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Edited version of your written advice
Authorisation Number: 1013032592663
Date of advice: 16 June 2016
Advice
Subject: Dividends and Part IVA
Question 1
Will the dividend be assessable income of Company D?
Advice
No
Question 2
On the basis there is a tax benefit because the dividend is not assessable income of Company D, will Part IVA apply to cancel the tax benefit?
Advice
No
This advice applies for the following periods:
Income year ending 30 June 2016 and
Income year ending 30 June 2017
The arrangement commences on:
1 July 2015
Relevant facts and circumstances
Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.
Company A is an Australian resident company.
Company B and Company C are both Australian resident companies.
The beneficial owner of Company A (the Individual) is a resident of Australia.
The issued capital of Company A consists of two shares. One share is owned by Company B and the other is owned by Company C. Both these companies hold their Company A share on bare trust for the Individual.
A new Australian company (for convenience referred to here as 'Company D') will be incorporated, with the Individual owning all the shares.
Company B, Company C and the Individual will then transfer all of their legal and beneficial interests, as the case may be, in the Company A shares to Company D for their market value. As a consequence, Company D will become the legal and beneficial owner of all the shares in Company A.
Company D and Company A will then form a consolidated group, with Company D as the head company.
Company A will then pay a dividend to Company D.
Company A will then be wound up so that the Individual can bring their overseas activities to complete finality.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 701-1
Income Tax Assessment Act 1936 Part IVA
Reasons for decision
Question 1
Will the dividend be assessable income of Company D?
The dividend will not be assessable income of Company D because the dividend will be paid within a consolidated group. Such a dividend is treated for tax purposes as if it were a transfer of funds within the one entity (section 701-1 of the ITAA 1997).
Question 2
On the basis there is a tax benefit because the dividend is not assessable income of Company D, will Part IVA apply to cancel the tax benefit?
The relevant scheme can be viewed as consisting of incorporating a new Australian company (Company D) and consolidating it with Company A, where this is arguably unnecessary to achieve any particular economic aim, and paying an intra-group dividend.
In fact the aim of the scheme is to wind up Company A so that the Individual can bring their overseas activities to complete finality - a non-economic aim. The Individual wants to do this without triggering a taxing point. This is a legitimate aim and Part IVA was not designed to impact upon arrangements that have, as their principal aim, an outcome that has nothing to do with tax avoidance or indeed anything to do with tax. There is no requirement that taxpayers always seek to trigger a taxing point when rearranging their affairs.
A possible counterfactual could be Company A pays a dividend to the Individual, or alternatively Company A is simply wound up, in which case some of the final distribution would likely be a dividend to the Individual. However, these are not relevant counterfactuals because they involve moving profits outside a company into the hands of an individual when this is not an immediate aim of the Individual, being the controlling mind of Company A. Such an aim (i.e. moving profits out of a company to an individual) should not be a requirement imposed on a taxpayer by the tax law in order to allow them to simply wind up a company that was originally incorporated in another country.