Edited version of your private ruling

Authorisation Number: 1012199896094

Ruling

Subject: Trust distribution

Question 1(a)

1(a) As the proposed distribution to the child represents a fully franked dividend, will the child be exempt from income tax by virtue of section 128D of the Income Tax Assessment Act 1936 (the ITAA 1936) in respect of the distribution from the trust created by the grandparent (the Trust) in the 2013 income year?

Answer

Yes. The child will be exempt from income tax by virtue of section 128D of the ITAA 1936 in respect of the distribution from the Trust in the 2013 income year.

Question 1(b)

As the proposed distribution to the child represents a fully franked dividend, will the trustee of the Trust be assessable to income tax under section 98 of the ITAA 1936 in respect of the dividend derived by the Trust in the 2013 income year?

Answer

No. The trustee of the Trust will not be liable to pay tax under section 98, in particular, subsection 98(3), of the ITAA 1936 in respect of the dividend derived by the Trust in the 2013 income year.

Question 2(a)

As the proposed distribution to the child represents a fully franked dividend, will an amount be required to be withheld under the Pay As You Go (PAYG) withholding provisions contained in section 12-210 of Schedule 1 of the Taxation Administration Act 1953 (the TAA 1953) by the company in respect of the dividend paid to the Trust in the 2013 income year in light of section 12-300 of Schedule 1 of the TAA 1953 and subparagraph 128(3)(ga)(i) of the ITAA 1936?

Answer

No. The company is not required to withhold any amount under the PAYG withholding provisions contained in section 12-210 of Schedule 1 of the TAA 1953 in respect of the dividend paid to the Trust in the 2013 income year .

Question 2(b)

As the proposed distribution to the child represents a fully franked dividend, will an amount be required to be withheld under the PAYG withholding provisions contained in section 12-215 of Schedule 1 of the TAA 1953 by the trustee of the Trust in respect of the distribution from the Trust in the 2013 income year in light of section 12-300 of Schedule 1 of the TAA 1953 and subparagraph 128(3)(ga)(i) of the ITAA 1936?

Answer

No. The trustee of the Trust is not required to withhold any amount under the PAYG withholding provisions contained in section 12-215 of Schedule 1 of the TAA 1953 in respect of the distribution from the Trust in the 2013 income year.

Question 3

Will the parent be assessable under section 97 of the ITAA 1936 on any part of the distribution from the Trust represented by the dividend for the 2013 income year?

Answer

No. The parent will not be assessable under section 97 of the ITAA 1936 on any part of the distribution from the Trust for the 2013 income year.

Question 4

Will child X be assessable under section 97 of the ITAA 1936 on any part of the distribution from the Trust for the 2013 income year?

Answer

No. Child X will not be assessable under section 97 of the ITAA 1936 on any part of the distribution from the Trust represented by the dividend for the 2013 income year.

Question 5

Will child Y be assessable under section 97 of the ITAA 1936 on any part of the distribution from the Trust for the 2013 income year?

Answer

No. Child Y will not be assessable under section 97 of the ITAA 1936 on any part of the distribution from the Trust represented by the dividend for the 2013 income year.

Question 6

Will the general anti avoidance provisions in Part IVA of the ITAA 1936, in particular having regard to section 177A to section 177E, apply to this transaction?

Answer

No. The general anti avoidance provisions in Part IVA of the ITAA 1936, in particular having regard to section 177A to section 177E, will not apply to this transaction.

Question 7

Will a primary taxable amount be taken to have arisen under section 5 of the Trust Recoupment Tax Assessment Act 1985 (the TRTAA 1985) (disregarding the effect of subsection 13(1) of the TRTAA 1985)?

Answer

No. A primary taxable amount will not be taken to have arisen under section 5 of the TRTAA 1985.

Question 8

Will the transaction be treated as being void by virtue of subsection 13(1) of the TRTAA 1985?

Answer

No. The transaction will not be treated as being void by virtue of subsection 13(1) of the TRTAA 1985.

This ruling applies for the following periods:

Year ended 30 June 2013.

The scheme commenced on:

The scheme has not commenced yet.

Relevant facts and circumstances

The parent has a number of children including the child.

The child is not a resident of Australia and has been a non-resident of Australia for many years and the child has no intention to return to Australia in the foreseeable future.

The grandparent established the Trust as a discretionary trust in order to benefit future children, the future children and grandchildren of the parent's children, all the children, grandchildren and great-grandchildren of the brothers of the parent and all the future children, grandchildren and great-grandchildren of the siblings of the parent.

The principal beneficiaries of the Trust are the child, child X and child Y.

The Trust holds all of the ordinary shares in the company.

The parent owns certain other classes of shares in the company.

The Trust has a number of trustee companies.

The parent holds all the share capital of the trustee companies and is also a director of the trustee companies.

Mr A is also a director of the aforementioned trustee companies.

The trustee of the Trust holds the trust funds for the benefit of a specified class of beneficiaries. The Trust is a discretionary trust.

The child's family trust is not an eligible beneficiary of the Trust and it is not possible to distribute directly to the child's family trust.

If the trustee of the Trust does not make any beneficiary presently entitled, the income will be distributed to the listed default beneficiaries.

The child's family trust is a discretionary trust.

The class of beneficiaries of the child's family trust is very broad, including:

(a) the child;

(b) any lineal descendent of a grandparent of the child born before the termination date;

(c) the spouse of any person referred to in (a) or (b).

The trustee of the child's family trust is Trustee Z.

The parent holds all of the share capital of Trustee Z and is also a director of Trustee Z. Mr A is also a director of Trustee Z.

The parent is the appointor of the child's family trust in order to protect the child from economic loss of the trust estate in the event of a divorce.

The proposed transaction is being contemplated to enable the child to receive its entitlement under the Trust. Advice was sought from legal counsel in Country A regarding the exposure of the child's share of the corpus of the Trust should any action be taken by the child's current partner under Country A family law. The Country A counsel's advice as to what structure should be adopted is in line with the structure which was adopted in the present private ruling.

The company proposes to declare and pay a fully franked dividend to the Trust in 2013 income year.

The company will continue as a going concern after the payment of the dividend.

Under the direction of the trustees, the Trust proposes to make the child presently entitled to the taxable income of the Trust which includes the proposed dividend and the associated franking credits.

The amount will be transferred in real terms, that is, there will be a transfer of these funds to a bank, rather than just being reflected in accounting entries. The trustee holds the necessary level of cash to make the distribution.

The child intends to settle the entire trust distribution in the corpus of the child's family trust.

The expected timeline for the transactions is as follows:

Day 1: Trustee of the Trust resolves to make the child presently entitled to the amount.

As soon as practicable: The trustee pays the amount to the child's personal bank account and notifies the child of same (within 1 month).

As soon as practicable: The child will settle the amount into the child's family trust (within 1 month).

If the trustee of the Trust resolves to make the child presently entitled to the amount this amount will be transferred to an account nominated by the child. Although there is an understanding that the child will contribute the amount to the child's family trust, the child will be under no obligation to transfer the amount into the child's family trust once the child is made presently entitled to the amount. There will be no restrictions or impediments to the child changing its mind as to the use of the amount, however, the child's intention is to settle this amount in the child's family trust.

If the trustee of the Trust resolves to make the child presently entitled to the amount, the funds will be transferred directly to the child's personal bank account. This bank account cannot be accessed by the parent or by persons acting for the parent. The child will be given notice of the fact that the funds have been transferred to the child's personal bank account. The funds are expected to remain in the child's personal bank account for only one day.

The very nature and purpose of the scheme is to distribute funds to the child so the child and the child's family can benefit from the trust. As the very nature of the scheme is to distribute funds to the child so the child and family can benefit from the Trust, if the Trust had decided not to make the child presently entitled to the amount, no dividend would have been paid by the company to the Trust.

The child will be made 'specifically entitled' to the fully franked distribution from the Trust in terms of subsection 95(1) of the ITAA 1936.

The present ruling deals with the proposed fully franked dividend of the amount by the company to the Trust and the proposed distribution of the amount as a fully franked dividend by the Trust to the child. The amount will be distributed in the 2013 income year.

It is not intended that distributions will be made by the child's family trust out of the amount capital, which the child proposes to contribute to the child's family trust, to an Australian resident.

It is currently expected that only the child, the child's spouse and children will be made presently entitled to the income which will be generated by the child's family trust in the foreseeable future. It is not expected that an Australian resident will be made presently entitled to the income which will be generated by the child's family trust in the foreseeable future.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Section 128D

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 1936 Paragraph 6-5(3)

Income Tax Assessment Act 1936 Paragraph 6-10(5)

Taxation Administration Act 1953 Schedule 1, Section 12-210

Taxation Administration Act 1953 Schedule 1, Section 12-215

Trust Recoupment Tax Assessment Act 1985 Section 5

Trust Recoupment Tax Assessment Act 1985 Subsection 13(1)

Reasons for decision

Background

The child is not a resident of Australia for the purposes of sections 6-5 and 6-10 of the ITAA 1997 and paragraph 128B(1)(a) of the ITAA 1936.

Accordingly, sections 6-5 and 6-10 of the ITAA 1997 will generally only include Australian sourced income in the child's assessable income. Further, because the child is not a resident, section 128D of the ITAA 1936 will generally exclude dividends from the child's assessable income.

Question 1(a)

Summary

The child will be exempt from income tax by virtue of section 128D of the ITAA 1936.

Detailed reasoning

The child is a non-resident who will be 'specifically entitled' in terms of section 207-58 of the Income Tax Assessment Act 1997 (ITAA 1997) to the fully franked distribution which will be received by the Trust from an Australian resident company.

In terms of subsection 128A(3) of the ITAA 1936 a beneficiary who is presently entitled to a dividend is deemed to have derived the dividend income. Under subsection 128B(1) of the ITAA 1936 there is a liability to withholding tax on dividend income paid to a non-resident. However, franked dividends paid to non-residents are excluded from the withholding tax provisions under paragraph 128B(3)(ga) of the ITAA 1936.

Section 128D of the ITAA 1936 provides that a dividend upon which withholding tax is payable, or would have been payable if not for paragraph 128B(3)(ga) of the ITAA 1936, is not assessable income and is not exempt income. Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income then it is not assessable income.

In this case, the fully franked dividend income is non-assessable non-exempt income. Hence, it is not included in the child's assessable income.

Question 1(b)

Summary

The trustee of the Trust will not be liable to pay tax under section 98, in particular, subsection 98(3), of the ITAA 1936.

Detailed reasoning

As stated above, the child is a non-resident who will be presently entitled and 'specifically entitled' to the franked dividend which will be paid to the Trust by an Australian resident company.

Subsection 98(2A) of the ITAA 1936 provides that where a non-resident beneficiary is presently entitled to a share of the income of the trust estate, the trustee is assessed and liable to pay tax under subsection 98(3) of the ITAA 1997. The liability is in respect of so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

In this case, the trust expects to receive a fully franked dividend from a resident Australian company. Once the dividend has been declared and received, the trust deed allows the trustee to make the non-resident beneficiary, the child, presently entitled to this dividend income.

Section 98 of the ITAA 1936 will assess the trustee in respect of the dividend distributed to the non-resident at the appropriate non-resident rates as though it is assessed in the hands of the beneficiary.

The net income of a trust estate is defined in subsection 95(1) of the ITAA 1936 as the total assessable income of the trust estate calculated as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions.

In terms of subsection 128A(3) of the ITAA 1936 a beneficiary who is presently entitled to a dividend is deemed to have derived the dividend income. Under subsection 128B(1) of the ITAA 1936 there is a liability to withholding tax on dividend income paid to a non-resident. However, paragraph 128B(3)(ga) of the ITAA 1936 excludes franked dividends from withholding tax.

Section 128D of the ITAA 1936 provides that a dividend upon which withholding tax is payable or would have been payable if not for paragraph 128B(3)(ga) of the ITAA 1936, is not assessable income and is not exempt income. Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income then it is not assessable income.

In this case, the fully franked dividend income is non-assessable non-exempt income. This means it is not included in the net income of the trust, and it is not included in the trustee's assessable income.

Although the trustee is assessed under section 98 of the ITAA 1936 in respect of the fully franked dividend being distributed to the non-resident, the trustee is not liable to pay income tax on the distribution of non-assessable non-exempt net trust income.

Question 2(a)

Summary

The company is not required to withhold any amount under the PAYG withholding provisions in respect of the dividend paid to the Trust.

Detailed reasoning

The company will pay a dividend to an Australian resident trust. It will not pay a dividend to a non-resident. The company is not required to withhold any amount under the PAYG withholding provisions because it has not paid an amount to a non-resident.

Question 2(b)

Summary

The trustee of the Trust is not required to withhold any amount under the PAYG withholding provisions in respect of the distribution from the Trust.

Detailed reasoning

Again, the child is a non-resident who will be presently entitled and 'specifically entitled' to the franked dividend which will be paid to the Trust by an Australian resident company.

Pursuant to section 12-215 of Schedule 1 of the TAA 1953 an Australian resident who receives a dividend to which a foreign resident becomes presently entitled must withhold an amount.

Pursuant to paragraph 12-300(a) of Schedule 1 of the TAA 1953, the Australian resident does not need to withhold any amount if there is no withholding tax payable on that amount under Division 11A of Part III of the ITAA 1936.

Under subsection 128B(1) of the ITAA 1936 there is a liability to withholding tax on dividend income paid to a non-resident. Under subsection 128C(1) of the ITAA 1936, the withholding tax is due and payable by the trustee. However, paragraph 128B(3)(ga) of the ITAA 1936 excludes franked dividends from withholding tax.

Because no withholding tax is payable under Division 11A of Part III of the ITAA 1936 due to the operation of paragraph 128B(3)(ga) of the ITAA 1936, the Australian resident does not need to withhold any amount from the dividend.

Questions 3, 4 & 5

Summary

The parent, child X and child Y will not be assessable under section 97 of the ITAA 1936 on any part of the distribution from the Trust represented by the fully franked dividend.

The trust deed allows the trustee to make the non-resident beneficiary, the child, presently entitled to the dividend income. When this occurs, the other potential beneficiaries, including the parent, child X and child Y, will not be assessable on any share of net trust income.

Detailed reasoning

Subsection 97(1) of the ITAA 1936 provides that where a beneficiary of a trust estate is not under any legal disability and is presently entitled to a share of the net income of the trust estate, the assessable income of the beneficiary includes:

· so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident, and

· so much of that share of the net income of the trust estate as is attributable to a period where the beneficiary was not a resident and is also attributable to sources in Australia.

In this case, the Trust expects to receive fully franked dividend from a resident Australian company. Once the dividend has been declared and received, the trust deed allows the trustee to make the non-resident beneficiary, the child, presently entitled to this dividend income. When this occurs, no other beneficiary, including the parent, child X and child Y, will be assessable on any share of net trust income under section 97 of the ITAA 1936 that is represented by the fully franked dividend.

Question 6

Summary

The general anti avoidance provisions in Part IVA of the ITAA 1936 will not apply to this transaction.

Detailed reasoning

General

First it is necessary to identify the relevant scheme under subsection 177A(1). The transactions involving the company paying a proposed dividend to the Trust and the Trust making the child presently entitled to the dividend income and the child contributing the amount as capital into the child's family trust constitute a scheme for the purposes of Part IVA. It is important to stress that the child's family trust does not intend to make a distribution out of the capital to an Australian resident.

Part IVA can only apply where the relevant taxpayer has entered into or carried out the scheme, or any part of the scheme, with the sole or dominant purpose of obtaining a tax benefit in accordance with section 177C in connection with the identified scheme.

For a tax benefit to have been obtained in connection with a scheme, it must be determined that the tax benefit would not have arisen to the taxpayer in the absence of the scheme, or the tax benefit might reasonably be expected not to have arisen to the taxpayer in the absence of the scheme.

Dominant purpose

Section 177D identifies eight factors that must be taken into consideration in order to determine the objective purpose, as set out below:

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

At para 93 of Practice Statement Law Administration PS LA 2005/24 it is stated:

[I]f a scheme is entered into and carried out in the manner in which ordinary…family dealings are conducted, the manner of the scheme will not indicate the purpose of obtaining the tax benefit

The steps in the scheme involve a transfer from the company to the Trust, then, from the Trust to the child, then, from the child to the child's family trust which is controlled by the parent.

By itself, making the child presently entitled to a fair fraction of the retained profits of the company and the child transferring those funds to the child's family trust, does not raise a strong inference of a tax avoidance purpose. Each of these steps is explicable as an ordinary family dealing of making gifts to associates. The intention is to give a fair fraction of the company's retained profits to the child. This is effected by the company paying a dividend to the Trust and, then, the Trust making the child presently entitled to that dividend income. The contribution of the funds to the child's family trust is explicable on the basis of providing for asset protection on divorce by ensuring that the trust is controlled by someone other than the child. Additionally, the use of the child's family trust can be explained by the desire to have the flexibility to distribute income and capital to a large class of beneficiaries by using a discretionary trust structure which is a commonly used structure in family dealings.

There is no artificiality or contrivance in the manner in which the child is proposed to be made presently entitled to the distribution from the Trust, or the manner in which the funds are proposed to be gifted to the child's family trust - the funds will be transferred in real terms rather than just being recorded as accounting entries. The manner in which the scheme was entered into and carried out is consistent with an ordinary family dealing in which the parent's family company gifts an amount to one of the parent's children in such a manner as to provide for asset protection on divorce.

(ii) The form and substance of the scheme

The form of the transaction involves an advancement of a fraction of the retained earnings of the company to the child and the child's family. However, the substance of this series of transactions is that the parent will retain control over who will benefit under each discretionary trust and can potentially benefit under both trusts. In substance, there is little difference between the two trusts other than the persons who are intended to benefit under each trust.

On the other hand, the fact that the parent has effective control of the child's family trust, is explicable on the basis of protecting the child's assets in the event of a dissolution of marriage.

It cannot be necessarily concluded from this factor by itself that a tax avoidance purpose was the dominant purpose having regard to the asset protection purpose.

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

In relation to timing, in PS LA 2005/24, the Commissioner explained:

The time at which a scheme is entered into, and the length of the period during which it is carried out, also draws attention to a particular aspect of the manner in which a scheme is entered into and carried out. Specifically, a scheme that is entered into shortly before the end of the financial year, and carried out for a brief period, is one whose timing indicates the purpose of obtaining a tax benefit. There are dates other than the end of the year of income that may also be significant, such as the date of a change in the tax rate.

The child has been a non-resident of Australia for many years and has no intention to return to Australia in the foreseeable future. In light of that, the timing of these transactions does not raise the inference that the scheme was undertaken to take advantage of the child's current status as a non-resident, as this status is not likely to change. Hence, the factor of timing is not indicative that Part IVA would apply to the transaction.

(iv) The tax result that would have been achieved by the scheme

Carrying out the present scheme produces the potential advantage that if the parent needs to access the amount at any time in the future, the parent could arrange for the amount to be distributed to the parent or to other Australian residents free of tax.

However, to obtain protection from loss of assets on divorce the child's family trust had to be established as a discretionary trust which was controlled by someone other than the child and who the child could trust, such as, the parent. Hence, in order for the child to obtain protection from loss of assets on divorce, the child would have carried out the present scheme regardless of whether or not a potential tax benefit arose from the scheme.

(v) Any change in the financial position of the relevant taxpayer resulting from the scheme

There will be a change to the financial position of the company as a result of this scheme. The company's franking account balance, cash position and retained earnings will decrease whilst the child's family trust will benefit from an injection of the amount to its corpus. These are real changes to the financial position of the parties (not just accounting entries) and the changes are in line with what would be reasonably expected if the dominant purpose of the transaction was the gifting of the funds to the child coupled with asset protection on divorce.

The fact that the child's family trust is not an eligible beneficiary of the Trust and that therefore it was not possible to distribute directly to the child's family trust lends weight to the view that the interposition of the child (which is one element of the scheme) was not necessarily undertaken for the purpose of tax avoidance.

However, from the point of view of who could control the funds, this scheme resulted in a distribution to the Trust and then, via the child, a transfer to the child's family trust in circumstances in which the parent effectively controlled both trusts and could benefit from both trusts. Although the child's family trust has a broader range of potential beneficiaries, the parent could use both trusts in much the same fashion. Once the child contributed the funds into the child's family trust, the funds returned to the control of the parent (as was the case when the funds were held by the Trust). Other than the fact that the child's family trust is intended to benefit the child's family, there is not much practical difference between the two trusts except in the name of each trust and the expansion of the class of potential beneficiaries in the child's family trust (most importantly, including the child's spouse) and the fact that the income of the Trust has been converted into the corpus of the child's family trust.

Had this scheme not been explained by the asset protection, this factor could potentially raise the inference of a tax avoidance dominant purpose.

However, this factor is not necessarily inconsistent with an asset protection dominant purpose.

(vi) Any change in the financial position of any associated person resulting from the scheme

Although it is proposed that the child will be made presently entitled by the Trust to the amount, the subsequent settlement of this money will increase the assets of the child's family trust with the intention of providing benefits to the child's family.

Had this scheme not been explained by the asset protection on divorce and had the intention not been to provide benefits to the child's family, this factor (the change of financial position) could potentially raise the inference of a tax avoidance dominant purpose because both trusts are ultimately controlled by the parent.

Nonetheless, this factor is not necessarily inconsistent with an asset protection dominant purpose.

(vii) Any other consequence for the relevant taxpayer

There are no other income tax consequences associated with the proposed transaction. This factor is not indicative that Part IVA should apply.

(viii) The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer

In Taxation Ruling IT 2330 and in the second reading speech it is made clear that Part IVA should not

cast unnecessary inhibitions on normal commercial transactions by which taxpayers legitimately take advantage of the opportunity available for the arrangement of their affairs

and that

[t]here will be no question ...of the new provisions impeding a parent who wished to pass to a spouse or to children the use or enjoyment of some income producing asset

The entities who were expected to benefit from a payment of dividends by the company are close family members of the parent. The net result of the present series of transactions is to transfer a fair fraction of the retained earnings of the company to the child and the child's family who are expected to benefit under the child's family trust. This can readily be explained as an ordinary family dealing involving a gift of a fair fraction of the retained earnings to one of the parent's children with control of the child's family trust being retained by the parent so as to provide for asset protection on divorce. The fact that the child's family trust will be structured as a discretionary trust is consistent with the desire to have a wide discretion to select beneficiaries which is a feature of structures ordinarily used in family dealings and is consistent with asset protection on divorce.

This factor is consistent with the scheme being regarded as an ordinary family dealing which is not necessarily indicative of a purpose to obtain a tax benefit.

Overall - dominant purpose

It is necessary to consider the eight factors listed above in light of the alternate postulates if the scheme had not been implemented (the counterfactuals).

The very nature and purpose of the scheme is to distribute funds to the child so the child and family can benefit from the trust. It is arguable that the company would not have paid any dividend if the scheme had not been entered into, as discussed below. For the present purposes, it is not necessary to decide whether that argument is correct.

One element of the scheme has the potential for tax avoidance - the fact that the child will contribute the amount to the child's family trust which is controlled by the parent. This will have the result that the funds which were previously controlled by the parent and which could previously have been accessed by the parent for the parent's own benefit or the parent's other children will remain in the parent's control and could potentially be paid to the parent or other Australian residents free of tax should the parent have any pressing need to access the funds (for instance, if there is an economic downturn and the parent or the other children need to access the amount). This raises the inference that one of the purposes of this scheme may have been to convert the amount into a tax-free format for potential use in the future by Australian residents.

However, it is relevant that the amount of the contribution to the child's family trust and the parent's control of the child's family trust can be explained on the basis of asset protection on divorce. It is important to note that the child's family trust does not intend to make distributions to Australian residents. It is also relevant that the child has been gifted a fair fraction of the retained earnings of the company. The purpose of the present scheme could have been to avoid tax, or, to make a gift to the child in such a way as to confer asset protection on divorce. Having regard to the above pointers, it is considered that the dominant purpose of the scheme is not tax avoidance. The possible tax avoidance purpose merely involves a potential for tax avoidance in the event that the child's family trust decides to make a distribution to an Australian resident and there is no intention to make such a distribution. Even if the present scheme is entered into for two purposes, it is considered that the dominant purpose is to make a gift to the child while providing asset protection on divorce.

Tax benefit

The counterfactual is relevant when determining whether there is a tax benefit arising from the scheme.

In RCI Pty Ltd v FCT [2011] FCAFC 104, it was decided that no tax benefit arose because, if the taxpayer had not entered into the scheme, it would be reasonable to conclude that the taxpayer would have either done nothing or would have done something else which would not have involved transferring the shares which generated the capital gain.

Similarly, as the very nature of the present scheme is to distribute funds to the child so that the child and family can benefit from the Trust, it can be argued that it would be reasonable to assume that if the present scheme was not entered into the company would not pay any dividend. Hence, no amount would have been assessable in the case of that counterfactual.

However, because it has been decided above that tax avoidance was not the dominant purpose of the scheme, it is not necessary to decide whether or not there is a tax benefit associated with this scheme.

Dividend Stripping s.177E

Section 177E of the ITAA 1936 can apply even if there is no tax benefit. In FCT v Ashwick (Qld) No 127 Pty Ltd & Ors [2011] FCAFC 49; 2011 ATC 20-255, Edmonds J at para 154 of Ashwick (citing Explanatory Memorandum to the Income Tax Law Amendment Bill (No 2) 1981) approved the comments that:

Schemes of the kind to which section 177E is directed could on occasions come within the general ambit of section 177D, but section 177E is needed for situations where, for example, although profits are in fact stripped from a company, it may not be a reasonable hypothesis that, but for the scheme, the profits would have been paid as dividends. But for the scheme they would formally have remained in the company, at least for the time being. If that were so in a particular case, the situation would not fall within section 177D because there would not, under section 177C, be a 'tax benefit' - i.e., an amount not included in assessable income that but for the scheme would have been, or might reasonably be expected to have been, included.

Nevertheless, section 177E can only apply if the dominant purpose of the scheme is tax avoidance.

It has been decided above that the dominant purpose of the scheme is not tax avoidance and therefore section 177E cannot apply.

Overall Part IVA

Accordingly, because tax avoidance is not the dominant purpose, Part IVA will not apply to this transaction.

Question 7

Summary

A primary taxable amount will not be taken to have arisen under section 5 of the TRTAA 1985 because there is no 'tax avoidance scheme' in the present case.

Detailed reasoning

Subsection 5(1) of the TRTAA 1985 applies if, among other things,:

(a) a beneficiary had a 'vested and indefeasible interest' in trust income

(b) the beneficiary was not actually presently entitled but is deemed to be presently entitled

(c) the entitlement arose out of a tax avoidance scheme (based on the objective dominant purpose) and

(d) it can be reasonably expected that the present value (based on a 10% p.a. discount) of the benefit to the beneficiary will be less than 50% of the distribution.

Subsection 3(4) of the TRTAA 1985 explains that

For the purposes of this Act, a scheme shall be taken to be a tax avoidance scheme if and only if, having regard to-

(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 the Assessment Act that, but for section 100A and Part IVA of that Act, would be achieved by the scheme;

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

(f) any other consequence for any person of the scheme having been entered into or carried out;

it would be concluded that the person, or any of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of securing that a person or persons (whether or not a particular person or particular persons) who, if the scheme had not been entered into or carried out, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than the person or persons would have been liable to pay if the scheme had not been entered into or carried out.

Paragraph 3(5)(b) of the TRTAA 1985 provides the following interpretation in respect of subsection 3(4):

a reference to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to a scheme or a part of a scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

The question is what is the sole or dominant objective purpose having regard to the above six factors. It has been decided, above, that the objective dominant purpose of the present scheme is not tax avoidance for the purposes of applying Part IVA of the ITAA 1936. In the present case, although the relevant factors are slightly different, there is no material difference in identifying the objective dominant purpose for the purposes of subsection 3(4) of the TRTAA 1985 and the objective dominant purpose which is identified for the purposes of Part IVA of the ITAA 1936. Accordingly, it is considered that the objective dominant purpose of the present scheme is not tax avoidance for the purposes of applying the TRTAA 1985.

Because there is no 'tax avoidance scheme' in the present case, the condition in paragraph 5(1)(c) of the TRTAA 1985 has not been met and therefore there will not be any primary taxable amount in terms of paragraph 5(1)(g) of the TRTAA 1985.

Because it has been concluded that there is no primary taxable amount, it is not necessary to consider whether or not the other conditions set out in section 5(1) of the TRTAA 1985 have been met.

Question 8

Summary

The transaction will not be treated as being void by virtue of subsection 13(1) of the TRTAA 1985.

Detailed reasoning

Subsection 13(1) of the TRTAA 1985 reads:

Where-

(a) a scheme entered into or carried out by a person after 28 April 1983 would, but for this section, have the effect of in any way, directly or indirectly, defeating, evading or avoiding any liability of the person to pay trust recoupment tax; and

(b) it would be reasonable to conclude or infer that the person entered into or carried out the scheme for the purpose of in any way, directly or indirectly, defeating, evading or avoiding any liability of the person to pay trust recoupment tax or future trust recoupment tax;

then, in any prescribed recovery proceedings, the scheme shall be treated as being void in so far as it would, but for this section, have the effect mentioned in paragraph (a) but without prejudice to such validity as the scheme may have for any other purpose.

Subsection 13(3) of the TRTAA 1985 adds:

A reference in this section to a scheme being entered into or carried out or a transfer of property being made by a person for a particular purpose shall be read as including a reference to the scheme being entered into or carried out or the transfer being made, as the case may be, by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

For a scheme to give rise to a liability for trust recoupment tax, it is necessary that the scheme be entered into for the sole or dominant purpose of tax avoidance. It has been decided in the answer to Question 7, above, that the present scheme cannot give rise to a liability for trust recoupment tax because it is not entered into for the dominant purpose of tax avoidance. Because there cannot be any liability for trust recoupment tax in the first place, there cannot be any scheme which has been entered into for the purpose of defeating, evading or avoiding any liability to pay trust recoupment tax.

Hence, the transactions in the present case will not be treated as being void by virtue of subsection 13(1) of the TRTAA 1985.

Not considered

This ruling has not considered the effect of any of the proposed amendments to Part IVA of the ITAA 1936. This private ruling will not be binding to the extent that there is a change of law as a result of any amendments which are made to Part IVA of the ITAA 1936.

This ruling has not considered the effect of other provisions which have not been identified in the questions to be ruled upon, in particular, sections 100A, 100AA, 100AB and 102AAM of the ITAA 1936.