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Ruling

Subject: Liquidations - Division 7A - Trusts

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In 20XX, Company A sold its major asset, being a X% share in another asset.

It is proposed to liquidate Company A in the year ended 20XX

Company A was incorporated several decades ago. All of the shareholders acquired their shares in Company A before the CGT Regime was introduced in 20 September 1985. The vast majority of the shares are held by a partnership of three trusts (The Shareholder Trusts)

Company A's franking account as at 30 June 20XX was estimated to be $X. These franking credits attach to the dividend of $X, which will be derived under section 47 of the ITAA 1936.

It is proposed that Company A be placed into liquidation under a member's voluntary liquidation. The duration of this liquidation may be over a number of years, and may involve several distributions by the liquidator. The liquidator would be required to anticipate liabilities and set aside an amount for those which would be paid out via interim distributions, prior to any final distribution.

The assumptions as to how much the Shareholder Trusts could be expected to receive in a typical year are outlined below in the section entitled "Assumptions." Nevertheless, consistent with previous years, it is expected that the Shareholder Trusts would pay the income distributions to the H Companies after year end.

Division 7A Implications.

The total loan receivables that Company A held as at 30 June 20XX, Division 7A loans currently amount to $X million. Of the balance of $X million receivables held that are not subject to Division 7A, this is for the reasons that:

• They are current year loans that will be subsequently placed on Division 7A terms;

• They are not loans to shareholders, or associates that are subject to Division 7A; and/ or

• One loan preceded the introduction of Division 7A.

The transfer of the $X million of loans currently subject to Division 7A, and the potential Division 7A implications is a critical taxation aspect of the proposed liquidation.

It is proposed that the following steps would occur upon the liquidation of Company A in relation to these receivables:

Step 1: Company A will declare a liquidator's distribution to the Shareholder Trusts.

Step 2: To satisfy the distribution, Company A will transfer its balance sheet assets (which are primarily cash of almost $X and an assignment of its receivables to the Shareholder Trusts.

Step 3: In effect, all related party borrowers that previously had loans owing to Company A would instead now owe the Shareholder Trusts.

Assumptions

Please note that as the taxpayers have not requested that the Commissioner consider the taxation impact of distributions of Corpus from the Shareholder Trusts, this ruling provides no indication of the same.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A,

Income Tax Assessment Act 1936 109C,

Income Tax Assessment Act 1936 109NA,

Income Tax Assessment Act 1936 109T,

Income Tax Assessment Act 1936 109F,

Income Tax Assessment Act 1936 109Y,

Income Tax Assessment Act 1997 Division 230,

Income Tax Assessment Act 1997 Part 3-1,

Income Tax Assessment Act 1936 Division 6,

Income Tax Assessment Act 1936 Section 97,

Income Tax Assessment Act 1936 Division 6E,

Income Tax Assessment Act 1997 Division 207,

Income Tax Assessment Act 1936 Section 100A and

Income Tax Assessment Act 1936 Part IVA.

Ruling

Subject: Liquidations - Division 7A - Trusts

Issue 1 Question 1

Will the liquidator's distribution satisfied primarily by an assignment of Company A receivables, (being loans owed to Company A, subject to Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) satisfy the relevant borrower's Division 7A loan repayment obligations to Company A in full?

Summary

Yes, provided that the value of the property assigned by the liquidation equals or exceeds the face value of loans owed to Company A, and provided the requirements of Section 109F and section 109N are strictly adhered to.

Detailed reasoning

One of the requirements of Division 7A requires that where a loan is advanced to an entity which is either a shareholder of the Company A, or is an associate of that shareholder, the loan is either repaid before the lodgement day of the current year or, alternatively, the loan is subject to the requirements of S 109N, including interest at benchmark rates and a fixed term. Should this not be adhered to, a dividend is deemed to the extent of the loan, subject to the distributable surplus of the company as defined by S 109Y.

In this instance, the Commissioner has been informed that the loans in question are between Company A, as lender, and associates of the shareholders, as borrowers, rather than the shareholders themselves. Ordinarily a loan obligation for proper service of the loan, including repayment, remains the obligation of each borrower, and not an associate of the lender.

The Commissioner has been informed that the intention of the trustees of each of the shareholder discretionary trusts is to resolve to distribute the income of each of their trust estates to eligible corporations as trust beneficiaries, identified as the H Companies.

The Commissioner also notes that for a Division 7A dividend not to result under S109D there needs to be a full repayment of any Division 7A loan before the lodgement day of the company tax return for the current year. As the existing loans subjected to Section 109D and S 109N are between Company A and associates of the shareholders, and not the shareholders themselves, it is the associates themselves that have the obligation to repay those respective loans, irrespective of liquidator distributions.

According to the information provided to the Commissioner, an assignment of the loans to Company A is to be made to the Shareholders Trusts. The Commissioner notes that such an assignment satisfies the definition of a forgiven debt that will be subject, prima facie, to Section 109F.

Notwithstanding the application of S 109F, the Commissioner also notes the intended application of s 109F(4).

The basis of application of S 109F will then turn on what the assignees being the Shareholder Trusts seek to recover by way of repayment of the assigned loans including the assigned rights. To assure that Division 7A is not transgressed, and to satisfy the reasonable person tests, loans that are subject to Division 7A that are assigned should be on identical terms with the Division 7A exposures of Company A and should be fully repaid (by cash or property) within their standard loan terms.

Issue 2 Question 1

Will the liquidator's distribution of Company A's cash and assets constitute a "payment" pursuant to section 109C?

Summary

No

Detailed reasoning

Section 109C(3) of the ITAA 1936 defines a "payment" to mean:

(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.

The Commissioner notes that the declaration of the liquidator's dividend satisfied by the transfer of company property involves a "crediting" of an amount for the benefit of the Shareholder Trusts and a transfer of property to then. As such and without more, this satisfies the criteria of payment and as such, there is a "payment" for the purposes of section 109C.

However, the Commissioner also notes that in a simple case where a liquidation occurs within 12 months that due to the operation of Section 109C (4), the value of the "payment" in a completed liquidation is likely to be nil, as the amount of the payment is normally equal to the value of shares that are being disposed of via the liquidation process

Of note however to both simple and complex liquidations that span multiple years, is the operation of Section 109NA. Section 109NA provides that there is no application of Section 109C in circumstances where distributions of property are made in the course of winding up the company. However, and importantly should loan obligations be outstanding at the end of the following year, as the liquidation may not be final, Section 109D(1A) may still apply.

This will be the case, for example, where a distribution is paid (in specie) without an approximate value of shares being appropriately surrendered or cancelled by the liquidator, (hence the company property having a positive value that provides a financial benefit or accommodation to the shareholder)

The Commissioner will not apply section 109C in cases involving liquidator's distributions, due to the mechanical operation of S 109NA in conjunction with s 109D (1A) but will instead apply s 109D(1A) in cases where a loan as defined under S 109D(3) has been provided to any of the Shareholder Trusts or their associates.

Issue 3 Question 1

Does section 109NA apply in the circumstances described, so that a deemed dividend under section 109C does not arise by reason of the liquidator's distribution?

Summary

Yes.

Any liquidator's distribution from Company A to the Shareholder Trusts will not give rise to any deemed dividends under section 109C, but rather will promote a potential exposure under S109D to each of the Shareholder Trusts or their associates depending on the length of time (in years) that the liquidation takes and any liquidation steps that involve financial accommodation to the Shareholders Trusts or their associates

Detailed reasoning

The liquidator's distribution from Company A to the Shareholder Trust will not give rise to any Division 7A exposure under section 109C, but may promote an exposure under S 109D should a loan as defined under S 109D(3) ensue to the shareholders of Company A or its associates. This will be the case, where the value of the property distribution to the Shareholder Trusts results in a financial accommodation to the Shareholder Trusts or any associate, or in substance becomes a loan.

On the basis that no financial accommodation or, in substance, loan is provided to shareholders (or their associates) by the liquidation process then S 109D will have no operation. This will be the case, for example where the property value distributed by the liquidator is equal to the arm's length value of shares subject to liquidation in a year of income.

Issue 4 Question 1

Will the liquidator's distributions, satisfied by way of the assignment of Receivables to related parties, attract the application of section 109T?

Summary

No,

The liquidator's distributions, satisfied by way of the assignment of Receivables to related parties will not attract the application of section 109T

Detailed reasoning

Section 109T of the ITAA 1936 applies if:

• a private company makes a payment or loan to an entity that is interposed between the private company and the target entity;

• a reasonable person would conclude (having regard to all the circumstances) that the payment or loan was solely or mainly made as part of an arrangement involving a payment or loan to the target entity; and

• the interposed entity makes a payment or loan to the target entity.

Based on the information provided, Section 109T does not apply in these circumstances for the following reasons:

• Notwithstanding a payment may be made by Company A to its shareholders, relevantly, the payment is a liquidators distribution to which S 109C does not apply due to the operation of s 109NA; and

• There is no interposition of an entity in this instance between the private company and the target entity. Instead the intent of the company is to distribute its property on liquidation to the Shareholder Trusts, who will in turn manage distributions received on liquidation in accordance with its trust resolutions.

In order for there to be an arrangement to which Section 109T may apply, Company A must enter into an arrangement to provide a payment or loan to a target entity It is clear that a liquidators distribution in winding up an entity, where such a distribution is on consistent terms with the arm's length value of existing related party loans, is not part of an arrangement to which S 109T was designed to deal with..

Issue 5 Question 1

Can the Commissioner confirm that he would not treat the Division 7A loans assigned by Company A on liquidation as forgiven debts and thus deemed dividends pursuant to section 109F?

Summary

No

Technically, any debt that is assigned is a 'forgiven debt' as defined by S 245-36 and as such it is the Commissioner's view that in such cases, a debt forgiveness, to which the provisions contained in section 109F ordinarily apply can ordinarily apply.

As previously discussed however, the Commissioner considers that a deemed dividend will only ensue in cases only where the rights and obligations required by S 109N when Company A entered into such arrangements, are assigned on terms that are not exercised consistently, having regard to the circumstances, with the original obligations (and that would offend the conclusion that a reasonable person would make under S 109F(5)(b))

Detailed reasoning

Subsection 109F(5) states:

Debt Forgiveness by debt parking

An amount of debt an entity (the debtor) owes a private company is also forgiven for the purposes of this Division if:

(a) The private company assigns the right to receive payment of the amount to another entity (the new creditor) who is either:

i. An associate of the debtor; or

ii. A party to an arrangement with the debtor about the assignment; and

(b) A reasonable person would concludes (having regard to all circumstances) that the new creditor will not exercise the assigned right"

It is noted that in the current situation:

• The related party borrowers in relation to the receivables assigned have a clear history of repayment. It is noted that it is the intention of the associates of Company A that the assignment to them should not disturb this; and

• It is the understood intention of the parties, as provided, that going forward distributions will be made by the Shareholder Trusts in a consistent fashion to past years, being distributions to the H Companies and that in turn, to satisfy the present entitlement owing to those companies, the assigned loans will be required to call on the assigned rights and call on the loans provided to associates. As such, and on the basis that the assigned right is on consistent terms with the loans between Company A as lender and the respective associated borrowers, a reasonable person would conclude that the new creditors, being the Shareholder Trusts have fully exercised assigned rights.

Issue 6 Question 1

Can the Commissioner confirm, for the purposes of Division 230 of the ITAA 1997 that the Shareholder Trusts will be taken to have a cost of the Company A receivables equal to their face value (being their market value)?

Summary

The Commissioner confirms that the ultimate collection of the receivables by the Shareholder Trusts for their face value will only give rise to a gain or a loss, where the collection at face value is away from the arm's length value of the receivables. In such circumstances, the Shareholder Trusts will be taken to have a cost for the purposes of Division 230 based on the arm's length value of the receivable. An arm's length value will be equal to face value where the receivables assigned for the arm's length value.

Detailed reasoning

The Shareholder Trusts are all taxpayers who have a financial arrangement, in the sense that each have one or more cash settlable legal or equitable rights and/ or obligations to receive or provide a financial benefit as required by subsection 230-5(1) of the ITAA 1997. This is in form of the receivables which are being assigned by Company A to each of the Shareholder Trusts.

It is accepted that for the purposes of Division 230, the Shareholder Trusts will be taken to have provided financial benefits in respect of acquiring these rights equal to the arm's length value of assigned receivables It is also accepted that the Shareholder Trusts will be taken to have provided consideration equal to the shares in Company A provided in return for acquiring these receivables.

Subsection 230-510(2) and (3) also apply to the current arrangement. These subsections provide the following:

230-510(2):

Subsection (3) applies if the parties to the dealing that resulted in you starting to have the arrangement were not dealing at arm's length in relation to the dealing.

230-510(3):

For the purposes of this Division:

(a) Disregard the amount of the financial benefit (if any) that you provided or received in relation to you starting to have the arrangement;

(b) Instead, treat yourself as having provided or receive a financial benefit in relation to you starting to have the arrangement that is equal to the amount of the financial benefit that you would have provided or received if the parties to the dealing mentioned in subsection (2) were dealing at arm's length in relation to the dealing.

Accordingly, the operation of Division 230 will deem the Shareholder Trusts to have provided financial benefits equal to the arm's length dealing amount.

The ultimate collection of the receivables by the Shareholder Trusts provided the assignment for their face value, is equal to the arm's length value of the debts assigned does not give rise to either a gain or loss.

Issue 7 Question 1

Can the Commissioner confirm, for the purposes of Part 3-1 of the ITAA 1997 that the Shareholder Trusts will not derive a capital gain if the Company A receivables are repaid for the face value in a future period?

Summary

Yes, the Commissioner can confirm for the purposes of Part 3-1 of the ITAA 1997, that the Shareholder Trusts will not derive a capital gain if the Company A assigned receivables are repaid to the Shareholder Trusts at the face value in a future period, where the market value of property provided to acquire the assigned debts, is equal to that face value.

Detailed reasoning

The Company A receivables are CGT Assets within the meaning of that term in section 108-5 of the Income Tax Assessment Act 1997. The Shareholder Trusts would receive a combined cost base for the purposes of Part 3-1 equal to the market value of the property each trustee is required to provide for the acquisition of the assigned debts, under section 110-25(2)(b) - in this case the market value of the shares in Company A.

Accordingly the repayment of the receivables at face value, where face value equals market value, will not give rise to a capital gain to the Shareholder Trusts, as the capital proceeds that they will receive on debt repayment by the lender, will be equal to the cost base of the relevant asset from their perspective.

In addition, any application of Part 3-1 is subject to S 118-20 in that should other parts of the ITAA apply, Part 3-1 will not apply to the transactions.

Issue 8 Question 1

Can the Commissioner confirm that the liquidator's distributions distributed from Company A to its Shareholder Trusts is capital in the Shareholder Trusts' hands for the purpose of Division 6 of the ITAA 1936?

Summary

Yes, the Commissioner confirms that liquidator distributions distributed from Company A to the Shareholder Trusts is capital or corpus from the perspective of the shareholder trust estates.

Detailed reasoning

It is a well settled principle of law that a liquidator's distribution upon winding up is capital and not income from the perspective of the trust shareholders under general law concepts, including general trust law concepts. As such, a distribution in liquidation will be capital or corpus of the shareholder trust (Refer Hill v Perpetual Trustees [1930] AC 720 where the principle is expressly recognised).

Whilst the characterisation of liquidation distributions at general law is settled, regard where trusts are concerned should also be given to the relevant terms of each specific Trust Deed. In the case of the specific trust deeds, being the Trust Deeds of the Shareholder Trusts, there is no express intention to classify a capital receipt as income. For completeness however, it should be noted that sub-clause 7(15) of the Trust Deeds for Market, Whitehorse and Z all empower the trustees to determine whether assets or receipts of the trust funds are "income" or "capital" of the trusts. As such a power vests with the trustee and it is that trustee who will determine same for trust law purposes. In so far as application of Division 6 of the ITAA (1936) has application to each of the trust estates, the Section 97 definition of 'income of the trust estate' refers to what is the income of the trust estate under general law concepts having regard to the specific trust instrument (refer FCT v Bamford [2010] 240 CLR 481). Accordingly, Division 6 cannot in itself re-characterise amounts to be income. Instead but it is the relevant trust instrument that determines same.

Issue 9 Question 1

Can the Commissioner confirm the effect of the Shareholder Trusts resolving to distribute income (in a year that liquidation proceeds are received by those trusts and retained as capital), is that their beneficiaries (being the H Companies) are assessed on their proportionate share of amounts included in the assessable income of the trusts, pursuant to section 97?

Summary

Yes.

The Commissioner can confirm that the beneficiaries of each of the Shareholder Trusts will be assessed on proportionate shares of the assessable income of those trust estates, subject to the express requirement of a valid trust resolution being passed by each of the relevant trustees prior to the last day of the financial year. On the basis that it is the H Companies that are the only beneficiaries made presently entitled to the income of the trust estate, it will be those companies that will be assessed on their proportionate share of amounts being the assessable income of the trusts, in accordance with section 97 of the ITAA (1936).

Detailed Reasoning

The Commissioner understands that it is planned that prior to the end of the accounting period, being the end of the 20XX financial year, the trustees of the Shareholder Trusts will make resolution in accordance with each trust instrument to make distribution of the whole of the income of each respective trust to the H Companies.

The Commissioner further understands that the H Companies are general beneficiaries of each of the trust estates as they are eligible corporations as defined by the Deed of Settlement(s).

On making a valid resolution for the distribution of income of each trust estate in favour exclusively to the H Companies, the H Companies will become presently entitled to the income of the trust estates.

Each H Company will be required to include in their respective assessable income calculations for income tax purposes an amount equal to the Section 97 proportional share of the net income of the trust estates, as defined in section 95 and in accordance with the principles enunciated in Zeta Force Pty Ltd v FCT 84 FCR 80 and FC of T v Bamford (2010) 240 CLR 481.

Issue 10 Question 1

The Commissioner is requested to confirm that Division 6E operates in this case to prevent an amount being included in assessable income twice by reducing the H Companies' present entitlement to income of the shareholders trusts, to the extent that the franked dividend (already included in assessable income of the H Companies) is to be disregarded

Summary

Yes, subject to the specific requirement that a frankable distribution is made by each of the Shareholder Trusts to the beneficiaries of those trust estates.

The Commissioner confirms that the intention of Division 6E is to prevent an amount being included in assessable income twice, by reducing a presently entitled beneficiary's income by the amount of a franked dividend that is specifically included in the beneficiary's net income due to the operation of Division 207 of the ITAA (1997).

On the basis of the H Companies being presently entitled to a frankable distribution from the Shareholder Trusts, Subdivision 207-B will operate to include the frankable distribution and the relevant franking credit into the assessable income of the trust beneficiary.

Detailed Reasoning

Section 102UW of the ITAA 1936 states that Division 6E applies if (relevantly):

(a) The net income of a trust estate exceeds nil; and

(b) Any of the following things are taken into account in working out the net income of the trust estate:

…

(ii) a franked distribution (to the extent that an amount of the franked distribution remained after reducing it by deductions that were directly relevant to it);

(iii) a franking credit. [emphasis added]

Specifically, Subsection 102UY(4) provides that a beneficiary of the trust estate has an amount of a Division 6E present entitlement to the income of the trust estate that is equal to the amount of the beneficiary's present entitlement to the income of the trust estate, decreased by:

…

(c) for each franked distribution taken into account as mentioned in paragraph 102UW(b) - so much of the beneficiary's share of the franked distribution as was included in the income of the trust estate;

In this particular instance, due to the operation of section 47 to the liquidator's distributions, distributions by the liquidator of Company A will be deemed to be dividends paid to the Shareholder Trusts, by the company out of profits derived by it.

Such dividends are frankable distributions to the extent that they meet the criteria contained in Section 202-40 and 202-45 of the ITAA (1997)

Issue 11 Question 1

The Commissioner is requested to confirm that the H Companies will be entitled to apply the franking credits they receive from the Shareholder Trusts as tax offsets pursuant to Division 207 of the Income Tax Assessment Act 1997 ("ITAA 1997")

Summary

The H Companies will be entitled to apply franking credits they receive from the Shareholder Trusts as tax offsets under section 207-45 of the ITAA 1997, subject to the H companies being qualified persons within the meaning of Division 1A of former Part IIIA of the ITAA 1936.

Detailed reasoning

The combined operation of subsection 47(1) and section 44 of the ITAA 1936 results in the shareholders of Company A receiving distributions that will be deemed as dividends for income tax purposes.

Division 202 of the ITAA 1997 enables Company A to frank a deemed dividend to the extent of its available franking credits. On the basis that the conditions of Subdivision 207-F are satisfied by each of the trustees of the Shareholder Trusts, then the H Companies will be entitled to apply the franking credits.

Accordingly, the H Companies, being beneficiaries of the Shareholder Trusts will including their share of both the liquidation distributions taken to be a dividend under section 47 (which flows from the trust distributions made by the Shareholder Trusts) and the franking credits relating to that distribution.

Issue 12 Question 1

Can the Commissioner confirm that section 100A does not apply to trust distributions made by the Shareholder Trusts as described herein?

Summary

Yes The Commissioner confirms that section 100A does not apply to trust distributions made by the Shareholder Trusts in the circumstances outlined, provided that the Shareholder Trusts make payment to the H Companies equal to the full entitlement in full to the H Companies.

Detailed reasoning

Section 100A of the ITAA 1936 provides that where a beneficiary of a trust estate who is not under a legal disability, is presently entitled to trust income, and that present entitlement is linked either directly or indirectly to a reimbursement agreement, the beneficiary is deemed not to be presently entitled to the income. Trust distributions which fall within section 100A of the ITAA 1936 are assessed to the trustee under section 99A of the ITAA 1936.

Subsection 100A(7) of the ITAA 1936 defines a reimbursement agreement to include,

...the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or persons.

Further, the term 'agreement' is defined in subsection 100A(13) of the ITAA 1936 to include any agreement, arrangement or understanding, whether formal or informal, express or implied, and either enforceable or unenforceable. However, the term does not include any agreement entered into in the course of ordinary family or commercial dealings.

The Commissioner considers that that the H Companies' present entitlements do not arise out of a "reimbursement agreement," due to the intention of the trustees to make full payment to the H companies to the extent of their unpaid present entitlement.

Issue 13 Question 1

Yes, the Commissioner can confirm that Part IVA does not have application to the broad arrangement of liquidation of Company A and distribution of the proceeds of liquidation in the manner as described.

In a strict sense Part IVA could have some residual application only, should the operation of the specific integrity mechanisms contained in Division 7A fail to achieve their intended application as a matter of policy.

Detailed reasoning

The essential elements of Part IVA are:

a) There must be a scheme;

b) a taxpayer must obtain a tax benefit in connection with the scheme; and

c) a taxpayer to the scheme must have the dominant purpose of enabling the taxpayer to obtain a tax benefit

Each will be analysed briefly

1. Scheme

There is one possible scheme within the transactions described:

a. The assignment of Company A receivables, as a liquidation step, to the shareholders of Company A on terms that result in a reduced assessable income from the receivables to that expected had the scheme not been entered into ("the scheme");

2. Tax Benefit

Having identified the scheme, it must next be determined whether, in accordance with section 177C of the ITAA 1936, the taxpayer obtains a tax benefit in connection with a scheme if an amount is not included in the assessable income of the taxpayer in the year of income and:

(i) That amount would have been included; or

(ii) Might reasonably be expected to be included,

in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out.

Insofar as the scheme identified, a "tax benefit" in respect of the identified scheme can only result where an assignment is performed by the related parties on more favourable terms to the borrower then would be the case, should the assignment not have been entered into.

As to the nature of any tax benefit, this will largely turn on the existing section 109N arrangements and the tax included in assessable income, but for the purported assignment being entered into, so long as the assignment is performed having regard to interest rates under section 109N for loans assigned, there is no apparent tax benefit.

(iii) Dominant Purpose

The identified scheme can only be described as having a dominant purpose as to tax benefit if the overarching reason for the identified scheme was for same. This will be the case for example, where the parties subject to the assignment have performed steps of the liquidation in a manner that makes limited if any sense, commercially, other than for the purposes of the resultant tax benefit.

a) It is noted however that the liquidation process in itself is a liquidation of a redundant company, and hence the liquidation, at a headline level is commercially driven.

b) Further, the payment of taxable dividends by Company A and distribution of taxable income by each of the shareholder trusts is consistent with 20 years of distribution patterns (in accordance with proper and due performance of trustee duties and obligations pursuant to the trust deeds). This would occur regardless of assignment of the debts or a liquidation process for that matter.

Issue 14 Question 1

Can the Commissioner confirm that a taxable capital gain would not arise on the ultimate disposal of Company A' shares, following all liquidation distributions being made?

Summary

Yes

The Commissioner can confirm that a taxable capital gain will not arise on the ultimate cancellation of Company A's shares, following all liquidation distributions being made, and the deregistration process is adhered to.

Detailed reasoning

If a company is wound up voluntarily, it is deregistered three months after the liquidator lodges a return of the holding of the final meeting of members or of members and creditors (subsection 509(5) of the Corporations Act 2001). Taxation Determination TD 2000/7 (TD 2000/7) provides that in such a case, CGT Event C2 happens to the members' shares for the purposes of Part 3-1 and 3-3.

The Commissioner's view in Taxation Determination TD 2001/27 is that, for the purposes of CGT event C2, 'the full amount' of a liquidator's final distribution on the winding-up of a company is capital proceeds from the ending of the shareholders' shares in the company.

104-25 Cancellation, surrender and similar endings: CGT event C2

(1) CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option - being exercised; or

(f) if the asset is a convertible interest - being converted.

Deregistration is the specific occurrence which triggers CGT event C2. 'Shares' in a company are an 'intangible CGT asset' which 'ends', when the intangible chose is 'released, discharged or satisfied' by the shareholder and is 'cancelled' by operation of law.

Paragraph104-25(5)(a) provides that a capital gain or capital loss you make from CGT Event C2 is disregarded if you acquired the asset before 20 September 1985 ("Pre CGT Assets". As indicated, Company A was incorporated on dd/mm/yyyy. Accordingly the shares, which are the CGT Asset in this instance, are Pre CGT Asset. Therefore, any capital gain or capital loss would be ordinarily disregarded.

It should be noted, however, that where companies which are incorporated prior to the introduction of a Capital Gains Tax regime, a taxable event being CGT Event K6 can still occur where Pre CGT shares are disposed of. Such is the case where the Post CGT property within the company is greater than 75% of the property of the Pre CGT incorporated company.

It has been explained to the Commissioner that liquidators distributions are to be finalised over a number of years and at the end of all distributions, including in specie property distribution, the liquidator will then finalise the deregistration process.

Although CGT event K6 is theoretically capable of happening in this case as the majority of the property of Company A is Post CGT property (being loans receivable), it is most unlikely that the company would have any property of the kind referred to in in the relevant section, being Section 104-230(2) just before the deregistration process, and CGT event C2 happens.

That is, Company A is highly likely to be a 'shell' at that stage. This is the position established by Taxation Ruling 2004/18 (paragraphs 48 and 49).

In the unlikely event that CGT event K6 is attracted, section 118-20 of the ITAA 1997 reduces any capital gain under subsection 104-230(6), in any event by the amount (if any) of the liquidator's distribution that is assessed as a dividend.

Finally, for the purposes of completeness, CGT Event G3, which provides that you can crystallise a capital loss if the liquidator declares the shares in Company A worthless, will not apply and is not relevant to the above transactions. Relevantly, subsection 104-145(6) provides that you cannot choose to make a capital loss if you acquired the shares before 20 September 1985.