Edited version of your written advice

Authorisation Number: 1051432228153

Date of advice: 4 October 2018

Ruling

Subject: Dividend stripping

Question 1

Are the proposed redeemable preference shares (RPS) equity interests under subdivision 974-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

(a) Will the proposed transaction give rise to a direct value shift (DVS) under Division 725 of the ITAA 1997?

(b) If the answer to part (a) is Yes, will the DVS cause CGT event K8 (section 104-250 of the ITAA 1997) to occur?

Answer

(a) No

(b) Not Applicable

Question 3

Will a payment of fully franked dividends to the holders of the proposed RPS to Company Y and Company Z be considered dividend streaming under Subdivision 204-D ITAA 1997?

Answer

No

Question 4

Will the proposed transaction be considered:

(a) a dividend stripping operation under section 207-155 of the ITAA 1997; or

(b) a scheme for the stripping of company profits within the meaning of subsection 177E(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

(a) No

(b) No

Question 5

Will section 45A of the ITAA 1936 apply to the proposed issue of the RPS to Company Y and Company Z?

Answer

No

Question 6

Will section 45B of the ITAA 1936 apply to the proposed issue of the RPS to Company Y and Company Z?

Answer

No

Question 7

Will section 177EA of the ITAA 1936 apply to any distribution of fully franked dividends to the holders of the proposed RPS?

Answer

No

Question 8

Will Part IVA of the ITAA 1936 apply to the proposed transaction?

Answer

No

This ruling applies for the following period:

1 July 2018 to 30 June 2022

The scheme commences on:

July 2018

Relevant facts and circumstances

Company X

Company X is an Australian resident company.

The directors of Company X are Individuals A and B.

Individual A and B hold all the ordinary shares in Company X equally (1 share each).

Company X earns income from investments.

Company X does not have any dividend policy or pattern in relation to the frequency or quantum of past dividend payments.

Estate plan

Individual A and B previously owned a number of businesses. One of A and B’s children (C) has worked for many years in these businesses and has collaboratively worked together with their parents to help the business grow and succeed.

Individual A and B expect that the division of their estate between their children may result in a testamentary family maintenance claim by the other children. They wish to avoid this if possible, due to the litigation expenses which will be borne by their estate, the potential disruption to the business, and the negative impact on familial relations.

Proposed transaction

To reduce the risk of a family maintenance claim, while still alive, individual A and B propose to distribute a significant amount of the existing retained profits in Company X to an entity that C controls (Company Y), and another amount of retained profits to a company A and B control (Company Z).

To achieve this, they intend to:

● issue one A-class redeemable preference share in Company X to Company Y;

● issue one B-class redeemable preference share in Company X to Company Z.

Both classes of redeemable preference shares will be issued at fair market value, and will have the same terms:

● they will carry rights to dividends, amount to be determined by resolution of Company X’s directors at any time;

● they will not carry any rights to vote or to capital on a winding up of Company X;

● they are redeemable by Company X at any time for nil consideration; and

● if not redeemed earlier, they are automatically redeemed at the third anniversary of their date of issue for nil consideration.

Following the issue of the redeemable preference shares, the Board of Company X will resolve to declare dividends on the A-class share to Company Y, and the B-class share to Company Z.

These dividends will not immediately be paid out in cash to Company Y and Z. Rather, the monies will remain in Company X by reason of loans back from Company Y and Z.

None of the relevant entities to the proposed transaction have accumulated tax losses.

Individual A and B and all relevant family members are Australian residents for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-250

Income Tax Assessment Act 1997, section 202-45

Income Tax Assessment Act 1997, Subdivision 204-D

Income Tax Assessment Act 1997, section 204-30

Income Tax Assessment Act 1997, Division 207

Income Tax Assessment Act 1997, section 207-145

Income Tax Assessment Act 1997, section 207-150

Income Tax Assessment Act 1997, section 207-155

Income Tax Assessment Act 1997, Division 725

Income Tax Assessment Act 1997, subsection 725-50

Income Tax Assessment Act 1997, section 725-90

Income Tax Assessment Act 1997, section 725-145

Income Tax Assessment Act 1997, Subdivision 974-C

Income Tax Assessment Act 1997, section 974-20

Income Tax Assessment Act 1997, section 974-70

Income Tax Assessment Act 1997, section 974-75

Income Tax Assessment Act 1997, section 974-135

Income Tax Assessment Act 1997, subsection 995-1(1)

Income Tax Assessment Act 1936, section 45A

Income Tax Assessment Act 1936, section 45B

Income Tax Assessment Act 1936, section 45C

Income Tax Assessment Act 1936, Part IVA

Income Tax Assessment Act 1936, subsection 177A(1)

Income Tax Assessment Act 1936, section 177C

Income Tax Assessment Act 1936, section 177D

Income Tax Assessment Act 1936, subsection 177D(2)

Income Tax Assessment Act 1936, section 177E

Income Tax Assessment Act 1936, subsection 177E(1)

Income Tax Assessment Act 1936, section 177EA

Income Tax Assessment Act 1936, subsection 177EA(3)

Reasons for decision

Question 1

Are the proposed Redeemable Preference Shares (RPS) equity interests under Subdivision 974-C of the ITAA 1997?

Summary

The proposed RPS would be an equity interest in Company X, pursuant to subsection 974-70(1).

Detailed reasoning

For the RPS to be an equity interest:

● it must satisfy the equity test in subsection 974-75(1); and

● must not pass the debt test in subsection 974-20(1).

A share is an interest in a company as a member or stockholder of that company. Therefore, item 1 of subsection 974-75(1) of the ITAA 1997 is satisfied and the RPS pass the basic test for an equity interest.

An interest cannot be an equity interest if it is also classified as a debt interest (subparagraph 974-70(1)(b) of the ITAA 1997). Thus, it is necessary to determine whether the RPS also satisfy the test for a debt interest pursuant to subsection 974-20(1).

Are the RPS a debt interest?

Subsection 974-20(1) of the ITAA 1997 provides the test for a debt interest. The conditions which must be met for a scheme to satisfy the debt test are:

● there must be a scheme (subsection 974-20(1));

● the scheme must be a financing arrangement (paragraph 974-20(1)(a)). However, this condition is not required to be met where the interest is as a member or stockholder of a company;

● there must be a financial benefit received (paragraph 974-20(1)(b));

● the issuing entity must have an “effectively non-contingent obligation” to provide a future financial benefit (paragraph 974-20(1)(c)); and

● it must be substantially more likely than not that the value of the financial benefit to be provided will be at least equal to, or exceed the financial benefit received and will not equal nil (paragraphs 974-20(1)(d) and 974-20(1)(e)).

There is an effectively non-contingent obligation to take an action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation to take that action (subsection 974-135(1) of the ITAA 1997). An obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation (subsection 974-135(3)).

In determining whether there is in substance or effect a non-contingent obligation to take the action, one must have regard to the artificiality, or the contrived nature, of any contingency on which the obligation to take the action depends (subsection 974-135(6) of the ITAA 1997).

In the present case, the obligation to pay dividends will be entirely at the discretion of the Board of Company X.

Company X may redeem the RPS at any time at its own discretion up to the third anniversary of the issue date of the RPS. If the RPS remains on issue as at the third anniversary, they will be redeemed. Importantly, whether Company X redeems the RPS at some time during the first three years or otherwise before the third anniversary, it is not obligated to pay Company Y or Company Z any consideration for that redemption.

In summary, there is no obligation on Company X to pay dividends to the holders of the RPS or to pay all or part of the subscription amount (or a greater amount) upon redemption of the RPS to the holders. There is thus no effectively non-contingent obligation for Company X to provide a financial benefit under the scheme. On that basis, the proposed RPS do not meet all the conditions to be a debt interest, and would therefore would be an “equity interest” in Company X, pursuant to subsection 974-70(1) of the ITAA 1997.

Question 2

(a) Will the proposed transaction give rise to a direct value shift (DVS) under Division 725 of the ITAA 1997?

(b) If the answer to part (a) is “Yes”, will the DVS cause CGT event K8 (section 104-250 of the ITAA 1997) to occur?

Summary

The proposed transaction will not give rise to a direct value shift (DVS) under Division 725 of the ITAA 1997 and therefore CGT event K8 under section 104-250 will not occur?

Detailed reasoning

Subsection 725-145(1) of the ITAA 1997 explains that a DVS occurs when:

● there is a decrease in the market value of one or more equity or loan interests in the target entity; and

● the decrease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when the thing, or the first of those things is done; and

● either or both of subsections (2) and (3) of section 725-145 are satisfied.

Subsections 725-145(2) and (3) relevantly provide:

● one or more equity or loan interests in the target entity must be issued at a discount. The decrease in the interest must occur at or after the time of the issue and be reasonably attributable to it.

● there must be an increase in the market value of one or more equity or loan interests in the target entity. The increase must be reasonably attributable to the decrease in the other interest.

Does the proposed transaction involve the issue of equity or loan interests at a discount or is there an increase in value of any share in Company X?

The proposed transaction involves issuing the RPS at market value of $1,000 each. There are therefore no equity or loan interests in Company X being issued at a discount. It follows that subsection 725-145(2) of the ITAA 1997 is not satisfied.

Whether subsection 725-145(3) of the ITAA 1997 is satisfied is less clear on the present facts. However, section 725-50 in any event relevantly provides that a DVS will only have consequences under Division 725 if section 725-90 does not apply. Section 725-90 applies if:

● the one or more things referred to in paragraph 725-145(1)(b) brought about a state of affairs, but for which the direct value shift would not have happened; and

● as at the time referred to in that paragraph, it is more likely than not that, because of the scheme, that state of affairs will cease to exist within 4 years after that time

The “one or more things referred to in section 725-145” that might have “brought about a state of affairs but for which the value shift would not have happened” is the issue of the RPS to Company Y and Z.

The relevant “state of affairs” is that the proposed RPS has specific characteristics in the form of discretionary dividend rights which give rise to the potential shift in value. The removal of these specific characteristics when the RPS are redeemed (which must happen within 4 years of the issue of the RPS by virtue of its terms of issue), will satisfy the requirements of section 725-90 of the ITAA 1997 and hence enliven its operation.

For the above reasons, it is considered that the proposed transaction does not cause any DVS. In the alternative, if there is a DVS, its reversal within 4 years of the issue of the RPS means section 725-90 of the ITAA 1997 will apply such that the DVS will not have any consequences under Division 725. CGT event K8 happens if there is a ‘taxing event generating a gain’ for a down interest under section 725-245 (subsection 104-250(1)). As there is no DVS that has consequences under Division 725, CGT event K8 will not happen as a result of the proposed transaction.

Question 3

Will a payment of fully franked dividends to the holders of the proposed RPS be considered dividend streaming under Subdivision 204-D of the ITAA 1997?

Summary

The payment of fully franked dividends to the holders of the proposed RPS will not be considered dividend streaming under Subdivision 204-D of the ITAA 1997.

Detailed reasoning

Subdivision 204-D of the ITAA 1997 contains provisions which aim to prevent the streaming of franking credits to one member of a corporate tax entity in preference to another.

Section 204-30 of the ITAA 1997 applies where an entity streams one or more distributions in such a way that the franking credits attaching to the distribution are received by those members of the entity who derive a greater benefit from them; and other members receive lesser imputation or no imputation benefits.

For this section to apply, members to whom distributions are streamed must be in a position to derive a greater benefit from the franking credits than other members.

Subsection 204-30(8) of the ITAA 1997 details examples of when a member of an entity will be taken to have derived a greater benefit from franking credits than another member. These are where the other member:

(a) is not an Australian resident;

(b) is not entitled to use the tax offset under Division 207 of the ITAA 1997;

(c) incurs a tax liability as a result of the distribution that is less than the benefit associated with the tax offset attributable to the distributions;

(d) is a corporate tax entity at the time the distribution is made, but no franking credit arises for the entity as a result of the distribution;

(e) is a corporate tax entity at the time the distribution is made, but cannot use the franking credits to frank a distribution to its own members because it is not a franking entity or is unable to make a frankable distribution; and

(f) is an exempting entity.

In the current circumstances, it has been confirmed that the Company Y and Z, all individuals, and all entities they control and their children are residents of Australia for tax purposes. Therefore from a residency perspective no entity will derive a greater benefit from franking credits than another entity.

Furthermore, provided only assessable dividends are paid to Company Y and Z, none of the other factors listed in subsection 204-30(8) of the ITAA 1997 are applicable, nor do the proposed RPS holders derive a greater benefit from franking credits than other Company X shareholders in some other way. Therefore the Commissioner is not empowered to make a determination under Subdivision 204-D of the ITAA 1997.

Question 4

Will the proposed transaction be considered:

(a) part of a dividend stripping operation under section 207-155 of the ITAA 1997; or

(b) a scheme for the stripping of company profits within the meaning of paragraph 177E(1) of the ITAA 1936?

Summary

Section 207-155 of the ITAA 1997 or section 177E of the ITAA 1936 will not apply to the proposed transaction.

Detailed reasoning

Direct or indirect recipients of a franked distribution can be denied the benefits of the franking credits in various situations including if the distribution is made as part of a dividend stripping operation (paragraphs 207-145(1)(d), 207-150(1)(e)).

The notion of dividend stripping operation in this context is defined in section 207-155 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 threshold condition for the application of section 177E of the ITAA 1936, found in paragraph 177E(1)(a) of the ITAA 1936, is in substantially the same terms to section 207-155 of the ITAA 1997.

The consequences of a scheme being considered a dividend stripping scheme are found in:

● sections 207-145 and 207-150 of the ITAA 1997, which operate to deny franking credits on distributions from a dividend stripping operation; and

● section 177E of the ITAA 1936, which is a general anti-avoidance provision relating specifically to dividend stripping schemes, where the tax benefit associated with a dividend scheme can be cancelled in whole or part, if determined by the Commissioner.

Dividend stripping is not a defined term, and it does not have a precise legal meaning. The meaning of dividend stripping is considered in paragraphs 8 to10 of Taxation Ruling IT 2627 Income Tax: Application of Part IVA to Dividend Stripping Arrangements, which state:

8. The term 'dividend stripping' has no precise legal meaning. Therefore, it is not possible in this Ruling to provide exhaustive definitions of what does and what does not satisfy that expression.

9. However, it can be said that in its traditional sense a dividend stripping scheme would include one where a vehicle entity (the stripper) purchases shares in a target company that has accumulated or current years' profits that are represented by cash or other readily-realisable assets. The stripper pays the vendor shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company.

10. No exhaustive list of other examples can be given of what might constitute a dividend stripping scheme for the purposes of section 177E. Having regard to the overall scope and purpose of the section, an important element to be looked at will be any release of profits of a company to its shareholders in a non-taxable form, regardless of the different methods that might be used to achieve this result.

Dividend stripping is further considered in Taxation Determination TD 2014/1 Income tax: is the 'dividend access share' arrangement of the type described in this Taxation Determination a scheme 'by way of or in the nature of dividend stripping' within the meaning of section 177E of Part IVA of the Income Tax Assessment Act 1936? The characteristics of a dividend stripping scheme are listed in paragraph 17 of TD 2014/1, of relevance is:

• the vendor shareholders [receive] a capital sum for the shares in an amount the same as or very close to the dividends paid to the purchasers …., and

• the scheme [is] carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholders, in particular, avoiding tax on a distribution of dividends from the company.

In both Income Tax Ruling IT 2627 and the High Court's statement in the case FCT v Consolidated Press Holdings Ltd (2001), a core factor is that the scheme is designed to enable a shareholder(s) to be paid or receive the profits of the company, or an equivalent amount, in a tax-free or substantially tax-free manner.

The High Court in Federal Commissioner of Taxation v Spotless Services (1996) 186 CLR 404; 96 ATC 5201; (1996) 34 ATR 183 at CLR 416; ATC 5206; ATR 188; ATR 183 established that where a scheme makes no commercial sense without the tax benefits, there is a greater likelihood of concluding that it is entered into for the sole or dominant purpose of obtaining a tax benefit.

Where the circumstances of a scheme suggest the scheme had been entered into for commercial reasons or as part of ordinary family dealings it will generally lead to the opposite conclusion even if the arrangement is to some extent tax driven.

Application to the current circumstances

On balance, the nature of the transaction is consistent with an overriding purpose of achieving Individual A and B’s estate planning objectives. Viewed objectively, the dominant purpose appears to be to shift a significant portion of the accumulated value in Company X to one of the children and outside the scope of Individual A and B’s personal estates.

Accordingly, the facts do not support a finding that the taxpayers have a predominant purpose of avoiding tax on a distribution of dividends by Company X.

Conclusion on whether there is a dividend stripping scheme

The proposed transaction is not being carried out with a predominant purpose of avoiding tax. Absent this core feature, there is no scheme by way of or in the nature of dividend stripping, or a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping.

Conclusion on application of section 177E

The proposed transaction does not satisfy all the conditions in paragraphs 177E(1)(a)-(d) of the ITAA 1936. Section 177E therefore does not apply to the proposed transaction.

Conclusion on application of section 207-155

It is considered that a ‘scheme…by way of, or in the nature of dividend stripping’ for the purposes of section 207-155 of the ITAA 1997 bears the same meaning as section 177E. For the same reasons set out above, the proposed transaction is not considered part of a dividend stripping operation under section 207-155.

Question 5

Will section 45A of the ITAA 1936 apply to the proposed issue of the RPS?

Summary

Section 45A of the ITAA 1936 will not apply to the proposed issue of the RPS.

Detailed reasoning

Section 45A of the ITAA 1936 applies in circumstances where capital benefits are streamed to certain shareholders (the advantaged shareholders) who derive a greater benefit from the receipt of capital and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends.

The proposed arrangement in question involves the issue of RPS to Company Y and Company Z. Prior to the issue of the RPS these entities are not shareholders of Company X.

It is not considered that section 45A of the ITAA 1936 applies to the proposed issue of the RPS.

Question 6

Will section 45B ITAA 1936 apply to the proposed issue of the RPS?

Summary

Section 45B of the ITAA 1936 will not apply to the proposed issue of the RPS.

Detailed reasoning

Section 45B of the ITAA 1936 applies where certain payments are made to shareholders in substitution of dividends. Subsection 45B(2) of the ITAA 1936 sets out the conditions under which the Commissioner may make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies with the effect that the payment is taken to be an unfranked dividend. These conditions are that:

● there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936);

● under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936); and

● having regard to the relevant circumstances of the scheme, it would be concluded 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 a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936). The relevant circumstances of the scheme are listed include the various matters listed in subsection paragraphs 45B(8)(a)-(k) of the ITAA 1936 (paragraph (k) bringing into the various circumstances the eight matters referred to in subsection 177D(2) of Part IVA).

In this case, the issue of RPS would constitute a scheme under which a person is provided with a capital benefit by a company.

However, having regard to the relevant circumstances of the scheme, it cannot be concluded that any of the parties to the scheme entered into or carried out the scheme for a more than incidental purpose of enabling the RPS holders to obtain a tax benefit. As explained above, the dominant purpose of the taxpayers in carrying out the scheme is to achieve their estate planning objectives.

Accordingly, the Commissioner is not empowered to make a determination under subsection 45B(3) of the ITAA 1936.

Question 7

Will section 177EA of the ITAA 1936 apply to any distribution of fully franked dividends to the holders of the proposed RPS?

Summary

Section 177EA of the ITAA 1936 will not apply to any distribution of fully franked dividends to the holders of the proposed RPS.

Detailed reasoning

Section 177EA of the ITAA 1936 is a general anti avoidance provision that applies where one of the purposes (other than an incidental purpose) of a person entering into a scheme is to enable a taxpayer to obtain an imputation benefit.

Specifically, section 177EA of the ITAA 1936 applies if the following conditions, set-out in subsection 177EA(3) of the ITAA 1936 are satisfied:

● there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

● either:

ii. a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or

iii. a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and

● the distribution was, or is expected to be, a franked distribution; and

● except for section 177EA, the person would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

● having regard to the relevant circumstances of the scheme, it would be concluded that one of those who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant that person to obtain an imputation benefit.

It is considered that the first four conditions in subsection 177EA(3) of the ITAA 1936 are satisfied in respect of the issue of the RPS because:

(a) the issue of the RPS constitutes a scheme for the disposition of a membership interest (paragraph 177EA(3)(a) of the ITAA 1936). Pursuant to paragraph 177EA(14)(a) of the ITAA 1936, a 'scheme for a disposition of membership interests or an interest in membership interests' includes a scheme that involves the issuing of membership interests;

(b) frankable distributions are expected to be payable to the holder of the RPS (paragraph 177EA(3)(b) of the ITAA 1936). Dividends payable on the RPS will be frankable distributions to the extent that the dividends on the RPS do not fall within the list of unfrankable distributions in section 202-45 of the ITAA 1997;

(c) distributions are expected to be paid to the holder of the RPS (paragraph 177EA(3)(c) of the ITAA 1936). It is expected that these distributions will be franked; and

(d) it is reasonable to expect that an imputation benefit will be received by the relevant taxpayers as a result of distributions made on the RPS given that Company X expects to frank the distributions on the RPS: paragraph 177EA(3)(d) and subsection 177EA(16) of the ITAA 1936.

As these threshold requirements of section 177EA of the ITAA 1936 have been met, it is necessary to consider the 'relevant circumstances' of the scheme in determining whether it could be concluded 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 (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit. The relevant circumstances include the matters listed in paragraphs 177EA(17)(a)-(j) of the ITAA 1936 (paragraph (j) bringing into the various circumstances the eight matters referred to in subsection 177D(2) of Part IVA)).

As discussed above, the RPS were issued to implement the estate succession plan of Individual A and B. The proposed transaction involving the issue of the RPS is not being carried out for a more than incidental purpose of enabling taxpayers to obtain an imputation benefit.

As a result, and having regard to the relevant circumstances of the scheme, the five conditions in 177EA(3) of the ITAA 1936 have not been satisfied and section 177EA will not apply to any fully franked distribution under the proposed transaction: specifically the Commissioner will not be empowered to make a determination under subsection 177EA(5).

Question 8

Will Part IVA of the ITAA 1936 apply to the proposed transaction?

Summary

Part IVA of the ITAA 1936 will not apply to the proposed transaction.

Detailed reasoning

A scheme will be one to which Part IVA applies if a taxpayer has obtained a tax benefit in connection with the scheme and it would be concluded that the (objective) dominant purpose of a person who entered into or carried out the scheme (or a part of the scheme) was to obtain a tax benefit (subsection 177D(1) of the ITAA 1936).

As discussed above, a dominant purpose of tax avoidance is not present. Consequently, the proposed arrangement is not a scheme to which Part IVA applies.

As section 177D of the ITAA 1936 does not apply, the Commissioner would not be empowered to make a determination would not be made under subsection 177F(1) of the ITAA 1936 to cancel any tax benefit that may be obtained under the proposed arrangement.