Edited version of your written advice

Authorisation Number: 1051476293543

Date of advice: 22 January 2019

Ruling

Subject: Dividend streaming

Question 1

Does section 177EA apply to the proposed dividend?

Answer

No

Question 2

Does Subdivision 204-D apply to the proposed dividend?

Answer

Yes

Question 3

Will the Commissioner make a determination under section 204-30 that no imputation benefit is to arise in respect of the proposed dividend?

Answer

No

This ruling applies for the following period:

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You are a trustee of a deceased estate (the Estate) which holds shares in an investment company that receives income from investments made by the deceased taxpayer. Other shareholders of this investment company are Australian residents and non- residents for tax purposes.

The directors of this investment company plans to declare a dividend to the Estate to the exclusion of all other shareholders to reflect the wishes of the deceased taxpayer. It is intended that a single distribution of dividends will issue to the Estate in a single franking period.

Relevant legislative provisions

All reference is to Income Tax Assessment Act 1997 unless otherwise specified

Reasons for decision

Question 1

Does section 177EA apply to the proposed dividend?

Summary

No, section 177EA does not apply to the proposed dividend.

Detailed reasoning

For section 177EA to apply there must be a disposition of membership interests within the definition of subsection 177EA(14) and it must be a scheme entered into for the purpose of enabling the relevant taxpayer to obtain an imputation benefit. The distribution of a dividend will not be a disposition of membership interests as the shareholdings are not sold and remain unchanged.

The entitlement to the imputation credit flows from the original shareholdings and the original rights attached to the shares. The Estate did not enter into a scheme for the purpose of obtaining an imputation benefit.

177EA(3)

This section applies if:

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

(b) either:

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

(ii) 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

(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

(d) except for this section, the person (the relevant taxpayer ) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

(e) 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 an imputation benefit.

Question 2

Does Subdivision 204-D apply to the proposed dividend?

Summary

Subdivision 204-D applies to the proposed dividend.

Detailed reasoning

Subsection 204-30 “empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that:

(a) an *imputation benefit is, or apart from this section would be, received by a *member of the entity as a result of the distribution or distributions; and

(b) the member would *derive a *greater benefit from franking credits than another member of the entity;

(c) the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.”

The Estate will be the favoured member receiving a share of the imputation credits that is greater than those held by shareholders who will not receive a dividend. The Estate is also able to better utilise the tax offset because it is a resident taxpayer. An imputation benefit is defined to include a tax offsets resulting from the distribution; franking credits; exemption of credits and withholding taxes. The requirements of section 204-30 are met and the Commissioner is empowered to make a determination.

Question 3

Will the Commissioner make a determination under subsection 204-30(3)?

Summary

The Commissioner will not make a determination under subsection 204-30(3) to prevent the streaming of imputation benefits.

Detailed reasoning

The proposed distribution to only the Estate will result in Australian resident shareholders receiving all the available franking credits. It is necessary to determine whether the proposed dividends are consistent with the intent of the underlying policy for the anti-streaming rules.

Legislative intent of Subdivision 204-D

The underlying policy for the anti-streaming rules as stated in the Explanatory Memorandum to the New Business Tax System (Imputation) Act 2002 is provided below.

3.2 The benchmark rule lays down the framework for ensuring that, over time, the benefit of franking credits is spread more or less evenly across members in proportion to their ownership interest in the entity. To prevent the undermining of this framework, 4 specific rules are required to ensure that franking credits representing tax paid on behalf of all members of an entity are not allocated to only some of them. These rules are referred to as anti-streaming rules, because they prevent the streaming, or disproportionate allocation, of franking credits to certain members…

3.8 Where members hold interests in the profits of a corporate tax entity, the policy is that credits for tax paid on behalf of all members should flow to all members and not to only some of them. The franking rules do not, in general, attempt either to track the source of distributed profits or the particular members who hold an interest in a corporate tax entity at any given time. However, the policy of the tax law assumes that the benefit of imputation will, over time, be spread more or less evenly across members in proportion to their holdings in a corporate tax entity, having regard to any particular rights that attach to those holdings.

3.9 A consequence of generally spreading imputation benefits evenly across members is that members who cannot use, or cannot fully use, imputation benefits will nevertheless receive franked distributions. This results in the wastage of those benefits, which is a design feature of the imputation system. Wastage of imputation benefits also includes the failure to use franking credits attributable to profits that are never distributed.

3.10 The benchmark rule and the anti-streaming rules ensure that the intended wastage of imputation benefits is not undermined.

It also states at paragraph 1.20 of the Explanatory Memorandum that the “objects of the new imputation system are also to ensure that:

● the imputation system is not used to give the benefit of income tax paid by a corporate tax entity to members who do not have a sufficient economic interest in the entity;

● the imputation system is not used to prefer some members over others when passing on the benefits of having paid income tax; and

● the membership of the corporate tax entity is not manipulated to create either of the above outcomes.”

The dividends

It has been assumed that the investment company is permitted by its Company Constitution and the Corporations laws to distribute to the Estate to the exclusion of all shareholders.

The purpose of the proposed dividend is to allow the profits the investment company to be distributed as part of the administration of the Estate. The decision to not distribute to other shareholders is to support this purpose. The dividends will be paid to a shareholder with a sufficient economic interest. They are ordinary dividends from existing shareholdings. They are not from bonus shares or any payment in lieu of a dividend.

There has been no attempt to prevent wastage of credits or to separate the franking credits from the dividends or to manipulate the imputation system. The proposed dividends are consistent with the policy intent and therefore a determination should not be made to deny the imputation benefits.

The distribution to the Estate alone will result in a larger amount of tax payable. Where the dividends are paid to the Estate, the dividends will be grossed up (as required under section 207-20) and tax will be applied at the marginal rate of the Estate.

The alternative to paying the dividend to the Estate is to pay a dividend to all shareholders equally. Dividends paid to non- residents will not be grossed up and withholding taxes will be payable on the unfranked portion at 30% and 15%. The Australian tax payable is reduced if the alternative position is adopted.