Edited version of your private ruling

Authorisation Number: 1012417909518

Ruling

Subject: Distribution of franked dividends

Question 1

Will subsection 205-15(1) and section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a distribution of franked dividends by the trustee of the ABC Trust to its beneficiary the GHI Trust, such that a franking credit will arise in the franking account of JKL Pty Ltd, being the head company of a consolidated group of which the GHI Trust is a subsidiary member?

Answer

Yes.

Question 2

Will the GHI Trust form part of a family group as specified in section 272-90 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 3

Will Division 7A of the ITAA 1936 apply where the distribution remains outstanding as an unpaid present entitlement in the hands of JKL Pty Ltd?

Answer

Yes, section 109D of the ITAA 1936 will operate to deem a dividend between JKL Pty Ltd and the ABC Trust being in quantum the amount of the UPE between the GHI Trust and the ABC Trust.

This ruling applies for the following period:

1 July 2012 to 30 June 2014

Relevant facts and circumstances

XYZ Pty Ltd is the trustee of the ABC Trust. The ABC Trust is a discretionary trust. X and Y hold all the shares in XYZ Pty Ltd and are also directors of that company. The appointor of the ABC Trust is X.

The principal beneficiaries of the ABC Trust are X, Y, the children and grandchildren of X and Y, the relatives of X and Y, and any corporation in which the beneficiaries are a director or shareholder and any other trust of which the beneficiaries of the ABC Trust are a beneficiary. The default beneficiaries of the ABC Trust are Y and, in the event they do not survive until the vesting day, the children of X and Y.

The ABC Trust has made a Family Trust Election specifying the X family group as the group to be taken into account for the purposes of Schedule 2F to the ITAA 1936.

DEF Pty Ltd acts as Trustee of the GHI Trust. The GHI Trust is a fixed unit trust of which all the issued units are held by JKL Pty Ltd.

According to a clause of the deed establishing the GHI Trust, if the Trustee makes no determination in terms of another clause with respect to the distribution or accumulation of the net income or part thereof for each accounting period the net income or part thereof will be accumulated.

X and Y hold all the issued shares in JKL Pty Ltd and are also the directors of that company.

JKL Pty Ltd, the GHI Trust and DEF Pty Ltd are to become members of a consolidated group with JKL Pty Ltd as the head company, such group to come into existence before any distribution, whether it be interim or final, is made by the Trustee of the ABC Trust with respect to its net income for the relevant income year.

The most significant investment held by the ABC Trust and the primary source of income is a holding of shares in a listed company. The ABC Trust borrowed a substantial amount to acquire the shares. The terms of the borrowing are such that the dividends received by the ABC Trust to date and, at least, the first 20XX anticipated dividend will be applied entirely to reduce debt.

Assumption

The GHI Trust will not receive any distributions from the ABC Trust until such time as it becomes a member of a consolidated group. The consolidated group will consist of JKL Pty Ltd (as the head company), the GHI Trust and DEF Pty Ltd.

Also this ruling is given on the basis that during the ruling period the trustee of the GHI Trust will not:

· issue any units of a class other than of the sole existing class; or

· amend the trust deed (whether under clause XX or any other provision of the trust deed) to allow the trustee or any other entity to issue different classes of units.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 109D

Income Tax Assessment Act 1936 Subsection 109D(1)

Income Tax Assessment Act 1936 Subsection 109D(3)

Income Tax Assessment Act 1936 Section 109T

Income Tax Assessment Act 1936 Section 109W

Income Tax Assessment Act 1936 Section 109Y

Income Tax Assessment Act 1936 Section 109ZD

Income Tax Assessment Act 1936 Part X Division 1

Income Tax Assessment Act 1936 Section 318

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Subdivision 272D

Income Tax Assessment Act 1936 Section 272-80

Income Tax Assessment Act 1936 Section 272-87

Income Tax Assessment Act 1936 Section 272-90

Income Tax Assessment Act 1936 Section 272-95

Income Tax Assessment Act 1997 Part 3-6 Division 202

Income Tax Assessment Act 1997 Section 202-5

Income Tax Assessment Act 1997 Section 202-15

Income Tax Assessment Act 1997 Division 205

Income Tax Assessment Act 1997 Section 205-15

Income Tax Assessment Act 1997 Subsection 205-15(1)

Income Tax Assessment Act 1997 Section 205-40

Income Tax Assessment Act 1997 Subdivision 207-A

Income Tax Assessment Act 1997 Section 207-20

Income Tax Assessment Act 1997 Subdivision 207-B

Income Tax Assessment Act 1997 Section 207-35

Income Tax Assessment Act 1997 Section 207-45

Income Tax Assessment Act 1997 Section 207-50

Income Tax Assessment Act 1997 Division 701

Income Tax Assessment Act 1997 Section 701-1

Income Tax Assessment Act 1997 Subsection 701-1(1)

Income Tax Assessment Act 1997 Subsection 701-1(2)

Income Tax Assessment Act 1997 Subsection 701-1(3)

Income Tax Assessment Act 1997 Subdivision 709-A

Income Tax Assessment Act 1997 Section 709-50

Income Tax Assessment Act 1997 Section 709-60

Income Tax Assessment Act 1997 Section 709-65

Income Tax Assessment Act 1997 Section 709-70

Income Tax Assessment Act 1997 Section 709-75

Income Tax Assessment Act 1997 Subdivision 713-L

Income Tax Assessment Act 1997 Section 713-550

Income Tax Assessment Act 1997 Subdivision 716-A

Income Tax Assessment Act 1997 Section 716-75

Income Tax Assessment Act 1997 Section 716-80

Income Tax Assessment Act 1997 Part 6-5

Income Tax Assessment Act 1997 Subsection 995-1

Reasons for decision

Question 1

Subsection 205-15(1) of the ITAA 1997 sets out when a credit arises in the franking account of an entity and the amount of the credit. The consolidation regime allows a wholly-owned group of entities to be treated as a single entity for income tax purposes. The single entity rule is provided under section 701-1 of the ITAA 1997.

Based on the facts provided, subsection 205-15(1) and section 701-1 of the ITAA 1997 will apply to a distribution of franked dividends by the trustee of the ABC Trust to its beneficiary the GHI Trust, such that a franking credit will arise in the franking account of JKL Pty Ltd, being the head company of a consolidated group of which the GHI Trust is a subsidiary member.

Question 2

Under subsection 272-90(5) of Schedule 2F to the ITAA 1936 and entity owned by a family will form part of a family group:

'272-90(5)

A company, partnership or trust is a member of a primary individual's family group in relation to the conferral or distribution if, when the conferral takes place or the distribution is made:

(a) the primary individual; or

(b) one or more members of the primary individual's family; or

(c) the trustees of one or more family trusts, provided the primary individual is specified in the family trust election of each of those family trusts;

Or any combination of the above, have fixed entitlements, directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust'.

The GHI Trust is a unit trust in which all the issued units are held by JKL Pty Ltd. X and hold all the issued shares in JKL Pty Ltd and are also the directors of that company.

The ABC Trust has made a Family Trust Election specifying the X family group as the group to be taken into account for the purposes of Schedule 2F to the ITAA 1936.

As the primary individual (X) and a member of the family group (Y) indirectly own fixed entitlements to the income and capital of the GHI Trust it will be a member of the primary individual's family group.

Question 3

Division 7A is an anti-avoidance or 'integrity' provision, directed to ensuring that company profits effectively accessed by shareholders or their associates are included in the assessable income of the shareholders or associates as a dividend.

109D

A private company may be taken to pay such a dividend to an entity at the end of one of the private company's years of income under subsection 109D(1) of the ITAA 1936 where:

(a) the private company makes a loan to the entity during the current year; and

(b) the loan is not fully repaid before the lodgement day for the current year; and

(c) Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and

(d) either:

(i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or

(ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time.

Based on the facts provided, section 109D of the ITAA 1936 will operate to deem a dividend between JKL Pty Ltd and the ABC Trust being in quantum the amount of the UPE between the GHI Trust and the ABC Trust.