Edited version of your written advice

Authorisation Number: 1011805940435

NOTICE

This edited version has been found to be misleading or incorrect. It does not represent the ATO’s view of the relevant law.

This notice must not be taken to imply anything about:

● the binding nature of the private advice issued to the applicant

● the correctness of other edited versions.

Ruling

Subject: Part IVA

Question

Will the Commissioner of Taxation apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to cancel any tax benefit under the proposed transaction/arrangement described in this ruling?

Answer:

No

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts

The Individual is the only shareholder in the Company.

The Company owns several commercial properties which are leased to tenants and cash.

As some of the properties owned by the Company had environmental hazards, the Company has voluntarily incurred significant costs dealing with these environmental hazards rather than leave the problem to future generations after the Individual’s passing.

A trust which the Individual controls owns and operates a business. The Individual is the sole director of the corporate trustee. The Individual is concerned that as there is a significant risk associated with the business (acts of nature etc), and as the Individual is the sole director of the corporate trustee and controller/”owner” of the trust, they could be personally sued by customers. The Individual is concerned that any assets owned by them, particularly their share in the Company, are at risk.

In the past, the Individual has been involved in a number of legal disputes with third parties. The disputes relate to a number of different matters including commercial business dealings, property acquisitions, landlord/tenant disputes and occupiers liability. As a result asset protection and risk minimisations are priorities.

The Individual and their spouse are currently at retirement age. With the assistance of their Accountants the Individual is currently reviewing their personal affairs as the Individual wishes to ensure that they have made adequate provision and planned appropriately in relation to their retirement and estate. As part of this review the Individual is also considering asset protection strategies. The Individual is also reviewing their current estate plan as the Individual wishes to ensure there is an appropriate succession strategy in place which will benefit the Individual’s spouse and children.

The Individual currently has a self managed superannuation fund, the Individual and their spouse, are the members. Although the Individual and their spouse are currently receiving a pension from the Superfund, it is the Individual’s intention to continue to build up the value of the Superfund so that its assets and income will fund their retirement.

The Superfund recently lost a large amount of money due to an investment it had. This has heightened the Individual’s concern in relation to risk and asset protection. Further, the Superfund wishes to build up its assets as soon as possible to cover this loss. The reduced contribution limits have made this difficult. The Superfund views the purchase of shares in the Company at this time as a wonderful opportunity to acquire a secure asset with significant potential for both income and capital growth to replace the failed investments and recover some of the money lost.

As a result of the recent introduction of section 67(4A) of the Superannuation Industry Supervision Act 1993 (SIS 1993), which now permits superannuation funds to borrow money, the Superfund proposes to borrow money to purchase all the shares in the Company from the Individual for their current market value.

The Individual has previously sought to maximise the assets and benefits in the Superfund by maximising the Individual’s contributions to it but it is only because of the changes to the borrowing rules that the Superfund is now able to acquire all the shares in the Company. The Individual believes that as a result of the recent global financial crisis the value of the assets of the Company, and hence the value of its shares, are currently depressed but the Individual expects that will change in the future.

From the Superfund’s perspective the acquisition of the Company would be a sound and prudent investment as the trustee knows the assets it owns and they provide a reliable source of income as well they are likely to grow in value.

The Company also has significant retained earnings and franking credits. Although these retained earnings have been held in the Company for many years and have not been distributed to its shareholder it is expected that the Superfund, after it has acquired all the shares in the Company, will want some of those retained earning distributed to it to invest or to pay benefits to its members.

If the Company distributes the retained earning held as cash to the Superfund as its sole shareholder by way of paying fully franked dividends to it, the Superfund, will receive a refund of the excess tax offsets.

The sale of the shares in the Company by the Individual to the Superfund will generate a capital gain to the individual. Tax will be paid by the individual at marginal rate. Stamp duty will also be payable.

The ultimate capital gains and duties payable will depend on the valuation provided by a qualified valuer.

Financial reports provided shows the Company is a non-geared company.

As the Individual expects the value of the assets in the Superfund to increase over time, particularly after it acquires all the shares in the Company, and as part of the review of the Individual and their spouse’s estate and succession plans, the Individual will review, and where appropriate, amend the Individual’s will and binding death benefit nomination.

The proceeds from the sale of the Company shares will be transferred to a discretionary trust which will acquire investment assets. A discretionary trust will be used for asset protection purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 177A.

Income Tax Assessment Act 1936 Section 177C.

Income Tax Assessment Act 1936 Paragraph 177D(b).

Reasons for decision

It is the applicant’s responsibility to ensure that the proposed transaction/arrangement meets a number of conditions set out in the SISA 1993 and the SISR 1994 applicable to acquisitions of assets by trustees of superannuation funds from related parties, in-house assets and borrowing by trustees of superannuation funds.

We also note that any potential investment must also comply with the sole purpose test set out in section 62 of the SISA 1993, be in line with the fund’s investment strategy and be permitted under the fund’s trust deed. Trustees should also ensure the investment complies with the covenants in subsection 52(2) of the SISA 1993.

This ruling does not consider whether the proposed transactions/arrangement meets the requirements under SISA 1993 and SISR 1994.

The general anti-avoidance provisions section 177D

The Tax Office considers that the general anti-avoidance provisions (known as Part IVA) apply where a ‘scheme’ has been entered into for the ‘dominant purpose’ of obtaining a ‘tax benefit’.

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

Is there a Scheme?

For Part IVA to apply there must be a ‘scheme’ within section 177A of the ITAA 1936, through which a taxpayer obtains a ‘tax benefit’. Additionally, the scheme must have been implemented for the dominant purpose of enabling the taxpayer to obtain the tax benefit, within section 177C of the ITAA 1936.

Section 177A of the ITAA 1936 defines a scheme to include ‘any agreement, arrangement, understanding, promise or undertaking …and whether or not enforceable … and any scheme, plan, proposal, action, course of action or course of conduct’.

The Commissioner is of the opinion that the scheme is the proposed sale of shares in the Company by the Individual to the Superfund and the payment of franked dividends by the Company to the Superfund.

Is there a Tax Benefit?

Under section 177C of the ITAA 1936 a tax benefit received in relation to a scheme is any of the following four amounts:

● An amount that was not included in the assessable income of the taxpayer, where that amount would have been included, or might reasonably be expected to be included, in the assessable income of the taxpayer if the scheme had not been entered into.

● An amount for a deduction being allowable to the taxpayer, where that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into.

● An amount of a capital loss being incurred by the taxpayer, where that amount would not have been, or might reasonably be expected not to have been, incurred by the taxpayer if the scheme had not been entered into.

● An amount of a foreign tax credit being allowable to the taxpayer, where that foreign tax credit would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into.

The definition of tax benefit does not include the obtaining of franking credits. Therefore, Part IVA will not apply to the proposed transaction because a tax benefit, as defined will not be obtained. The benefit that will be obtained under the proposed transaction is the receipt of franking credits by the Superfund which, due to the tax rate of the Superfund, will generate a refund.

The Individual would obtain a tax benefit because if the scheme had not been entered into or carried out it might reasonably be expected that the Company would have paid a dividend to the Individual which the Individual would have included in their assessable income.

Whether a scheme has been carried out for the dominant purpose of enabling a taxpayer to obtain a tax benefit is determined according to the provisions of section 177D of the ITAA 1936. Under section 177D of the ITAA 1936, it would be concluded that the person who entered into or carried out the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme, whether or not that person who entered the scheme is the relevant taxpayer or one of the other taxpayers. Additionally, subsection 177D(b) of the ITAA 1936 sets out a number of tests to be applied in determining the purpose of a scheme.

The eight factors required to be considered in connection with the broader scheme are:

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

(b) the form and substance of the scheme;

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

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

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

(f) 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;

(g) 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

(h) 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 factors under subsection 177D(b) of the ITAA 1936 are examined below.

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

The proposed sale of shares by the Individual to the Superfund and the payment of franked dividends by the Company to the Superfund from time to time. This is further supported in recent years by the individual undertaking a review of their estate and personal retirement planning matters.

(ii)      the form and substance of the scheme;

Case law suggests that not only does this require the Commissioner to consider the legal form of the arrangement but the underlying substance of the arrangement. That is, whether or not the legal form of the arrangement is consistent with what is really taking place. In this case, you submit that there is no real difference between the “form” of entering into the sale and the “substance”.

The Superfund proposes to borrow money to purchase all the shares in the Company from the Individual for their current market value. There will be payments of franked dividends by the Company to the Superfund from time to time.

The form and substance of the scheme are the same. A simple sale of shares by the Individual to the Superfund and the payment of a dividend.

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

The proposed transaction will not be entered into just prior to 30 June. It is not a transaction which requires it to be entered into prior 30 June.

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

The benefit that will be obtained under the proposed transaction is the receipt of franking credits by the Superfund which, due to the tax rate of the Superfund, will generate a refund.

The individual would obtain a tax benefit because if the scheme had not been entered into or carried out it might reasonably be expected that the Company would have paid a dividend to the individual which the individual would have included in their assessable income.

If the Superfund acquire shares in a non-geared company it will have a tax benefit because:

● unfrankable dividends will be taxed 15% in a non-pension fund and nil % in a pension fund, instead of 46.5%

● frankable dividends will attract 15% rebate in the hand of non-pension funds and 30% in a pension fund.

(vii) 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 individual’s financial position will not change as he will receive market value for the sale of their shares.

(viii) 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;

The Superfund will also pay market value for the shares and so its financial position should not change.

(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

There do not appear to be any other consequences other than those described above.

(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 relevant parties are “related” in that the Individual is a member of the Superfund. However, the proposed transaction is at arm’s length, as an independent market valuation will be obtained to determine the true market value of the shares.

Cases

In FCT v Spotless 96 ATC 5201, the High Court held that a scheme can fall within the meaning of Part IVA even though there is a commercial purpose as long as the dominant purpose is to obtain a tax benefit.

In FCT v Hart 2004 ATC 4599, the High Court held that the fact that a scheme is directed to a commercial end does not preclude the operation of Part IVA if the particular means adopted was predominantly for the purpose of obtaining a tax benefit. In considering whether a scheme was entered into predominantly for the purpose of obtaining a tax benefit, the alternative forms which the transaction might have taken must be considered.

In the Hart decision the High Court also made the following statements at 2004 ATC 4611 in considering the argument whether a commercial transaction can be held to be a scheme:

51. It is important to bear steadily in mind that, as was pointed out in the joint reasons of six members of the Court in FC of T v Spotless Services Limited & Anor,^[41] ``Part IVA is to be construed and applied according to its terms, not under the influence of `muffled echoes of old arguments' concerning other legislation''<sup>[42]</sup>. That applies to all aspects of Pt IVA. Whether considering what is a ``scheme'', or considering other provisions of Pt IVA, it is necessary to eschew arguments that proceed from unstated premises about choice^[43] or the drawing of false dichotomies^[44] between ``rational commercial decisions'' and obtaining a tax benefit. It is important to identify why that is so.

52. There is no doubt that ``tax laws affect the shape of nearly every business transaction''.^[45] But as was said in the joint reasons in Spotless:^[46]

``... A particular course of action may be, to use a phrase found in the Full Court judgments, both `tax driven' and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Pt IVA, a person entered into or carried out a `scheme' for the `dominant purpose' of enabling the taxpayer to obtain a `tax benefit'.''

Always the question must be whether the terms of the Act apply to the facts and circumstances of the particular case.

Conclusion

For Part IVA of the ITAA 1936 to apply it is necessary that on an analysis of the above factors that it would be concluded that the scheme was entered into for the sole or dominant purpose of obtaining a tax benefit. Our analysis of the above factors leads to the conclusion that Part IVA of the ITAA 1936 would not apply to the scheme.

From the facts provided the proposed scheme is being entered into as the Individual, or entities associates with them, have recently suffered losses and as a result asset preservation and protection is currently at the forefront of the Individual’s mind. As part of their general business and estate planning arrangements the Individual will divest themself of assets. The proceeds from the sale of the Company shares will be settled on a discretionary trust for future investment.

This indicates the dominant purpose for the sale of the Company shares is for general business, estate planning and asset protection purposes and not to obtain a tax benefit.