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Ruling

Subject: Dividend Access Shares

Question 1

Will the declaration of the proposed dividends to NewCo give rise to a direct value shift within the meaning of section 725-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the payment of the proposed dividends to NewCo give rise to a direct value shift within the meaning of section 725-145 of the ITAA 1997?

Answer

Yes

Question 3

Will the ordinary shares held by the applicant be a 'down interest' within the meaning of section 725-155 of the ITAA 1997 if the answer to questions (1) and (2) are yes?

Answer

Yes

Question 4

Will the Applicant be an affected party within the meaning of section 725-80 of the ITAA 1997 if the answer to questions (1) and (2) are yes?

Answer

Yes

Question 5

Will the direct value shift be one which does not have consequences for the applicant because of the application of section 725-90 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2012

Facts

The Applicant is a principal of a business.

The business is operated through the B Unit trust.

The D Trust, a discretionary trust controlled by the Applicant, receives income distributions attributable to the business through a holding trust, the F Discretionary Trust.

Net income of the D Trust has been distributed to the following primary beneficiaries:

(a) the Applicant;

(b) the Applicant's spouse;

(c) the Applicant's children;

(d) the Applicant's parent; and

(e) Company A Pty Ltd (Company A).

Company A is incorporated with the Applicant as the sole director and shareholder.

While the business is now significantly smaller than in the past, the Applicant continues to be exposed to significant ongoing business risk relating to the business activities.

The Applicant recently engaged new accountants. As part of their preliminary review, the accountants advised the Applicant that his shareholding in Company A was exposed to any claim made against him personally because they are the sole shareholder of Company A.

Company A has a large amount of retained earnings, which is approximately the value of the Applicant's shares (as sole shareholder).

The current group structure was submitted with the ruling request.

To reduce his ongoing exposure to the business risk, the Applicant proposes that Company A will issue a 'dividend access' share to a new company, NewCo Pty Ltd (NewCo) and then declare and pay a dividend to that company.

Shares in NewCo will not be held by the Applicant but by a new discretionary trust (NewTrust).

As a result, these shares should not be exposed to a claim against the Applicant.

The constitution of Company A allows for the directors to issue dividend access shares as a separate class of shares provided that the existing shareholder (in this case, the Applicant consents in writing). A copy of the constitution of Company A was submitted with the ruling request.

Company A and NewCo will not form a consolidated group.

NewCo intends to apply for dividend access shares in Company A.

The rights attaching to the dividend access shares are proposed to be as follows.

(a) The dividend access shares will be redeemable at any time after the X anniversary of their issue date at the option of the sole director of Company A.

(b) The dividend access shares shall have the right to receive dividends that will expire on the day Y years after the date of their issue.

(c) The dividend access shares have the right to receive such dividends as may be declared from time to time in respect of such class.

(d) The dividend access shares do not carry any voting entitlements at any general meeting of Company A.

(e) On a winding up of the company, the holder of the dividend access shares is entitled to a return on capital paid up on the shares but not to participate in a distribution of surplus capital.

The shares are issued at $Z each.

The declaration and payment of the dividend by Company A to NewCo is proposed to be as follows.

(a) Company A will declare dividends in favour of NewCo.

(b) Company A will pay the dividends to NewCo within 14 days of them being declared.

The proposed group structure was submitted with the ruling request.

All of the entities within the group are understood to be solvent and there is no evidence of any creditor, known or potential, being disadvantaged by the proposed payment of the dividend.

Relevant legislative provisions

Income Tax Assessment Act 1936 part IVA

Income Tax Assessment Act 1936 section 177E

Income Tax Assessment Act 1997 section 725-50

Income Tax Assessment Act 1997 paragraph 725-50(e)

Income Tax Assessment Act 1997 section 725-90

Income Tax Assessment Act 1997 subsection 725-90(1)

Income Tax Assessment Act 1997 subsection 725-90(2)

Income Tax Assessment Act 1997 section 725-145

Income Tax Assessment Act 1997 subsection 725-145(1)

Income Tax Assessment Act 1997 subsection 725-145(3)

Income Tax Assessment Act 1997 section 727-520

Reasons for decision

There can be consequences under Division 725 of the ITAA 1997 where there is a direct value shift involving the equity or loan interests in a target entity, as defined in section 725-145, for which the threshold conditions in section 725-50 are satisfied.

There is a direct value shift on the facts of this case.

Under a scheme involving the issue of a new class of shares (dividend access shares) in the target entity Company A and declaration and payment of a dividend to the holders of those shares, there are decreases in the market values of the ordinary shares held by the applicant in Company A, an increase in the market value of the new class of share in NewCo held by the NewTrust, and those decreases and increases are reasonably attributable to the same thing or things done under the scheme: subsections 725-145(1) and (3) and definition of 'equity or loan interest' in section 727-520 of the ITAA 1997.

One of the threshold conditions for there to be consequences under the Division is that 'neither of sections 725-90 and 725-95 (about direct value shifts that are reversed) applies: paragraph 725-50(e).

Section 725-90 applies where the state of affairs that is brought about by the things done under the scheme:

· will more likely than not cease to exist within four years after the time that the first of those things is done; and

· does not still exist at the earlier of the end of those four years or when a realisation event happens to an affected interest for the direct value shift.

The legislative context shows that the term 'state of affairs' is used to refer to the factual circumstance that is the trigger or cause for the value shift. The state of affairs is one but for which the direct value shift would not have happened: paragraph 725-90(1)(a) of the ITAA 1997. The example that follows subsection 725-90(1) reads:

Under a scheme, the voting rights attached to a class of shares in a company are changed. As a result, the market value of shares in that class decreases, and the market value of other classes of shares in the company increases. The company's constitution provides that the change is to last for only Y years.

The relevant state of affairs here is that a dividend is payable to the holders of the new class of shares. This state of affairs will cease to exist when the dividend is paid, an event that will happen within the four year period: subsections 725-90(1) and (2).

Conclusion

Therefore, as the reversal exception in section 725-90 will apply, there will be no consequences to the applicant under Division 725 of the ITAA 1997.

Note:

'This decision has been limited to the issue about the direct value shifting reversal exception. The applicant would also need to consider whether the arrangement as described may cause consequences to arise for a shareholder under other income tax provisions, including section 177E and Part IVA of the Income Tax Assessment Act 1936.' Refer to Taxpayer Alert TA 2012/4.