Edited version of private advice

Authorisation Number: 1051581708988

Date of advice: 17 September 2019

Ruling

Subject: Dividends, gifts and leases

Question 1

Will individual A be assessable on the dividend paid by Company B and attached franking credits pursuant to section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) and Division 207 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will Individual C be assessable on the gift under any of the following provisions:

a. Section 6-5 of the ITAA 1997?

b. Part 3.1-3.3 of the ITAA 1997?

c. Division 7A of the ITAA 1936?

Answer

a.     No.

b.     No.

c.      No.

Question 3

Will the trustee for the Trust D or the trustee for the Trust E be assessable on any amount in relation to the granting of the leases pursuant to section 104-110 of the ITAA 1997?

Answer

No.

Question 4

Will Company F or Company G be assessable on any amount in relation to the granting of the leases under any of the following provisions:

a. Section 6-5 of the ITAA 1997?

b. Part 3.1-3.3 of the ITAA 1997?

Answer

a.     No.

b.     No.

This ruling applies for the following period

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1. Individual A controls a group of entities that own investments and properties, including X freeholds leased to X associated businesses.
2. Individual A has Y children, Individual H, Individual I and Individual C.
3. Individual H and I each control an entity that runs the respective businesses.
4. Individual C is not involved in either of the businesses.

Relevant Group Structure

5. Individual A is the sole shareholder of Company B, a company with retained profits and franking credits.
6. Individual A is also a controller of Trust J being the sole shareholder and director.
7. Trust J owns 100% of the units and is sole director in the trustee company for Trust D and the trustee company for Trust E.
8. Trust D owns the K Freehold.
9. Trust E owns the L Freehold.

10.  Trust D currently leases the K Freehold to Company F, a company XY% owned by an entity Individual H controls by XY% share ownership and sole director.

11. Trust E currently leases the L freehold to Company G, a company XZ% owned by an entity Individual I controls and ZY% owned by an entity Individual A controls. Individual I is the sole director of Company G.
12. Both existing leases are on arm's length terms, however the leases have no right to assign their leases or dispose of their businesses. Both leases are due to expire in the second half of 20XX.

Proposal

13. Individual A would like to make gifts to Individual A's children, in particular of money to Individual C and extensions of leases (by way of new leases) to entities controlled by Individuals H and I. Individual A proposes to fund the gift to Individual C from dividends from Company B paid to Individual A.
14. Individual A has reviewed the terms of the leases. Individual A expects Individual H and I to continue running businesses for an extended period of time but also to have the ability to dispose of the present businesses (which would require them to be able to assign leases if they choose to do so). Individual A is therefore proposing to direct Trust D and Trust E to grant new leases on updated terms.
15. It is proposed that both leases will have terms of approximately XX years and market rentals will be paid.
16. It is common practice in the relevant industry for the landlord to charge a lease premium on the granting or renewal of a lease, however there is no legal obligation to do so. No lease premiums will be paid by Company F or Company G on the granting of the new leases.
17. Individual A therefore wishes to benefit Individual H and Individual I (and their businesses) to a commensurate extent as Individual C.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1936 paragraph 44(1)(a)

Income Tax Assessment Act 1936 section 109C

Income Tax Assessment Act 1936 section 109T

Income Tax Assessment Act 1936 subsection 109T(3)

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1997 Part 3.1 - 3.3

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 15-2

Income Tax Assessment Act 1997 section 104-110

Income Tax Assessment Act 1997 subsection 104-110(1)

Income Tax Assessment Act 1997 subsection 116-20(2)

Income Tax Assessment Act 1997 paragraph 116-20(2)(a)

Income Tax Assessment Act 1997 paragraph 116-20(2)(b)

Income Tax Assessment Act 1997 Division 207

Income Tax Assessment Act 1997 Subdivision 207-A

Reasons for decision

Question 1

Summary

Yes, Individual A will be assessable on the dividend Individual A receives from Company B. The franking credit will also be included in Individual A's assessable income.

Detailed reasoning

The Law.

Assessable income of a resident shareholder of a company includes dividends (other than non-portfolio dividends) that are paid out of profits derived by it from any source and all non-share dividends paid to the shareholder by the company pursuant to paragraph 44(1)(a) of the ITAA 1936.

Pursuant to Subdivision 207-A of the ITAA 1997 an amount equal to the franking credit, where an entity receives a franked distribution, is included in their assessable income. The entity is then entitled to a tax offset equal to the franking credit on the distribution.

Applying the law to your circumstances.

Therefore, Individual A will be assessable on the dividend received from Company B. The franking credit will also be included in Individual A's assessable income and Individual A is entitled to a tax offset equal to the franking credit pursuant to Subdivision 207-A of the ITAA 1997.

Question 2

Summary

No, Individual C will not be assessable on the gift under any of the following provisions:

a.     Section 6-5 of the ITAA 1997;

b.     Part 3.1-3.3 of the ITAA 1997; or

c.      Division 7A of the ITAA 1936.

Detailed reasoning

The Law.

a. Section 6-5 of the ITAA 1997.

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income may be included in assessable income under another provision as statutory income.

Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? deals specifically with whether gifts received by church workers are assessable; however, from this ruling some general principles for determining whether gifts are considered to be assessable income can be established. Paragraph 32 of IT 2674 states:

·        a personal gift received for personal reasons without any connection to any income-producing activity on the part of the recipient is not assessable income for income tax purposes,

·        a gift or gratuity made only on grounds personal to the recipient is not assessable income,

·        if a gift is referable exclusively to the attitude of the donor personally it is not assessable income, and

·        a voluntary payment received from a family member, a friend or an acquaintance, or a fellow worker is prima facie received on grounds personal to the recipient, or to assist his or her personal needs; if nothing more than this appears from a consideration of the whole circumstances of the case, the payment is not assessable income.

All of the above principles are derived from relevant case law.

Applying the law to your circumstances

In your case, the money will be given to Individual C as a gift. It was paid for personal reasons without any connection with any income-producing activity on Individual C's part. The money was not 'earned' as it was not directly related to any services Individual C may perform. The amount received will be a voluntary gift of money to Individual C. As such, the money is not ordinary income.

Also, it is accepted that in this case the payment was not in relation to any employment or services rendered by Individual C and therefore is not assessable as statutory income under section 15-2 of the ITAA 1997.

b. Part 3.1-3.3

The receipt of a gift of money from Individual C's parent by Individual C does not have any capital gains tax implications as it does not result in any CGT event to occur.

c. Division 7A

Division 7A can deem certain payments from a private company to a shareholder or associate of a shareholder as a deemed dividend pursuant to section 109C of the ITAA 1997. Included in the definition of "associate" in section 318 of the ITAA 1936, is a child of the shareholder, in this case Individual C.

However, for there to be a payment from Company B to Individual A, then to Individual C,
> section 109T of the ITAA 1936 would need to apply to the circumstances. This section can apply if a private company makes a payment or loan to an entity (Individual C in this case) through one or more interposed entities (Individual A).

However, as Individual A will have already treated the payment as an assessable dividend, subsection 109T(3) states that section 109T cannot apply if the payment has been treated as a dividend by the first interposed entity (Individual A in this case).

Therefore, no deemed dividend will arise under Division 7A of the ITAA 1936 as a result of the gift to Individual C.

Question 3

Summary

Even though CGT event F1 will occur under section 104-110 of the ITAA 1997 on the granting of the new leases, no capital gain will arise to Trust D or Trust E as no lease premium is payable on the granting of the new leases.

Detailed reasoning

CGT event F1 in subsection 104-110(1) of the ITAA 1997 happens when a taxpayer grants, renews or extends a lease. A capital gain or capital loss may arise from the CGT event happening.

The lessor makes a capital gain if the capital proceeds from the grant, renewal or extension are more than the expenditure it incurred on the grant, renewal or extension. Conversely a capital loss occurs if the capital proceeds are less (subsection 104-110(3)).

The capital proceeds are any premium paid or payable for the grant of the lease (subsection 116-20(2)). Expenditure incurred on the grant of the lease does not include any part of the cost of the underlying asset.

CGT event F1 occurs:

·        at the time the contract for the lease is entered into, or if there is no contract, at the start of the lease (paragraph 104-110(2)(a)); and

·        for a renewal or extension - at the start of the renewal or extension
> (paragraph 104-110(2)(b))

A payment which is a premium received for the grant of a lease is a capital receipt if the lessor is not in the business of granting leases.

Application to the facts.

If a premium was paid for the granting of the new leases, we would need to consider if the payment was in the nature of a revenue or capital receipt. As neither Trust D or Trust E are in the business of granting leases, any lease premium would be a capital receipt for the grant of the lease under subsection 116-20(2) of the ITAA 1997.

When Trust D and Trust E both grant new leases CGT event F1 occurs on the granting of the lease pursuant to section 104-110 of the ITAA 1997. However, as the lease premium in both instances is nil, the capital proceeds received by both Trust D and Trust E will be nil pursuant to subsection 116-20(2) of the ITAA 1997.

Trust D and Trust E will not be assessable on any amount pursuant to 104-110 of the ITAA 1997 as a result of the granting of the new leases.

Question 4

Summary

No, there is not an assessable amount to Company F or Company G under either section 6-5 of the ITAA 1997 or Part 3.1-3.3 of the ITAA 1997 as a result of the granting of the new leases or the cancellation of the existing leases.

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income may be included in assessable income under another provision as statutory income.

The lessee receives no amount from the lessor on the granting of the new leases. Therefore, there is no amount paid to the X lessees to give rise to ordinary income.

If an amount was paid for the granting of the new lease to the lessees, CGT event F4 would have application and the lessee may have a capital gain if the capital proceeds (the amount received for changing the lease) was more than the lease's cost base at the time of the event. However, CGT event F4 does not occur for Company F or Company G as no amount was paid by the lessor to change each of the leases.

Therefore, there is not an assessable amount to Company F and Company G under either
> section 6-5 of the ITAA 1997 or Part 3.1-3.3 of the ITAA 1997 as a result of the granting of the new leases or the cancellation of the existing leases.