise where;

1. an amount is not included in assessable income,

2. a deduction is allowable,

3. a capital loss is incurred, or

4. a foreign income tax offset is allowable

in circumstances where that outcome would not have been reasonably expected if the scheme had not been entered into or carried out. Section 177F allows the Commissioner to cancel certain tax benefits which have been obtained, or would but for section 177F be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

For Part IVA to apply, the following requirements must be satisfied:

(i) a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

(ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A;

(iii) having regard to the criteria in section 177D, the scheme must be one to which Part IVA applies.

Whilst this ruling request is in relation to Operating Co Pty Ltd, it needs to be considered with regard to Investor Co Pty Ltd's circumstances. Thus, the scheme will extend to the entire transaction, that is the 'scheme' will encompass both Operating Co Pty Ltd's and Investor Co Pty Ltd's SCR.

Elements of the scheme

A 'scheme' is defined in wide terms (section 177A). A scheme is not to be identified so narrowly that '… the circumstances are incapable of standing on their own without being robbed of all practical meaning': FCT v. Peabody (1994) 181 CLR 359; 94 ATC 4663; (1994) 28 ATR 344 (Peabody). A narrower scheme can exist within a set of arrangements if that narrower scheme can stand on its own as a separate scheme: FCT v. Consolidated Press Holdings Ltd (2001) 207 CLR 235; 2001 ATC 4343; 47 ATR 229 (Consolidated Press).

In this case, whilst both Operating Co Pty Ltd's and Investor Co Pty Ltd's SCR may be characterised as a 'scheme' in themselves, the full and proper characterisation of the scheme encompasses the following elements:

1. The obtaining of debt financing by Operating Co Pty Ltd

2. The determination by Operating Co Pty Ltd of the group of shareholders who will be invited to participate in the SCR

3. The determination of the dividend / capital allocation in relation to the payments to be made under the Operating Co Pty Ltd SCR

4. The timing of the payments made by Operating Co Pty Ltd

5. The use of the payments received by Investor Co Pty Ltd from the Operating Co Pty Ltd SCR

6. The determination of the group of Investor Co Pty Ltd shareholders who will participate in the Investor Co Pty Ltd SCR

7. The determination of the dividend / capital allocation in relation to the payments to be made under the Investor Co Pty Ltd SCR

8. The timing of the payments made by Investor Co Pty Ltd

Tax Benefit

If Part IVA is to apply Operating Co Pty Ltd must have obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme. It must be possible to say that the tax benefit would not have arisen if the scheme had not been entered into or carried out, or that it might reasonably be expected not to have been obtained. In Peabody, the High Court had earlier commented:

A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable to be regarded as reasonable: (1994) 181 CLR 359.

The applicant has submitted that in the context of this ruling application, section 177D can have no application, as this scheme is 'in respect of obtaining imputation benefits'. As such, there can be no 'tax benefit', as the definition of that term 'does not extend to an entity receiving franking credits'.

Where an entity receives franking credits, the benefit it will enjoy flows from the tax offset that those franking credits provide. The entity's taxable income is calculated prior to the application of that tax offset (section 4-15 of the ITAA 1997). Once the entity has determined its taxable income, it then determines its income tax liability, which is calculated by reference to the amount of any tax offset (subsection 4-10(3) of the ITAA 1997).

Accordingly, a tax offset is not:

a. an allowable deduction

b. an amount that is included in assessable income

c. a capital loss, or

d. a foreign tax credit.

On this basis, the applicant contends that a 'tax offset' can not fall within the definition of a tax benefit under section 177C.

Whilst the Commissioner accepts the applicant's contention in relation to the characterisation of a franking credit in terms of 'tax benefit' under section 177C, it is apparent that the scheme has the potential to afford Operating Co Pty Ltd other benefits that will satisfy the definition of 'tax benefit'.

For example, Operating Co Pty Ltd will presumably obtain a tax deduction for the third party finance that it sources to fund the SCR. This will result in an allowable interest deduction to Operating Co Pty Ltd, and that interest deduction is a tax benefit.

In the High Court decision in Federal Commissioner of Taxation v. Hart (2004) 217 CLR 216; 2004 ATC 4599; (2004) 55 ATR 712 (Harts Case), Gleeson CJ and McHugh J noted '…any tax benefit identified must be related to the scheme, as must any conclusion of dominant purpose, and also the ultimate determination'. Their Honours expressly endorsed comments by Hill J in the Full Federal Court in Hart v Commissioner of Taxation (2002) 121 FCR 206; 2002 ATC 4608; (2002) 50 ATR 369 where Hill J observed that when applying Part IVA '…any tax benefit which is identified must have a relationship to the defined scheme and not some other scheme'.

So having identified the 'tax benefit' that is to be tested, the Commissioner must then determine if the particular tax benefit (the interest deduction) arose as a result of the scheme. In order to determine if the tax benefit that would be obtained by Operating Co Pty Ltd resulted from the scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes that Operating Co Pty Ltd might reasonably have been expected to enter into.

As there are a number of possible reasonable alternative means of raising finance without being able to obtain an interest deduction, the Commissioner is satisfied that the interest deduction that would result from the utilisation of debt finance to fund the Operating Co Pty Ltd SCR is a result of the scheme.

Dominant Purpose of Getting a Tax Benefit

For Part IVA to apply, the obtaining for the relevant taxpayer of any identified tax benefit in connection with the scheme must constitute the dominant purpose for one of the persons entering into or carrying out the scheme. As stated in FC of T v. Spotless Services Ltd (1996) 186 CLR 404; (1996) 96 ATC 5201; (1996) 34 ATR 183:

Much turns upon the identification, among various purposes, of that which is dominant. In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose: (1996) 186 CLR 404 at 416.

To uncover the dominant purpose, the statutory predication test outlined in paragraph 177D(b) requires the Commissioner to apply the facts of the case to the objective factors listed. Such a consideration requires objective conclusions of a reasonable person to be drawn.

Whilst the scheme in this ruling includes Operating Co Pty Ltd, Investor Co Pty Ltd, and the participating shareholders in the Investor Co Pty Ltd SCR, the application of section 177D needs to be considered against the background of the counterfactual(s) available to Operating Co Pty Ltd.

(a) Manner in which scheme was entered into or carried out

The first factor, examined under paragraph 177D(b)(i), is the manner in which the scheme was entered into or carried out.

The scheme is not complex. It is noted that each of the entities in the scheme are dealing with each other at arm's length for their own commercial objectives. There is nothing in this consideration that suggests the existence of the requisite purpose.

(b) Form and substance of the scheme

The second factor, examined under paragraph 177D(b)(ii), looks at the form and substance of the scheme. The form refers to the legal form by which the scheme is to be performed, whereas the substance refers to the overall effect of it. It would not be considered commercial practice if the form and substance of the scheme were inconsistent.

On these facts the form and substance of the scheme are consistent. Accordingly, the form and substance of the scheme does not suggest that the parties to the scheme undertook the transaction with the dominant purpose of gaining a tax benefit for Operating Co Pty Ltd.

(c) Time at which scheme was entered into and length of period during which the scheme was carried out

The third factor, examined under paragraph 177D(b)(iii), considers the time at which the scheme was entered into and the length of the period during which the scheme was carried out.

The scheme is taking place in one financial year and over commercially acceptable periods of time. Accordingly, there is nothing in this consideration that suggests the existence of the requisite purpose.

(d) Tax consequences but for the application of section 177D

The fourth factor, examined under paragraph 177D(b)(iv), looks at the tax consequences that flow as a result of the scheme as compared to those that would arise in the absence of the scheme.

The capital management of Operating Co Pty Ltd is a matter that is both determined and managed by the entity's governing mind (that is, senior management and its Board). Operating Co Pty Ltd has chosen to enter into this arrangement for commercial reasons. If the scheme were not entered into then its share capital account would remain unaffected. Further, the entity would presumably continue to pay franked dividends. Finally, Operating Co Pty Ltd's share value would not be greatly affected.

In contrast, under the scheme Operating Co Pty Ltd's share capital account decreases, its liabilities (the third party borrowings) increase, and it incurs a deductible interest expense. Finally, whilst the Commissioner is unable to draw any conclusions, it is possible that Operating Co Pty Ltd's share value would also be impacted.

The tax outcome differential between implementing the proposed scheme, and not doing so, or entering a different scheme, does not suggest the existence of the requisite purpose.

(e) Any change in the financial position of relevant taxpayer

The fifth factor, examined under paragraph 177D(b)(v), requires an analysis of any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme.

Operating Co Pty Ltd's operating financial position will vary when the scheme is undertaken. However, the principal change under the scheme would seem to be a decrease in an asset (cash), a decrease in owners equity (contributed capital), and an increase in liabilities (the third party finance).

The change in the financial position of Operating Co Pty Ltd when the scheme is implemented is commercially understandable, and the Commissioner is satisfied that there is nothing in this consideration that suggests the existence of the requisite purpose.

(f) Any change in the financial position of anyone connected with the relevant taxpayer

The sixth factor, examined under paragraph 177D(b)(vi), identifies another indicator of obtaining a tax benefit as any change in the financial position of any person who has, or has had any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme.

It is not possible to identify the precise financial positions of all the relevant taxpayers involved in the scheme. As identified by the applicant, Investor Co Pty Ltd holds a mix of pre and post CGT-shares, and Investor Co Pty Ltd's shareholders also hold a mix of pre and post-CGT shares.

Notwithstanding the inevitable variation in financial position of the various taxpayers involved in the scheme, the Commissioner is satisfied that they are not likely to be relevant in suggesting the existence of the requisite purpose.

(g) Any other consequences for the relevant taxpayer or any person referred to in the preceding paragraph as a result of the scheme

The seventh factor, examined under paragraph 177D(b)(vii), identifies consequences for the relevant taxpayer (other than financial) or any person referred to in paragraph (vi) as a consequence of the scheme being carried out. There has not been any consequences identified for the relevant taxpayer (other than financial) or any person referred to in paragraph (vi) as a consequence to the scheme being carried out.

The Commissioner is satisfied that there are no other consequences that would suggest the existence of the requisite purpose.

(h) Nature of any connection between the relevant taxpayer and any person referred to in paragraph (vi) above

The eighth factor, examined under paragraph 177D(b)(viii), identifies the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (vi). This test relates to the connection between the taxpayer and any other person for whom there are consequences from the operation of the scheme.

Unlike the circumstances in Hart's Case, the particular form of the scheme, and the various steps and elements in the scheme, is not unusual and is commercially explicable for non-tax considerations.

The SCR is a bona fide commercial arrangement with each party to the transaction acting at arm's length to attain its commercial objectives. The Commissioner is satisfied that there are no other connections between the parties that would suggest the existence of the requisite purpose of obtaining a tax benefit.

Having regard to the eight factors referred to in section 177D, the dominant purpose of the scheme appears to be the facilitation of a capital change in two entities for commercial reasons on commercial terms.

Accordingly, the Commissioner will not make a determination that section 177F applies to deny the whole or part of any deduction claimable by Operating Co Pty Ltd to finance the proposed arrangement to cancel certain shares in Operating Co Pty Ltd.

Question 5

Section 177EA is a general anti-avoidance provision that applies to a wide range of schemes to obtain a tax advantage in relation to imputation benefits including schemes involving franking credit trading and dividend streaming. The reason for its introduction was explained in the Explanatory Memorandum to the Taxation Laws Amendment Act (No.3) 1998 (Act No 47 of 1998) as follows:

One of the underlying principles of the dividend imputation system is that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves. Franking credit trading, which broadly is the process of transferring franking credits on a dividend from investors who cannot fully use them (such as non-residents and tax-exempts) to others who can fully use them undermines this principle. Similarly, dividend streaming (i.e. the streaming of franking credits to select shareholders) undermines the principle that, broadly speaking, tax paid at the company level is imputed to shareholders proportionately to their shareholdings.

The preconditions to the application of section 177EA are:

a. a scheme for the disposition of shares or an interest in shares in a company;

b. a frankable dividend or a distribution has been paid, is payable, or is expected to be payable in respect of the shares or interest in shares;

c. the dividend or distribution was or is expected to be franked;

d. but for the section, a person (the 'relevant taxpayer') would receive or could reasonably be expected to receive franking credit benefits from the dividend or distribution; and

e. having regard to the relevant circumstances of the scheme, it would be concluded that the person or one of the persons who entered into or carried out the scheme or any part thereof did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a franking credit benefit (subsection 177EA(3)).

One of the features of section 177EA is its purpose test. This is based on a non incidental purpose, whether or not the dominant purpose, of enabling the relevant taxpayer to obtain a franking credit.

The elements of this purpose test require that having regard to the 'relevant circumstances' it is concluded that at least one of the persons who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a franking credit benefit. That purpose must not be an incidental purpose but may or may not be the dominant purpose.

An example of the need to apply section 177EA can be found in a scheme based on the greater attraction of a distribution to resident shareholders who can fully utilise franking credits than to non-resident shareholders who cannot. When dividends are streamed away from non-residents under such a scheme to avoid the 'wastage' of franking credits, section 177EA is attracted.

In the case of Operating Co Pty Ltd's SCR, non-residents shareholders of Operating Co Pty Ltd constitute only 0.072% of the company's issued share capital. As such, the quantum of any determination made under section 177EA would be correspondingly small.

Having regard to these relevant circumstances of the scheme, the Commissioner is satisfied that there can be no more than an incidental purpose of enabling the relevant taxpayer to obtain a franking credit benefit. Accordingly, the scheme does not satisfy the purpose test in paragraph 177EA(3)(e), and as such section 177EA has no application to the arrangement.