Edited version of your written advice

Authorisation Number: 1013041245513

Date of advice: 8 August 2016

Ruling

Subject: Tax implication of a corporate restructure and application of Part IVA of ITAA 1936

Issue 1

Question 1

Will the capital gain on the sale of shares in Company A be disregarded under Division 615 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

Yes

Question 2

If the answer to Question 1 is 'no', will the capital gain on the sale of shares in Company A be disregarded under Subdivision 122-A of the ITAA 1997?

Answer

Not considered.

Issue 2

Question 1

Do sections 177E and 177F of the Income Tax Assessment Act 1936 ('ITAA 1936') apply?

Answer

The Commissioner will not make a determination under section 177F of the ITAA 1936 to the scheme comprised of the steps described in the 'Relevant facts and circumstances' section of this ruling.

Question 2

Does any provision within Part IVA of the ITAA 1936 apply?

Answer

The Commissioner will not seek to apply Part IVA of the ITAA 1936 to the scheme comprised of the steps described in the 'Relevant facts and circumstances' section of this ruling.

Question 3

Will the arrangement be considered part of a dividend stripping operation for the purposes of section 207-155 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

1 July 201X to 30 June 201Y

The scheme commences on:

1 July 201X

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.

Company A is a family owned company which owns and operates a substantial business in a regional Australian state.

All the shares in Company A are ordinary shares. All but one of those shares is held by Corporate Trustee as trustee for the Family Trust. The one remaining share is held by individual shareholder on bare trust for the Family Trust. There has been no amendment to the trust deed of the Family Trust in relation the definition of 'beneficiary'.

All shares in Company A are of the same class and carry the same rights.

The share register records Corporate Trustee and individual shareholder as the two shareholders. The shareholders are Australian residents for tax purposes.

Over the years, Company A has accumulated significant retained earnings. Asset protection had never been a particularly important consideration for the directors of Company A until recently, when it emerged through a worker's compensation claim that the company could be financially exposed.

In order to protect Company A from any unforseen future claims, it is considering interposing a company ('Holding Co') between the existing shareholders and paying a fully franked dividend to Holding Co to protect those liquid reserves from claims against the operating business.

The corporate restructure will comprise only the following steps:

• Step 1: Holding Co will be incorporated as a new company.

• Step 2: All the shareholders in Company A will exchange their shares in Company A for shares in Holding Co.

Holding Co will prepare a market valuation of Company A.

All shareholders in Company A will receive 1 share in Holding Co, and nothing else, for each share in Company A that they are giving up.

All shares in Holding Co are of the same class and carry the same rights.

At the end of the step, Holding Co will recognise its investment in Company A shares at the market value. Holding Co will also have a share capital of that market value.

• Step 3: Company A will pay a fully franked dividend up to Holding Co.

Company A is not a head company of a tax consolidated group and there is no tax consolidated group involved in the proposed restructure.

Relevant legislative provisions

Income Tax Assessment Act 1936 - section 177D,

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 207-155,

Income Tax Assessment Act 1997 - section 615-5,

Income Tax Assessment Act 1997 - section 615-20,

Income Tax Assessment Act 1997 - section 615-25,

Income Tax Assessment Act 1997 - section 615-30,

Income Tax Assessment Act 1997 - section 615-35,

Income Tax Assessment Act 1997 - section 615-65, and

Income Tax Assessment Act 1997 - section 960-130.

Issue 1

Question 1

Summary

The proposed restructure satisfies the requirement in Division 615 of the Income Tax Assessment Act 1997 ('ITAA 1997'). The shareholders of Company A can choose to obtain a roll-over under this Division and disregard the capital gain from the shares disposal.

Detailed reasoning

Under Division 615 of the ITAA 1997, taxpayer can choose to obtain the roll-over in section 615-5 when all the requirements in that section are satisfied.

Corporate Trustee and individual shareholder are recorded on the share registry as the shareholders of the company. They satisfy the definition of a "member" of the company under item 1 of subsection 960-130(1) of the ITAA 1997.

Together, these 2 shareholders hold all the shares in Company A. Under the proposed restructure, they are exchanging their shares in Company A for shares in Holding Co.

The requirements in paragraphs 615-5(1)(a), (b), and (c) are satisfied.

Paragraph 615-5(1)(d) requires the elements of Subdivision 615-B to be satisfied.

In the proposed restructure, Holding Co will hold all the shares in Company A. Section 615-15 is satisfied.

The current shareholders in Company A will receive 1 share in Holding Co for each share in Company A with all the shares in Company A as well as all the shares in Holding Co are of the same class and carry the same right. Subsection 615-20(1) is satisfied. Furthermore, as the shareholding in Company A is replicated in Holding Co, the requirement in subsection 615-20(2) will also be satisfied.

As Company A's shareholders are Australian resident for tax purposes, the requirement in subsection 615-20(3) is satisfied.

Under the proposed restructure, the current shareholders in Company A will receive ordinary shares in Holding Co, will be holding these shares throughout the restructure and will be the only shareholders in Holding Co. The requirements in section 615-25 are satisfied.

Company A is not the head company of a tax consolidated group. Therefore Holding Co will elect to apply section 615-65. The requirement in section 615-30 is satisfied.

Company A is not an authorised deposit-taking institution of part of an extended licensed entity that includes an ADI. Section 615-35 is not applicable.

Company A will satisfy all the requirements in Subdivision 615-B. Paragraph 615-5(1)(d) is satisfied.

As all the requirements in subsection 615-5(1) are satisfied, Company A's shareholders can choose to obtain the roll-over under Division 615.

Question 2

As the answer to Question 1 is 'yes', this question does not arise.

Issue 2

Question 1

Summary

The proposed restructure is not a scheme to which section 177E and therefore section 177F of the Income Tax Assessment Act 1936 ('ITAA 1936') apply.

Detailed reasoning

Section 177E is an anti-avoidance provision within Part IVA of the ITAA 1936 designed to prevent dividend stripping schemes. The section applies where the four conditions in paragraphs 177E(1)(a) to (d) are satisfied.

The application of section 177E is not made dependent on the purpose, either objective or subjective, of a party to the scheme to avoid tax. Rather, where the four conditions mentioned above are met, the section automatically applies and deems the scheme to be one that Part IVA applies and the taxpayer obtained a tax benefit equal to the notional amount.

Section 177F then gives the Commissioner the discretion to make a determination cancelling the tax benefit obtained in connection with the scheme.

However, in deciding if the scheme meets the condition in paragraph 177E(1)(a), consideration must be given to the purposes of the parties to the scheme.

The High Court considered in FC of T v Consolidated Press Holdings Ltd & Anor 2001 ATC 4343 that a scheme can only have the effect of dividend stripping where it can be said to have the dominant purpose of tax avoidance.

Taxation Determination TD 2014/1, in considering the application of section 177E, states at paragraph 6:

'In deciding whether there is a scheme 'by way of dividend stripping' or 'in the nature of dividend stripping' within the meaning of section 177E of Part IVA it is necessary to determine if there is an objective purpose of tax avoidance in respect of the scheme'.

In the proposed restructure, there is no evidence that there is a dominant purpose of tax avoidance. This is demonstrated by:

• The current shareholders of Company A will also be the shareholders of the interposed Holding Co.

• There has been no amendment to the trust deed of the beneficial owner of the shares, the Family Trust, in relation to the definition of 'beneficiary'.

The proposed restructure, comprised of the steps as described in the 'Relevant facts and circumstances' section, is not a dividend stripping scheme for the purposes of section 177E.

Accordingly, the Commissioner will not seek to make a determination under section 177F to the proposed restructure.

Question 2

Summary

The Commissioner will not seek to apply Part IVA of the ITAA 1936 on the proposed restructure.

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a tax benefit, or part of a tax benefit, that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. Under section 177D, Part IVA can only apply to a scheme where there is a sole or dominant purpose of obtaining a tax benefit in entering the scheme.

In the proposed restructure of Company A, the Commissioner does not consider that there is any sole or dominant purpose to obtain a tax benefit. There is no scheme to which Part IVA applies under section 177D.

Under section 177EA, the Commissioner can apply the section to determine franking debit or deny franking credit obtained under a scheme. However, this section can only apply where there is a purpose in entering the scheme to enable the relevant taxpayer to obtain an imputation benefit.

The Commissioner does not consider that there is a purpose in the proposed restructure to obtain an imputation benefit. Section 177EA is not applicable.

It is determined that Part IVA of the ITAA 1936 does not apply to the proposed restructure comprised of the steps as described in the 'Relevant facts and circumstances' section.

Question 3

Summary

The proposed restructure is not a dividend stripping operation for the purposes of section 207-155 of the ITAA 1997.

Detailed reasoning

Section 207-155 of the ITAA 1997 provides the definition of 'dividend stripping operation' for the operation of Subdivision 207-F of the Act. It states:

'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.'

The above definition of 'dividend stripping' closely follows and parallels with the definition provided within section 177E of the ITAA 1936.

Consistent with the discussion on application of section 177E in Question 3 above that there is no dividend stripping scheme or a scheme in the nature of dividend stripping scheme, there is also no dividend stripping operation for the purposes of section 207-155 of the ITAA 1997.