Edited version of your private ruling

Authorisation Number: 1012532825148

Ruling

Subject: Redeemable Preference Shares

Question 1

Will dividend stripping under section 177E of the ITAA 1936 apply to this arrangement, providing that the only way the beneficiaries of the New Trusts receive money in respect to the dividends paid to the Reserve Company on the Z class shares it holds is by way of assessable dividends (franked or otherwise)?

Answer

No.

This ruling applies for the following periods:

1 July 2013 to 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

1. ABC Pty Ltd and XYZ Pty Ltd ('The Companies") are trading companies that operate a business and have significant retained earnings.

2. The shareholders of the Companies are EFG Pty Ltd as trustee of the AAA Trust, and HIJ Pty Ltd as trustee of the BBB Discretionary Trust (collectively referred to as the "Existing Trusts"). The Existing Trusts have all made a Family Trust Election specifying the same individual.

3. The Existing Trusts are not passive and are used in other ventures.

4. CCC Pty Ltd as trustee of the DDD Trust, and EEE Pty Ltd as trustee of the FFF trust are newly established Discretionary Trusts ("the New Trusts") which will be shareholders in a newly established company holding all of the ordinary issued shares ("the Reserve Company")

5. The New Trusts have also made Family Trust Elections specifying the same individual as the Existing Trusts. The New Trusts hold the shares in 'the Newly Established Companies'. The reason for establishing the Reserve Company and the Newly Established Companies is to have companies in the group that are held by passive discretionary trusts for asset protection purposes.

6. Then they will adopt a new Constitution for the Companies which will allow them to issue a new share class called redeemable preference shares ("RPS").

7. Each share shall cease to exist at the expiration of 12 months following its issue. No amount is payable to the shareholder on the cessation of a share.

8. Once the RPS's are issued to the Reserve Company and the Newly Established Companies, a fully franked dividend equal to the retained earnings of the Companies will be declared. As the Newly Established Companies require funding to allow them to continue to acquire assets then the Companies may declare dividends to them.

9. The only way the beneficiaries of the New Trusts receive money in respect to the dividends paid to the Reserve Company on the Z class shares it holds is by way of assessable dividends (franked or otherwise). For example, if the shareholders or beneficiaries receive money, or have access to the economic benefit of the accumulated profits by entering into a Division 7A loan, then the Commissioner may apply section 177E to the arrangement.

10. There is no corporate value being released to shareholders or associates in a tax free form. Only fully franked dividends are paid to the beneficiaries of the New Trusts.

Assumptions and conditions attached to this ruling

It is a condition of this ruling that fact number 9 and fact number 10 from the above statement of facts are strictly adhered to in order to apply this ruling to this arrangement. Deviations from these facts will render this ruling invalid, and this arrangement could then attract the application of section 177E of Income Tax Assessment Act 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 177E.

Income Tax Assessment Act 1936 paragraph 177E (1)(a)

Income Tax Assessment Act 1936 paragraph 177E (1)(b)

Income Tax Assessment Act 1936 paragraph 177E (1)(c)

Income Tax Assessment Act 1936 paragraph 177E (1)(d)

Income Tax Assessment Act 1936 paragraph 177E (1)(e)

Income Tax Assessment Act 1936 paragraph 177E (1)(f)

Income Tax Assessment Act 1936 paragraph 177E (1)(g)

Reasons for decision

Question 1

Summary

If the only way the beneficiaries of the New Trusts receive money in respect to the dividends paid to the Reserve Company on the Z class shares it holds is by way of assessable dividends (franked or otherwise), then section 177E of the ITAA 1936 will not apply to the arrangement.

Detailed reasoning

The application of section 177E

1. Section 177E is a supplementary code inserted within the framework of Part IVA designed to counter particular kinds of schemes which would otherwise effectively place company profits in the hands of shareholders in a tax-free form.

2. The preconditions for the operation of section 177E are set out in paragraphs 177E(1)(a) to (d). By virtue of those paragraphs, section 177E applies where:

i. as a result of a dividend stripping scheme entered into after 27 May 1981, any property of the company is disposed of,

ii. the Commissioner is of the opinion that the disposal of the property represents, wholly or in part, a distribution of profits of the company, and

iii. if the profits represented by the disposal of the property had been paid as a dividend immediately before the scheme was entered into, it would be reasonable to expect that this would result in an amount (the ''notional amount'') being included in the assessable income of a taxpayer.

1. Where these conditions are satisfied:

i. the scheme is to be taken to be a scheme to which Part IVA applies (paragraph 177E(1)(e)),

ii. the taxpayer is taken to have obtained a tax benefit in connection with the scheme that is referable to the notional amount not being included in their assessable income (paragraph 177E(1)(f)), and

iii. the amount of the tax benefit is the notional amount (paragraph 177E(1)(g)).

2. In this situation the only way the beneficiaries of the New Trusts receive money in respect to the dividends paid to the Reserve Company on the Z class shares it holds is by way of assessable dividends (franked or otherwise). This would result in an amount being included in the taxpayer's assessable income in the year of income to which they receive the assessable dividends. This amount included in the taxpayer's assessable income is analogous to the tax benefit the taxpayer is taken to have obtained in connection with the scheme. Consequently the Commissioner will not make a determination to cancel the tax benefit that accrues to the taxpayers in the dividend stripping arrangement.