Edited version of your written advice

Authorisation Number: 1051197400455

Date of advice: 1 March 2017

Ruling

Subject: Part IVA

Questions and Answers

Is there a scheme to which Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies?

No

This ruling applies for the following periods

1 July 20XX to 30 June 20YY

1 July 20YY to 30 June 20ZZ

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Background

1. Person A has legal capacity.

2. Person A has three middle aged children:

● Person B,

● Person C, and

● Person D.

3. Person D has two adult children

4. Person A wishes their children to benefit equally from their future estate's interest in the Company save that Person D's entitlements of 1/3 being further shared equally with Person D's two adult children.

The Company

5. The Company was incorporated before 1985 and has always maintained excellent compliance as a taxpayer and corporate citizen.

6. Its issued shares (which were all acquired before 21st September 1985 and are not subject to CGT event K6) are held by the following shareholders and in the following proportions:

The Property E

7. The Company's principal assets comprised of the land and buildings Property E and Property F.

8. The Property E was let upon commercial terms to an unrelated third party that conducts a business upon the Property E. Property F is also leased to another unrelated third party tenant upon arm's length terms.

9. The Company sold the Property E pursuant to a standard form contract for market value. The Company considers that disposing of the Property E for market value was the most prudent business decision.

10. The sale of the Property E was settled in late 20ZZ.

The Plan

11. Person A considers that if they were to simply divest their shares by Will, to each of their children in resultant equal proportions, their Will would be challenged.

12. Person A's future estate will largely be contained within their shares in the Company. Their value will essentially be their proportional entitlement as a shareholder, if ever the Company is wound up, to the capital proceeds of the sale of the Property E (after corporate tax) and the value of Property F which may also be sold in the long term.

13. Person A intends to incorporate a new company (Estate Holding Company) with three equal shareholders being special trusts. Each special trust will hold an equal number of shares all with the same rights attached. These special trusts are inheritance trusts, with one being created for and named after each child, and:

14. are inter vivos discretionary trusts with:

i. Person A as the trustee and appointor of each child's inheritance trust during their life or until they cease to have legal capacity permanently, whichever occurs first;

ii. only Person A and the relevant child will be the specified beneficiaries of the respective inheritance trust however, their issue (if any) will also be discretionary beneficiaries;

iii. upon their passing or permanent legal incapacity, the trustee and appointor of each trust will default to the respective child alone (in the case of Person B, and Person C) or a trusted independent professional (i.e. accountant and/or lawyer). However, a trusted third party professional will be appointed for Person D's trust pursuant to a specific clause of the trust deed, and not pursuant to a provision of Person A's Will; and

iv. each inheritance trust deed will contain a provision that none of the inheritance trusts features described above can be amended or varied during Person A's life.

15. Person A will sell their Class A shares for market value to the Estate Holding Company under a standard form share sale agreement. As the Estate Holding Company is a new entity and has insufficient share capital it is unable to pay the consideration for the Share Sale. Person A will provide the Estate Holding Company with an interest free loan, in order for it to purchase her shares. Person A will assign the amount due from the Estate Holding Company to the three inheritance trusts in unequal portions (see paragraphs 16 and 17).

16. Each child will sell their Class B shares to the Estate Holding Company. Each child will provide the Estate Holding Company with an interest free loan, in order for it to purchase their shares. Each child will then assign by gift the sum due from the Estate Holding Company for their shares to their respectively named inheritance trust.

17. Person A will concurrently gift a larger portion of the receivable due to them from the share sale to Person B's inheritance trust and Person D's inheritance trust to equalise this imbalance.

18. Each inheritance trust will be owed an identical amount from the Estate Holding Company (the market value of Y B class shares and, in equal portions, the remaining market value of the X A class shares).

Estate Holding Company Constitution

19. The Estate Holding Company will have special clauses inserted into its constitution which will require a unanimous resolution of:

1. Directors, and

2. Shareholders;

for any decision, action, transaction or dealing by the Estate Holding Company including any affecting its assets.

20. If a unanimous resolution cannot be achieved, a formal alternative dispute resolution process will be imposed upon its directors and shareholders to avoid lengthy and expensive litigation over Estate Holding Company differences or issues.

Limiting Future Liabilities of the Property E

21. Person A is concerned that should any major issues arise with the new owner's redevelopment of the Property E, the owner and/or the local council may commence litigation against the Company and Person A to recoup any loss or damage incurred thereby.

22. Person A has been advised by their lawyers that this risk can be minimized by the Company transferring Property F and any after tax reserves of the Company post settlement of the sale of the Property E by dividend to the Estate Holding Company.

23. Then once Property F and all the reserves have been so transferred and distributed, the Company will be liquidated (not deregistered) under a creditor's voluntary winding up.

24. The Estate Holding Company and the Company will thus form a consolidated group by the former making a choice as the head company under part 3-90 of the Income Tax Assessment Act 1997 as amended after settlement of the Property E sale.

25. The Estate Holding Company as the new "parent" of the Company (arising from the restructure) will apply for stamp duty relief upon the transfer of Property F.

26. If the application is rejected, the Company will declare dividends from its cash reserves and asset evaluation reserve to create a debt due from the Company to its parent, the Estate Holding Company.

27. Future payment of that indebtedness will be secured by a registered 1^st mortgage granted by the Company in favour of its parent, the Estate Holding Company. That will better secure the Company from the risk and other contingent liabilities of the Company including those arising from its ownership and the Property E and dealings with the purchaser of the Property E and the Council.

28. Under this alternative, the Company is not liquidated.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 paragraph 177C(1)(b)

Income Tax Assessment Act 1936 subsection 177C(4)

Income Tax Assessment Act 1936 subsection 177CB(2)

Income Tax Assessment Act 1936 subsection 177CB(3)

Income Tax Assessment Act 1936 subsection 177D(1)

Income Tax Assessment Act 1936 subsection 177D(2)

Reasons for decision

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances if a taxpayer obtains a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. Part IVA is a provision of last resort.

In order for Part IVA to apply, the following requirements must be satisfied:

● There must be a scheme as defined by section 177A of the ITAA 1936.

● There must be a tax benefit as defined by section 177C of the ITAA 1936, obtained in connection with the scheme

● The scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit.

It is determined that Part IVA would not apply to the arrangement.