Edited version of your written advice

Authorisation Number: 1012335310904

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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 Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the retirement planning proposal?

Answer:

No.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You and your spouse are two of less than five individual taxpayers aged 59 years and over and you are all members of the same self managed superfund, the fund.

All individuals are all also directors of the corporate trustee of the fund and have commenced a pension from the fund. There are no relevant superannuation assets outside of the fund.

You and another are the sole directors and shareholders, holding 50% each, of a company incorporated over ten years ago (the company).

The company carried on a business from incorporation until the business was sold in 20XX.

At present, the company has retained earnings of over $2 million with fully franked credit coverage, paid up share capital and no liabilities.

The retained earnings amount includes related party loans and cash/listed shares.

The loans arose primarily in the 20XX-YY financial year when the company loaned part of the business sale proceeds to a number of directors/shareholders (the borrowers).

The borrowers are in the process of repaying the loans using an annual fully franked dividend paid by the company and drawings from the super fund. The franking credit offsets the tax on the dividend.

Under the current arrangement, the debt will be repaid in less than 10 years.

If continuing in this way, under the current structure it will take an additional 10 years, after the loan is repaid, to extract these earnings tax effectively.

You and your spouse wish to reorganise and simplify family financial affairs and enable clear succession planning.

Proposal

You and the other borrower will draw funds from the superfund to repay loans to the company in full.

After the loans are repaid, you will transfer half of your shares in the company to your spouse by way of a gift.

All members would then make an in specie non-concessional contribution of shares to the superfund, totalling around 50% of the company share value with some of the contributions spread over two financial years. Your contribution amount will be the maximum non-concessional contribution allowed for your age and be 50% of your shareholding.

In due course, the company will pay a fully franked dividend of all its retained profits.

The company will then be placed into voluntary liquidation.

You will make a capital gain and be assessable on the dividend and imputation amount when it is paid.

All transactions will be undertaken on an arms length commercial basis and based on independent professional valuations.

The expected time frame for the proposal is three to six months.

Relevant legislative provisions

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 177EA

Income Tax Assessment Act 1936 section 177F

Reasons for decision

Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

In broad terms, Part IVA will apply where the following requirements are satisfied:

● there is a scheme (see section 177A of the ITAA 1936);

● a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with the scheme (see section 177C of the ITAA 1936); and

● the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b) of the ITAA 1936).

The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case.

You contend that an alternative that is available to you involves the first stages of the proposal, along with payment of the dividends in the original time frame.

After considering any relevant tax benefits obtained and the factors in paragraph 177D(b) of the ITAA 1936, Part IVA is not considered to apply to this arrangement.

It is also considered that on an assessment of the relevant circumstances of the scheme, section 177E or 177EA will not apply.