Edited version of private ruling

Authorisation Number: 1011678508863

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Income tax implications of variation to funding and dividend arrangements

Question 1

Will the Commissioner make a determination pursuant to subsection 204-30(3) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the payment of Agreement Dividends in conjunction with the calls under the Agreement to B and C?

Answer

No, the Commissioner will not make a determination pursuant to subsection 204-30(3) of the
ITAA 1977 in relation to the payment of Agreement Dividends in conjunction with the calls under the Agreement to B and C.

This ruling applies for the following period/s:

Other/Substituted Accounting Period 1 January 2011 to 31 December 2011
Other/Substituted Accounting Period 1 January 2012 to 31 December 2012
Other/Substituted Accounting Period 1 January 2013 to 31 December 2013
Other/Substituted Accounting Period 1 January 2014 to 31 December 2014
Other/Substituted Accounting Period 1 January 2015 to 31 December 2015

The scheme commences on:

1 January 2006

Question 2

Will the Commissioner make a determination pursuant to subsection 204-30(3) of the ITAA 1997 in relation to the payment of Funding Dividends to B and C?

Answer

No, the Commissioner will not make a determination pursuant to subsection 204-30(3) of the
ITAA 1997 in relation to the payment of Funding Dividends to B and C.

This ruling applies for the following period/s:

Other/Substituted Accounting Period 1 January 2011 to 31 December 2011
Other/Substituted Accounting Period 1 January 2012 to 31 December 2012
Other/Substituted Accounting Period 1 January 2013 to 31 December 2013
Other/Substituted Accounting Period 1 January 2014 to 31 December 2014
Other/Substituted Accounting Period 1 January 2015 to 31 December 2015

The scheme commences on:

1 January 2006

The scheme that is the subject of the ruling:

1. Several years ago, A, B, C, D and the B&C partnership entered into a funding agreement (the Agreement). The terms of this agreement was central to the original ruling request issued several years ago.

2. Further ruling requests were made after various amendments to the arrangements leading to further rulings from the Tax Office.

3. The commercial objectives to the extension to the Agreement outlined in the background below are:

(a) to continue the dividend policy with respect to the payment of dividends by A vis-à-vis its funding requirements; and

(b) the continuation of the protocols for the funding of the capex requirements of entities in the ABCD venture between a non-resident company D and Australian company C. A is part of the ABCD venture and is jointly owned by B (an Australian company wholly owned by D) and C.

4. The parties have amended, subject to receiving a suitable ruling, the agreement to continue the terms of that arrangement. This involves the continuation of the agreement, and the continuation of Funding Dividends and Funding Loans. What these arrangements seek to achieve, as with the existing arrangements, are summarised as follows:

(a) capital expenditure requirements of ABCD entities can in certain circumstances trigger requirements of A to pay additional dividends to its shareholders. Further the parties may mutually agree that A will pay further dividends outside the requirements of the agreement;

(b) in respect of the capital expenditure requirements of A itself, an amount equivalent to these capex requirements (including working capital) or the dividend pursuant to the agreement or further dividends, may be lent to A (via the B&C Partnership with equity subscriptions from B and C into the partnership); and

(c) in relation to capital expenditure requirements of other ABCD entities the funding requirement could trigger a dividend (either under the agreement or as a result of further dividends). The capex requirements of these ABCD entities could be satisfied by an interest bearing loan from the ABCD members, the B&C Partnership or A. Alternatively, the parties could fund the capex requirements of these ABCD entities via an equity injection into the ABCD entity by its shareholders.

5. Relevant background information is provided below regarding:

(a) The operation of the Agreement and Funding Dividends;

(b) The anticipated capital expenditure on expansion projects;

(c) The Agreement arrangements; and

(d) Background on C and D's Australian groups.

6. Copies of all relevant documents were included in the ruling request.

7. Some changes to the agreement were made several years ago. One condition in particular in the agreement restricts the payment of dividends pursuant to the agreement. The shareholders have agreed in principle to relax this requirement.

8. The parties further amended the Agreement and loan arrangement.

9. The income tax issues on which the parties seek a ruling are the same issues as addressed in the previous rulings noted above. That is the confirmation that the dividend streaming provisions of Subdivision 204-D of the ITAA 1997 will not apply to dividend payments made by A under the Agreement or as Funding Dividends.

Background Information

Commercial Objectives

10. Since the original ruling request several years ago ABCD's product market has experienced price decreases and overcapacity, in part due to the global financial crisis.

11. Within ABCD, several upgrades to their facilities have been made in the past few years.

12. Whilst there are no committed major projects, potential capex spend for ABCD exists in relation to:

(a) potential expansions and upgrades,

(b) large sustaining capex in the future.

13. In addition the ABCD enterprises will have ongoing capex requirements to sustain existing facilities.

14. The schedule and ordering of expansion and spend will depend on commercial issues such as cost and pricing of ABCD's product.

Dividends of A

15. A is the head company of a consolidated group.

16. Fully franked dividends are regarded as an important criterion for shareholders investing in C, and releasing franking credits of A via the proposed arrangement to which this ruling request relates will permit C to maintain franking of its dividends in the medium to long term.

17. C's board determines dividends paid to shareholders based on performance and expected business conditions. Its intention is, to the extent practicable, to fully distribute to shareholders all fully franked dividends received by C from ABCD. Dividend payments will be subject to current and expected business conditions.

18. To continue the formalisation of A's dividend practice and to accommodate ABCD's potential and proposed funding requirements (including A's own funding requirements), it is proposed that A, B, C, D and the B&C Partnership continue the agreement as amended and B and C enter into the amended B&C Partnership to facilitate funding of ABCD projects.

19. In the parties amended, subject to the receipt of a favourable ruling, the Agreement, the B&C Partnership Agreement and the loan arrangement. The amendment agreement for the Agreement provides that:

(a) some of the requirements to provide Agreement Loans be amended; and

(b) the Agreement to be a continuing agreement, with one year's notice from either party.

20. The B&C Partnership agreement was amended to tie in the notice of termination provisions to the termination of the Agreement.

21. Dividends are paid at the beginning of a quarter or month in respect of interim net income for all previous quarters since 1 January 200X less any amount of such income that has already been paid out as dividends.

22. The payment of dividends is, in summary, subject to:

(a) compliance with section 254T of the Corporations Act 2001 (Corporations Act);

(b) not causing A to be unable to pay its debts; and

(c) for dividends in excess of the minimum dividends, the ability to fully frank the dividend and the next scheduled minimum dividend.

Funding of ABCD Capital Requirements

23. As discussed at paragraph 12, ABCD is examining a number of other capex requirements within the ABCD joint venture. Also the ABCD enterprise entities will have ongoing capex requirements to sustain existing infrastructure and facilities.

24. Some of the future capital expansion will be funded directly and independently (that is, not via the B&C Partnership) by C and D or by ABCD entities where quarterly dividends are not sufficient to fund the calls.

B&C Partnership

25. Key terms of the Agreement Loans are that each loan will be:

a) unsecured,

b) used to fund the working capital requirements of the Borrower (including A), subject to an aggregate limit,

c) repayable by X,

d) subject to commercial arm's length interest rates.

26. The amounts to be provided to A to fund A's capex including ongoing capex to sustain existing facilities, are anticipated to be provided by Agreement Loans as contemplated in the Loan Arrangement. The B&C Partnership is an Australian general law partnership with both B and C subscribing for equity in the partnership in their existing respective interests in A.

27. The B&C Partnership may then loan funds to A as a drawdown on the loan arrangement on commercial arm's length terms.

28. D is seeking to address an issue that arises as it consolidates in its accounts a 100% interest in A before making adjustments to eliminate minorities. Under current accounting, D would, on A borrowing funds, consolidate in the preparation of its accounts 100% of the debt shown on A's balance sheet, notwithstanding it only has a X% interest in A. This adversely impacts on the perceived gearing level of D.

29. The accounting for the B&C Partnership enables D to consolidate 100% of the A debt but also 100% of the asset being the loan from the B&C Partnership. This addresses the disproportionate accounting gearing impact.

Funding Dividends and Funding Loans

30. In addition, the shareholders in A (who are also the partners in the B&C Partnership) wish to have the ability to be able to mutually agree to pay further dividends from A and to make additional loans as Funding Loans to A of up to a cumulative limit. Naturally the parties will not agree to pay Funding Dividends where this would cause a breach of section 254T of the Corporations Act or cause A to be unable to pay its debts. The total value of loans made whether in accordance with the Agreement or not, is not to exceed the limit. These Funding Dividends and Funding Loans will be implemented by the movement of funds between bank accounts of the relevant entities.

31. The key differences between Funding loans and Agreement Loans are that the former will not be subject to the requirements of the agreement and may not necessarily be linked to available cash and they have a different repayment term.

32. In summary, the Funding Dividends and resulting Funding Loans may be made where:

(a) C and D (through its wholly owned subsidiary, B) agree to facilitate the payment of a dividend by A; and

(b) The resulting Agreement Loans and Funding Loans do not exceed the aggregate limit.

Shareholder background

D Group

33. The D group holds its interest in A interest through its wholly-owned Australian subsidiary B.

C Company

34. C holds a less than 50% interest in A

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 204-D.

Income Tax Assessment Act 1997 section 204-30.

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

Income Tax Assessment Act 1997 paragraph 204-30(3)(a).

Income Tax Assessment Act 1997 paragraph 204-30(3)(b).

Income Tax Assessment Act 1997 paragraph 204-30(3)(c).

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

Corporations Act 2001 section 254T.

Explanation: (This does not form part of the notice of private ruling)

Question 1

Detailed Reasoning

Will the Commissioner make a determination pursuant to subsection 204-30(3) of the ITAA 1997 in relation to the payment of Agreement Dividends in conjunction with the calls under the Agreement to C and B?

1. Section 204-30 of the ITAA 1997 is a general anti-streaming measure. It is designed to curb the unintended use of franking credits through streaming arrangements. It permits the Commissioner to make determinations where an entity streams one or more distribution whether in a single franking period or in a number of franking periods, in such a manner whereby:

a) an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of a distribution or distributions; and

b) that member derives a 'greater benefit from franking credits' than another member of the entity; and

c) the other member of the entity receives a lesser imputation benefit, or receives no imputation benefits, whether or not the other member receives other benefits.

2. Streaming is the act of selectively directing the flow of franked distributions to those members that are best positioned to utilise imputation benefits to the exclusion of those members that are not. The result of such action by a company is the reduction or elimination of the intended wastage of franking credits, inherent in the design of the imputation system. A definite strategy designed to achieve this outcome would need to have been put in place by the company, before an arrangement could be classified as a streaming arrangement.

3. 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 specified in the determination (paragraph 204-30(3)c)) of the ITAA 1997.

4. In the current circumstances, C, as a resident corporate tax entity, will be able to benefit from imputation credits received as a result of Agreement Dividends. The associated franking credits are to be utilised by C to frank its dividends. Similarly B, as a resident corporate tax entity, will be able to benefit from imputation credits received as a result of the Agreement Dividends.

5. However, as B is owned by D, a non-resident entity, B will be deemed to be an exempting entity. Consequently, as a result paragraph 204-30(8)(f) of the ITAA 1997, C (the favoured member) will be taken to have derived a greater benefit from franking credits than B (the disadvantaged member).

6. Regardless of the fact that C derives a greater benefit from franking credits than B, if the Commissioner is to make a streaming determination under subsection 204-30(3) of the
ITAA 1997, it must be possible to demonstrate that the distribution made by A has been so made as to result in the favoured member deriving greater imputation benefits and the disadvantaged member receiving lesser or no imputation benefits. However, in this case, A intends paying the Agreement Dividends proportionately between its members. Both C and B will receive their proportionate share of the franked distribution in accordance with their ordinary shareholdings in A. Despite C being able to derive a greater benefit from franking credits than B, A has demonstrated no preference for one over the other in making the distribution.

7. Consequently, it is not considered appropriate to make a determination under
paragraph 204-30(3)(a) or (b) of the ITAA 1997, to give rise to a franking debit in the franking account of A or to deny the whole, or any part, of the imputation benefits received by C or B. Hence the Commissioner will not make a determination pursuant to subsection 204-30(3) of the ITAA 1997 in relation to the payment of Agreement Dividends to C or B.

Question 2

Detailed Reasoning

Will the Commissioner make a determination pursuant to subsection 204-30(3) of the
ITAA 1997 in relation to the payment of Funding Dividends to C and B?

1. The same reasoning and conclusion as for Agreement Dividends above applies in relation to the payment of Funding Dividends. That is, A intends paying the Funding Dividends proportionately between its members, so that both C and B will receive their proportionate share of the franked distributions in accordance with their ordinary shareholdings in A. Despite C being able to derive a greater benefit from franking credits than B, A has demonstrated no preference for one over the other in making the distribution. Hence the Commissioner will not make a determination pursuant to subsection 204-30(3) of the ITAA 1997 in relation to the payment of the Funding Dividend to C or B.