Edited version of your written advice

Authorisation Number: 1051420328184

Date of advice: 4 September 2018

Ruling

Subject: Dividend access share arrangement

Question 1

Is the Scheme a scheme by way of in the nature of dividend stripping within the meaning of paragraph 177E(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Is the Scheme a scheme to which section 177D of the ITAA 1936 will apply?

Answer

No.

Question 3

Is the Scheme a ‘dividend stripping operation’ for the purposes of section 207-145 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following periods:

30 June 2018

30 June 2019

30 June 2020

30 June 2021

The scheme commences on:

Prior to 30 June 2018.

Relevant facts and circumstances

1. A business operated via a unit trust structure whose units are held by entities owned by the directors and the directors received distributions from the units they held.

2. After a restructure to simplify the business, the business is conducted through a corporate structure.

3. Consequently, the company issued a special class of shares to each director and the directors will receive dividend payments on a differential basis.

4. The special class shares (shares) carry no voting rights or any other rights or entitlements other than the right to receive dividends decaled on those shares.

5. Each share ceases to exist 47 months following its issue and no amount is payable on its cessation.

6. The holder of a share shall not assign the share or an interest in it nor in respect of dividends declared or dividend proceeds in respect of the share.

7. The directors in their sole discretion will determine the distribution the holder of the shares will receive in such proportions as the directors see fit.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177D(1)

Income Tax Assessment Act 1936 subsection 177C(1)

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

Income Tax Assessment Act 1936 section 177E

Income Tax Assessment Act 1936 paragraph 177E(1)(a)

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

Income Tax Assessment Act 1936 paragraph 177E(1)(c)

Income Tax Assessment Act 1936 paragraph 177E(1)(d)

Income Tax Assessment Act 1936 subparagraph 177E(1)(a)(i)

Income Tax Assessment Act 1936 subparagraph 177E(1)(a)(ii)

Income Tax Assessment Act 1997 section 207-145

Income Tax Assessment Act 1997 paragraph 207-145(1)(d))

Income Tax Assessment Act 1997 section 207-155

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1:

Is the Scheme a scheme by way of in the nature of dividend stripping within the meaning of paragraph 177E(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The scheme is not a scheme by way of or in the nature of dividend stripping because the purpose of the scheme is not to avoid income tax.

Detailed reasoning

Paragraph 177E(1)(a) of the ITAA 1936 states where:

(a) as a result of a scheme that is, in relation to a company:

(i) a scheme by way of or in the nature of dividend stripping; or

(ii) a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping;

any property of the company is disposed of;

Section 177E of the ITAA 1936 operates where four pre-conditions are satisfied. These are set out in paragraphs 177E(1)(a) to 177E(1)(d) of the ITAA 1936.

(1) as a result of a scheme, entered into after 27 May 1981 (whether in or outside Australia), that is, in relation to a company, a scheme by way of, or in the nature of, dividend stripping or a scheme having substantially the effect of such a scheme, any property of the company is disposed of

(2) the Commissioner is of the opinion that the disposal of the property represents, wholly or in part, a distribution of profits of the company, and

(3) if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits represented by the disposal of the property, an amount (the ''notional amount'') would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer of a year of income.

The application of section 177E of the ITAA 1936 is not made to depend on the purpose, either objective or subjective, of any party to the scheme; if the preconditions to the application of s 177E (i.e. paragraphs 177E(1)(a), (b), (c) and (d)) are met, the section automatically results in the scheme being a scheme to which Pt IVA applies and the taxpayer obtaining a tax benefit equal to the ''notional amount''.

However, the purpose of parties to a scheme which the Commissioner alleges is within section 177E of the ITAA 1936 is relevant in determining whether the scheme was ''by way of or in the nature of dividend stripping'' or is one that has ''substantially the effect'' of a scheme by way of or in the nature of dividend stripping within section 177E (see subparagraph 177E(1)(a)(i) and 177E(1)(a)(ii)).

The High Court decision in FC of T v Consolidated Press Holdings Ltd & Anor ATC 4343 considered that a scheme could only have the effect of dividend stripping if it satisfied both the objective elements of dividend stripping and the element of a purpose to avoid tax.

Taxation Determination TD 2014/1¹ which considers a type of ‘dividend access share’ arrangement provides at paragraph 14 that section 177E “is an additional rule designed to counter particular kinds of scheme which would otherwise effectively place company profits in the hands of shareholders in a tax-free form; namely 'dividend stripping' schemes and variations of it.”

TD 2014/1 paragraph 6 states that “[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 determining objective purpose, a simple assertion that another non-tax purpose exists will not of itself conclusively determine the issue. Any such assertion must:

● be supported by the other available evidence; and

● not be inconsistent with the objective facts of the case having regard to all the other relevant evidence.”

Under the proposed arrangement, the Scheme, there is no evidence that there is a dominant purpose to avoid tax, but rather the Scheme is a reorganisation of a business structure. This is evident by:

● the holders of the special class shares are the same owners of the unit holders before the restructure;

● the Directors who previously received special income unit distributions will continue to receive dividend distributions under the Scheme;

● under the terms of issue of the special class shares, as per the amended Constitution, the distributions cannot be assigned to a tax-preferred entity; and

● The special purpose shares are directly issued to the individual directors in their own personal capacity.

Question 2

Is the Scheme a scheme to which section 177D of the ITAA 1936 will apply?

Summary

The scheme is not a scheme that section 177D would apply to because although there is a tax benefit, there is no dominant purpose in obtaining this tax benefit under the scheme.

Detailed reasoning

Subsection 177D(1) states:

This Part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of:

(a) enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or

(b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme;

whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

Subsection 177C(1) defines tax benefits to include:

(a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or

(ba) a capital loss being incurred by the taxpayer during a year of income where the whole or a part of that capital loss would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out; or

(bb) a foreign income tax offset being allowable to the taxpayer where the whole or a part of that foreign income tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into or carried out; or

(bc) the taxpayer not being liable to pay withholding tax on an amount where the taxpayer either would have, or might reasonably be expected to have, been liable to pay withholding tax on the amount if the scheme had not been entered into or carried out;

The Scheme is a scheme which satisfies the definition of scheme in section 177A of the ITAA 1936. However section 177D of the ITAA 1936 applies where the dominant purpose of entering into the scheme is to obtain a tax benefit. In this case the relevant tax benefit that may be obtained under the Scheme is the tax benefit noted at paragraph 177C(1)(a) of the ITAA 1936 (the non-inclusion of income).

As the directors hold the shares in their own personal capacity and they declare the dividends on the shares is included as assessable income for each director, there is no tax benefit identified under the scheme.

Question 3:

Is the Scheme a ‘dividend stripping operation’ for the purposes of section 207-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

No the Scheme is not a dividend stripping operation as defined in section 207-155 of the ITAA 1997.

Detailed reasoning

Section 207-145 of the ITAA 1997 denies a taxpayer a tax offset where distributions are manipulated and certain conditions that are listed in that section are met. This includes distributions “made as part of a *dividend stripping operation” (see paragraph 207-145(1)(d)).

A dividend stripping operation is a defined term. Section 995-1 of the ITAA 1997 provides that dividend stripping operation has the meaning given by section 207-155 of the ITAA 1997 which provides:

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 parallels with the definition within section 177E regarding dividend stripping.

Consistent with the discussion on section 177E of the ITAA 1936 at question 1 above that there was no dividend stripping scheme or a scheme in the nature of a dividend stripping scheme, paragraph 207-145(1)(d) will not be relevant to this case.