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Edited version of your written advice
Authorisation Number: 1012924349035
Date of advice: 8 December 2015
Ruling
Subject: Division 7A Section 109XA and 109XB
Question 1
Will you be taken to have received a dividend under section 109XA or section 109XB of the Income Tax Assessment Act 1936 in relation to the transfer of several properties to you from the XY Family Trust pursuant to a family court order?
Answer
No
This ruling applies for the following periods:
Income year ending 30 June 2016
Income year ending 30 June 2017
Income year ending 30 June 2018
Income year ending 30 June 2019
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The XY Family Trust (the Trust) was established on dd/mm/yyyy.
Company A is the trustee of the Trust. Taxpayer A and Taxpayer B hold one share each in Company A and are both directors of Company A. Taxpayer A and Taxpayer B are both beneficiaries of the Trust.
The Trust possesses several real estate properties.
Company B is a corporate beneficiary of the Trust. Taxpayer A and Taxpayer B are directors of Company B.
As a result of a proposed matrimonial property settlement between Taxpayer A and Taxpayer B, Taxpayer B will renounce their rights as a beneficiary of the Trust and Taxpayer A will retain control of the Trust. Taxpayer B will resign as a director of Company A and transfer their share in Company A to Taxpayer A. Taxpayer B will resign as director of Company B.
Taxpayer B will have some of the properties transferred to them. From the settlement date Taxpayer B will accept sole liability and fully indemnify Taxpayer A in relation to all liabilities secured against or relating to the properties to be transferred to Taxpayer B.
The matrimonial settlement will be made by way of a Consent Order by the Family Court pursuant to, section 79 of the Family Law Act 1975.
The Trust owes an unpaid present entitlement to Company B (created prior to 16 December 2009). There is currently no written agreement in place between the Trust and Company B in relation to the UPE. It is the intention of the Trust to pay the UPE to Company B at a future date.
The property transfers to Taxpayer B will occur via a payment of the trustee out of its net income, (as an expense through the books of the trust), at cost.
Relevant legislative provisions
Income Tax Assessment Act 1936 Division 7A
Income Tax Assessment Act 1936 Section 109XA
Income Tax Assessment Act 1936 Section 109XB
Reasons for decision
Question 1
Will you be taken to have received a dividend under section 109XA or section 109XB of the Income Tax Assessment Act 1936 in relation to the transfer of several properties to you from the XY Family Trust pursuant to a family court order?
Subdivision EA - Unpaid Present Entitlements Income Tax Assessment Act 1936 (ITAA 1936) contains the rules for working out when a shareholder of a private company will, by virtue of Division 7A, have a dividend included in their assessable income as a result of receiving a financial benefit through a trust in the form of a loan, payment or a forgiven debt.
The rules in Subdivision EA are designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to a private company without paying it, and then distributing the underlying cash to a shareholder (or their associate) of the company.
Section 109XA defines the kinds of transactions to which the operative provision, section 109XB, applies. The relevant transactions are certain payments, loans and forgiven debts where the beneficiary of the transaction is a shareholder of a private company, or an associate of the shareholder. Where a transaction is one of the kinds as defined in section 109XA, the effect of section 109XB is to include a deemed dividend in the assessable income of the shareholder.
A payment to an entity is defined in subsection 109C(3) and includes a transfer of property to an entity.
Associate is defined in section 109ZD ITAA 1936 by reference to section 318 of ITAA 1936. The definition in section 318 of an associate includes a relative of an individual shareholder. In ATOID 2004/461 a couple going through a divorce were treated as associates for Division 7A purposes.
The Commissioner will not treat any pre-16 December 2009 unpaid present entitlements (UPEs) as Division 7A loans. Subdivision EA can still apply if the trust makes a payment or loan to a shareholder or associate of the shareholder of the private company for as long as there is an UPE of the private company to trust income, including any pre-16 December 2009 UPEs.
Taxpayer B is an associate for Division 7A purposes.
The Trust intents to pay the UPE at a future date and will have sufficient assets left in the Trust to do so. The transfer of the properties to Taxpayer B will occur via a payment of the trustee out of its net income, as an expense through the books of the trust. This amount will therefore not be viewed as a present entitlement to an unrealised gain.
Summary
The transfer of properties from XY Family Trust to Taxpayer B pursuant to a family court order will not be a dividend for the purpose of Subdivision EA ITAA 1936.