Edited version of private advice

Authorisation Number: 1012637563523

Ruling

Subject: Imputation system

Question 1

Will the payment of a fully franked dividend of $X million (with associated franking credits of $Y million) from Company B, flowing through various trusts, and ultimately out to an individual beneficiary, carry the relevant franking credits under Division 207 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the individual beneficiary be entitled to a tax offset pursuant to section 207-45 of the ITAA 1997?

Answer

Yes

Question 3

Will the individual beneficiary be entitled to a refund of any excess tax offsets under Divisions 63 and 67 of the ITAA 1997?

Answer

Yes

Question 4

Will the trust loss rules in Schedule 2F of the ITAA 1936 prevent any utilisation of tax losses by Trust 2?

Answer

No

Question 5

Will the Commissioner seek to apply Part IVA of the ITAA 1936 to deny any tax benefits derived under the proposed arrangements?

Answer

No

This ruling applies for the following period(s)

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

Background

1. You state that the ABC group of entities consists of a number of elected family trusts, unit trusts and companies which include those explained below.

Trust No. 1

2. Trust No.1 is an Australian resident discretionary trust that was settled in the 1990s. X is a general beneficiary of the Trust. You claim that the Trust has a family trust election in place.

Trust No. 2

3. Trust No. 2 is an Australian resident fixed unit trust which you state was settled in the 1990s.

4. You state that since its establishment, all units in the Trust No.2 have been held by Trust No.1.

5. You state that the Trust No.2 had carried forward losses of $X million as at 30 June 2013.

6. You claim that the Trust has a family trust election in place, with Y listed as the primary individual. The family trust election was in place during the period the losses were incurred.

Trust No. 3

7. Trust No. 3 is an Australian resident discretionary trust which was settled in the 1990s. You state that Trust No. 2 it is a general beneficiary of Trust No. 3.

8. You state that Trust No. 3 is an elected family trust where Y is the primary individual.

Company A

9. Company A is an Australian resident company that you state was incorporated in the 1990s. It is the head of a consolidated group of companies.

10. You state that Trust No. 3 is the sole shareholder of Company A, the shares in the company for a number of years.

11. You claim that Company A had a franking account balance of $Z as at 30 June 2013.

Company B

12. Company B is an Australian resident company that you state was incorporated in the 1990s. You state Company A is the sole shareholder of Company B.

13. The following diagram represents the group structure:

Company B

↑ 100% shareholder

Company A

↑ 100% shareholder

Trust 3

↑ general beneficiary

Trust 2

↑ 100% unit holder

Trust 1

↑ 100% unit holder

X

Proposed arrangement

14. You state that all of the entities of the proposed arrangement (explained below) were established on behalf of the Y's family group. In addition, these entities have been wholly controlled by the family since their establishment. All losses and franking credits arose from business and investment activities undertaken by the family group.

15. You state that the trusts of the proposed arrangement are not taxed as corporate entities.

16. You state that the following arrangement is proposed in order to access refundable tax offsets:

a. Company B will declare a dividend of $X million to Company A.

b. Company A will then declare and pay a fully franked dividend of $X million to Trust No. 3, with associated franking credits of $Y million

c. Trust No. 3 will declare a $X million income distribution, including associated franking credits of $Y million, to Trust No. 2

d. Trust No. 2 will also receive income from other trusts in the group

e. the accounting profit of Trust No. 2 is estimated to exceed its accumulated accounting losses

f. Trust No. 2 is anticipated to have a net (taxable) income of over $ X million for the year ended 30 June 2014

g. Trust No. 2 will utilise its carry-forward tax losses incurred in the 2002 and subsequent income years such that its net income is reduced to under $ million

h. Trust No. 2 will declare a distribution of under $ million, with associated franking credits of $Y million, to Trust No. 1

i. Trust No. 1 will also receive income from other sources such that it has an accounting profit and taxable income of over $ million

j. Trust No. 1 will resolve to make a distribution of over $ million to X, including franking credits of $Y million

k. X is anticipated to receive approximately $ million, with associated franking credits of over $, from other sources such that their total taxable income will equal under $ million, and

l. X will have a tax refund of over $ million based on the following calculation:

Item	Amount ($)
Taxable income	Z million
Tax payable	Y million
Medicare levy	X thousand
Franking credit offset	Q million
Net tax payable/(refundable)	$

17. You claim that the trustees of the abovementioned trusts will ensure that valid resolutions are made to ensure that their beneficiaries are presently entitled to the franked distributions.

18. Also, you confirm that:

a. the companies involved in the arrangement will have assets in excess of liabilities immediately before the proposed dividends are declared

b. the payment of the proposed dividends by the companies will be fair and reasonable for all shareholders; and

c. the payments of the proposed dividends will not prejudice any creditors.

19. You state that the proposed arrangement is not being contemplated for the purpose of obtaining a tax benefit through the utilisation of the carry forward tax losses incurred by Trust No. 2. You explain that family group has no immediate need to utilise the tax losses, nor is the group attempting to shelter from tax any additional income.

20. You accept that one purpose of the proposed arrangement is to restore the accumulated loss and negative net asset position of the Trust No. 2. You also accept that there is a potential advantage to the family group of entities through the accessing of accumulated franking credits in a manner that is sanctioned by Divisions 207 and 67 of the Income Tax Assessment Act 1997 (ITAA 1997). However, you claim that these benefits do not satisfy the definition of a tax benefit for the purposes of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936).

Relevant legislative provisions

Section 4-10 of the Income Tax Assessment Act 1997

Section 36-15 of the Income Tax Assessment Act 1997

Division 63 of the Income Tax Assessment Act 1997

Division 67 of the Income Tax Assessment Act 1997

Division 200 of the Income Tax Assessment Act 1997

Division 207 of the Income Tax Assessment Act 1997

Paragraph 97(1)(a) of the Income Tax Assessment Act 1936

Division 270 of Schedule 2F of the Income Tax Assessment Act 1936

Division 272 of Schedule 2F of the Income Tax Assessment Act 1936

Part IVA of the Income Tax Assessment Act 1936

Reasons for decision

QUESTION 1

Will the payment of a fully franked dividend of $X million (with associated franking credits of $Y million) from Company B, flowing through various trusts, and ultimately out to an individual beneficiary, carry the relevant franking credits under Division 207 of the ITAA 1997?

IMPUTATION SYSTEM

21. Division 200 of the ITAA 1997 provides for an imputation system to avoid double taxation at the shareholder level. Broadly, this is achieved by allowing members who receive assessable income from a corporate tax entity to claim a tax offset for tax already paid by the corporate tax entity. The tax credit paid by the corporate tax entity is known as a franking credit.

Effect of receiving a franked distribution

22. In general, sections 207-15 and 207-20 of the ITAA 1997 set out the tax effect of receiving a franked distribution for entities that are not partnerships or trustees - known as the general rule. It provides that a franked distribution is included in the assessable income of the receiving entity, including the franking credit.

23. Where the receiving entity is a trustee of a trust, the tax effect of receiving a franked distribution is provided in Subdivision 207-B of the ITAA 1997.

24. Section 207-45 of the ITAA 1997 provides for the tax treatment of the franked distribution in the hands of the ultimate recipients, that is the ultimate taxpayers in respect to the income. As the distribution does not flow through them to any further entities, section 207-45 provides that corporate tax entities and individuals, amongst others, to which a franked distribution has indirectly flowed are entitled to a tax offset in the same year equal to their share of the franking credit on the distribution. Applied together with section 207-50 of the ITAA 1997 (explained below), this means that an entity whom a distribution flows through will not be entitled to an offset equal to the franking credit.

Application to your circumstances

25. You state that Company B will declare a fully franked dividend of around $X million to its sole shareholder, Company A.

26. You state that after having received the around $X million fully franked dividend, Company A will then declare and pay a fully franked dividend of around $X million to Trust No. 3, with associated franking credits of near $Y million. As the franked dividend received by Company A will be distributed to a further entity, the company will not be entitled to a franking credit pursuant to section 207-45 of the ITAA 1997.

27. After having received the around $X million fully franked dividend, Trust No. 3 will make a franked distribution of around $X million, including associated franking credits of near $Y million, to its general beneficiary, the Trust No. 2. As the franked dividend received by Trust No. 3 will be distributed to a further entity, it will not be entitled to a franking credit pursuant to section 207-45 of the ITAA 1997.

Gross up - distribution made to, or flows indirectly through, a trustee

28. Section 207-35 of the ITAA 1997 provides for the circumstances where a franked distribution is made to, or flows indirectly through, a partnership or a trust. Specifically, subsection 207-35(1) provides that if the franked distribution is made to a trustee of a trust, the assessable income of the trust for that year includes the amount of franking credit on the distribution if the following conditions are met at the time the distribution is made:

a. the entity is not a corporate tax entity, and

b. in the case of a trustee of a trust, the trust is not a complying superannuation entity or FHSA trust.

29. Section 960-115 of the ITAA 1997 defines the term 'corporate tax entity' as an entity that is:

a. a company

b. a corporate limited partnership

c. a corporate unit trust, or

d. a public trading trust.

30. The amount is included in assessable income in addition to any other income in relation to the distribution, pursuant to subsection 207-35(2) of the ITAA 1997.

31. Subsections 207-35(3) and (4) of the ITAA 1997 provide that, in relation to a trust, the beneficiary's assessable income includes their share of the franking credit on the distribution and the amount referred to in section 207-37 where:

a. the franked distribution is made, or flows indirectly, to a trustee of a trust

b. the assessable income of the trust for that year includes the franking credit amount that is all or part of the additional amounts of assessable income included in subsection 207-35(1)

c. the distribution flows indirectly to a beneficiary of the trust, and

d. the beneficiary has an amount of assessable income for that year that is attributable to all or part of the distribution.

When a franked distribution flows indirectly to or through an entity

32. Pursuant to subsection 207-50(3) of the ITAA 1997, a franked distribution flows indirectly to a beneficiary if:

a. during that income year, the distribution is made to the trustee, and

b. the beneficiary receives the following during that income year:

(i) a share of the trust's net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936; or

(ii) an individual interest in the trust's net income for that income year that is covered by section 98A or 100 of that Act;

(whether or not the share amount become assessable income in the hands of the beneficiary); and

c. the beneficiary's share of the distribution pursuant to section 207-55 is a positive amount.

33. Broadly, paragraph 97(1)(a) of the ITAA 1936 provides that a beneficiary of a trust that is not under a legal disability is presently entitled to a share of the trust's income must include in their assessable income that share of the trust income.

Residency requirements

34. Section 207-70 of the ITAA 1997 broadly provides that an individual or corporate tax entity must meet the residency requirement in order to be entitled to a tax offset associated with a franked distribution it received.

35. The residency requirement is provided by section 207-75 of the ITAA 1997. Pursuant to subsection 207-75(1), the residency requirement is satisfied at the time the distribution is made if:

a. in the case of an individual - he or she is an Australian resident

b. in the case of a company - it is an Australian resident, and

c. in the case of a corporate unit trust - the trust is a resident unit trust fur the income year in which the distribution occurred.

Application to your circumstances

36. In addition to the near $X million distribution that will be received from Trust No. 3, you state that the Trust No. 2 will also receive income of almost $ X thousand from other trusts in the group. As Trust No. 2 is not a corporate unit trust, section 207-35 of the ITAA 1997 is satisfied and the $X million distribution from Trust No. 3 will carry the associated franking credits.

37. The Trust No. 2 will then declare a distribution of under $ X thousand, with associated franking credits of near $Y million, to Trust No. 1. As Trust No. 1 is not a corporate unit trust, section 207-35 of the ITAA 1997 is satisfied and the distribution from Trust No. 2 will carry the associated franking credits.

38. X will be presently entitled, and will receive $ million from Trust No. 1, consistent with paragraph 97(1)(a) of the ITAA 1936. Pursuant to subsection 207-50(3) of the ITAA 1997, the franked distribution will flow indirectly to X. As he, and all the other entities in the proposed arrangement, are Australian residents, the residency requirements of section 207-70 of the ITAA 1997 will be met. X will be entitled to a tax offset associated with the franked distribution pursuant to section 207-45.

QUESTION 2:

Will the individual beneficiary, X, be entitled to a tax offset pursuant to section 207-45 of the ITAA 1997?

Tax offset - distribution flows indirectly to an entity

39. As explained above, section 207-45 of the ITAA 1997 provides for the tax treatment of the franked distribution in the hands of the ultimate recipients, that is the ultimate taxpayers in respect to the income. As the distribution does not flow through them to any further entities, section 207-45 provides that individuals, amongst others, to which a franked distribution has indirectly flowed are entitled to a tax offset in the same year equal to their share of the franking credit on the distribution.

40. Section 207-55 of the ITAA 1997 broadly provides that, in relation to a distribution that has flowed indirectly to a beneficiary of a trust, the franking credits will be notionally allocated to the entities that benefit from the distribution.

Application to your circumstances

41. Under the proposed arrangement, X will indirectly receive a distribution of under $ million from the Trust No. 1 which has near $ Y million of franking credits attached. As the distribution will not flow to any subsequent entities, section 207-45 of the ITAA 1997 will be satisfied and X will be entitled to a tax offset equal to the franking credits.

QUESTION 3

Will the individual beneficiary, X, be entitled to a refund of any excess tax offsets under Divisions 63 and 67 of the ITAA 1997?

Refund of tax offsets

42. A common set of rules applicable for all tax offsets is provided for in Division 63 of the ITAA 1997. Read together with Division 67, item 40 of the table in subsection 63-10(1) states that tax offsets obtained as a result of receiving a franked distribution, that is, those offsets available pursuant to Division 207, are subject to the refundable tax offset rules. Where an entity's tax offsets are greater than its income tax liability, it is entitled to a refund.

Application to your circumstances

43. In addition to the under $ million distribution to be received from Trust No. 1, X is expected to receive a further million, with associated franking credits of above $, from other sources. As such, the tax payable position for the year ended 30 June 2014 is expected to be as follows:

Item	Amount ($)
Taxable income	Z million
Tax payable	X million
Medicare levy	Y thousand
Franking credit offset	Q million
Net tax payable/(refundable)	X

44. Consistent with subsection 63-10(1) and Division 67 of the ITAA 1997, X will have a tax offset that is greater than his income tax liability and consequently, he will be entitled to a refund of the excess amount.

QUESTION 4

Will the trust loss rules in Schedule 2F of the ITAA 1936 prevent any utilisation of tax losses by Trust No. 2?

TRUST LOSSES AND OTHER DEDUCTIONS

Family Trusts

45. Section 272-75 of Schedule 2F of the ITAA 1936 provides that a trust is a family trust during the time that a family trust election is active.

46. Section 272-80 of the ITAA 1936 provides that trustee of the trust may make an election that the trust is a family trust at all times after the beginning of a specified year. Section 272-80 also provides that the election must be in writing, must specify the individual whose family group is to be taken into account in relation to the election and must satisfy a number of other requirements.

Application to your circumstances

47. You state that all the trusts have family trust elections in place. With regards to Trust No. 2, you claim that the family trust election was in place during the period the losses were incurred. Consequently, section 272-75 would be satisfied and the three trusts are family trusts.

Schemes to take advantage of deductions

48. Schedule 2F of the ITAA 1936 deals with trust losses and other deductions. Broadly, Division 270 prevents trusts from using deductions in certain circumstances where a scheme to take advantage of deductions exists.

49. In general, section 270-15 of the ITAA 1936 provides the tax consequences where a scheme has been entered into to take advantage of deductions. Specifically, paragraph 270-15(a) provides that if the requirements of subsection 270-10(1) are met, the deduction related exclusively to the scheme assessable income will be disallowed.

50. Subsection 270-10(1) of the ITAA 1936 provides that section 270-15 will be triggered if:

a. the trust has an allowable deduction

b. under a scheme the trust derives an amount of assessable income (known as scheme assessable income) and an outsider to the trust directly or indirectly provides a benefit to the trustee or beneficiary (or an associate of either)

c. the trustee or beneficiary (or an associate of either) directly or indirectly provides a benefit to the outsider to the trust (or an associate of the outsider)

d. it is reasonable to conclude that paragraph 148.b. and 148.c. occurred wholly or partly, but not incidentally, because the deduction would be allowable, and

e. the trust is not an excepted trust under paragraphs 272-100(b), (c) or (d).

51. Consequently, section 270-15 of Schedule 2F of the ITAA 1936 will not apply if the scheme does not involve the trustee or beneficiary providing a benefit to an outsider to the trust (subparagraph 207(1)(a)(ii)).

52. Subsection 270-25(1) provides that an outsider to a family trust is anyone other than:

a. the trustee

b. a person with fixed entitlement to a share of income of capital

c. the individual specified in the family trust election

d. a member of the specified individual's family

e. a trust with the same individual specified in its family election

f. a company, partnership or trust that made an interposed entity election to be included in the individual's family group

g. a fixed trust, company or partnership that, at all times during the scheme:

i. the individual specified in family trust election

ii. one or more members of the individual's family; or

iii. trustees of one or more family trust (provided that the individual is specified in the family trust election of those family trusts)

or any combination of the above, had fixed entitlements to all of the income and capital of the entity.

Application to your circumstances

53. Under the proposed arrangement, Trust No. 2 will receive a distribution of around $X million, including associated franking credits of near $Y million, from Trust No. 3 and income of almost $ from other trusts in the group. Trust No. 2 will then utilise its more than $X million carry-forward tax losses to reduce its net income to under $. Trust No. 2 will then declare a distribution of under $, with associated franking credits of near $Y million, to Trust No. 1.

54. Consequently, Trust No. 2 will have an allowable deduction equivalent to its carried-forward losses. It will also derive assessable income of over $X million pursuant to the scheme. In order to establish whether section 270(1) of the ITAA 1936 is satisfied (and whether section 270-15 could be triggered), it is necessary to establish whether the benefit, being the under $ distribution to Trust No. 1, is one that is provided to an outsider to Trust No. 2.

55. You state that both Trust No. 2 and Trust No. 1 have existing family trust elections in place which name Y as the nominated individual. Subsection 270-25(1) is therefore not satisfied and Trust No. 1 is not an outsider to the Trust No. 2. Consequently, section 270-15 is not applicable in your circumstances.

QUESTION 5

Will the Commissioner seek to apply Part IVA of the ITAA 1936 to deny any tax benefits derived under the proposed arrangements?

SCHEMES TO REDUCE TAX

56. Part IVA of the ITAA 1936 is a general anti-avoidance provision which allows the Commissioner to exercise his discretion to cancel a tax benefit obtained by a taxpayer in relation to a scheme where the sole or dominant purpose of the scheme was to obtain a tax benefit if certain criteria are met.

57. Part IVA of the ITAA 1936 was introduced to attempt to overcome difficulties of former section 260. The Explanatory Memorandum to Income Tax Laws Amendment Bill (No. 2) 1981 states:

That test for application of the new provisions is intended to have the effect that arrangements of a normal business or family kind, including those of a tax planning nature, will be beyond the scope of Part IVA.

Definition of 'scheme'

58. Subsection 177A(1) of the ITAA 1936 defines a scheme as:

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

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

Application to your circumstances

59. The proposed arrangement explained in paragraph 22 satisfies the broad definition of a scheme pursuant to subsection 177A(1) of the ITAA 1936 as it is an agreement, arrangement, understanding, promise or undertaking, intended to be enforceable by legal process, and is a scheme, plan, proposal, action, course of action or course of conduct.

Tax benefit

60. Broadly, subsection 177C(1) of the ITAA 1936 provides that in relation to a scheme, reference to a tax benefit obtained by a taxpayer in a year of income includes:

a. an amount not being included in the assessable income of a taxpayer that, but for the scheme, would have been included in their assessable income

b. a deduction being allowable to the taxpayer where, but for the scheme, the whole or part of the deduction would not have been allowable

c. a capital loss incurred by a taxpayer where, but for the scheme, the whole or part of the capital loss would not have been expected to have been incurred

d. a loss carry back tax offset being allowable to the taxpayer where, but for the scheme, the whole or part of the loss carry back tax offset would not have been allowable

e. a foreign income tax offset being allowable to the taxpayer where, but for the scheme, the whole or part of the foreign income tax offset would not have been allowable, and

f. a taxpayer not being liable to an amount of withholding tax where a taxpayer would have, but for the scheme, been liable for the withholding tax.

61. Section 4-10 of the ITAA 1997 provides that a tax offset reduces the amount of income tax.

62. Part 2-5 of the ITAA 1997 provides a number of rules regarding the deductibility of certain amounts. Section 36-15 broadly provides that entities that are not corporate tax entities are entitled to deduct tax losses from earlier years from a current year's assessable income.

Application to your circumstances

63. The proposed scheme involves the declaration of a fully franked dividend of $X million by Company B, flowing through to a further company and various family trusts, such that X will ultimately receive additional assessable income with franking credits attached. As explained in the paragraphs above, X will be entitled to a refundable tax offset pursuant to section 207-45 of the ITAA 1997.

64. Pursuant to section 4-10 of the ITAA 1997, a tax offset reduces the amount of tax payable. Consequently, a tax offset is not an allowable deduction, nor is it:

a. an amount of assessable income

b. a capital loss

c. a loss carry back tax offset

d. a foreign income tax offset, or

e. an amount of withholding tax.

65. Consequently, the criteria provided by subsection 177C(1) of the ITAA 1936 have not been met and a tax offset does not met the definition of a tax benefit.

66. However, the scheme also involves the utilisation of carried forward losses currently accumulated by Trust No. 2. As explained earlier, Trust No. 2 is not a corporate tax entity. Pursuant to section 36-15 of the ITAA 1997, the Trust can deduct earlier year tax losses from a current year of assessable income.

67. Trust No. 2 will be entitled to a deduction in relation to its carried forward losses that, but for the scheme, it would not be entitled to. Paragraph 177C(1)(b) of the ITAA 1997 is thereby satisfied and the deduction is a tax benefit to which Part IVA may apply.

Dominant purpose

68. Subsection 177D(1) of the ITAA 1936 provides that Part IVA applies to a scheme that is entered into for the purpose of enabling a taxpayer (referred to as the relevant taxpayer) to obtain a tax benefit in connection with the scheme.

69. Subsection 177D(2) of the ITAA 1936 provides that in applying subsection 177D(1), regard to the following 8 factors must be made:

i. how the scheme was carried out or entered into

j. the scheme's form and substance

k. the timing of the scheme, including the period of time the scheme was carried out

l. the tax consequences resulting from the scheme

m. the change in financial position of the relevant taxpayer resulting from the scheme

n. the change in financial position of any person who has any connection with the relevant taxpayer resulting from the scheme

o. any other consequence for the relevant taxpayer, or person who has any connection with the relevant taxpayer, as a result of the scheme, and

p. the nature of any connection between the taxpayer and any person who has connection with the relevant taxpayer.

70. In summary, section 177D of the ITAA 1936 provides that Part IVA of the ITAA 1936 applies to a scheme in connection with which a taxpayer has obtained a tax benefit if, after having regard to the eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the dominant purpose of enabling the relevant taxpayer to obtain the tax benefit.

71. The identification of a tax benefit requires consideration of the tax consequences of a 'counterfactual', or alternative hypothesis, that would have resulted had the scheme not been entered into. As stated by Gummow and Hayne JJ in Federal Commissioner of Taxation v Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599, 55 ATR 712 at [66]:

When [section 177C(1)] is read in conjunction with [former] s177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in [former] s177D(b) will require consideration of what other possibilities existed.

72. In Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 the Court explained that although the Commissioner has to consider each of the factors provided by former subsection 177D(b), this doesn't mean that each of the factors must point to the dominant purpose, stating that:

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 [former] s177D requires in order to reach the conclusion to which 177D refers.

73. The Commissioner's support of this view is provided in Practice Statement PS LA 2005/24: Application of the General Anti-Avoidance Rules (PS LA 2005/24). PS LA 2005/24 states at paragraph 88 that all factors of subsection 177D(2) need to be taken into account with regard to the relevant evidence, and weight together, to identify the dominant purpose of the scheme.

(a) manner in which the scheme was entered into or carried out - paragraph 177D(2)(a) of the ITAA 1936

74. Consistent with the Explanatory Memorandum to Income Tax Laws Amendment Bill (No. 2) 1981, paragraph 93 of PS LA 2005/24 states that the first factor, being the manner in which the scheme was entered into or carried out enables the identification of artificiality or contrivance when compared to the manner in which the scheme would have been carried out pursuant to the counterfactual. Paragraph 93 further states that if a scheme was carried out in a manner consistent with ordinary business or family dealings, this would not indicate a purpose of obtaining a tax benefit.

(b) form and substance of the scheme - paragraph 177D(2)(b) of the ITAA 1936

75. Paragraph 95 of PS LA 2005/24 states that this factor requires the consideration of the substance rather than the form of the scheme. That is, if there is a discrepancy between the legal form and it's economic and practical substance, this may indicate that the scheme was implemented as a means of obtaining a tax benefit.

(c) timing of the scheme - paragraph 177D(2)(c) of the ITAA 1936

76. PS LA 2005/24 discusses the timing factor at paragraph 101, stating that this involves consideration of the time the scheme was entered into and the length of the period in which the scheme will be carried out. It also states that this factor examines whether the scheme was entered into shortly before the end of a financial year, or a tax sensitive date such as a change in tax rates, and whether the scheme was entered into for a short period.

(d) the tax consequences resulting from the scheme - paragraph 177D(2)(d) of the ITAA 1936

77. This factor requires the examination of the tax benefit and other tax consequences that result from the scheme, as explained by paragraph 105 of PS LA 2005/24.

(e) the change in financial position of the relevant taxpayer and connected parties resulting from the scheme - paragraphs 177D(2)(e) to (g) of the ITAA 1936

78. These three factors require the examination of the change in the financial position of the relevant taxpayer and connected entities. As explained by paragraph 106 of PS LA 2005/24, it may not be the financial position of the relevant taxpayer that has a material change, but that of his/her spouse or wholly-owned company.

(f) the nature of any connection between the taxpayer and any person who has connection with the relevant taxpayer - paragraph 177D(2)(h) of the ITAA 1936

79. This factor requires consideration of the nature of the relationship between the taxpayer and any other entity who will experience a change in financial position as a result of the scheme. PS LA 2005/24 explains at paragraph 111 that examination of any family relationship between the taxpayer and others affected by the scheme is necessary for this factor. It further explains that transactions that may appear odd between strangers may be entirely appropriate between family members.

Application to your circumstances

80. The Commissioner considers that the counterfactual to the proposed scheme is that the family group would 'do nothing' if the scheme is not entered into. Consequently, there would be no tax consequences should the scheme not be implemented.

(a) manner in which the scheme was entered into or carried out - paragraph 177D(2)(a) of the ITAA 1936

81. The proposed scheme involves a number of transactions within a family group which distribute profits from Company B, through another company and three trusts, one with carried forward losses. The franking credits associated with the initial dividend of around $ X million are maintained throughout these transactions such that they are attached to the final transaction, being an approximately $ million trust distribution to X.

82. The proposed scheme does not involve the creation of any new entities or changes to existing shareholdings or trust deeds. Nor does it involve any new elections or restructuring of the entities already in existence. The transactions are not complex, they involve a group of entities that have been owned and controlled by the same family group since the 1990s.

83. Further, the proposed scheme does not create any new income or expenses. Rather, it accesses the carried forward losses that have been held by Trust No. 2 for some years. The franking credits that are associated with the proposed dividends are not generated by the implementation of the scheme.

84. Consequently, it is not considered that the proposed scheme involves any degree of artificiality or contrivance, as described by paragraph 93 of PS LA 2005/24. Rather, the transactions are consistent with ordinary business or family dealings.

(b) form and substance of the scheme - paragraph 177D(2)(b) of the ITAA 1936

85. The form of the scheme is the distribution of fully franked dividends through entities that have been in existence for a number of years. There will be no change in the shareholding of the companies or trust deeds of the trusts involved.

86. Further, the proposed distribution to be made by the Trustee of Trust No. 2 will be to its sole unit holder, Trust No. 1. The proposed distribution to be made by the Trustee of Trust No. 1 is in accordance with its pre-existing authority to exercise its discretion in determining which beneficiary to distribute.

(c) timing of the scheme - paragraph 177D(2)(c) of the ITAA 1936

87. Although the proposed scheme is intended to be implemented prior to 30 June 2014, this is part of the ordinary business transactions of the group of entities. That is, the Trustees are required to make distributions of the Trusts income prior to the end of the financial year.

(d) tax consequences resulting from the scheme - paragraph 177D(2)(d) of the ITAA 1936

88. The proposed scheme will result in the retained earnings of Company B being reduced and franking credits being utilised. The accumulated tax losses of Trust No. 2 will be recouped such that the financial position of the Trust will be improved. Additionally, X will be entitled to a refund for the excess tax offsets available as a result of the franking credits.

(e) change in financial position of the relevant taxpayer and connected parties resulting from the scheme - paragraphs 177D(2)(e) to (g) of the ITAA 1936

89. There are no additional changes to the financial position of any other related entities to those already explained.

(f) the nature of any connection between the taxpayer and any person who has connection with the relevant taxpayer - paragraph 177D(2)(h) of the ITAA 1936

90. The entities involved in the proposed arrangement are all part of the same family group.

Conclusion

91. Consideration of the 8 factors contained in subsection 177D(2) of the ITAA 1936 indicates that the proposed scheme would be entered into for the purpose of obtaining a tax benefit. However, given that it does not involve any convoluted steps, newly formed entities, changes to group structure or has any other elements of artificiality or contrivance, the Commissioner is satisfied that the proposed arrangement is one of ordinary business or family dealings. Consequently, the Commissioner will not exercise his discretion to cancel the tax benefit arising from the scheme pursuant to section 177F.