Edited version of your private ruling

Authorisation Number: 1012496574479

Ruling

Subject: Application of Part IVA of the

Does Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the scheme?

Answer

No

This ruling applies for the following period

1 June 2013 to 03 June 2016

Relevant facts and circumstances

The entity is a unit trust established by a deed.

There are two unit holders for the trust, one of whom is a non resident individual. The other unit holder is an Australian resident individual.

The non resident individual has loaned monies to the trust. These loans are on commercial, arm's length terms.

At least 90% of the market value of the Capital Gains Tax (CGT) assets held by the trust will be taxable Australian property at the time of the proposed transfer of units in the trust from one individual to the other.

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 177F,

Income Tax Assessment Act 1997 Division 820 and

Income Tax Assessment Act 1997 Section 8-1.

Does Part IVA apply to this ruling?

Part IVA of the ITAA 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with a scheme and it can be concluded that the scheme, or any part of it, was entered into or carried out for the dominant purpose of enabling a tax benefit to be obtained. Part IVA is a provision of last resort.

Section 177F of the ITAA 1936 gives the Commissioner discretion to cancel a tax benefit that has been obtained, or would be obtained, but for section 177F, in connection with an arrangement or scheme to which Part IVA applies.

Before the Commissioner can exercise the discretion in section 177F, the following questions must be addressed:

· Is there a scheme as defined by section 177A of the ITAA 1936?

· Is there a tax benefit that was obtained in connection with the scheme as defined by section 177C of the ITAA 1936?

· Is the scheme a scheme to which Part IVA applies, as determined by section 177D of the ITAA 1936, in that it would be concluded that the major or dominant purpose of entering into the scheme on the part of a participant was for the taxpayer to obtain the tax benefit?

The Scheme

Part IVA has its own definitional provision for the word "scheme". It is defined broadly in subsection 177A(1) to mean:

(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.

Section 177A(3) expressly includes within the definition of 'scheme' a 'unilateral scheme, plan, proposal, action, course of action or course of conduct'.

The scheme that you have identified is described in the facts as follows:

The non resident individual proposes transferring, by way of gift, all of their units in the trust to the Australian resident individual.

The transfer of the units will occur in a single transaction.

The Australian resident individual will then hold 100% of the units in the trust.

One of the consequences of the transfer of units is that the trust would no longer be subject to the thin capitalisation rules in Division 820 of the Income Tax Assessment Act 1997. As a result the trust might become entitled to a greater interest deduction under s8-1 of the Income Tax Assessment Act 1997.

Tax Benefit

For Part IVA to apply, a taxpayer must have obtained, or would obtain, but for section 177F of the ITAA 1936, a "tax benefit" in connection with a scheme.

Paragraph 177C of ITAA 1936 defines what is meant by the term tax benefit. 177C(1)(b) provides:

Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; …

However, paragraph 177C (2)(b) provides:

A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to:

(b) a deduction being allowable to the taxpayer in relation to a year of income the whole or a part of which would not have been, or might reasonably be expected not to have been, allowable to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out where:

(i) the allowance of the deduction to the taxpayer is attributable to the making of a declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option by any person, being a declaration, agreement, election, selection, choice, notice or option expressly provided for by this Act or the ITAA 1997, except one under Subdivision 960-D of the ITAA 1997; and

(ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be.

ATO Practice Statement Law Administration PS LA 2005/24 Application of General Anti-Avoidance Rules (PSLA 2005/24) provides instruction and practical guidance to tax officers on the application of Part IVA. It provides:

64. 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 not have been obtained but for the scheme, it is not necessary to refer to the reasonable expectation test……

66. It follows that the relevant tax benefit will not be excluded under subsection 177C(2) if it was obtained in connection with a scheme that was entered into or carried out by any person for the sole or dominant purpose of enabling that person or any other person to make the election or choice etc.

While the choice principle is relevant in this scenario to exclude certain schemes, it does not extend to a scheme created for the purpose of creating an opportunity for income tax avoidance by using an election or a choice.

The tax benefit under section 177C is that provided in paragraph (b) being a deduction being allowed to the taxpayer in relation to a year of income

Objective purpose test

Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that any person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit. The person referred to above need not be the taxpayer.

Subsection 177A(5) of the ITAA 1936 clarifies that the purpose referred to includes the dominant purpose where there are two or more purposes. Section 177D of the ITAA 1936 requires an objective conclusion as to purpose to have been reached having regard to the objective facts. The actual subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion under section 177D.

A conclusion about a relevant person's purpose for section 177D of the ITAA 1936 is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the eight factors for the scheme. However, not all of the factors will be equally relevant in every case. Provided the eight factors are each taken into account, it is possible to arrive at the conclusion as to purpose by making a global assessment of purpose.

These eight factors are as follows:

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 that has resulted, will result, or may reasonably be expected to result, from the scheme;

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

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

Consideration of the eight factors involves comparison of the scheme with the alternative arrangement. In other words, the conclusion about the dominant purpose of a person entering into or carrying out the scheme, or any part of it, necessarily requires consideration of what may otherwise have occurred. This is the reasonable expectation test.

Conclusion

The Commissioner will not apply Part IVA to cancel the tax benefit obtained under the 'scheme' in this scenario.