Edited version of your private ruling

Authorisation Number: 1012612646190

Ruling

Subject: Retirement planning proposal

Question 1

Is the franked distribution from the Company to the Fund made as part of a dividend stripping operation within the meaning of paragraph 207-145(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is there a scheme to which Part IVA, and therefore section 177F, of the Income Tax Assessment Act 1936 (ITAA 1936) applies?

Answer

Yes

Question 3

Is there a scheme to which section 177EA of the ITAA 1936 applies?

Answer

Yes

This ruling applies for the following periods:

Year of income ended 30 June 2013

Year of income ended 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

1. Taxpayer 1 and Taxpayer 2 are spouses (together, the Taxpayers). Both currently meet the work test for superannuation contribution purposes.

2. The Taxpayers are currently receiving pensions from their self-managed superannuation fund (the Fund). The Taxpayers are the directors of the corporate trustee (the Trustee) of the Fund.

3. The Taxpayers are shareholders in a private company (the Company). The Company has served its purpose and is of no further use.

4. There are several classes of shares in the Company.

5. Taxpayer 1 and Taxpayer 2 each own a parcel of shares in the Company that entitles them to both payments of dividends and capital, but do not provide voting rights nor any other right to participate in the management of the Company.

6. The remaining classes of shares have various rights and entitlements. Default shares carry the right to participate in the assets or profits of the Company to the extent that the holders of the employee shares are not entitled to do so. Default shares do not carry the right to vote.

7. One class of shares has voting rights, but not income or capital rights.

8. Another class of shares is entitled to a return of capital of $X per share. These shares carry no voting rights, no rights to receive dividends or other distributions from the Company, no rights to participate in the management of the Company or to appoint directors and no right to share in any surplus assets on winding up.

9. Taxpayer 2 is the sole director and secretary of the Company.

10. The cost base of Taxpayer 2's holding in the Company is equal to the current market value of those shares.

11. At or around 30 June 2013, the estimated value of the shares held by the Taxpayers is approximately $X, being the total of retained earnings, reserves and capital accounts.

12. Based on the rights attaching to the various other share classes (i.e. other than the class of shares held by the Taxpayers) those other shares are considered to be worth nominal value only.

13. The Company's sole asset at the time of implementing the arrangement at paragraph 14 below is cash represented by retained earnings and reserves. The retained earnings can be paid as a fully franked distribution.

14. It is intended that the following steps will be implemented:

(a) a professional valuation of the Company will be obtained. It is stated that the market value of the Taxpayers' shares in the Company is estimated to be approximately $X;

(b) the Taxpayers will each make an in-specie contribution to the Fund of a parcel of shares in the Company (each making a contribution of approximately $Y based on the share value as set out at paragraph 11 above);

(c) the Trustee will treat the entirety of the in-specie contributions as non-concessional contributions;

(d) the Fund will use its cash to purchase the balance of the Taxpayers' shares;

(e) upon transfer of their shares to the Company, Taxpayer 1 will crystallise a capital gain. Taxpayer 1 does not have any carried forward income or capital losses;

(f) the Fund will record the shares contributed to it in its accounts at their stated market value;

(g) on receipt of the shares, the Fund will use the shares to support the commencement of the payment of new pensions to the Taxpayers. Once the new pensions are commenced, the Fund will only have members whose total account balances are supporting pensions and no other members will be admitted to the Fund;

(h) after the expiry of 45 days from the Fund acquiring the shares in the Company, the Company will pay a fully franked distribution equal to its retained earnings;

(i) the franked distribution, including the franking credit on that distribution, is said to be exempt from income tax for the Fund. A proportion (as worked out under subsection 295-390(3) of the ITAA 1997) of the franked distribution and the franking credit on that distribution which would otherwise be assessable income of the Fund is treated as exempt from income tax under subsection 295-390(1) of the ITAA 1997. The relevant proportion is said to be 100%. The Fund is expected to be entitled to a refund of the unused franking credit tax offset;

(j) the franked distribution and the refunded franking credit tax offset will be used by the Fund to fund pension payments to the Taxpayers over a number of years;

(k) after the Fund receives the dividend from the Company, it will not pay either of the Taxpayers a superannuation lump sum;

(l) the amount remaining within the Company after the payment of the fully franked distribution will be used to redeem the other issued shares;

(m) having regard to the rights attached to some of the classes of shares to be redeemed, the shares are said to be worthless;

(n) the Company will then be placed into voluntary liquidation and deregistered; and

(o) when the Company is deregistered, the Fund will realise a capital loss, but this loss will not be used while the Fund is entirely in pension phase.

15. The Taxpayers say that the purposes of taking these steps are to:

(a) simplify the Taxpayers' financial affairs to ease the passing of the Taxpayers' eventual estate to their beneficiaries; and

(b) to provide additional and adequate retirement benefits.

16. If the above steps are not implemented, it is said that over the next five years, the Company will pay out the retained earnings amount as a fully franked distribution each year to each of the Taxpayers proportional to their respective shareholdings. The Taxpayers will contribute the distribution received, and any refunded unused franking credit tax offset, to the Fund as concessional and non-concessional contributions. In each of the next five years, the Company will redeem one fifth of the Taxpayers' shares. The Taxpayers will contribute any cash proceeds from the redemption of shares (net of any tax payable) to the Fund each year as non-concessional contributions. It is said that this will result in a net assessable capital gain for Taxpayer 1. Taxpayer 2 will not incur a capital gain on her portion of the redemption because their cost base will equal the redemption amount. Once the retained profits have been fully paid out, the Company will be deregistered.

Assumptions

17. Payments to the Fund that are made from a share capital account or a share premium reserve account are not dividends or frankable distributions for the purposes of the ITAA 1997 and ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA,

Income Tax Assessment Act 1936 Section 177E,

Income Tax Assessment Act 1936 Section 177EA,

Income Tax Assessment Act 1936 Section 177F,

Income Tax Assessment Act 1997 Section 207-20,

Income Tax Assessment Act 1997 Section 207-35,

Income Tax Assessment Act 1997 Section 207-145,

Income Tax Assessment Act 1997 Section 207-155,

Income Tax Assessment Act 1997 Section 295-390, and

Income Tax Assessment Act 1997 Section 295-550

Reasons for decision

Question 1

Summary

18. The franked distribution from the Company to the Fund is made as part of a dividend stripping operation within the meaning of paragraph 207-145(1)(d) of the ITAA 1997. As a consequence the amount of the franking credit on the distribution is not included in the assessable income of the Fund under section 207-20 of the ITAA 1997 and the Fund is not entitled to a tax offset under Subdivision 207-F because of the distribution (paragraphs 207-145(e) and (f) of the ITAA 1997).

Detailed reasoning

Section 207-145(1) of the ITAA 1997

19. Subsection 207-145(1) of the ITAA 1997 provides, relevantly, that where a franked distribution is made to an entity in circumstances where (in paragraph (d)) "the distribution is made as part of a dividend stripping operation", then, relevantly:

(a) (in paragraph 207-145(1)(e)) the amount of the franking credit on the distribution is not included in the assessable income of the entity under section 207-20 or 207-35 of the ITAA 1997; and

(b) (in paragraph 207-145(1)(f)), the entity is not entitled to a tax offset under Subdivision 207-F because of the distribution.

20. Section 207-155 of the ITAA 1997 defines when a distribution is made as part of a "dividend stripping operation" within the meaning of paragraph 207-145(1)(d) of the ITAA 1997 as follows:

A distribution made to a member of a corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a scheme that:

(a) was by way of, or in the nature of, dividend stripping; or

(b) had substantially the effect of a scheme by way of, or in the nature of, dividend stripping.

21. If the franked distribution from the Company to the Fund would be a distribution made "as part of a dividend stripping operation" within the meaning of paragraph 207-145(1)(d) of the ITAA 1997, the relevant effect will be that the amount of any franking credit on the distribution will not be included in the assessable income of the Fund and the Fund will not be entitled to a tax offset under Subdivision 207-F of the ITAA 1997.

Dividend stripping operations

22. A "dividend stripping operation" has been recognised as involving the following characteristics:

(a) a company with substantial undistributed profits (target co);

(b) a sale or allotment of shares in target co to another party;

(c) the payment of a dividend to the purchaser or allottee of shares by target co;

(d) the acquirer escaping Australian income tax on the dividend so declared;

(e) the vendor shareholder receiving a capital sum for their shares in an amount the same as or very close to the dividend paid out; and

(f) the transactions being carefully planned, with the parties acting in concert for the predominant purpose of avoiding tax on the distribution of dividends by target co.

Commissioner of Taxation v. Consolidated Press Holdings Ltd [1999] FCA 1199; (1999) 91 FCR 524 (FCT v. CPH (FFC)) at [136] - [137] and [157], Commissioner of Taxation v. Consolidated Press Holdings Ltd [2001] HCA 32; (2001) 207 CLR 235 (FCT v. CPH (HC)) at [126] and [129]; Lawrence v. Federal Commissioner of Taxation [2009] FCAFC 29; (2009) 175 FCR 277 (Lawrence v. FCT) at [42] - [43].

23. A scheme may still be a "dividend stripping operation" because the making of a distribution was "by way of or in the nature of dividend stripping" even if it contains features which vary from the paradigm case of dividend stripping, so long as it retains the central characteristics of a dividend stripping scheme: FCT v. CPH (FFC) at [156], Lawrence v. FCT at [45].

24. A difference between a scheme "by way of or in the nature of dividend stripping" and a scheme which has "substantially the effect" of a scheme "by way of or in the nature of dividend stripping" lies in the means adopted to distribute the profits of the target company. Where the means adopted do not involve a distribution, but some other step (such as the purchase by the target company of near worthless assets or assets later rendered near worthless by the target company) this involves a scheme having "substantially the effect" of a scheme "by way of or in the nature of dividend stripping": Lawrence v. FCT at [47] - [52].

Will the franked distribution from the Company to the Fund be a distribution made as part of a dividend stripping operation?

25. The payment of the franked distribution from the Company to the Fund will be made as part of a "dividend stripping operation" within the meaning of paragraph 207-145(1)(d) of the ITAA 1997 because each of the elements of a scheme "by way of or in the nature of dividend stripping" will be present. For the reasons below, each of the central characteristics of a scheme by way of or in the nature of dividend stripping identified in paragraph 22 above are satisfied.

26. First element: The Company has substantial undistributed profits. The Company's sole asset is cash or cash assets, which in part is attributable to retained earnings. Accordingly, the element of a "dividend stripping operation" identified in paragraph 22(a) above is satisfied.

27. Second element: The Taxpayers will transfer a parcel of shares each (by way of a contribution) to the Fund. The remaining shares held by Taxpayer 1 will be transferred (by way of a sale) to the Fund. As to those latter shares, there will be a sale of shares in the Company. As to the initial transfer of shares, while there will be no sale, there will be a transfer of shares in the Company to the Fund which will result in an accretion to the value of the Taxpayers' respective interests in the Fund. This is a mere "variation on the paradigm" which will not remove the scheme from satisfying the central characteristics of a "dividend stripping operation": FCT v. CPH (FFC) at [156], Lawrence v. FCT at [45]. Alternatively, the scheme will have "substantially the effect" of a scheme "by way of or in the nature of dividend stripping".

28. Accordingly, whether by way of contribution in return for an accretion of capital for the Taxpayers or by way of a sale, the element of a "dividend stripping operation" in paragraph 22(b) above is satisfied.

29. Third element: The Company will pay a franked distribution to the Fund which is equal or substantially equal to the value of its retained earnings. Accordingly, the element of a "dividend stripping operation" in paragraph 22(c) above is satisfied.

30. Fourth element: On the assumption that the franked distribution is "consistent with an arm's length dealing" within the meaning of subsection 295-550(2) of the ITAA 1997, and therefore is not "non-arm's length income" of the Fund within the meaning of paragraph 295-390(2)(a) of the ITAA 1997, the franked distribution is said to be exempt from income tax under subsection 295-390(1) of the ITAA 1997. In the result, absent the application of subsection 207-145(1) of the ITAA 1997, the Fund will obtain a refund of the unused franking credit tax offset in relation to the franked distribution. Accordingly, the element of a "dividend stripping operation" in paragraph 22(d) above is satisfied.

31. Fifth element: the Taxpayers will benefit from an accretion to the value of their respective interests in the Fund as a result of the transfer of the shares in the Company to the Fund.

32. Taxpayer 1 will also receive a capital sum for Taxpayer 1's remaining shares in the Company.

33. The Taxpayers will therefore receive a capital sum, as well as an accretion to the value of their interests in the Fund, which in total exceeds the dividend amount that is paid out by the Company to the Fund. The total value received by the Taxpayers is, however, only explicable taking account of both the dividend amount and redemption amount that the Fund is to receive from the Company in relation to the shares. That is, while part of the capital amount received or credited for the benefit of the Taxpayers by the Taxpayers is referrable to that redemption amount, a part of the capital amount received or credited for the benefit of the Taxpayers is referrable to that dividend amount.

34. Amounts standing to the credit of a "Share Premium Reserve" are not available to pay dividends or make frankable distributions: Federal Commissioner of Taxation v. Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 87 ALJR 98 at [25] - [27]. This explains the difference between the amount of the dividend paid and the total value received by the Taxpayers in accretion to the value of their respective interests in the Fund and capital sum received.

35. Although the Taxpayers will not receive direct payments for the X shares in the Company and only part of the capital amount received by them is referrable to the dividend amount, in the circumstances referred to above, this is (again) only a "variation on the paradigm" which will not remove the scheme from one which has the central characteristics of a "dividend stripping operation": FCT v. CPH (FFC) at [156], Lawrence v. FCT at [45]. Alternatively, the scheme will have "substantially the effect" of a scheme "by way of or in the nature of dividend stripping".

36. Accordingly, the element of a "dividend stripping operation" in paragraph 22(e) above is satisfied.

37. Sixth element: The arrangement proposed and described at paragraph 14 above is carefully planned. It involves all the parties acting in concert for a predominant purpose. The objective purpose of the parties is to obtain:

(a) the exemption in subsection 295-390(1) of the ITAA 1997 as it applies to the franked distribution and the refund of the unused franking credit tax offset thus increasing the amount available for subsequent tax free distribution as superannuation benefits to the Taxpayers;

(b) (to a lesser extent) the generation of a capital loss in the Fund on the deregistration of the Company; and

(c) the substitution of a capital amount for the disposal of the shares, to the extent and instead of a franked distribution, with a resultant lower incidence of tax (under the applicable capital gains tax provisions) for the Taxpayers: see Lawrence v. FCT at [44].

There are no other rational explanations for the implementation of the arrangement.

38. It is no answer to say that the arrangement is undertaken for the purposes of retirement planning rather than for the purposes of avoiding tax. This is because that poses a false dichotomy of the kind referred to in Commissioner of Taxation v. Spotless Services Limited (1996) 186 CLR 404 (FCT v. Spotless) at 415 - 416. This is because, on an objective assessment, the substantial aspect of the arrangement that makes it desirable retirement planning for the Taxpayers and gives rise to the enhanced value is the tax benefits obtained through the channelling of the franked distribution through the Fund, namely, refund of the franking credit tax offset (see paragraphs 14(h) and (i) above).

39. Furthermore, the fact that the Taxpayers may have been assessed on a net capital gain in respect of the disposal of the shares in the Company to the Fund does not mean that a "dividend stripping operation" cannot arise. In Lawrence v. FCT, the Full Court of the Federal Court observed at [44] that "notwithstanding the advent of comprehensive taxation of capital gains, this characteristic remains relevant because the methods of calculating capital gains invariably lead to a lower amount of tax".

Question 2

Summary

40. There is a scheme to which Part IVA and therefore section 177F of the ITAA 1936 applies. The Commissioner may make a determination under section 177F of the ITAA 1936 that has the effect of cancelling the tax benefit.

Detailed reasoning

Section 177E of Part IVA

41. Where the conditions of subsection 177E(1) of Part IVA of the ITAA 1936 are satisfied, paragraph 177E(1)(e) provides that the relevant scheme "shall be taken to be a scheme to which this Part applies". This has the result that the Commissioner is empowered to issue a determination cancelling a tax benefit under section 177F of the ITAA 1936.

42. The conditions in subsection 177E(1) of the ITAA 1936 are to the following effect:

(a) there is a "scheme" of the kind defined in subsection 177A(1) of the ITAA 1936 that is in relation to the company (target co);

(b) the scheme is one:

(i) by way of or in the nature of dividend stripping; or

(ii) having substantially the same effect as dividend stripping;

(c) a result of the scheme is that property of the target co is disposed of;

(d) the Commissioner forms the opinion that the disposal of property by the target co represents in whole or in part a distribution whether to a shareholder (called the vendor shareholder) or another person of profits of target co;

(e) had the target co, immediately before the scheme was entered into, paid a dividend out of profits equal to the amount of profits represented by the target co's disposal of property (the "notional amount"), the notional amount would or might reasonably be expected to have been included by reason of the payment of the dividend in the assessable income of a taxpayer in a year of income; and

(f) the scheme was entered into after 27 May 1981.

See FCT v. CPH (FFC) at [118] - [123].

43. As noted above, if those conditions are satisfied, the scheme is taken to be one to which Part IVA of the ITAA 1936 applies (paragraph 177E(1)(e)), and the taxpayer shall be taken to have obtained a tax benefit referable to the notional amount not being included in the assessable income of the taxpayer in the year of income: FCT v. CPH (FFC) at [124] - [127].

Are the conditions of subsection 177E(1) of the ITAA 1936 satisfied in relation to the franked distribution from the Company to the Fund?

44. For the following reasons, each of the conditions in paragraphs 177E(1)(a) to (d) of the ITAA 1936 referred to in paragraph 42 above are satisfied.

45. First condition: The breadth of the definition of "scheme" in section 177A of the ITAA 1936 has been judicially noted: British American Tobacco Australia Services Ltd v. Federal Commissioner of Taxation [2010] FCAFC 130; (2010) 189 FCR 151 at [30]. It includes any "scheme, plan, proposal, action, course of conduct, or course of action". The matters in paragraph 14 above clearly constitute a scheme within the meaning of subsection 177A(1).

46. Moreover, the "scheme" described in paragraph 14 above is plainly a "scheme that is in relation to a company".

47. For this reason, the first condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 42(a) above is satisfied.

48. Second condition: For the reasons given above in paragraphs 25 to 35, the "scheme" is one by way of or in the nature of dividend stripping or having substantially the effect of dividend stripping. For this reason, the second condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 42(b) above is satisfied.

49. Third condition: Subsection 177E(2) of the ITAA 1936 provides as follows:

Without limiting the generality of subsection (1), a reference in that subsection to the disposal of property of a company shall be read as including a reference to:

(a) the payment of a dividend by the company;

(b) the making of a loan by the company (whether or not it is intended or likely that the loan will be repaid);

(c) a bailment of property by the company; and

(d) any transaction having the effect, directly or indirectly, of diminishing the value of any property of the company.

50. The scheme involves the payment by the Company of the franked distribution to the Fund, along with a redemption amount, and thus is a scheme the result of which is the disposal of property of the Company within the meaning of paragraph 177E(2)(a) of the ITAA 1936 (see paragraphs 14(h) and (l) above).

51. Accordingly, the third condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 42(c) above is satisfied.

52. Fourth condition: As noted above in paragraph 14(h), the franked distribution to be paid represents all or substantially all of the Company's retained earnings. Therefore, the Commissioner has formed the view that the franked distribution will represent, in whole or in part, a distribution of the profits of the Company. For this reason, the fourth condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 42(d) above is satisfied.

53. Fifth condition: If, before the scheme described in paragraph 14 was entered into, the Company paid a franked distribution to its then shareholders, the Taxpayers, it is reasonable to expect that an amount would have been included in their respective assessable incomes. For this reason, the fifth condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 42(e) above is satisfied.

54. Sixth condition: The scheme is to be entered into after 27 May 1981. Therefore, the sixth condition in subsection 177E(1) of the ITAA 1936 referred to in paragraph 42(f) above is satisfied.

55. For those reasons, if the scheme in paragraph 14 above is entered into, it will be taken to be a scheme to which Part IVA of the ITAA 1936 applies (paragraph 177E(1)(e) of the ITAA 1936) and the Taxpayers will be taken to have obtained a tax benefit in connection with the scheme, being the amount which, had the Company paid a franked distribution prior to entering into the scheme, would have formed part of their respective assessable incomes (paragraphs 177E(1)(f) and (g)).

Question 3

Summary

56. There is a scheme to which section 177EA of the ITAA 1936 applies. The Commissioner may therefore determine (under paragraph 177EA(5)(b)) that no imputation benefit arises for the Fund in respect of that distribution.

Detailed reasoning

Section 177EA of the ITAA 1936

57. Subsection 177EA(5) of the ITAA 1936 gives the Commissioner the power (relevantly, in paragraph 177EA(5)(b)) to determine that no imputation benefit is to arise in respect of a distribution or specified part of a distribution that is made or flows indirectly to a relevant taxpayer.

58. In Mills v. Federal Commissioner of Taxation [2012] HCA 51; (2012) 87 ALJR 53 (Mills v. FCT) at [59], it was pointed out that subsection 177EA(3) of the ITAA 1936 "is an exhaustive statement of the jurisdictional facts that are necessary and sufficient for s177EA to apply so as to found an exercise of power by the Commissioner to deny a franking credit under s177EA(5)(b)".

59. The "jurisdictional facts" can be relevantly identified as follows:

(a) there is a scheme for the distribution of membership interests, or interests in membership interests, in a corporate tax entity (paragraph 177EA(3)(a) of the ITAA 1936). This includes entering into a contract, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the membership interests or interests in membership interests (paragraph 177EA(14)(b));

(b) a frankable distribution has been paid, or is payable, or expected to be payable in respect of the membership interest (subparagraph 177EA(3)(b)(i); subparagraph 177EA(3)(b)(ii) being presently irrelevant);

(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit (paragraph 177EA(3)(c));

(d) except for section 177EA, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, an imputation benefit as a result of the distribution (paragraph 177EA(3)(d)). An "imputation benefit" includes receipt by the taxpayer of a tax offset under Division 207 of the ITAA 1997 or, in the case of a corporate taxpayer, a franking credit arising in the franking account of the taxpayer (subsection 177EA(16));

(e) "having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit" (paragraph 177EA(3)(e)).

60. The "relevant circumstances" are defined in subsection 177EA(17) of the ITAA 1936 to include 11 matters, the last of which (in paragraph 177EA(17)(j)) includes the eight matters in paragraphs 177D(2)(a) to (h) of the ITAA 1936.

61. Section 177EA of the ITAA 1936 was considered by the High Court in Mills v. FCT. The following propositions emerge from the judgment of Gageler J (with whom the other members of the Court agreed):

(a) the relevance of the "relevant circumstances" in subsection 177EA(17) lies in the extent to which they are probative of the ultimate question of purpose (at [61]);

(b) the circumstances referred to in subsection 177EA(17) are not exhaustive of the circumstances that might be probative of that ultimate question. They are nevertheless mandatory relevant considerations. Where they exist, they must be taken into account and their degree of relevance will vary according to the extent to which they are probative of the ultimate question (at [61]);

(c) the reference to purpose in paragraph 177EA(3)(e) may, but need not, be that of the issuer. A purpose is a consequence intended by a person to result from some action and, in this context, refers to a consequence intended by the person in entering into or carrying out a scheme for the disposition of relevant interests. A person will often intend a single action to have multiple consequences (at [63]);

(d) a purpose is an "incidental purpose" within the meaning of paragraph 177EA(3)(e) if it does no more than follow from some other purpose. A purpose can be incidental even when it is central to the design of a scheme if the design is directed to the achievement of another purpose (at [64] and [66]);

(e) the reference to "enabling" in paragraph 177EA(3)(e) refers to "supplying with the requisite means or opportunities" to the end of obtaining an imputation benefit (at [65]);

(f) a relevant purpose within the scope of paragraph 177EA(3)(e) need not be a "dominant purpose"; a "dominant purpose" is sufficient but not necessary to supply the relevant jurisdictional fact. It does not follow that "a purpose which does no more than further or follow from some dominant purpose is incidental" (at [66]);

(g) counterfactual analysis is not antithetical to the assessment of purpose in paragraph 177EA(3)(e). Consideration of alternatives may assist the drawing of conclusions in a particular case that a purpose of enabling a holder to obtain a franking credit does or does not exist and, if it does exist, whether it is incidental to some other purpose (at [66]);

(h) in the case of a capital raising, if the franking of distributions serves no purpose other than to facilitate the capital raising, then the purpose is an incidental purpose within the meaning of paragraph 177EA(3)(e) (at [67]); and

(i) in the assessment of purpose in subsection 177EA(3), each of the factors in subsection 177EA(17) need not be analysed individually, so long as they are all taken into account, where probative, in a global assessment of purpose (at [73]).

Application of paragraphs 177EA(3)(a) - (d) of the ITAA 1936

62. It is clear that the "jurisdictional facts" in paragraphs 177EA(3)(a) to (d) of the ITAA 1936 and described in paragraphs 59(a) to (d) above are satisfied. This is because:

(a) there is a "scheme for the disposition of membership interests" because the relevant scheme involves the transfer of shares in the Company from the Taxpayers to the Fund (see paragraph 14 above). Accordingly, the jurisdictional fact in paragraph 177EA(3)(a) is satisfied;

(b) it is expected that the distribution to the Fund will be a frankable distribution and it is expected to be a franked distribution. Accordingly, the jurisdictional facts in subparagraph 177EA(3)(b)(i) and paragraph 177EA(3)(c) are satisfied;

(c) except for section 177EA, the Fund could reasonably be expected to receive an imputation benefit as a result of the franked distribution. Accordingly, the jurisdictional fact in paragraph 177EA(3)(d) is satisfied.

63. Accordingly, the question as to whether the power to make a determination under subsection 177EA(5) of the ITAA 1936 will arise turns on whether the relevant purpose in paragraph 177EA(3)(e) is present.

Is it more than an incidental purpose of the scheme to enable the Fund to obtain an imputation benefit?

64. As was observed in Mills v. FCT, the relevance of each of the factors in subsection 177EA(17) of the ITAA 1936 and the probative weight they bear will differ in each case (at [61]).

65. Some of the "relevant circumstances" in subsection 177EA(17) of the ITAA 1936 can be put aside as irrelevant. Because the Fund will be the sole shareholder of shares in the Company that have dividend rights, there is no question of it deriving a "greater benefit" than other persons who hold membership interests with dividend rights. Thus, the circumstances in paragraphs 177EA(17)(b), (c) and (d) can be put to one side. Equally, the scheme does not involve the issue of non-share equity and so the matter in paragraph 177EA(17)(e) can be put to one side. These matters are generally concerned with "dividend streaming" arrangements: see Mills v. Federal Commissioner of Taxation [2011] FCAFC 158; 198 FCR 89 at [43].

66. Some of the "relevant circumstances" in subsection 177EA(17) of the ITAA 1936 point, at least to some extent, against the existence of the relevant purpose. The value attributed to the transfer of the parcel of shares by each Taxpayer and reflected as an accretion to the value of the Taxpayers respective interests in the Fund, as well as the consideration paid by the Fund to Taxpayer 1 for an additional parcel of shares in the Company do not appear to have been calculated by reference to any imputation benefits (cf., paragraph 177EA(17)(f)). The franked distribution does not appear to be equivalent to receipt of an amount in the nature of interest (cf., paragraph 177EA(17)(h)). The franked distribution appears to be paid from taxed and not untaxed profits (cf., paragraph 177EA(17)(ga)). These matters, to the extent that they bear probative weight, point against the relevant conclusion.

67. The following matters in subsection 177EA(17) of the ITAA 1936 point towards the existence of the relevant purpose:

(a) the period of time the Fund will hold the shares in the Company prior to the payment of the franked distribution is short and the Company (following the redeeming of the shares) will be thereafter deregistered. It will conduct no trading activities in that period and its assets are cash assets. The extent and duration of the risk of loss the Fund will bear as a result of its holding of the shares in the Company will be minimal (cf., paragraphs 177EA(17)(a) and (i));

(b) the subsequent deregistration of the Company will give rise to a capital loss for the Fund (cf., paragraph 177EA(17)(g)).

68. Turning to the matters in paragraphs 177D(2)(a) to (h) of the ITAA 1936 which are picked up by paragraph 177EA(17)(j) of the ITAA 1936, the following are relevant:

(a) the scheme involves a carefully orchestrated and interlinked series of transactions (cf., paragraph 177D(2)(a)) between persons who are all connected with the Taxpayers, being either the Taxpayers themselves, the Company or Trustee of the Fund which the Taxpayers control and are interested in (cf., paragraph 177D(2)(h))

(b) the scheme's form involves a transfer of the shares in the Company to the Fund and payment of a franked distribution to it. The substance of the scheme (that is, "what in fact [the relevant person] may achieve by carrying it out": Mills v. FCT at [71]) is the channelling of the distribution of the profits and the franking credits of the Company to its ultimate economic owners (the Taxpayers) through the Fund (cf., paragraph 177D(2)(b));

(c) the scheme is to be implemented over a short period of time (cf., paragraph 177D(2)(c));

(d) the effects of the scheme (that is, the financial position of the relevant persons with and without the scheme: Mills v. FCT at [70]) will be as follows:

(i) the Fund will receive the franked distribution together with a refund of the franking credit tax offset on the basis that the franked distribution is exempt income pursuant to section 295-390 of the ITAA 1997. The Fund will also make a capital loss on the Company's deregistration. The net effect for the Fund will be an increase in the value of the Fund (cf., paragraph 177D(2)(d));

(ii) Taxpayer 1 will have an amount, referrable to the net capital gain made upon disposal of the shares, included in their assessable income and, because of the method of calculating net capital gains, this will be a lesser amount than arises from dividend income: see FCT v. Lawrence at [44] (cf., paragraph 177D(2)(e)); and

(iii) the Taxpayers will receive the benefit of tax free pension incomes from the Fund supported by the franked distribution and the refund of the unused franking credit tax offset whereas without the scheme they would not have the benefit of the full value of the franked distribution and a franking credit. Instead they would have the benefit of a lesser amount. That is, the dividend amount reduced by tax payable ("top-up tax") to the extent that their respective marginal tax rates exceed the company tax rate (cf., paragraph 177D(2)(f)).

69. Overall, the balance of matters points towards a conclusion that a more than incidental purpose of the scheme is to enable the Fund to gain an imputation benefit. The critical factor in an assessment of purpose is the absence of any explanation for the implementation of the scheme other than to ensure that the profits of the Company and the attached franking credits are channelled to their ultimate economic owners (the Taxpayers) through the Fund and thus with the benefit of the exemption in section 295-390 of the ITAA 1997 which gives rise to the consequent refund of the franking credit tax offset.

70. It is no answer to say that the main purpose of the scheme is the maximising of the Taxpayers' wealth in retirement. That draws the same false dichotomy as was rejected in FCT v. Spotless. This is because it is the tax effect referred to above which achieves the maximisation of wealth in retirement over that which would otherwise be achieved (see paragraph 38 above).