Edited version of your private ruling

Authorisation Number: 1012457494141

Ruling

Subject: Division 7 A - Property Settlement

Issue 1

Question 1

Does subsection 109C(1) of the Income Tax Assessment Act 1936 (ITAA 1936) apply when a private company makes a cash payment to the taxpayer due to a Family Court Order under the Family Law Act 1975 (FLA 1975)?

Answer

Yes

Question 2

Does section 109J of the ITAA 1936 apply when a private company makes a cash payment to the taxpayer due to a Family Court Order under the FLA 1975?

Answer

Yes

Question 3

Will the payment by the private company to the taxpayer be statutory income under subsection 6(1) of the ITAA 1936?

Answer

No

Question 4

Will the payment by the private company to the tax payer be statutory income under subsection 44(1) of the ITAA 1936?

Answer

No

Question 5

Will the Commissioner apply the general anti-avoidance provisions under Part IVA of the ITAA 1936 to the payment by the company to the taxpayer?

Answer

No

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commences on:

Once the court orders are formalised.

Relevant facts and circumstances

The taxpayer separated from their spouse in 20XX.

The parties do not have a binding financial agreement.

The combined assets of the parties for Family Law Purposes were estimated to be valued at approximately $Z million in 20YY.

Failing agreement between the parties, the Family Court is to determine precise orders for the division of the assets in the marital pool.

The taxpayer wishes to have a substantial cash settlement paid to them. They propose that all or part of the cash settlement be paid to them by the spouse's company.

The taxpayer has never held shares in their x-spouses company.

The x spouse has been the sole director of the company.

Subject to the Family Courts approval and following resolution of this Private Ruling, the taxpayer will seek to have the following orders made by the Family Court under the FLA in satisfaction of the property settlement:

a. that the x-spouses company be made a party to the proceedings; and

b. that the company pay to the taxpayer:

i. a cash payment equivalent to a specified percentage of the company's net asset value; and

ii. the remainder of entitlement to the assets of the parties (if any) to be satisfied by the transfer of property and cash by the x-spouse or any of their associated entities.

The parties are not legally divorced.

The taxpayer does not have any loans with the x-spouses company.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A.

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Subsection 109C(1).

Income Tax Assessment Act 1936 Subsection 109C(2).

Income Tax Assessment Act 1936 Subsection 109C(3).

Income Tax Assessment Act 1936 Subsection 109C(3A).

Income Tax Assessment Act 1936 Subsection 109C(4).

Income Tax Assessment Act 1936 Paragraph 109C(3)c.

Income Tax Assessment Act 1936 Section 109J

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1936 Subsection 44(1).

Income Tax Assessment Act 1997 Division 974.

Income Tax Assessment Act 1936 Subsection 177A(1).

Income Tax Assessment Act 1936 Section 177D.

Income Tax Assessment Act 1936 Subsection 177F(1).

Income Tax Assessment Act 1936 Subsection 177F(2C).

Income Tax Assessment Act 1936 Subsection 177F(2D).

Income Tax Assessment Act 1936 Subsection 177F(2E).

Income Tax Assessment Act 1936 Subsection 177C(1).

Income Tax Assessment Act 1936 Subsection 177A(5).

Income Tax Assessment Act 1936 Section 177G.

Income Tax Assessment Act 1936 Section 177A.

Income Tax Assessment Act 1936 Section 177C.

Income Tax Assessment Act 1936 Subsection 177A(3).

Income Tax Assessment Act 1936 Subsection 177F.

Income Tax Assessment Act 1936 Paragraph 177D(b).

Income Tax Assessment Act 1936 Subsection 177A(4).

Reasons for decision

Issue 1

Question 1

Summary

Yes the payment will be deemed a dividend under subsection 109C(1) of the ITAA 1936.

Detailed reasoning

The substantive issue in this ruling is whether a transfer of property pursuant to a court order from a private company to a former spouse is caught by the provisions of Division 7A of Part III of the ITAA 1936. Division 7A has the effect of deeming payments, loans or debts forgiven by a private company to a shareholder or an associate of a shareholder to be dividends assessable to that entity under section 44 of the ITAA 1936.

The company that is involved in the present ruling is a private company within the meaning of subsection 103A(1) of the ITAA 1936.

The rulee, is not a shareholder in the company but is an associate of a shareholder within the meaning of section 318 of the ITAA 1936.

Associated person, in relation to a company, was defined in former paragraph 108(3)(c) of the ITAA 1936 to mean a shareholder of the company or a person who, by reason of the wide definition of "associate" in former section 26AAB, was an associate of a shareholder, eg a relative or partner of a shareholder, the spouse or a child of a partner of a shareholder or a person who indirectly held a beneficial interest in shares in the company.

As the taxpayer is the spouse of a shareholder, it is taken that they are considered an associate of the shareholder.

The present application for a ruling arose because the taxpayer is separated and seeking a divorce from their spouse and proceedings are currently before the Family Court of Australia for a property settlement pursuant to the provisions of the Family Law Act 1975. At this point in time the parties have not reached agreement regarding the final property settlement and no orders in relation to the final property settlement have issued from the Family Court of Australia. The trial to determine each party's has not yet been set down.

It is anticipated that pursuant to orders of the Family Court of Australia, the taxpayer spouse will be transferring a cash payment of the company's net asset value and the remainder, if any, in property and cash to the taxpayer. Therefore up until the time of transfer of property pursuant to the court order the taxpayer will still be an associate of a shareholder in the company mentioned in the request.

Thus the first question posed by the taxpayer is whether a transfer of property pursuant to the anticipated Family Court order from the private company to the taxpayer is caught by the provisions of section 109C of the ITAA 1936.

This section has been set out below:

Section 109C Payments treated as dividends

Subsection 109C(1) When private company is taken to pay a dividend. A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

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

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

Note 1: Some payments do not give rise to dividends. See Subdivision D.

Note 2: A private company is treated as making a payment to a shareholder or shareholder's associate if an interposed entity makes a payment to the shareholder or associate. See Subdivision E.

Subsection 109C(2) Amount of dividend

The dividend is taken to equal the amount paid, subject to section 109Y.

Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.

Subsection 109C(3) What is a payment to an entity?

In this Division, -payment- to an entity means:

(a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and

(b) a credit of an amount to the extent that it is:

(i) to the entity; or

(ii) on behalf of the entity; or

(iii) for the benefit of the entity; and

(c) a transfer of property to the entity.

Subsection 109C(3A) Loans are not payments

However, a loan to an entity is not a payment to the entity.

Subsection 109C(4) Value of payment by transfer of property

The amount of a payment consisting of a transfer of property is the amount that would have been paid for the transfer by parties dealing at arm's length less any consideration given by the transferee for the transfer. (The amount of a payment is nil if the consideration given by the transferee equals or exceeds the amount that would have been paid at arm's length for the transfer.)

Essential conditions for the operation of section 109C of the ITAA 1936 are present in this ruling.

1. The company is a private company;

2. The Taxpayer is an associate of a shareholder in the company;

3. The taxpayer will be an associate of a shareholder at the time of transfer of property pursuant to the Family Court order from the private companies.

The question then remains whether there has been a payment to the rule in the present case. -Payment- is defined in subsection 109C(3) of the ITAA 1936 and it specifically includes a transfer of property as paragraph 109C(3)(c). There are many ways that property can move from one person to another so as to effect a -transfer of property. When a court order directs that property move from one party to another, the court order may immediately vest the property in the second person or it may require the first person to take a number of preliminary steps to effect a conveyance of that property. Whatever method is used, it is submitted that an order of the Family Court vesting property in a spouse is a -transfer of property- for this sub-paragraph. This is because not only is it quite natural to describe such a vesting as a transfer of property, but the common law has emphasised the wide meaning to be given to this phrase, even if it involves a compulsory alienation of property.

In Coles Myer Ltd v Commissioner of State Revenue (1997) 35 ATR 1, McDonald J analysed a number of cases which had considered the meaning of the term -transfer-. One of the cases that was cited was Gathercole v Smith (1881) 17 Ch D 1 at 6. In that case James LJ spoke of the word -transfer, as one of the widest terms that can be used- and Lush LJ said at 9. -I agree with Lord Justice James that transfer is a word of the widest import, and includes every means by which property may be passed from one person to another-. The phrase -transfer of property- can include a movement of property pursuant to a court order as the case of Sun Alliance Insurance Ltd v Inland Revenue Commissioners (1972) 1 Ch 133 demonstrates. In that case a court order effecting transfer of outstanding minority shares under an approved scheme of arrangement was itself held to be a -transfer on sale- for the purposes of the relevant English Stamp Act.

Thus it is satisfied that on the words of section 109C of the ITAA 1936 that the transfer of property pursuant to a Family Court Order from the private company to the taxpayer is a payment to which Division 7A applies. However, the applicant for the ruling in the present case has submitted the argument that as a former spouse, the taxpayer would not be an associate of their former spouse at the time the payment is made for the purposes of paragraph 109C(1)(a) of the ITAA 1936, but would have been an associate at some time for the purposes of paragraph 109C(1)(b) of the ITAA 1936.

Taxation Determination TD 2008/14 (TD 2008/14) considers the meaning of "because" in the context of the expression 'because the entity has been such a shareholder or associate at some time' in relation to payments, loans and debt forgiveness made by a private company to the entity?

In this case Division 7A has been targeted as a reasonable person would conclude that the payment or loan is made, or the debt is forgiven, because there has been a shareholder (or shareholder associate) relationship at some time. The Commissioner interprets this as meaning that there must be a real and substantial reason for the payment, loan or debt forgiveness concerned, even if it is not the only reason or the main reason for the transaction.

Looking at TD 2008/14 the issue of whether or not the taxpayer is considered a shareholder's associate at the time the payment is made is not really the issue as it is considered that at sometime she has been an associate of the shareholder. The payment is the event itself that triggers Division 7A and not some ulterior purpose on behalf of the company.

In summary, the taxpayer as an associate of a shareholder in the company would be considered to have received a dividend from the company pursuant to subsection 109C(1) of the ITAA 1936, when the court orders the payment to take place. This applies to both cash and property.

Furthermore, the structure of Division 7A is such that all advances, loans and other credits (unless they come within a defined class of exclusions) by private companies to shareholders and their associates are deemed to be dividends to the extent that there are realised or unrealised profits in the company. The exclusions from Division 7A are limited and exhaustively stated in Subdivision C -Forgiven Debts that are not treated as dividends and Subdivision D -Payments and Loans that are not treated as dividends. Transfers of property pursuant to a Family Court order are not mentioned as an exclusion in either of these Sub-Divisions.

Question 2

Summary

Yes the cash payment will trigger section 109J of the ITAA 1936 to be applied.

Detailed reasoning

Subdivision B of Part III of Division 7A of the ITAA 1936 deals with the circumstances under which certain private company payments will be treated as dividends.

A Family Court order directing the company to pay cash to the taxpayer is a payment for the purposes of section 109C of the ITAA 1936 and would meet the requirements to be treated as a dividend for the purposes of subsection 109C(1) of the ITAA 1936.

However Subdivision D of Division 7A of Part III of the ITAA 1936 sets out rules about some payments which are not treated as dividends under subsection 109C(1) of the ITAA 1936. Section 109J of the ITAA 1936 in Subdivision D is specifically relevant to the circumstances here.

Section 109J of the ITAA 1936 provides that:

A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment:

(a) discharges an obligation of the private company to pay money to the entity; and

(b) is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length.

Effectively, section 109J of the ITAA 1936 provides that such a payment is not taken to be the payment of a dividend for the purposes of section 109C of the ITAA 1936 to the extent that it discharges an obligation of the private company to pay money to a shareholder or an associate of the shareholder, and does not exceed the arm's length amount required to discharge that obligation.

The term obligation is not expressly defined for the purposes of section 109J of the ITAA 1936 and therefore adopts its ordinary meaning. The Macquarie Dictionary defines obligation as follows:

"a binding requirement as to action; the binding power or force of a promise, law, duty, agreement, etc; a binding promise or the like".

An order made under section 79 of the FLA 1975 as a result of proceedings in the Family Court regarding the property of parties to a marriage, may result in an entity who is a party to the court proceedings (for example, a company or trust) making a transfer of property under the terms of that court order. Part VIIIAA of the FLA 1975 gives the Family Court the power to make an order under section 79 binding on third parties.

Therefore, any payment made by the company to the rule as a result of a binding order made by the Family Court would satisfy paragraph 109J(a) of the ITAA 1936.

Paragraph 109J(b) of the ITAA 1936 would also be satisfied by the cash payment made under a binding order made by the Family Court. Any settlement terms proposed by the parties in relation to their property settlement must provide justice and equity between the parties if they are to be approved by the Family Court as required by the FLA 1975. In view of this, it is considered that a cash payment amount ordered to be paid by the company to the rulee would represent an arm's length transaction as the terms of the settlement would have been determined objectively by the Family Court to achieve a just and equitable result.

Therefore, as both elements of section 109J of the ITAA 1936 are satisfied, any cash payment made by the company to the rule under a binding order by the Family Court will not be considered a dividend.

Question 3

Summary

The payment will not fall under subsection 6(1) of the ITAA 1936 as statutory income.

Detailed reasoning

Subsection 6(1) of the ITAA 1936 defines 'dividend' to include:

(a) any distribution made by a company to any of its shareholders, whether in money or other property; and

(b) any amount credited by a company to any of its shareholders as shareholders;

(c) (Repealed by No 63 of 1998)

but does not include:

(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or

(e) monies paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if:

(i) the company gives the holder of the share a notice when it redeems or cancels the share; and

(ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and

(iii) the amount is debited to the company's share capital account;

except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or

(f)          a reversionary bonus on a life assurance policy.

From a reading of this definition it appears that the payments would not come within the definition of the word 'dividend' in subsection 6(1). The payments to the taxpayer who is not a shareholder, are payments made pursuant to court proceedings and are not in the nature of being a distribution as required in the definition.

The payment by the company to the taxpayer will not constitute a dividend for the purposes of subsection 6(1) of the ITAA 1936.

Question 4

Summary

Yes, subsection 44(1) of the ITAA 1936 is applicable in this case.

Detailed reasoning

Under subsection 44(1) of the ITAA 1936 the assessable income of a shareholder in a company who is a resident includes:

(i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

(ii) all non-share dividends paid to the shareholder by the company.

The payment to be made by the company to the rulee is not a dividend, as the rulee is not a shareholder, therefore it will not be assessable under subsection 44(1) of the ITAA 1936.

Question 5

Summary

Part IVA of the ITAA 1936 is not relevant to this case as no scheme has been determined.

Detailed Reasoning

Part IVA of the ITAA 1936 was introduced by the Income Tax Laws Amendment Act (No 2) 1981 and consists of sections 177A to 177G of the ITAA 1936. It applies to schemes entered into after 27 May 1981 and was intended to provide a general anti-avoidance measure to replace the former anti-avoidance provision, section 260 of the ITAA 1936.

Part IVA gives the Commissioner the discretion to cancel a tax benefit that has been, or would be obtained by a taxpayer in connection with a scheme. This discretion is found in subsection 177F(1) of the ITAA 1936.

Before the Commissioner can exercise the discretion contained in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA must be satisfied. These requirements are:

(i)      A tax benefit, as identified in section 177C, was or would, but for subsection 177F(1), have been obtained.

(ii)     The tax benefit was or would have been obtained in connection with a scheme as defined in section 177A.

(iii)     Having regard to section 177D, the scheme is one to which Part IVA applies.

Where the Commissioner exercises the discretion in subsection 177F(1) of the ITAA 1936 to make a determination, he shall take such action as he considers necessary to give effect to that determination.

A notice of the determination must be given to the taxpayer although the failure to give the notice of determination to the taxpayer does not affect the validity of a determination: subsections 177F(2C) and 177F(2E) of the ITAA 1936.

Subsection 177F(2D) of the ITAA 1936 provides that more than one determination may be included in the same notice.

Scheme section 177A

For Part IVA of the ITAA 1936 to apply, the identified scheme must fall within the broad definition of a scheme as provided in subsection 177A(1) of the ITAA 1936, which states:

scheme means:

(a)     any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal proceedings; and

(b)     any scheme, plan, proposal, action, course of action or course of conduct

In Federal Commissioner of Taxation v. Spotless Services Limited (1985) 32 ATR 309 at 388; 95 ATC 4775 at 4805 Cooper J stated:

"In my view, the definition in section 177A requires that the parties to the scheme, insofar as they are known, must be identified and the terms or content of any agreement, arrangement, understanding, promise or undertaking and the steps or stages of any course of action or proposal, insofar as they are relevant, be identified. It is not sufficient to identify a scheme by reference to a hoped for fiscal outcome. Section 177A requires that the scheme has an existence based in fact and reality and is not something based on the Commissioners view of the facts or their legal effect".

The definition of a scheme includes a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct: subsection 177A(3) of the ITAA 1936.

In Federal Commissioner of Taxation v. Peabody (1993) 25 ATR 32 at 39; 93 ATC 4104 at 4111 Hill J of the Federal Court (with whom Ryan and Copper JJ agreed) stated:

"The expression scheme is defined in section 177A. It encompasses, inter alia, non-enforceable arrangements or understandings as well as courses of action or courses of conduct. In a particular case a unilateral action may constitute a scheme for the purposes of the definition. In other cases, as identified by the Commissioner in the present circumstances, the scheme may consist of a series of steps or a course of action. This is not to say that where, as a matter of fact, a scheme consists of a course of action comprising several steps, the Commissioner may isolate out of that course of action one step and classify that as a scheme. Reference in Part IVA to part of a scheme (cf section 177A(5)) suggests rather that, in a case where a series of steps constitutes a scheme, that whole series of steps is to be considered, the individual steps being seen as parts of the scheme rather than each step being capable of being seen as a scheme in itself":

The Commissioner may advance alternative schemes including a narrower scheme within a wider scheme in support of a Part IVA determination.

In Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 382; (1994) 28 ATR 344 at 351; 94 ATC 4663 at 4670 the High Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) stated:

"But the Commissioner is entitled to put his case in alternative ways. If, within a wider scheme which has been identified, the Commissioner seeks also to rely upon a narrower scheme as meeting the requirement of Part IVA, then in our view there is no reason why the Commissioner should not be permitted to do so, provided it causes no undue embarrassment or surprise to the other side. If it does, the situation may be cured by amendment, provided the interests of justice allow such a course".

Whatever steps or circumstances the Commissioner relies on in defining the scheme must be capable, by themselves, of constituting a scheme for the purposes of Part IVA. In Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 383; (1994) 28 ATR 344 at 352; 94 ATC 4663 at 4670 the High Court stated:

"But Part IVA does not provide that a scheme includes part of a scheme and it is possible, despite the very wide definition of a scheme, to conceive of a set of circumstances which constitutes only part of a scheme and not a scheme in itself. That will occur where the circumstances are incapable of standing on their own without being robbed of all practical meaning".

If the Commissioner erroneously identifies a scheme, this will not always result in the wrongful exercise of the discretion conferred by subsection 177F(1) of the ITAA 1936. The discretion will only be wrongfully exercised if the identified tax benefit is not in fact a tax benefit within the meaning of Part IVA.

In Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 382; (1994) 28 ATR 344 at 351; 94 ATC 4663 at 4669 the High Court stated:

"The erroneous identification by the Commissioner of a scheme as being one to which Part IVAA applies or a misconception on his part as to the connection of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by subsection 177F(1) only if in the event the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Part IVA. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner".

 Tax benefit section 177C

Part IVA of the ITAA 1936 cannot apply unless a taxpayer has obtained, or would, but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. Subsection 177C(1) defines four types of tax benefit, relating broadly to:

(i) an amount not being included in the assessable income of the taxpayer of a year of income;

(ii)     a deduction being allowable to the taxpayer in relation to a year of income;

(iii)    a capital loss being incurred by the taxpayer during a year of income;

(iv)    a foreign tax credit being allowable to the taxpayer.

Subsection 177C(1) allows two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out. If it is possible to say that a tax benefit would have been obtained, it is not necessary to refer to the reasonable expectation test.

In Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 385; (1994) 28 ATR 344 at 353; 94 ATC 4663 at 4671 the High Court stated:

"A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable".

The Full Federal Court in Federal Commissioner of Taxation v. Consolidated Press Holdings (No 1) (1999) 42 ATR 575; 99 ATC 4945, referring to Federal Commissioner of Taxation v. Spotless Services Limited (1996) 186 CLR 404; 34 ATR 183; 96 ATC 5201 at 5211 stated:

"The language [in Spotless] suggests less of a predictive and more of a reasonable hypothesis approach than the passage earlier quoted from Peabody".

Purpose section 177D

The test in paragraph 177D(b) of the ITAA 1936 is the core of Part IVA and is frequently referred to as the statutory prediction test.

The statutory prediction test is applied by carefully weighing the matters contained in paragraph 177D(b) of the ITAA 1936 having regard to all the relevant evidence. Section 177D requires the Commissioner to have regard to each of the matters in paragraph 177D(b) of the ITAA 1936. However, not all of the matters will be equally relevant in every case.

 Section 177D of the ITAA 1936 states:

This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -

(a) a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

(b) having regard to -

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

(ii) the form and substance of the scheme;

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

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

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

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),

In Federal Commissioner of Taxation v. Peabody (1993) 25 ATR 32 at 41-42; 93 ATC 4104 at 4113-4114 Hill J of the Federal Court (with whom Ryan and Copper JJ agreed) stated:

"In arriving at his conclusion, the Commissioner must have regard to each and every one of the matters referred to in section 177D(b). This does not mean that each of those matters must point to the necessary purpose referred to in section 177D. Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against, that section 177D requires in order to reach the conclusion to which section 177D refers".

Section 177D of the ITAA 1936 refers to the purpose of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. Two points will be made at this stage. First, the reference to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons: subsection 177A(4) of the ITAA 1936.

Second, the particular purpose referred to in the section is the dominate purpose: subsection 177A(5) of the ITAA 1936. The dominate of two or more purposes is the ruling, prevailing or most influential purpose: Federal Commissioner of Taxation v. Spotless Services Limited (1996) 186 CLR 404 at 416; 34 ATR 183 at 188; 96 ATC 5201 at 5206.

It is possible for Part IVA of the ITAA 1936 to apply, notwithstanding that the dominate purpose of obtaining the tax benefit was consistent with the pursuit of a commercial gain. In Federal Commissioner of Taxation v. Spotless Services Limited (1996) 186 CLR 404 at 415; 34 ATR 183 at 187; 96 ATC 5201 at 5206 the High Court stated.

"A person may enter into or carry out a scheme, within the meaning of Part IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business".

The conclusion to be reached under section 177D of the ITAA 1936 is the conclusion of a reasonable person. In Federal Commissioner of Taxation v. Spotless Services Limited (1996) 186 CLR 404 at 422; 34 ATR 183 at 192; 96 ATC 5201 at 5210 the High Court stated.

"[T]he conclusion reached, having regard to the matters in paragraph (b) as to the dominate purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person".

The consideration of purpose or dominate purpose under paragraph 177D(b) of the ITAA 1936 requires an objective conclusion to be drawn. In Federal Commissioner of Taxation v. Spotless Services Limited (1996) 186 CLR 404 at 421; 34 ATR 183 at 192; 96 ATC 5201 at 5210 the High Court, citing Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359 at 382, stated:

"The eight categories set out in paragraph (b) of section 177D as matters to which regard is to be had are posited as objective facts".

The Full Federal Court in Federal Commissioner of Taxation v. Consolidated Press Holdings (No 1) (1999) 42 ATR 575 at 601; 99 ATC 4945 at 4971 stated:

"The section requires the decision-maker, be it the Commissioner or the Court, to have regard to each of these matters. It does not require that they be unbundled from a global consideration of purpose and slavishly ticked off. The relevant dominate purpose may be so apparent on the evidence taken as a whole that consideration of the statutory factors can be collapsed into a global assessment of purpose".

To determine if Part IVA applies it is necessary for us to work through paragraph 177D(b) of the ITAA 1936;

The scheme

The adoption of a payment under a Court Order should not result in an adverse conclusion. The parties are seeking independent legal and accounting advice and each have their own interests. The manner in which the payment will eventuate is not unusual or complicated and is being carried out in a manner that other families rely on.

The form and substance

There are no inequalities between the form of the arrangement and its substance. The ending of the marriage and the finality of financial interests in the parties is normal practice. The arrangement is not suspicious or unusual.

The time

Whilst there has been some delay from separation date until the division of the assets will occur, this is not unusual. Matters involving business interests can take substantial time to settle. The payment is a result of a marriage breakdown and has nothing to do with the avoidance of tax.

The result

The result had it not been for the circumstances and the situation may have resulted in Division 7A loans being triggered. However the exceptions to the provisions when applied to the taxpayer have declared the payment is not a dividend.

Change in financial position

There will be a substantial change in the financial position of both parties but not due to an avoidance of tax.

Any change in the financial position of anyone associated with the taxpayer

This has little relevance to the case as the only parties involved are the taxpayer and their former spouse. No other person will receive a benefit or have a change in their financial position.

Other consequences for the taxpayer or any other person

The consequences are that the end result will be the finality of financial interests involving the taxpayer and their former spouse.

The nature of any connection between the taxpayer and any other person mentioned

The connection between the taxpayer and that of their former spouse is that of any family facing a marriage breakdown. There is nothing unusual about the connection of the parties or the proceedings.