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Ruling

Subject: Transfer of shares and Part IVA

Question 1

Would the Commissioner consider that the disposal of shares by natural persons to wholly owned companies under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) constitutes 'carrying out of a scheme' to which Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) would apply?

No.

Question 2

Would the Commissioner seek to apply section 177E of the ITAA 1936 if, after the above rollover took place, the underlying company paid a dividend to shareholders equal to surplus profits?

No.

Question 3

If not, would the Commissioner consider that the course of action described in question 2 constitutes 'carrying out of a scheme' to which Part IVA of the ITAA 1936 would apply?

No.

This ruling applies for the following periods

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

During 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.

A private company until recently operated a business. Following contractual negotiations with suppliers, it was decided by the controllers of the company to windup the business.

The company ceased trading. Following the disposal of all residual assets and satisfaction of primary liabilities, the company has been left with a cash surplus representing a combination of retained profits and paid up share capital.

A copy of the last completed and audited accounts have been provided with the ruling application. The reported equity in these accounts is a sufficient reflection of the approximate composition of retained profits and paid up share capital.

All the ordinary shares in the company were held by three shareholders.

Shareholders 1 and 2 have no need to immediately access their financial entitlements in the company. Shareholder 3 has expressed a preference for doing so as soon as possible.

In the event that entitlements are distributed from the company, it is the intention of Shareholders 1 and 2 to apply some of those funds to private purposes and some to other income earning activities. It is the taxpayer's preference to retain the funds in a company as this is considered the most appropriate vehicle for ongoing business and investment activities. With the option of retaining the funds in the company removed by reason of the dispute with shareholders, Shareholders 1 and 2 have established new wholly owned companies to hold these funds.

The shares in the company held by Shareholders 1 and 2 were transferred by Shareholders 1 and 2 into wholly owned companies utilising the 122-A rollover relief.

The new corporate shareholders would receive the dividend and capital of the company in accordance with their shareholding. They would then apply the funds in accordance with the objectives of Shareholders 1 and 2, paying out some as dividends immediately and retaining the balance for investment purposes.

You have supplied a number of documents are to be read with and form part of the facts for the ruling.

Relevant legislative provisions

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 Section 177E

Income Tax Assessment Act 1997 Subdivision 122-A

Reasons for decision

Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision that can apply in certain circumstances if you obtain a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. Part IVA is a provision of last resort.

In order for Part IVA to apply the following requirements must be satisfied:

· There must be a scheme as defined by section 177A of the ITAA 1936.

· There must be a tax benefit as defined by section 177C of the ITAA 1936 obtained in connection with the scheme.

· The scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit.

You have provided a number of reasons including references to the Income Tax Assessments Acts and ATO view documents to support your view that this arrangement will not fall within the ambit of Part IVA of the ITAA 1936. These reasons have been reviewed and the main points as to how they refer to Part IVA and dividend stripping are summarised below.

The scheme in your circumstances is the creation of new companies by Shareholders 1 and 2 and the transfer of their respective shareholdings in the company to the new companies. Shareholder 1 will wholly own one company and Shareholder 2 will wholly own one company. This involves a roll-over of shares for the individual shareholders under Subdivision 122-A of the ITAA 1997. The company will be liquidated and there will be a payment of dividends and capital by the company to the two new companies and to Shareholder 3 in accordance with their original shareholding percentage. The two new companies will then pay some of the funds received from the company to Shareholders 1 and 2 respectively and retain the remaining funds for future investment and income earning activities.

In the circumstances described in the application the primary purpose of liquidating the company is to pay out the entitlement of Shareholder 3 as requested by them. The purpose of creating new corporate structures by Shareholders 1 and 2 to receive the distribution from the company is so that they may pursue their own financial activities for future investment and income earning activities. The principal motivation for the transaction is to achieve an equitable and efficient distribution to shareholders of the capital and retained profits of a company which had ceased trading activities for commercial reasons.

The tax benefit to be obtained in the year in which the distribution of capital and retained profits is made is the difference in the marginal tax rates of the individual shareholders and the company tax rate. However some of the funds received by the new companies will be immediately paid as dividends to Shareholder 1 and 2. These dividends would then be subject to the individual shareholder's marginal tax rate.

Having regard to the eight factors in section 177D of the ITAA 1936, it is concluded that your dominant purpose for entering into or carrying out the scheme will be other than to obtain a tax benefit on the part of Shareholders 1 and 2. Accordingly Part IVA will not apply to the scheme.

Having regard to the four pre-conditions in section 177E of the ITAA 1936, it is considered that as only some of the pre-conditions are satisfied section 177E of the ITAA 1936 does not apply to the arrangement.