Edited version of private ruling

Authorisation Number: 1011640308853

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Ruling

Subject: Transfer cash from individuals to company

Issue 1

Question:

Is the cash in the taxpayer's bank accounts capital gains tax assets in accordance with section 108-5 of the Income Tax Assessment Act 1997?

Answer

Yes.

Issue 2

Question:

Does the transfer of cash from individuals to a wholly owned proprietary company constitute the carrying out of a scheme to which Part IVA of the Income Tax Assessment Act 1936 will be applied?

Answer

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Related taxpayers held cash in bank accounts and derived interest.

The taxpayers wish to transfer funds in the bank accounts to a bank deposit in the name of a proprietary company of which the taxpayers will own all the shares and be directors of the company.

As retained profits accumulate in the proprietary company, the taxpayers' will decide if a dividend will be paid from the company on an annual basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5 and

Income Tax Assessment Act 1936 Part IVA.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1

Question:

Is the cash in the taxpayer's bank accounts capital gains tax assets in accordance with section 108-5 of the Income Tax Assessment Act 1997?

Reasoning

In this case the funds transferred will come from bank accounts in the names of the taxpayers.

The depositing of money into a bank account results in the acquisition of a debt by the depositor, the debt being a chose in action and a capital gains tax asset. The chose in action is the ability to require payment of the account balance, or part of it, on demand (Joachimson v. Swiss Bank Corporation [1921] 3 KB 110 at 127). In coming to this conclusion we have considered ATO ID 2003/551 titled Income Tax - Capital Gains Tax: foreign exchange gains or losses.

Therefore, it is considered that money held in bank accounts prior to being transferred to a bank deposit in the name of a proprietary limited company are capital gains tax assets under section 108-5 of the Income Tax Assessment Act 1997.

Issue 2

Question:

Does the transfer of cash from individuals to a wholly owned proprietary company constitute the carrying out of a scheme to which Part IVA of the Income Tax Assessment Act 1936 will be applied?

Reasoning

Part IVA of the ITAA 1936 contains a number of anti-avoidance provisions. These provisions give the Commissioner the discretion to cancel a tax benefit that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by the taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1).

Before the Commissioner can exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA must be satisfied. These requirements are that:

(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; and

(iii) having regard to section 177D, the scheme is one to which Part IVA applies.

Regard must be had to the individual circumstances of each case in making a determination under section 177F of the ITAA 1936 to cancel a tax benefit.

In this case, the taxpayers propose to enter into an arrangement in which the assessable interest income from the balance of cash will be derived by a company rather than by the taxpayers.

On the basis the company tax rate is lower than the taxpayer's current average marginal tax rates; tax payable on interest income may be reduced. However, any dividends (and franking credits) paid by the company to the taxpayers will be required to be included in the assessable income of the taxpayers and subject to tax at marginal tax rates.

Given the broad definition of the term 'scheme' in section 177A of the ITAA 1936, some or all of the steps involved in the transfer of funds from bank accounts owned by the taxpayers to a bank deposit in the name of the proprietary limited company that will be owned by the taxpayers could be considered to constitute a scheme to which Part IVA might apply.

An element that must be considered for Part IVA to apply is whether a taxpayer has entered into, or carried out a scheme or part thereof, for the dominant purpose of obtaining a tax benefit having regard to the following objective factors in paragraph 177D(b) of the ITAA 1936:

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

(ii) the form and substance of the scheme;

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

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

(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;

(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;

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

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

The manner in which the scheme was entered into or carried out

The taxpayers intend to establish the proprietary company owned by them for the purpose of transferring funds from bank accounts owned by the taxpayers to a bank deposit in the name of the proprietary limited company. The manner in which this is proposed to be carried out is straightforward and without artifice or contrivance.

Dealings between the parties to the scheme require the involvement of arms length third parties to establish the company and its bank account according to written documentation.

The form and substance of the scheme

The use of a family proprietary limited company is common and provides the taxpayers with capital management flexibility. It is accepted that the scheme is explicable by reference to ordinary dealings by individuals to choose the best use of available cash.

The taxpayers will control the timing and extent of dividends paid to them. This is an inherent feature in the way in which companies pay retained profits to shareholders.

The timing and duration of the scheme

The timing of the implementation of the arrangement should not improve the taxpayer's position in relation to interest income already earned to date.

The scheme does not provide the taxpayers with substantial year-end deductions or the company with tax advantages.

The timing of any company dividends will be controlled by the taxpayers.

The effects of the scheme: the tax results, financial changes and other consequences of the scheme

The applicant has made the following submissions with regard to the tax results, financial changes and other consequences of the scheme:

· The result that would arise out of the normal operation of the ITAA 1997 or the ITAA 1936 if the taxpayers do not implement the proposed arrangements will be the continued disclosure of future interest income in the taxpayer's individual tax returns.

However, the taxpayers are not precluded from structuring their affairs in the proposed manner.

As proposed, the company will derive future interest income and will be subject to income tax at normal company tax rates.

Any dividends paid to the taxpayers will be subject to income tax at their applicable marginal tax rates.

The proposed arrangements are straightforward are not unnecessarily complicated;

· The financial position of the taxpayers should remain unchanged immediately following the implementation of the proposed arrangement. This is because interest income already earned by the taxpayers will be subject to tax at their marginal tax rates and company profits and cash reserves will be controlled by the taxpayers.

Overtime, the taxpayers' income tax payable may reduce on the basis future interest income is derived by the proprietary company. However, company retained profits paid as dividends to the taxpayers will be subject to marginal tax rates;

· There is no change in the financial position of any other person as a result of the arrangement.

· There are no other foreseeable consequences relevant to the proposed arrangement.

The Commissioner agrees that this analysis of the tax results, financial changes and other consequences of the scheme points to ordinary dealings by individuals to choose the best use of available cash as opposed to a dominant tax purpose in the arrangement.

The nature of the connection between the taxpayer and any other person

The connection between the taxpayers and the company will be embodied in the legal rights and obligations created by the establishment of the company. As part of the scheme, the taxpayers will transfer cash to a bank deposit in the name of a 100% owned proprietary limited company. This connection does not necessarily lead to the circumstance that the parties are not dealing with one another at arm's length in connection with the scheme.

Conclusion

From the above objective analysis of all the factors referred to in paragraph 177D(b) of the ITAA 1936, the dominant purpose of entering into the scheme is not to gain a tax benefit but to satisfy the personal objectives of the taxpayers in making the best use of available cash. Therefore the Commissioner will not seek to apply Part IVA of the ITAA 1936 to deny, in part or in full, the transfer of funds from bank accounts owned by the taxpayers to a bank deposit in the name of the proprietary limited company.